<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 ON 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
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 NO. 0-18492
DIGITAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 ATRIUM DRIVE, SOMERSET, NEW JERSEY 08873
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 748-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE
[Cover Page 1 of 2 Pages]
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any
amendment to this Form 10-K. / /
On January 2, 1998, the aggregate market value of the voting stock of
Digital Solutions, Inc. (consisting of Common Stock, $.001 par value per share)
held by non-affiliates of the Registrant was approximately $34,332,000 based
upon the average bid and asked price for such Common Stock on said date as
reported by Nasdaq. On such date, there were issued and outstanding 19,141,760
shares of Common Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1998 Annual Meeting of Shareholders
[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Digital Solutions, Inc. ("DSI" or "the Company"), was founded in 1969
as a payroll service company and has evolved into a leading provider of human
resource management services to a wide variety of industries in 50 states.
DSI currently offers three general categories of services: (1)
professional employer organization ("PEO") services, (2) employer administrative
services, such as payroll processing, personnel and administration, benefits
administration and tax filing; and, (3) contract staffing, or the placement of
temporary and permanent employees. DSI currently furnishes PEO, payroll and
contract staffing services to over 1,438 client organizations with approximately
5,000 worksite PEO and staffing employees, and believes that it currently ranks,
in terms of revenues and worksite employee base, as one of the largest
professional employer organizations in the United States. In addition, DSI
places temporary help in hospitals and clinics throughout the United States
through its Houston, Texas and Clearwater, Florida offices. The Company has
three regional offices in Somerset, New Jersey; Houston, Texas; and Clearwater,
Florida and five sales service centers in New York, New York; El Paso and
Houston, Texas; Clearwater, Florida; and Somerset, New Jersey.
Essentially, the Company provides services that function as the
personnel department for small to medium sized companies. The Company believes
that by offering services which relieve small and medium size businesses of the
ever increasing burden of employee related record keeping, payroll processing,
benefits administration, employment of temporary and permanent specialized
employees and other human resource functions, the Company will position itself
to take advantage of a major growth opportunity during this decade and the next.
Recognizing the desire by many small businesses to be relieved not only
of the human resource administrative functions, but also of the responsibility
to manage employees and oversee operational tasks ancillary to their core
business, the Company has formulated a strategy of emphasizing PEO and
"outsourcing" services. In PEO, a service provider becomes an employer of the
client company's employees and provides these employees to the client to perform
their intended functions at the worksite. In outsourcing, the service provider
is not only responsible for human resource administration but also assumes
ultimate responsibility in some cases for management of the employees and their
job functions. For example, a provider of outsourcing services could be engaged
by a hospital or clinic to manage the maintenance and operation of the facility.
The medical staff would still be responsible for the medical
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functions but the physical plant would be managed by the provider.
DSI is focusing its future growth on the PEO and outsourcing industry.
The Company's expansion program will focus on internal growth through the cross
marketing of its PEO services to its entire client base and the acquisition of
compatible businesses strategically situated in new areas or with a client base
serviceable from existing facilities.
DSI is now committed to focusing on the PEO and outsourcing industry
for its future growth and to convert Staff-Rx, the Company's medical contract
staffing subsidiary, into more than a staffing business by focusing on PEO,
outsourcing and facilities management. While DSI will continue to sell
stand-alone employer services, such as payroll and tax filing, it will emphasize
the PEO component of its service offerings with a goal of becoming the leading
provider of PEO services in the United States. A major component of the
Company's growth strategy is the acquisition of well situated independent PEO
companies whose business can be integrated into the Companies operations.
However, there can be no assurance any such acquisition will be consummated by
the Company.
Digital Solutions, Inc. was organized under the laws of the State of
New Jersey on November 25, 1969 and maintains executive offices at 300 Atrium
Drive, Somerset, New Jersey 08873 where its telephone number is (732) 748-1700.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
BANK CREDIT LINE
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended and
amended on seven occasions. Each loan extension has been for limited periods of
time. The fifth amendment executed as of December 31, 1996, restricted the
Company from borrowing any additional funds available on the Line and required
weekly principal payments of $10,000, effective February 24, 1997. Effective
October 31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and 300,000
as of April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The warrants have
an exercise price of $2.4375 per share which was the fair market value of the
stock at the date of the agreement. The Company is obligated to make monthly
payments of interest on the outstanding amounts at the bank's floating base rate
plus three percent (11.5% at September 30, 1997). The Line is collateralized by
all of the
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Company's assets. On December 1, 1997, as a requirement of the extension of its
bank line of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive officers
and will be available for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance that
the Company will be successful in its efforts to raise additional funds.
SERVICES
PROFESSIONAL EMPLOYER ORGANIZATION (PEO)
The Company's core business, and the area management will continue to
promote, is its PEO services. When a client utilizes the Company's PEO services,
the client administratively transfers all or some of its employees to DSI which
then provides them to the client. DSI thereby becomes the recognized legal
co-employer and is responsible for all human resource functions, including
payroll, benefits administration, tax reporting and personnel record keeping.
The client still manages the employees and determines salary and duties in the
same fashion as any employer. However, the client is relieved of reporting and
tax filing requirements and other administrative tasks. Moreover, because of
economies of scale, DSI is able to negotiate favorable terms on workers'
compensation insurance, health benefits, retirement programs, and other valuable
services. The client company benefits because it can now offer its employees the
same or similar benefits as its larger competitors, and successfully compete in
recruiting highly qualified personnel, as well as build the morale and loyalty
of its staff.
The benefits DSI can offer include:
COMPREHENSIVE MAJOR MEDICAL PLANS -- DSI believes that medical
insurance costs have forced small employers to reduce coverage provided to its
employees and to increase employee contributions. DSI is able to leverage its
large employee base and allow their clients to offer a variety of health
coverage plans from traditional indemnity plans to Health Maintenance
Organizations (HMO) or Preferred Provider Organizations (PPO).
DENTAL AND VISION COVERAGE -- Such coverage is generally beyond the
reach of most small groups, but it is a cost effective option which can be
provided by DSI.
LIFE INSURANCE -- Affordable basic coverage is available, plus optional
supplemental life.
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SECTION 125 PREMIUM CONVERSION PLAN -- Employees can pay for benefits
with pre-tax earnings, reduce their taxable income and FICA payments, and
increase their take-home pay.
401(K) RETIREMENT PLANS -- DSI believes that most small groups are not
provided with any significant retirement benefits due to the administrative and
regulatory requirements associated with the establishment and maintenance of
retirement plans. DSI enables small business owners to offer their employees
retirement programs comparable to those of major corporations. Such plans can be
used to increase morale, productivity and promote employee loyalty.
CREDIT UNION -- An opportunity for employees to borrow money at lower
interest than offered at most banks.
PAYROLL SERVICES -- Although ancillary to the PEO services, clients no
longer incur the expense of payroll processing either through in-house staff or
outside service. DSI's PEO services include all payroll and payroll tax
processing.
UNEMPLOYMENT COMPENSATION COST CONTROL -- DSI provides an unemployment
compensation cost control program to aggressively manage unemployment claims.
HUMAN RESOURCES MANAGEMENT SERVICES -- DSI can provide clients with
expertise in areas such as personnel policies and procedures, hiring and firing,
training, compensation and performance evaluation.
WORKERS COMPENSATION PROGRAM -- DSI has a national workers compensation
policy which can provide DSI with a significant advantage in marketing its
services, particularly in jurisdictions where workers compensation policies are
difficult to obtain at reasonable costs. DSI also provides its clients where
applicable with independent safety analysis and risk management services to
reduce worker's injuries and claims.
By relieving client companies of personnel administrative tasks, the
client is able to focus on its core business. The client is also able to offer a
broader benefits package for its employees, a competitive rate in workers'
compensation insurance, and savings in time and paperwork previously required in
connection with personnel administration.
PAYROLL SERVICES
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DSI was established as a payroll service firm in 1969, and continues to
provide basic payroll services to its clients. Historically, DSI provided these
services primarily to the construction industry and currently 60% of the
Company's approximately 1,000 payroll service clients are in the construction
industry. DSI offers most, if not all, of what other payroll services provide,
including the preparation of checks, government reports, W-2's (including
magnetic tape filings), remote processing (via modem) directly to the clients
offices, and service.
In addition, DSI offers a wide array of tax reporting services
including accrual of tax summaries, timely deposit of taxes, impounding of tax
refunds, filing of returns, distribution of quarterly and year-end statements
and responding to agency inquiries.
CONTRACT STAFFING SERVICES
DSI's contract staffing subsidiaries have, in the aggregate, more than
27 years of experience in placing permanent and temporary employees with
specialized skills and talents with regional, national and international
employers. Contract Staffing enables clients to attain management and
productivity goals by matching highly trained professionals and technical
personnel to specific project requirements. DSI works in two specific markets
where it places people on a temporary long term assignment, or on a permanent
basis: (1) technical employees such as engineers, information systems
specialists and project managers primarily with Fortune 100 companies for
specific projects, and, (2) radiologists, therapists, nurses, doctors with
hospitals, clinics and therapy centers throughout the 50 states. Clients whose
staff requirements vary depending on the level of current projects or business
are able to secure the services of highly qualified individuals on an interim
basis.
DSI's staffing services provide clients with the ability to
"rightsize"; that is, expand or reduce its workforce in response to changing
business conditions. DSI provides numerous benefits to the client, such as
saving the costs of salary and benefits of a permanent employee whose services
are not needed throughout the year. The client also avoids the costs,
uncertainty and delays associated with searches for qualified interim employees.
The Company also provides insurance bonding where necessary and assumes all
responsibility for payroll tax filing and reporting functions, thereby saving
the client administrative responsibility for all payroll, workers' compensation,
unemployment and medical benefits.
DSI also increases the pool of qualified applicants for the client
since contract staffing employees have access to a wide array of benefits such
as health and life insurance, Section 125 premium conversion plans, and 401(k)
retirement plans. These benefits provide interim employees with the motivation
of full-time workers without additional benefit costs to the client. A client is
also able to temporarily rehire a retired
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employee for short-term or specialized projects without jeopardizing their
pension plan.
ACQUISITION STRATEGY
A key component of the Company's growth strategy has been, and will
continue to be, the acquisition of compatible businesses to expand its
operations and customer base. Currently, the human resource service industry
includes numerous small companies seeking to develop services, operations and
customer base similar to those developed by the Company. The Company has
actively acquired companies in the human resource industry during the last five
years. However, with the business and strategy of the Company further developed,
acquisitions in the future will be concentrated in the PEO and outsourcing
business. The Company believes that with a limited number of key acquisitions of
regional PEO companies who possess a strong customer base and regional
reputation, the Company will be able to grow into an industry leader, in not
only revenue size, but in scope of services offered.
A prospective acquisition candidate may be either a public or private
company, but will be required to meet certain financial criteria and growth
potential established by the Company. The Company evaluates acquisition
candidates by analyzing the company's management, operations and customer base,
which must complement or expand the Company's operations; financial stability,
including the company's profitability and cash flow. The Company's long term
plan is to expand sales and income potential by achieving economies of scale as
it expands and regionalizes its revenue base. However, there can be no assurance
that the Company will be able to successfully identify, acquire and integrate
into the Company operations, compatible PEO companies.
Although the Company did not consummate any acquisitions during fiscal
1997, management anticipates its acquisition activities will increase next
fiscal year. Any such acquisition activity will be subject to, among other
things, general economic conditions and the Company's ability to raise capital
or utilize its securities.
CUSTOMERS
The Company's customer base consists of over 1,438 client companies,
representing approximately 33,000 employees (including payroll services) as of
September 30, 1997. The Company's client base is broadly distributed throughout
a wide variety of industries; however, more than 60% of the customers in the
payroll processing area are in the construction industry and substantially all
of Staff-RX customers are in the healthcare industry.
The Company intends to maintain diversity within its client base to
lower its exposure to downturns or volatility in any particular industry and
help insulate the Company to some extent from general economic cycles. All
prospective customers are
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also evaluated individually on the basis of workers' compensation risk, group
medical history, unemployment history and operating stability.
SALES AND MARKETING
The Company has established sales teams in all of its locations.
Sales personnel offer a full array of DSI services, professional
employment, payroll and contract staffing, which supports the cross-marketing of
DSI's products and enables the sales representative to employ a professional
consultative approach to satisfying clients needs rather than forcing a single
solution.
All sales personnel have quotas and are held accountable on a weekly
basis with a sales meeting held in each location where the activity for the week
is discussed.
The Company has also implemented several focused marketing activities
to increase sales opportunities. DSI has been licensed by the various state
Boards of Accountancy to hold continuing professional education seminars for
CPAs. In addition, the Company has become an active participant in many trade
and community associations and chambers of commerce.
COMPETITION
The PEO industry consists of approximately 2,500 companies, most of
which serve a single market or region. The Company believes that there are
several PEOs with annual revenue exceeding $500 million. The largest PEO is
Staff Leasing of Bradenton, Florida with revenue in excess of $1 billion. While
there are several other large PEOs among the approximately 2,500 companies, many
are located in Florida and other states in the Sunbelt. The Company considers
its primary competition to be these large national and regional PEO providers,
as well as the traditional form of employment of employees.
The payroll services industry is characterized by intense competition.
The principal competitive factors are price and service. Management believes
that Automatic Data Processing, Inc., and Paychex, Inc., which each purchased
PEOs in Florida, will be major competitors in the future. The Company also
competes with manual payroll systems sold by numerous companies, as well as
other providers of computerized payroll services including banks, and smaller
independent companies. Some companies have in-house computer capability to
generate their own payroll documents and reports. The increasing availability of
personal computers at low cost may result in additional businesses acquiring
such capabilities. In the area of providing temporary technical and medical
personnel, the Company competes with companies
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such as Volt Information Services, Butler Arde, Olsten and Tech Aid, Inc., among
others. Many of these competitors have longer operating histories and greater
financial resources than the Company.
The Company competes with these companies by offering customized
products, personalized service, competitive prices and specialized personnel to
satisfy a client's particular employee requirements.
DSI believes that its broad scope of human resource management services
and its commitment to quality service will differentiate it from its
competition. Many companies compete in the various segments of the human
resource and financial services marketplace. However, the Company believes there
are none which compete in all of them and offer the broad range of services
which the Company offers. DSI believes that its concentration on providing
comprehensive services and moving into facilities management or outsourcing of
human resource management services will set it apart from its competitors. While
many of the PEOs entered the industry as a result of workers' compensation or
health insurance problems, DSI is establishing itself as a professional employer
organization which will assist companies, small and large, with all of their
human resource management challenges.
INDUSTRY REGULATION
INTRODUCTION
The Company's operations are affected by numerous federal and state
laws relating to labor, tax and employment matters. By entering into a
co-employer relationship with employees who are assigned to work at client
company locations (sometimes referred to as "worksite employees"), the Company
assumes certain obligations and responsibilities of an employer under these
federal and state laws. Many of these federal and state laws were enacted prior
to the development of nontraditional employment relationships, such as
professional employer organizations, temporary employment, and outsourcing
arrangements, and do not specifically address the obligations and
responsibilities of nontraditional employers. In addition, the definition of
"employer" under these laws is not uniform. Accordingly, the application of
these laws to the Company's business cannot be assured.
Some governmental agencies that regulate employment and labor laws have
developed rules that specifically address labor and employment issues raised by
the relationship among clients and PEOs. Existing regulations are relatively new
and, therefore, their interpretation and application by administrative agencies
and federal and state courts is limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. The
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Company cannot predict with certainty the nature or direction of the development
of federal, state and local regulations.
As an employer, the Company is subject to all federal statutes and
regulations governing its employer-employee relationships.
FEDERAL EMPLOYMENT TAXES
The Company assumes the sole responsibility and liability for the
payment of federal and state employment taxes with respect to wages and salaries
paid to its employees, including worksite employees. There are essentially three
types of federal employment tax obligations: (i) withholding of income tax
requirements governed by Code Section 3401, et seq.; (ii) obligations under
FICA, governed by Code Section 3401, et seq.; and, (iii) obligations under the
Federal Unemployment Tax Act (FUTA), governed by Code Section 3301, et seq.
Under these Code sections, employers have the obligation to withhold
and remit the employer portion and, where applicable, the employee portion of
these taxes. There is still considerable uncertainty as to the status of leased
employees in relation to these statutes. While the Company believes that it can
assume the client company's withholding obligations, in the event the Company
fails to meet these obligations, the client company may be held jointly and
severally liable for these payments. These interpretive uncertainties may have
an impact on the Company's PEO business.
EMPLOYEE BENEFIT PLANS
The Company offers various employee benefit plans to its employees,
including its worksite employees. These plans include a 401(k) Plan (a
profit-sharing plan with a cash or deferred arrangement ("CODA") under Code
Section 401(k)), a Section 125 plan, a group health plan, a group life insurance
plan and a group disability insurance plan. Generally, employee benefit plans
are subject to provisions of both the Code and the Employee Retirement Income
Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the
plans must be established and maintained by an employer for the exclusive
benefit of its employees. In addition to the employer/employee threshold,
pension and profit-sharing plans, including plans that offer CODAs under Code
Section 401(k) and matching contributions under Code Section 401(m), must
satisfy certain other requirements under the Code. These other requirements are
generally designed to prevent discrimination
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in favor of highly compensated employees to the detriment of non-highly
compensated employees with respect to both the availability of, and the
benefits, rights and features offered, in qualified employee benefit plans.
Employee pension and welfare benefit plans are also governed by ERISA.
ERISA defines "employer" as "any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an employee benefit
plan." ERISA defines the term "employee" as "any individual employed by an
employer." A definitive judicial interpretation of "employer" in the context of
a PEO arrangement has not been established. If the Company were found not to be
an employer for ERISA purposes, its plans would not comply with ERISA and the
level of services the Company could offer may be adversely affected. Further, as
a result of such finding, the Company and its plans would not enjoy the
preemption of state laws provided by ERISA and could be subject to varying state
laws and regulations, as well as to claims based upon state common laws.
In addition to ERISA and the Code provisions discussed herein, issues
related to the relationship between the Company and its worksite employees may
also arise under other federal laws, including other federal income tax laws.
STATE REGULATION
As an employer, the Company is subject to all statutes and regulations
governing the employer-employee relationship. The Staff Leasing Services
Licensing Act (the "Act") now regulates PEOs in Texas. The Act, which became
effective on September 1, 1993, established a mandatory licensing scheme for
PEOs and expressly recognizes a licensee as the employer of the assigned
employee for purposes of the Texas Unemployment Compensation Act. The Company
possesses a license to offer PEO services in the state of Texas.
While many states do not explicitly regulate PEOs, approximately 16
states have passed laws that have licensing or registration requirements for
PEOs and other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of
PEOs. Whether or not a state has licensing, registration or certification
requirements, the Company faces a number of other state and local regulations
that could impact its operations. The Company is currently licensed in Florida
and New Mexico as well as Texas.
EMPLOYEES
As of January 2, 1998, the Company employed 117 employees, both
full-time and part-time, including executive officers, a reduction from 133
during the previous
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fiscal year. The Company also employs approximately 4,500 leased employees and
500 temporary employees on client assignments. The Company believes its
relationship with its employees is satisfactory.
ITEM 2. PROPERTIES
OPERATIONS AND FACILITIES
The Company currently has three processing centers in Somerset, New
Jersey, Houston, Texas and Clearwater, Florida. The Company also has five sales
service centers which are located in New York City, Somerset, New Jersey,
Clearwater, Florida, Houston, and El Paso, Texas. A sales service center is an
office used primarily for sales efforts and client services. The Company's
strategy is to target acquisitions in the current areas of operation, whereby
the Company will acquire a business or business accounts and absorb these
accounts into the current operations with minimal additional overhead. The
Company intends to continue its national expansion efforts in fiscal years
1998-1999, most likely through additional acquisitions.
DSI leases its 15,000 square foot corporate headquarters in Somerset,
New Jersey, as well as offices in Clearwater, Florida and Houston, Texas. The
Company also leases sales offices in New York City and El Paso, Texas. The
facilities provide sufficient capacity to meet demands for the foreseeable
future. In fiscal year 1997, the Company's total lease expenses were $537,000.
Although DSI's offices are equipped with software and computer systems,
the Company is currently evaluating all systems including hardware and will
upgrade accordingly. At the Company's headquarters in Somerset, New Jersey, two
high speed Xerox printers produce 200,000 plus checks monthly for its client
base. These machines, which are integrated with the software system, do all of
the printing on the checks, including the client name, the employee, dates, as
well as the "Micro Encoding".
The following is summary information on DSI's facilities:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION
LOCATION SQUARE FEET DATE TERMS
- -------- ----------- ---- -----
<S> <C> <C> <C>
DSI Staff RX, Inc. (Houston) 5,398 9/30/99 $13,440 per month
2 Northpoint Drive, Suite 110 7,396 2/28/00
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Houston, TX 77060
DSI Staff RX, Inc. (Clearwater) 2,805 5/31/00 $ 3,272 per month
601 Cleveland Sreet Suite 350
Clearwater, FL 34615
Staff ConnXions Southwest (El Paso) 3,126 3/31/02 $ 3,759 per month
4050 Rio Bravo, Suite 151
El Paso, TX 79902
Corporate Office 15,244 9/30/07 $23,819 per month
300 Atrium Drive
Somerset, NJ 08873
New York Office 391 4/30/01 $ 3,082 per month
245 Fifth Avenue, Suite 2104
New York, NY 10016
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In October 1995, the Company entered into a note and finance agreement
with LNB Investment Corporation (LNB) providing for the loan to the Company of
up to $3,000,000. The loan was for a term of 15 months and was to be secured by
shares of the Company's common stock having a market value of no less than four
times the outstanding balance of the loan. LNB agreed not to sell or otherwise
liquidate the shares unless the Company were to default under the loan agreement
and failed to cure such default after notice. A total of 7,500,000 shares to be
pledged as collateral were registered under a registration statement filed under
the Securities Act of 1933, as amended.
The Company issued 1,783,334 shares in the name of LNB and delivered
the shares to a depository to secure the first portion of the loan of
$1,000,000. In January 1996, the Company determined that the shares pledged as
collateral had been transferred and sold in violation of the loan and finance
agreement. As a result, the financing agreement was terminated and never funded.
Through the efforts of the Company, 1,258,334 of these shares were recovered and
the Company received proceeds of $229,000 for a partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to recover
damages on account of the wrongful sale of the Company's common stock. On July
2, 1997, the Company settled the action. Without admitting or denying the
allegations in the complaint, the defendants agreed to pay $676,000 of which
$426,000 has been paid with the balance of $250,000 to be paid by LNB
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on or before August 4, 1997. The payment was not made by LNB as of December 16,
1997. The Company has commenced collection proceedings. The subsequent payment
is secured by a confession of judgment and a mortgage in the amount of $625,000.
The payments under the settlement agreement are in addition to $229,000
previously received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and remits the
last payment of $250,000. The agreement also provides that upon payment of all
sums due under the settlement agreement, LNB shall be deemed to have made full
restitution to the Company for the claims alleged in the action.
The Company is engaged in no other litigation, the effect of which is
anticipated to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5. MARKET OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
A. Principal Market
The Company's Common Stock is traded in the over-the-counter market and
included in the SmallCap Market System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol "DGSI".
B. Market Information
The Company's common stock commenced trading in the over-the-counter
market on May 15, 1986. The range of high and low bid prices for such securities
for the periods indicated below, are:
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Common Stock
<TABLE>
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
<S> <C> <C>
1st Quarter 5 15/16 1 15/32
2nd Quarter 6 15/16 4 5/16
3rd Quarter 6 1/8 3 9/16
4th Quarter 6 1/4 3 5/8
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
1st Quarter 6 1/4 3 1/8
2nd Quarter 3 15/16 1 13/16
3rd Quarter 2 7/16 1 9/16
4th Quarter 2 5/16 1 9/16
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
1st Quarter 2 11/16 1 1/2
</TABLE>
The above quotations, reported by NASDAQ, represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions. Such
quotations do not necessarily represent actual transactions.
C. Dividends
The payment by the Company of cash dividends, if any, rests within the
discretion of its Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition, as well as
other relevant factors. The Company has not declared any cash dividends on its
common stock since inception, and has no present intention of paying any cash
dividends on its common stock in the foreseeable future.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's common stock
as of January 2, 1998 was 329. Such number of record holders was determined from
the Company's stockholder records, and does not include beneficial owners of the
Company's common stock whose shares are held in the names of various security
holders, dealers and clearing agencies. The Company believes there are in excess
of 500 beneficial holders of the Company's common stock.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
1997 1996 1995 1994 1993
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Operating Revenues $122,695,000 $100,927,000 $73,821,000 $37,998,000 $14,681,000
Direct Costs 113,894,000 92,490,000 68,530,000 34,939,000 12,459,000
Gross Profit 8,801,000 8,437,000 5,291,000 3,059,000 2,222,000
Selling, General & Administrative
Expenses (includes Depreciation 11,316,000 8,801,000 7,547,000 2,695,000 1,962,000
and Amortization)
Income (Loss) From Continuing
Operations (2,515,000) (364,000) (2,256,000) 364,000 260,000
----------- --------- ----------- ------- -------
Net Income (Loss) $(2,832,000) $(597,000) $(3,316,000) $720,000 $301,000
============ ========== ============ ======== ========
Income (Loss) From Continuing
Operations Per Share of Common
Stock ($0.13) ($0.02) ($0.16) $0.03 $0.04
Net Income (Loss) Per Share ($0.15) ($0.04) ($0.24) $0.05 $0.04
Dividends Paid Per Preferred Stock
$0.00 $0.00 $0.00 $3.30 $4.00
BALANCE SHEET DATA:
Assets $14,163,000 $14,800,000 $13,816,000 $7,727,000 $4,264,000
Liabilities 9,291,000 7,632,000 10,967,000 2,671,000 1,079,000
Long Term Debt 89,000 100,000 175,000 107,000 241,000
Working Capital (Deficiency) (1,401,000) 286,000 (4,771,000) 1,146,000 1,920,000
Shareholders' Equity $4,872,000 $7,168,000 $2,849,000 $5,056,000 $3,195,000
</TABLE>
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "1995 Reform Act"). The Company desires to avail itself of certain
"safe harbor" provisions of the 1995 Reform Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Report on Form 10-K involve known and unknown risks, uncertainties, and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ from the future results,
performance (financial or operating) achievements expressed or implied by such
forward looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, risks associated with
the Company's recent losses, the Company's ongoing need for a new credit
facility, need for additional capital, risks of recently consummated
acquisitions as well as future acquisitions, effects of competition and
technological changes and dependence upon key personnel.
Fiscal Year 1997 as Compared to Fiscal Year 1996
Operating revenues for the fiscal year 1997 were $122,695,000 as compared
to fiscal year 1996 of $100,927,000 which represents an increase of $21,768,000
or 21.6%. This increase is due to the efforts of the internal sales force to
continually bring in new business which accounted for all of the increase. PEO
services accounted for 83% of the growth, while the balance is attributed to the
Company's staffing business.
Direct costs for fiscal year 1997 were $113,894,000 as compared to
$92,490,000 for fiscal year 1996 which represents an increase of $21,404,000, or
23.1%. The workers' compensation profit for the first four months of fiscal 1996
of $493,000 was recorded as a reduction of selling, general and administrative
expenses, whereas subsequent to that the revenue and direct costs for the
workers' compensation program were reflected in their respective accounts. In
addition, the first nine months of fiscal 1997 included $308,000 in
underbilled/excess charges for PEO medical expenses. After adjusting for the
treatment of the workers' compensation profit, one-time charges of $678,000
recorded in the second quarter of 1997 (primarily due to increased workers'
compensation charges) and medical expenses, direct costs increased $20,911,000
or 22.7%. As a percentage of revenue, and on an adjusted basis, direct costs for
fiscal 1997 and fiscal 1996 were 92% and 91.1% respectively. This increase is
attributed to the increase in the PEO business as well as the new workers'
compensation program, in which the Company is now expensing the maximum workers'
compensation exposure on a current basis.
18
<PAGE> 19
Gross profits were $8,801,000 and $8,437,000 for fiscal 1997 and 1996,
respectively, for an increase of 4.3%. Giving effect to the previously discussed
adjustments, gross profits for fiscal 1997 and 1996 would have been $9,787,000
and $8,930,000, respectively. As a percentage of revenue, adjusted gross profits
for fiscal 1997 and 1996 would have been 8% and 8.8%, respectively, reflecting
the increased PEO business in fiscal 1997 which has lower margins but adds more
dollars of gross profit.
Selling, general and administrative costs ("SG&A") for fiscal 1997
increased $2,334,000, or 29%, from $7,972,000 in fiscal 1996 to $10,306,000. Of
this increase, $1,973,000 pertains to charges recorded in the second quarter of
fiscal 1997, $1,000,000 of which was to increase the bad debt reserve with the
balance for other miscellaneous items. Giving effect to these adjustments, SG&A
increased 4.5%.
Depreciation and amortization increased $181,000 in fiscal 1997 due to the
write-off of all the intangible assets of Digital Insurance Services ($261,000)
recorded in the second fiscal quarter.
Net loss for fiscal 1997 was ($2,832,000) versus a net loss of ($597,000)
in fiscal 1996. The increased loss is due to $3,100,000 in adjustments recorded
in the second quarter of 1997.
Fiscal Year 1996 as Compared to Fiscal Year 1995
Operating revenues for the fiscal year 1996 were $100,927,000 as compared
to fiscal year 1995 of $73,821,000 which represents an increase of 36.7%. This
increase is attributable to the increased sales efforts of the internal sales
force as well as the full year impact of the acquisition of Turnkey Services
which was acquired in May, 1995.
Direct costs as a percentage of revenue for fiscal year 1996 was 91.6% as
compared to 92.8% for the prior fiscal year. These changes are attributable to
the increased margins in the PEO business due to reduced costs of the Company's
workers' compensation programs and the full year effect of the acquisition of
Turnkey Services. The Company provides management personnel services to certain
clients of Turnkey Services which generate higher than average administrative
fees. The reduction in workers' compensation costs were achieved through better
managed claims experience.
Selling, general and administrative costs ("SG&A") increased $1,270,000.
This growth in expenses includes $195,000 in charges for intangibles associated
with acquisitions that were not consummated during the year and $309,000 in an
increase in allowance for doubtful accounts attributable to accounts that have
aged beyond acceptable limits but which the Company continues to pursue.
Approximately $500,000 is attributable to the full year impact of Turnkey
Services which was acquired May 1, 1995. Additionally, the Company reversed
$515,000 in
19
<PAGE> 20
previously established reserves for claims which the Company resolved in its
favor. As a percentage of gross profit, SG&A expenses are 94.5% in fiscal 1996
as compared to 126.7% in fiscal 1995 and 88.1% in fiscal 1994. Management
believes that although there is improvement from 1995, it will continue to
improve this margin in the future.
Net loss before taxes was ($563,000) in fiscal year 1996 as compared to
loss of ($3,453,000) in fiscal year 1995. This decrease in net loss is primarily
attributable to the increase in gross profit and the decrease in SG&A as a
percentage of gross profit, explained above.
Fiscal Year 1995 as Compared to Fiscal Year 1994
Operating revenues for the fiscal year 1995 were $73,821,000 as compared to
fiscal year 1994 of $37,998,000. This represents an increase of $35,823,000 or
94%. This increase is attributable to the increased sales efforts of the
internal sales force $15,700,000, as well as the acquisition of Staff Rx
$8,400,000, Turnkey Services, Inc. $6,200,000 and the full year effect of the
other PEO companies which were acquired in the second quarter of fiscal year
1994 $5,500,000.
Direct costs as a percentage of revenue for fiscal year 1995 was 92.8% as
compared to 92.0% in fiscal year 1994. This increase is due to the continued
growth in the PEO business which has a higher direct cost than any other
segment, as a percentage of revenues.
Selling, general and administrative costs ("SG&A") increased $4,007,000
from fiscal year 1994 and was primarily due to: (i) increased selling and
marketing expenses including the cost of direct mail efforts and the addition of
15 senior account managers (sales force); (ii) additions at the corporate level
needed to help position and transform the Company into a national firm; (iii)
the establishment of a Houston processing center to support client and sales
activities in the Southwest and Florida; and, (iv) establishment of certain
necessary reserves and balances at year end.
Net loss before tax benefit was ($3,453,000) for fiscal year 1995 as
compared to a net gain of $720,000 the prior year. In accordance with Statement
of Financial Standards 109 (SFAS 109), the Company has recorded an additional
tax asset of $160,000 in the current fiscal year of 1994, representing the
expected future utilization of existing net operating loss carryforwards against
operating income. As of September 30, 1995, the Company has recorded total
deferred assets of $760,000, which it believes, based on the current level of
sales activity and the positive impacts of recent acquisitions, will more likely
than not be realized in accordance with SFAS 109.
Liquidity and Capital Resources
The Company's working capital for fiscal year 1997 was a deficit of
($1,401,000) versus
20
<PAGE> 21
$286,000 in fiscal 1996. At September 30, 1997, the Company had cash of
$841,000, restricted cash of $738,000 and net accounts receivable of $5,820,000.
In February 1995, the Company entered into a one year revolving credit line
facility (the "Line") with a bank which was subsequently extended and amended
on seven occasions. Each loan extension has been for limited periods of time.
The fifth amendment executed as of December 31, 1996, restricted the Company
from borrowing any additional funds available on the Line and required weekly
principal payments of $10,000, effective February 24, 1997. Effective October
31, 1997, the Company entered into the seventh amendment to the loan
agreement. Under the terms of this agreement, which expires October 31, 1998,
the Company was required to grant to the bank 500,000 warrants to purchase the
Company's common stock. The warrants will vest in amounts of 200,000 and
300,000 as of April 30, 1998 and October 31, 1998, respectively, if the
obligations under the loan agreement are not paid in full by these dates. The
warrants have an exercise price of $2.4375 per share, which was the fair
market value of the stock at the date of the agreement. The Company is
obligated to make monthly payments of interest on the outstanding amounts at
the bank's floating base rate plus three percent (11.5% at September 30,
1997). Under the present amendment, the Company can not borrow additional
funds and continues to make weekly principal payments of $10,000. The line is
collateralized by all of the Company's assets. At September 30, 1997 and
December 31, 1997, the total amount outstanding on the Line was $2,697,000 and
$2,567,000, respectively. In December 1997, the Company's directors and
executive officers, as well as a former director, made an equity investment of
$250,000 for general corporate purposes. The raising of these funds was a
requirement of the recently negotiated bank line of credit extension.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no assurance
that the Company will be successful in its efforts to raise additional funds.
At the present time, the Company does not have funds available to repay the
Line. Repayment of the Line is due in full on October 31, 1998.
In December 1996, due to the favorable trends in losses in its Workers'
Compensation program, the Company's former carrier reduced its letter of
credit requirement from $1,610,000 to $1,193,000 which resulted in $417,000 in
additional cash available. Of this availability, $344,000 has been added to
working capital during the quarter ended December 31, 1996 while the balance
of $73,000 was added to working capital during the quarter ended March 31,
1997.
Inflation and changing prices have not had a material effect on the Company's
net revenues and results of operations in the last three fiscal years, as the
Company has been able to modify its prices to respond to inflation and
changing prices.
ITEM 8. FINANCIAL STATEMENTS
See Attached Financial Statements appearing at pages F-1 through F-18.
21
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
Karl W. Dieckmann 69 Chairman of the Board of Directors
George J. Eklund 54 Director
Donald T. Kelly 48 Vice President, Chief Financial Officer
and Corporate Secretary
Senator John H. Ewing 77 Director
William J. Marino 54 Director
Donald W. Kappauf 51 President and Chief Executive Officer
</TABLE>
Each director is elected for a period of one year at the Company's
annual meeting of shareholders and will serve until his successor is duly
elected by the shareholders.
Karl W. Dieckmann, Director of the Company since April, 1990, has been
Chairman of the Board since November, 1991. From 1980 to 1988, Mr. Dieckmann was
the Executive Vice President of Science Management Corporation and managed the
Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr.
Dieckmann was employed by the Allied Corporation (now Allied Signal Corporation)
in various capacities including President, Semet Solvay Division; Executive Vice
President, Industrial Chemicals Division; Vice President Technical -- Fibers
Division; Group General Manager -- Fabricated Products Division; and General
Manager --Plastics Division, as well as various positions with the Chemicals
Division.
George J. Eklund became President and Chief Operating Officer of the
Company on September 21, 1994, and President and Chief Executive Officer on
March 13, 1996. On December 16, 1997, Mr. Eklund's position changed for health
reasons but he remains active with the Company. From 1992 to 1994, Mr. Eklund
was President of the
22
<PAGE> 23
Human Resource Information Services division of Fiserv, Inc., which provides
outsourcing services. From 1977 to 1992, Mr. Eklund was employed by ADP
(Automatic Data Processing) in various positions eventually serving as Corporate
Vice President and Eastern Division President. His eastern division served the
northeast area of the country.
Donald T. Kelly, has been Chief Financial Officer and Vice President of
Finance since he joined DSI on January 20, 1997. He was elected Corporate
Secretary in August of 1997. Mr. Kelly was Vice President and Chief Financial
Officer of Wireless Cable International and its predecessor company, Cross
Country Wireless, Inc. from 1993 to 1997. From 1987 to 1993, he was Vice
President of Finance and Administration at Potters Industries.
Senator John H. Ewing, has been a Director of the Company since April,
1990. Senator Ewing has been a State Senator for the state of New Jersey from
1978 to the present. From 1968 to 1977, Senator Ewing was a New Jersey State
Assemblyman. From 1940 to 1968, he was employed by Abercrombie and Fitch Co.,
New York City, and eventually rose to the position of Chairman of the Board.
Senator Ewing is also currently Chairman of the New Jersey Senate Education
Committee.
William J. Marino, President and Chief Executive Officer of Blue Cross
and Blue Shield of New Jersey, joined the Board of Directors in October, 1995.
He joined Blue Cross and Blue Shield in 1992 and was named to his present post
in 1994. From 1968 to 1991, Mr. Marino held a variety of sales, marketing and
management positions with the Prudential Insurance Company of America. He is
Chairman of the Board of Trustees of the United Way of Essex and West Hudson
(NJ) and is Chairman of the Board of Directors and Executive Committee of the
Regional Business Partnership, and a Trustee of the New Jersey Network
Foundation, St. Peter's College and the Newark Museum.
Donald W. Kappauf became President and Chief Executive Officer of
Digital Solutions, Inc. on December 16, 1997. Mr. Kappauf joined Digital
Solutions, Inc. in 1990 and has held several senior management positions
including Division President and Executive Vice President. From 1988 to 1990, Mr
Kappauf was President of Perm Staff/Temp Staff in Princeton, New Jersey. He was
Assistant Vice President of SMC Engineering and then President of SMC Personnel
Support from 1968 to 1988.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
Karl W. Dieckmann, John H. Ewing and William J. Marino served on the
Company's Compensation Committee during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
23
<PAGE> 24
The following provides certain summary information concerning
compensation paid or accrued by the Company during the years ended September 30,
1997, 1996 and 1995 to the Company's Chief Executive Officer and each of the
executive officers of the Company who received in excess of $100,000 in
compensation during the last fiscal year.
24
<PAGE> 25
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND YEAR SALARY BONUS OTHER OPTIONS/SAR'S
PRINCIPAL POSITION
<S> <C> <C> <C> <C> <C>
Raymond Skiptunis (1) 1997 $0 $0 $210,000 0
1996 $214,061 $0 $0 0
1995 $193,542 $0 $0 0
George J. Eklund, (2) 1997 $210,000 $0 $0 0
Chief Executive Officer 1996 $207,924 $100,000 $0 300,000
1995 $181,866 $50,000 $0 0
Donald T. Kelly, (3) 1997 $90,865 $20,000 $0 30,000
Chief Financial Officer
Louis J. Monari, (4) 1997 $106,077 $0 $0 0
Vice President 1996 $91,539 $20,000 $0 30,000
1995 $90,538 $15,000 $0 0
Donald W. Kappauf, (5) 1997 $121,154 $0 $0 0
Executive Vice President
1996 $110,000 $20,000 $0 0
1995 $110,000 $0 $0 0
</TABLE>
(1) Mr. Skiptunis was replaced as Chief Executive Officer by Mr. Eklund in
March, 1996. The other compensation of $210,000 during 1997 was
severance pay.
(2) Mr. Eklund's employment with the Company commenced on September
19,1994. He assumed the position of Chief Executive Office in March
1996.
(3) Mr. Kelly was granted a sign on bonus of $20,000 at employment, on
January 20, 1997.
(4) Mr. Monari's employment terminated in July, 1997.
(5) This includes Mr. Kappauf's compensation for the executive vice
president position he assumed on August 27, 1997. His compensation in
1997, prior to becoming executive
25
<PAGE> 26
vice president was $105,288. Compensation for 1996 and 1995 was for his
position as Division Vice President.
The Corporation provides normal and customary life and health insurance
benefits to all of its employees including executive officers. The Corporation
has no retirement or pension plan other than a 401(k), which is voluntary.
Compensation of Directors
Directors who are employees of the Company are not compensated for
services in such capacity except under the Director Plan, as defined below.
Non-Employee Directors receive $400 per meeting, $50 in travel expenses, and
$250 for each committee meeting. Effective October 1, 1997 the meeting and
committee meeting fees were increased to $1,000 and $500 respectively.
Employment Agreement
Effective March 12, 1996, the Company entered into a new employment
agreement with Mr. Eklund for a three year term. The employment agreement
provided for (i) annual compensation of $210,000 for the first year of the
agreement increasing at the discretion of the Company; (ii) a bonus in
accordance with a plan to be established by the Company; (iii) the award of
stock options to purchase 300,000 shares of the Company's common stock, subject
to vesting requirements; (iv) certain insurance and severance benefits; and (v)
a $700 per month automobile allowance. Effective December 16, 1997, Mr. Eklund's
position was changed for health reasons. The Company and Mr. Eklund have entered
into an agreement regarding the change in his position. Pursuant to this
agreement, Mr. Eklund no longer serves as President and Chief Executive Officer
of the Company. Mr. Eklund remains a Director. Mr. Eklund will continue to
receive his salary and certain other benefits as provided in his original
employment agreement.
Effective December 16, 1997, the Company entered into a verbal
agreement with Mr. Donald Kappauf wherein Mr. Kappauf assumed the duties of
President and Chief Executive Officer. The agreement provides for (i) annual
compensation of $165,000 for the first year of the agreement increasing at the
discretion of the Company; (ii) a bonus equivalent to 6% of the Company's
pre-tax profit for fiscal 1998 (8% of the amount over $2,500,000) provided the
Company's earnings before taxes are at least $1,500,000; (iii) the award of
stock options to purchase 100,000 shares of the Company's common stock, 50,000
of which will vest in one year while the remainder will vest in two years; (iv)
a two year term.
26
<PAGE> 27
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NO. OF PERCENTAGE
SECURITIES OF TOTAL
UNDERLYING OPTIONS/ EXERCISE OF
OPTIONS GRANTED IN BASE PRICE EXPIRATION
GRANTED FISCAL YEAR PER SHARE DATE
NAME
<S> <C> <C> <C> <C>
Donald T. Kelly 30,000 29% $1.875 01/20/02
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning exercise of stock options and SARs during the last
fiscal year and the value of unexercised options and SARs held as of the year
ended September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS/SARS AS OF AT SEPTEMBER 30,
ACQUIRED SEPTEMBER 30, 1997 1997
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
George J. Eklund 0 0 300,000/200,000 $0/$0
Louis Monari 0 0 30,000/20,000 $63,900/$0
Donald W. Kappauf 0 0 100,000/0 $213,000/$0
Donald T. Kelly 0 0 10,000/20,000 $21,300/$42,600
</TABLE>
(1) Based upon a closing bid price of the Common Stock at $2.1300 per share
on September 30, 1997.
1990 STOCK OPTION PLANS
In April, 1990, the Board of Directors adopted the 1990 Employees Stock
Option Plan (the "1990 Plan") which was approved by shareholders in August,
1990. The
27
<PAGE> 28
1990 Plan provides for the grant of options to purchase up to 1,000,000 shares
of the Company's common stock. Under the terms of the 1990 Plan, options granted
thereunder may be designated as options which qualify for incentive stock option
treatment ("ISOs") under Section 422A of the Code, or options which do not so
qualify ("Non-ISO's").
The 1990 Plan is administered by a Stock Option Committee designated by
the Board of Directors. The Stock Option Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted; whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option. The Committee has full authority to interpret the 1990
Plan and to establish and amend rules and regulations relating thereto.
Under the 1990 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the common stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent (10%) shareholder (as defined in the 1988 Plan), such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value.
The aggregate fair market value of shares subject to options granted to
a participant, which are designated as ISOs and which become exercisable in any
calendar year, shall not exceed $100,000.
The Stock Option Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1990 Plan will expire in April 2000.
In April 1990, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by
shareholders in August, 1991 and amended in March 1996. The Director Plan
provides for issuance of a maximum of 500,000 shares of common stock upon the
exercise of stock options arising under the Director Plan. Options may be
granted under the Director Plan until April, 2000 to: (i) non-executive
directors as defined and, (ii) members of any advisory board established by the
Company who are not full-time employees of the Company or any of its
subsidiaries. The Director Plan provides that each non-executive director is
automatically granted an option to purchase 5,000 shares upon joining the Board
and each September lst, pro rata, based on the time the director has served in
such
28
<PAGE> 29
capacity during the previously year. Similarly, each eligible director of
an advisory board will receive on each September lst an option to purchase 5,000
shares of the Company's common stock each September lst. The Directors' Plan
also provides that directors, upon joining the Board, and for one (1) year
thereafter, will be entitled to purchase restricted stock from the Company at a
price equal to 80% of the closing bid price on the date of purchase up to an
aggregate purchase price of $50,000.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the common stock on the date of grant. Until
otherwise provided in the Stock Option Plan, the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of common stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five (5) years from
the date of grant. The Director Plan shall be administered by a committee of the
board of directors composed of not fewer than three persons who are officers of
the Company (the "Committee"). The Committee has no discretion to determine
which non-executive director or advisory board member will receive options or
the number of shares subject to the option, the term of the option or the
exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
In April 1990, the Board of Directors adopted and in August, 1990, the
Company's shareholders approved the Senior Management Incentive Plan (the
"Management Plan") for use in connection with the issuance of stock, options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
It is contemplated that only those executive management employees (generally the
Chairman of the Board, Chief Executive Officer, Chief Operating Officer,
President and Vice Presidents of the Company or Presidents of the Company's
subsidiaries) who perform services of special importance to the Company will be
eligible to participate under the Management Plan. A total of 5,000,000 shares
of common stock will be reserved for issuance under the Management Plan. Awards
made under the Management Plan will be subject to three-(3) year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator.
Unless otherwise indicated, the Management Plan is to be administered
by the Board of Directors or a committee of the Board, if one is appointed for
this purpose (the Board or such committee, as the case may be, shall be referred
to in the following description as the "Administrator"). The Management Plan
generally provides that, unless the Administrator determines otherwise, each
option or right granted under a plan shall become exercisable in full upon
certain "change of control" events as
29
<PAGE> 30
described in the Management Plan. If any change is made in the stock subject to
the Management Plan, or subject to any right or option granted under the
Management Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Administrator will make appropriate
adjustments to such plans and the classes, number of shares and price per share
of stock subject to outstanding rights or options. The Management Plan permits
awards until April, 2000.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides four types of awards: stock options,
incentive stock rights, stock appreciation rights (including limited stock
appreciation rights) and restricted stock purchase agreements, as described
below.
Options granted under the Management Plan may be either incentive stock
options ("ISOs") or options which do not qualify as ISOs ("non-ISOs") similar to
the options granted under the 1990 Plan.
Incentive stock rights consist of incentive stock units equivalent to
one share of common stock in consideration for services performed for the
Company. If the employment or consulting services of the holder with the Company
terminate prior to the end of the incentive period relating to the units
awarded, the rights shall thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, shall be entitled to receive a pro-rata portion of the shares
represented by the units, based upon that portion of the incentive period which
shall have elapsed prior to the death or disability.
Restricted stock purchase agreements provide for the sale by the
Company of shares of common stock at a price to be determined by the Board of
Directors, which shares shall be subject to restrictions on disposition for a
stated period during which the purchaser must continue employment with the
Company in order to retain the shares. Payment can be made in cash, a promissory
note or a combination of both. If termination of employment occurs for any
reason within six months after the date of purchase, or for any reason other
than death or by retirement with the consent of the Company after the six month
period, but prior to the time that the restrictions on disposition lapse, the
Company shall have the option to reacquire the shares at the original purchase
price.
Restricted shares awarded under the Management Plan will be subject to
a period of time designated by the Administrator (the "restricted period")
during which the
30
<PAGE> 31
recipient must continue to render services to the Company before the restricted
shares will become vested. The Administrator may also impose other restrictions,
terms and conditions that must be fulfilled before the restricted shares may
vest.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 2,
1998 with respect to each director, each of the named executive officers as
defined in Item 402(a)(3), and directors and executive officers of the Company
as a group, and to the persons known by the Company to be the beneficial owner
of more than five percent of any class of the Company's voting securities.
<TABLE>
<CAPTION>
Number of Shares Percent of Company's
Name of Shareholder Presently Owned(1) Outstanding Stock
- ------------------- ------------------ -----------------
<S> <C> <C>
Karl W. Dieckmann(2) 310,743 1.6%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
George J. Eklund(3) 379,545 2.0%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
Senator John H. Ewing(4) 120,625 *
76 Claremont Road
Barnardsville, NJ 07924
William J. Marino(5) 88,617 *
c/o Blue Cross/Blue Shield
of New Jersey
3 Penn Plaza East
Newark, NJ 07105
Donald W. Kappauf(6) 526,248 2.75%
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C> <C>
Donald T. Kelly(7) 18,850 *
c/o Digital Solutions, Inc.
300 Atrium Drive
Somerset, NJ 08873
All officers and directors as a group 1,444,628 7.55%
(6) persons (2,3,4,5,6,7)
</TABLE>
* Less than 1 percent.
(1) Ownership consists of sole voting and investment power except as
otherwise noted.
(2) Includes options to purchase 10,000 shares of the Company's common
stock, and warrants to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(3) Includes options to purchase 300,000 shares of the Company's common
stock, and excludes unvested options to purchase 200,000 shares of
common stock.
(4) Includes options to purchase 35,000 shares of common stock, and
excludes unvested options to purchase 5,000 shares of common stock.
(5) Includes options to purchase 10,000 shares of the Company's common
stock, and excludes unvested options to purchase 5,000 shares of common
stock.
(6) Includes options to purchase 150,000 shares of the Company's common
stock, and excludes unvested options to purchase 150,000 shares of
common stock.
(7) Includes options to purchase 10,000 shares of common stock, and
excludes unvested options to purchase 70,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with and compensation
of the Corporation's executive officers and directors, see "Executive
Compensation".
32
<PAGE> 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements and schedules of the Company are included in
Part II, Item 8 of this report and appear as pages F-1 through F-18 and includes
page S-1.
2. All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
Consolidated Financial Statements or the notes thereto.
3. Exhibit List
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and, pursuant to
17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.6.1 *-- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New
Jersey
10.15.1 - Employment agreement between George J. Eklund and the Company dated March 12, 1996
10.15.2 *-- Amended employment agreement between George J. Eklund and the Company dated December 16, 1997
10.16.1 *-- Seventh Amended Loan Agreement between Registrant and Summit Bank and sixth amended Promissory
Note
</TABLE>
33
<PAGE> 34
21.0 -- Subsidiaries (Exhibit 21 to Form 10-K for fiscal 1996)
23.1 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-85526.
23.2 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-70928.
23.3 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-91700.
23.4 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-09313.
27. *-- Financial Data Schedule.
(b) Reports on Form 8-K. No 8-K reports were filed in the last fiscal quarter.
(c) See Item (a)(3) above.
(d) See Schedule II annexed hereto and appearing at page S-1.
34
<PAGE> 35
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.
DIGITAL SOLUTIONS, INC.
/s/Donald W. Kappauf
-------------------------------------
Donald W. Kappauf
President and Chief Executive Officer
Dated: January 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/George J. Eklund Director January 13, 1998
- ----------------------------
George J. Eklund
/s/Karl W. Dieckmann Chairman of the Board January 13, 1998
- ----------------------------
Karl W. Dieckmann
/s/John H. Ewing Director January 13, 1998
- ----------------------------
Senator John H. Ewing
/s/William J. Marino Director January 13, 1998
- ----------------------------
William J. Marino
/s/Donald W. Kappauf President & Chief January 13, 1998
- ---------------------------- Executive Officer
Donald W. Kappauf
/s/Donald T. Kelly Chief Financial Officer January 13, 1998
- ---------------------------- & Corporate Secretary
Donald T. Kelly
35
<PAGE> 36
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report Of Independent Public Accountants F-2
Consolidated Balance Sheets As Of September 30, 1997 And 1996 F-3
Consolidated Statements Of Operations For The Years Ended
September 30, 1997, 1996 And 1995 F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended
September 30, 1997, 1996 And 1995 F-6
Consolidated Statements Of Cash Flows For The Years Ended
September 30, 1997, 1996 And 1995 F-7
Notes To Consolidated Financial Statements F-9
Schedule I -- Valuation And Qualifying Accounts For The Years Ended
September 30, 1997, 1996 and 1995 S-1
Schedules other than those listed above have been omitted as they are either not
required or because the related information has been included in the notes to
consolidated financial statements
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Digital Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
Solutions, Inc. and subsidiaries (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Solutions, Inc. and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and regulations and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in our audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 23, 1997
F-2
<PAGE> 38
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $841,000 $0
Restricted cash (Note 8) 738,000 1,155,000
Accounts receivable, net of allowance for doubtful accounts
of $862,000 at September 30, 1997 and $339,000
at September 30, 1996 5,820,000 6,338,000
Notes due from officers 0 136,000
Other current assets 402,000 189,000
----------------- ----------------
Total current assets 7,801,000 7,818,000
----------------- ----------------
EQUIPMENT AND IMPROVEMENTS:
Equipment 3,170,000 2,883,000
Leasehold improvements 47,000 180,000
----------------- ----------------
3,217,000 3,063,000
Less - accumulated depreciation and amortization 2,310,000 2,226,000
----------------- ----------------
907,000 837,000
DEFERRED TAX ASSET (Note 4) 760,000 760,000
GOODWILL, net of accumulated amortization of $835,000 in 1997
and $713,000 in 1996 (Notes 2 and 3) 4,344,000 4,780,000
OTHER ASSETS 351,000 605,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-3
<PAGE> 39
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings (Notes 5 and 8) $2,697,000 $2,907,000
Current portion of long-term debt (Note 7) 113,000 88,000
Accounts payable 2,254,000 1,620,000
Accrued expenses and other current liabilities (Note 6) 4,138,000 2,917,000
----------------- ----------------
Total current liabilities 9,202,000 7,532,000
LONG-TERM DEBT, net of current portion (Note 7) 89,000 100,000
----------------- ----------------
Total liabilities 9,291,000 7,632,000
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Common stock, $.001 par value; authorized 40,000,000 shares; issued and
outstanding 19,141,760 in 1997 and 18,786,609 in 1996 19,000 19,000
Additional paid-in capital 13,393,000 12,857,000
Accumulated deficit (8,540,000) (5,708,000)
----------------- ----------------
4,872,000 7,168,000
----------------- ----------------
$14,163,000 $14,800,000
================= ================
</TABLE>
The accompanying notes to the consolidated
financial statements are an integral part of
these consolidated balance sheets.
F-4
<PAGE> 40
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING REVENUES $122,695,000 $100,927,000 $73,821,000
DIRECT OPERATING COSTS 113,894,000 92,490,000 68,530,000
----------------- ----------------- -----------------
Gross profit 8,801,000 8,437,000 5,291,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 8) 10,306,000 7,972,000 6,702,000
DEPRECIATION AND AMORTIZATION 1,010,000 829,000 845,000
----------------- ----------------- -----------------
Loss from operations (2,515,000) (364,000) (2,256,000)
----------------- ----------------- -----------------
OTHER CREDITS (CHARGES):
Interest income 60,000 173,000 124,000
Interest expense (Notes 5 and 7) (377,000) (422,000) (935,000)
Other income (expense) 0 50,000 (386,000)
----------------- ----------------- -----------------
(317,000) (199,000) (1,197,000)
----------------- ----------------- -----------------
Loss before income taxes (2,832,000) (563,000) (3,453,000)
INCOME TAX (EXPENSE) BENEFIT (Note 4) 0 (34,000) 137,000
----------------- ----------------- -----------------
Net loss ($2,832,000) ($597,000) ($3,316,000)
================= ================= =================
NET LOSS PER COMMON SHARE ($0.15) ($0.04) ($0.24)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,070,349 16,840,371 13,595,382
================= ================= =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 41
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
Shares Issued Paid-In
(Retired) Amount Capital Deficit
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1994 12,125,753 $ 12,000 $ 6,492,000 $ (1,795,000)
Exercise of stock options 1,605,426 2,000 853,000
Exercise of stock warrants 206,500 - 110,000
Retirement of common stock in connection with
exercise of stock options and warrants (249,255) - -
Common stock issued in connection with the
acquisition of Staff Rx 360,000 - 743,000
Expenses related to private placement of
common stock - - (164,000)
Common stock issued in connection with the
acquisition of Turnkey Services, Inc. 68,205 - 166,000
Common stock retired related to the
acquisition of The Alternative Source,
Inc., Ram Technical Corp. and MLB
Medical Staffing, Inc. (112,714) - (254,000)
Net loss - - - (3,316,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1995 14,003,915 14,000 7,946,000 (5,111,000)
Common stock issued in connection with
private placements, net of expenses 2,304,200 2,000 4,526,000 -
Common stock received and retired in
satisfaction of officer loans (107,130) - (679,000) -
Common stock issued 525,000 1,000 228,000 -
Exercise of stock options 794,157 1,000 48,000 -
Exercise of stock warrants 1,209,799 1,000 703,000 -
Stock issued for services rendered 56,668 - 85,000 -
Net loss - - - (597,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1996 18,786,609 19,000 12,857,000 (5,708,000)
Exercise of stock options 204,471 - 53,000
Exercise of stock warrants 117,347 - 181,000
Stock issued for employee bonus 33,333 - 100,000
Proceeds related to LNB settlement,
net of expenses - - 202,000
Net loss - - - (2,832,000)
----------------- ----------------- ----------------- -----------------
BALANCE, September 30, 1997 19,141,760 $ 19,000 $ 13,393,000 $ (8,540,000)
================= ================= ================= =================
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these consolidated statements.
F-6
<PAGE> 42
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30
---------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,832,000) ($597,000) ($3,316,000)
Adjustments to reconcile net loss to net
cash used in operating activities-
Deferred income taxes 0 0 (160,000)
Depreciation and amortization 1,010,000 829,000 845,000
Provision for doubtful accounts 1,120,000 462,000 153,000
Amortization of rent deferral 0 0 28,000
Stock issued employee bonus 100,000 85,000 0
Changes in operating assets and liabilities-
Increase in accounts receivable (602,000) (1,871,000) (2,490,000)
Decrease (increase) in other assets (106,000) 239,000 (909,000)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 1,855,000 (278,000) 2,806,000
Decrease in other liabilities 0 (75,000) (55,000)
Decrease (increase) in restricted cash 417,000 (1,155,000) 0
----------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 962,000 (2,361,000) (3,098,000)
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (361,000) (187,000) (355,000)
Acquisitions of businesses, net of cash acquired 0 0 (1,351,000)
----------------- ---------------- ----------------
Net cash used in investing activities (361,000) (187,000) (1,706,000)
----------------- ---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE> 43
<TABLE>
<CAPTION>
For the Years Ended September 30
----------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from borrowings on
revolving line of credit ($210,000) ($225,000) $2,122,000
Principal payments on long-term debt 0 (941,000) (443,000)
(Principal payments) proceeds on
subordinated bridge loan 0 (1,887,000) 1,887,000
Proceeds from other borrowings, net of repayments 14,000 71,000 837,000
Net proceeds from issuance of common stock,
net of expenses 0 4,528,000 245,000
Net proceeds from the exercise of stock options
and warrants 234,000 753,000 0
Net proceeds from common stock issued 0 229,000 0
Proceeds from LNB settlement, net of expenses 202,000 0 0
Other 0 0 (2,000)
----------------- ---------------- -----------------
Net cash provided by financing activities 240,000 2,528,000 4,646,000
----------------- ---------------- -----------------
Net increase (decrease) in cash 841,000 (20,000) (158,000)
CASH AT BEGINNING OF PERIOD 0 20,000 178,000
----------------- ---------------- -----------------
CASH AT END OF PERIOD $841,000 $0 $20,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $363,000 $412,000 $705,000
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Value of common stock issued in a business
acquisition $0 $0 $909,000
================= ================ =================
Value of common stock retired in satisfaction of
shareholder loans $0 $679,000 $0
================= ================ =================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-8
<PAGE> 44
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
Digital Solutions, Inc. (the Company) was incorporated under the laws of
the State of New Jersey on November 25, 1969. The Company, with its
subsidiaries, provides a broad spectrum of human resource services
including professional employer services, payroll processing, human
resource administration and placement of temporary and permanent
employees.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation-
The accompanying consolidated financial statements include those of DSI,
a New Jersey Corporation and its wholly-owned subsidiaries; DSI Contract
Staffing, DSI Staff ConnXions-Northeast, DSI Staff ConnXions Southwest,
and DSI Staff Rx, Inc. The results of operations of acquired companies
(see Note 3) have been included in the consolidated financial statements
from the date of acquisition. All significant intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
As more fully explained in Note 5, the Company has recently extended its
line of credit and is currently in discussion with several financial
institutions to receive additional financing for its capital needs. In
addition, management has instituted several cost reduction programs in an
effort to address its recurring operating losses. These management
initiatives have resulted in return to profitability of the Company in
the 4th quarter of fiscal 1997. Based upon the actions instituted and
forecast operating cash flows, management of the Company believes it can
sustain operations for at least twelve months from September 30, 1997.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Policy-
The Company recognizes revenue in connection with its professional
employer organization program (PEO) and its temporary placement service
program when the services have been provided. Revenues represent the
Company's billings to customers, with the corresponding cost of providing
those services reflected as direct operating expenses. Payroll services,
commissions and other fees for administrative services are recognized as
revenue as the related service is provided.
F-9
<PAGE> 45
Equipment and Improvements-
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using straight-line and accelerated methods
over the estimated useful asset lives (3 to 5 years) and the shorter of
the lease term or estimated useful life for leasehold improvements.
Goodwill-
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the acquisition date and is being
amortized on a straight line basis over 20 years for substantially all of
the Company's acquisitions (see Note 3). Goodwill amortization expense
charged to operations was approximately $434,000 for 1997, $415,000 for
1996 and $327,000 for 1995. Amortization expense for 1997 and 1996
includes a provision for goodwill impairment as described below.
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. As a result of certain
of the acquisitions described in Note 3 experiencing operating cash flow
losses, the Company, utilizing the present value of estimated future cash
flows from these operations discounted at a rate of return (15%),
determined that some impairment had occurred in certain of these
acquisitions. As a result, the Company charged approximately $195,000 and
$180,000 of additional amortization to depreciation and amortization for
the year ended September 30, 1996 and 1995, respectively.
In 1997, the Company decided not to remain in the insurance business and
elected to write off $261,000 in intangible assets of Digital Insurance,
Inc.
Insurance Programs-
The Company previously maintained a large deductible workers'
compensation insurance program which was replaced on April 1, 1997 with a
new program. Under the old program the Company still maintains a reserve
for claims that are outstanding as of the balance sheet date. However the
new program requires the funding of anticipated loss reserves on a
current basis. To be conservative the Company expenses the maximum loss
it can be held accountable for under this program which is greater than
the current funding requirement.
Net Loss Per Common Share-
Net loss per common share is based upon the weighted average number of
shares outstanding. Outstanding stock options and warrants have not been
considered in the computations of net loss per common share in 1997, 1996
and 1995 since their effect was antidilutive. In March, 1997 the
Financial Accounting Standards Board issued Statement on Financial
Accounting Standards Number 128, (Earnings Per Share) [(SFAS No. 128)].
SFAS No. 128 is effective for fiscal years ending after December 15,
1997, and when adopted, it will require restatement of prior year
earnings per share. If the Company had adopted SFAS No. 128 for the year
ended September, 1997 there would have been no effect on earnings per
share.
Statement of Cash Flows-
For purposes of the statements of cash flows, the Company considers all
liquid investments purchased with a maturity of three months or less to
be cash equivalents.
F-10
<PAGE> 46
(3) ACQUISITIONS:
The following acquisitions have been accounted for under the purchase
method of accounting. Accordingly, the results of operations of these
entities have been included in the consolidated financial statements of
the Company since the date of acquisition.
Turnkey Services, Inc.-
In May 1995, the Company, through its subsidiary, DSI Staff
ConnXions-Southwest, purchased certain assets of a PEO company located in
El Paso, Texas, Turnkey Services, Inc. The assets acquired included the
customer lists and all owned and leased assets utilized by Turnkey in its
business operations, subject to interest of equipment lessors. In
consideration for the assets, the Company paid to Turnkey $784,000 in
cash and a note payable and issued common stock in the amount of
$166,000. In addition, the Company incurred approximately $200,000 in
transaction costs and recorded goodwill of approximately $989,000
associated with this acquisition.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect would
not have been significant.
Staff Rx, Inc.-
In November 1994, the Company acquired certain assets of several
affiliated contract staffing firms through the Company's wholly-owned
subsidiary DSI-Staff Rx, Inc. in exchange for $200,000 in cash and a
promissory note for $1,300,000. In addition, the Company incurred
approximately $266,000 in transaction costs and recorded goodwill of
approximately $1,766,000, associated with this acquisition.
In March 1995, the Company issued 360,000 shares of its common stock,
valued at $743,000, to satisfy part of the aforementioned promissory
note. The balance was paid in cash.
If this acquisition had been included in the consolidated financial
statements for the entire year ended September 30, 1995, the effect would
not have been significant
(4) INCOME TAXES:
At September 30, 1997, the Company had available operating loss
carryforwards of approximately $6,945,000 to reduce future periods'
taxable income. The carryforwards expire in various years beginning in
2004 and extending through 2012.
The Company has recorded a $760,000 deferred tax asset at September 30,
1997 and 1996. This represents management's estimate of the income tax
benefits to be realized upon utilization of a portion of its net
operating losses for which management believes utilization to be more
likely than not. In order for the Company to realize a $760,000 tax
benefit, the Company would have to generate approximately $2,000,000 in
future taxable income. Management believes the Company's operations can
generate sufficient taxable income to realize this tax asset as a result
of recent business developments, its ability to meet its operating plan
as well as the resolution of significant past problems which had
adversely affected the Company in prior years.
F-11
<PAGE> 47
The income tax benefit reflected in the consolidated statement of
operations for 1995 represents a portion of the recorded deferred tax
asset described above.
An analysis of the Company's deferred income tax asset is as follows-
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
Net operating loss carryforwards $2,500,000 $1,985,000
Accrued workers' compensation 476,000 278,000
Allowance for doubtful accounts 310,000 122,000
Other items, net 154,000 0
-------------------- --------------------
Gross deferred income tax asset 3,440,000 2,335,000
Valuation allowance (2,680,000) (1,575,000)
-------------------- --------------------
Deferred income tax asset $760,000 $760,000
==================== ====================
</TABLE>
(5) SHORT-TERM BORROWINGS:
In February 1995, the Company entered into a one year revolving credit
line facility (the "Line") with a bank which was subsequently extended
and amended on seven occasions. Each loan extension has been for limited
periods of time. The fifth amendment executed as of December 31, 1996,
restricted the Company from borrowing any additional funds available on
the Line and required weekly principal payments of $10,000, effective
February 24, 1997. Effective October 31, 1997, the Company entered into
the seventh amendment to the loan agreement. Under the terms of this
agreement, which expires October 31, 1998, the Company was required to
grant to the bank 500,000 warrants to purchase the Company's common
stock. The warrants will vest in amounts of 200,000 and 300,000 as of
April 30, 1998 and October 31, 1998, respectively, if the obligations
under the loan agreement are not paid in full by these dates. The
warrants have an exercise price of $2.4375 per share which was the fair
market value of the stock at the date of the agreement. The Company is
obligated to make monthly payments of interest on the outstanding amounts
at the bank's floating base rate plus three percent (11.5% at September
30, 1997). The Line is collateralized by all of the Company's assets. On
December 1, 1997, as a requirement of the Line, the Company raised
$250,000. These funds were an equity investment provided by its
directors, a former director and executive officers and will be available
for general corporate purposes.
To address the capital needs of the Company, management is presently in
discussions with several financial institutions. There can be no
assurance that the Company will be successful in its efforts to raise
additional funds.
During 1995, the Company issued approximately $1,975,000 of Subordinated
Bridge Notes to various investors. The notes bore interest at a rate of
12% per annum (which was increased to 16% in November, 1995 in
consideration for extending the maturity date) and were repaid in full in
1996. In connection with the issuance of these notes, the Company also
granted these investors warrants to purchase the Company's common stock
(see Note 9).
Other information with respect to short term borrowings for 1997 and 1996
is as follows-
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Balance at end of period $2,697,000 $2,907,000
Maximum amount outstanding during period 3,017,000 5,019,000
Weighted average balance outstanding during the
period 2,916,000 3,382,000
Weighted average interest rate during the period 11.16% 12.31%
</TABLE>
F-12
<PAGE> 48
(6) ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 1997 and
1996 consist of the following-
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Payroll and payroll taxes $2,271,000 $1,888,000
Worker's compensation insurance reserves 1,321,000 631,000
Legal 134,000 100,000
Other 412,000 298,000
--------------- ---------------
$4,138,000 $2,917,000
=============== ===============
</TABLE>
(7) LONG-TERM DEBT:
Long-term debt at September 30, 1997 and 1996 consists of the following-
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Leases $202,000 $188,000
Less- Current portion (113,000) (88,000)
------------- -------------
$89,000 $100,000
============= =============
</TABLE>
Maturities of long-term debt as of September 30, 1997 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------------
<S> <C>
1998 $113,000
1999 48,000
2000 34,000
2001 7,000
---------------
$202,000
===============
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES:
Leases-
In November 1991, the Company entered into a lease for its corporate
headquarters facility. The lease term extended 69 months with fixed
monthly payments of $18,000. The Company recognized rent expense of
$253,000 under this lease in 1997, 1996 and 1995. Commencing September,
1997, the Company relocated its corporate headquarters to a new
facility. The lease for this facility extends through September, 2007
and provides for minimum annual payments of $286,000. The old lease was
a triple net lease resulting in actual total payments approximating the
lease payments in the new building. Rent expense under all operating
leases was $537,000 in 1997, $627,000 in 1996 and $384,000 in 1995.
F-13
<PAGE> 49
Minimum payments under noncancellable lease obligations at September 30,
1997 are as follows-
<TABLE>
<CAPTION>
Year Ending
September 30
------------------
<S> <C>
1998 $ 567,000
1999 572,000
2000 434,000
2001 353,000
2002 308,000
Thereafter 1,601,000
-----------------------
$ 3,835,000
=======================
</TABLE>
Workers' Compensation Policy-
In connection with the Company's former workers' compensation insurance
policy which expired on April 1, 1997, the insurance company developed
reserve factors on each claim that may or may not materialize after the
claim is fully investigated. Generally Accepted Accounting Principles
require that all incurred, but not paid claims, as well as an estimate
for claims incurred, but not reported (IBNR), be accrued on the balance
sheet as a current liability, although a portion of the claims may not be
paid in the following 12 months. As of September 30, 1997 and September
30, 1996, this accrual amounted to $818,000 and $631,000, respectively.
On April 1, 1997, the Company entered into a workers' compensation policy
with a new carrier. Under the terms of the new workers' compensation
insurance program the Company fully accrues the maximum loss on a monthly
basis. During the twelve months ended September 30, 1997 and 1996, the
Company recognized approximately $868,000 and $1,332,000, respectively,
as its share of premiums collected from customers covered by these
policies in excess of claims and fees paid. The decrease in reported
workers' compensation profit is due to the revised methodology in
evaluating the Company's exposure as reported in the Company's second
fiscal quarter 10-Q and the new insurance program.
The Company has outstanding letters of credit amounting to $1,193,000 as
of September 30, 1997. The letters of credit are required to
collateralize unpaid claims in connection with the Company's former
workers' compensation insurance policy and can only be drawn upon by the
beneficiary if the Company does not perform according to the terms of the
related agreement. The Company has collateralized these letters of credit
by maintaining compensating restricted cash balances of $738,000 and
utilizing $455,000 of amounts available under its line of credit. The
Company's current policy does not require a letter of credit because the
Company funds the estimated loss reserves on a monthly basis.
Legal Proceedings-
In October 1995, the Company entered into a note and finance agreement
with LNB Investment Corporation (LNB) providing for the loan to the
Company of up to $3,000,000. The loan was for a term of 15 months and was
to be secured by shares of the Company's common stock having a market
value of no less than four times the outstanding balance of the loan. LNB
agreed not to sell or otherwise liquidate the shares unless the Company
were to default under the loan agreement and failed to cure such default
after notice. A total of 7,500,000 shares to be pledged as collateral
were registered under a registration statement filed under the Securities
Act of 1933, as amended.
The Company issued 1,783,334 shares in the name of LNB and delivered the
shares to a depository to secure the first portion of the loan of
$1,000,000. In January 1996, the Company determined
F-14
<PAGE> 50
that the shares pledged as collateral had been transferred and sold in
violation of the loan and finance agreement. As a result, the financing
agreement was terminated and never funded. Through the efforts of the
Company, 1,258,334 of these shares were recovered and the Company
received proceeds of $229,000 for a partial payment on the 525,000
shares not recovered.
In March 1996, the Company commenced action against LNB, Donaldson,
Lufkin & Jenrette Securities Corporation and other individuals to
recover damages on account of the wrongful sale of the Company's common
stock. On July 2, 1997, the Company settled the action. Without
admitting or denying the allegations in the complaint, the defendants
agreed to pay $676,000 of which $426,000 ($202,000, net of expenses)
has been paid with the balance of $250,000 to be paid by LNB on or
before August 4, 1997. The payment was not made by LNB as of December
16, 1997 and as a result, the Company has commenced collection
proceedings. The subsequent payment is secured by a confession of
judgment and a mortgage in the amount of $625,000. The payments under
the settlement agreement are in addition to $229,000 previously
received from LNB bringing the total recovered to approximately
$905,000, assuming LNB complies with the terms of the settlement and
remits the last payment of $250,000. The agreement also provides that
upon payment of all sums due under the settlement agreement, LNB shall
be deemed to have made full restitution to the Company for the claims
alleged in the action.
At September 30, 1997 the Company is involved in various other legal
proceedings incurred in the normal course of business. In the opinion
of management and its counsel, none of these proceedings would have a
material effect, if adversely decided, on the consolidated financial
position or results of operations of the Company.
(9) SHAREHOLDERS' EQUITY
Private Placements-
In November, 1995, the Company issued in a private placement 500 Shares
of $.10 par value Series B Convertible Preferred Stock. Holders of the
preferred stock were entitled to dividends of $60 per annum, payable
semiannually and had the right to convert up to 50% of their shares at
any time after 41 days from the date of issuance of the Series B
Preferred Stock and 100% after 60 days after issuance into the
Company's common stock at a conversion price equaled to 75% of the
average closing price at the date of conversion. In January 1996,
holders of the Company's preferred stock exercised their conversion
privilege and received 421,792 shares of the Company's common stock.
The Company realized net proceeds of $437,000 from the proceeds of this
offering.
Additionally, during 1996 the Company raised an additional $4,091,000,
net of expenses through a private placement of 1,882,408 shares of its
common stock. The proceeds from these offerings were used in part to
pay down the balance on the Subordinated Bridge Notes, collateralize
letters of credit issued to secure the Company's workers' compensation
program (see Note 8) and for working capital needs.
On December 1, 1997, as a requirement of the extension of its bank line
of credit, the Company raised $250,000. These funds were an equity
investment provided by its directors, a former director and executive
officers and will be available for general corporate purposes.
F-15
<PAGE> 51
Stock Warrants -
The following is a summary of the outstanding warrants to purchase the
Company's common stock at September 30, 1997 as a result of various debt
and equity offerings that have occurred since the Company's inception:
<TABLE>
<CAPTION>
Exercise Price Per Number of Shares of
Exercise Period From Exercise Period Common Share Common Stock Reserved
To
---------------------- ---------------------- --------------------- -------------------------
<S> <C> <C> <C>
October 1991 October 2001 0.75 100,000
June 1993 June 1998 0.75 25,000
August 1993 August 1998 0.75 300
September 1993 September 1998 1.06 50,000
January 1995 January 2000 1.90 64,350
April 1995 April 2000 2.50 5,000
October 1995 October 2000 2.25 24,000
December 1995 December 2000 1.56 5,000
June 1996 June 2001 2.70 112,979
-------------
386,629
=============
</TABLE>
Stock Option Plans -
In April 1990 the Company adopted three stock option plans, the 1990
Employees Stock Option Plan, the Non-Executive Director Stock Option
Plan, and the Senior Management Incentive Plan (collectively the "1990
Plans"). The 1990 Plans will remain in effect until April 2000 or unless
terminated sooner by the Board of Directors.
The 1990 Employees Stock Option Plan (the "Employee Plan") provides for
options to be granted to employees, including certain officers of the
Company, for the purchase of up to 1,000,000 shares of common stock. Some
of the options granted under the 1990 Plan are intended to qualify as
incentive stock options under the Internal Revenue Code. The exercise
price of incentive stock options granted may not be less than the fair
market value of the shares on the date of grant, or in certain
circumstances, an option price at least equal to 110% of the fair market
value of the stock at the time the option is granted. Options granted
under the plan may not be exercised more than ten years from the date of
the grant (or in certain circumstances, five years from the date of
grant).
The Non-Executive Director Stock Option Plan (the "Director Plan"),
provides for the issuance of options for the purchase of up to 500,000
shares of common stock. Eligible participants are directors of the
Company who are also not employees of the Company and nonemployee
directors of any advisory board established by the Company. Under the
terms of the Director Plan, the exercise price of options granted will
equal 100% of the fair market value of the common stock at the date the
options are granted. Options will be granted to eligible participants as
follows: 5,000 upon becoming nonexecutive directors and 5,000 each
September 1, commencing September 1, 1990 provided such person had been
eligible for the preceding 12 months. Directors of advisory boards will
receive on each September 1 an option to purchase 10,000 shares of common
stock, providing such director has served as a director of the advisory
board for the previous 12 month period. The term of each option commences
on the date it is granted and expires five years from grant date unless
terminated sooner as provided in the Director Plan.
F-16
<PAGE> 52
The Senior Management Incentive Plan (the "Management Plan") provides
for the issuance of stock, options and other stock rights to executive
officers and other key employees who render significant services to the
Company. Under the terms of the Management Plan, the exercise price of
options granted will equal 100% of the fair market value of the common
stock at the date the options are granted. A total of 5,000,000 shares
of common stock have been reserved for issuance under the Management
Plan. Awards made under the Management Plan are generally subject to
three-year vesting periods (subject to the discretion of the Board of
Directors), but may become exercisable in full upon certain "change of
control" events as defined in the Management Plan.
The following tables summarizes the activity in the Company's stock
option plans for the year ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1996 Granted (1) Canceled Exercised 1997
------------------- ----------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Employee Plan 248,558 60,000 135,751 79,682 93,125
Director Plan 71,250 15,000 10,000 0 76,250
Management
Plan 977,540 30,000 207,751 124,789 675,000
----------------- -------------- --------------- --------------- -----------------
1,297,348 105,000 353,502 204,471 844,375
================= ============== =============== =============== =================
</TABLE>
(1) Options granted during 1997 have a weighted average exercise price
and weighted average fair value of $1.875 and $1.12, respectively.
<TABLE>
<CAPTION>
Options Options
Outstanding Outstanding
September 30, September 30,
Plan 1995 Granted(2) Canceled Exercised 1996
------------------- ----------------- -------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Employee Plan 186,964 131,500 6,655 63,251 248,558
Director Plan 70,000 31,250 0 30,000 71,250
Management
Plan 1,451,500 350,000 123,054 700,906 977,540
----------------- -------------- --------------- --------------- -----------------
1,708,464 512,750 129,709 794,157 1,297,348
================= ============== =============== =============== =================
</TABLE>
(2) Options granted during 1996 have a weighted average exercise price
and weighted average fair value of $4.63 and $2.40, respectively.
During 1997, certain individuals exercised options by delivering to the
Company shares previously purchased in consideration for the option
price. The amounts reflected in additional paid in capital are net of
the fair market value of the shares redeemed by the Company.
F-17
<PAGE> 53
Options outstanding as of September 30, 1997 become exercisable as
follows-
<TABLE>
<CAPTION>
Exercise
Plan Price Total 1997 1998 1999 Thereafter
----------------- ------------- ------------- -------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Employee $0.75- 93,125 41,178 24,614 15,833 11,500
Plan $6.50
Director $0.81- 76,250 61,250 15,000 0 0
Plan $4.4375
Management $.875- 675,000 438,999 124,000 112,001 0
Plan $5.8125
------------- -------------- ----------- ------------ ---------------
844,375 541,427 163,614 127,834 11,500
============= ============== =========== ============ ===============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was
effective October 1, 1996, the fair value of option grants is estimated
on the date of grant using the Black-Scholes option-pricing model for
proforma footnote purposes with the following assumptions used for
options granted subsequent to October 1, 1996; dividend yield of 0%,
risk-free interest rate of 6.31% and 6.64% in 1997 and 1996, and
expected option life of 4 years. Expected volatility was assumed to be
73.5% and 78% in 1997 and 1996, respectively.
As permitted by FAS 123, the Company has chosen to continue to account
for its employee stock-based compensation at their intrinsic value in
accordance with Accounting Principle Board Opinion No. 25. Accordingly
no compensation expense has been recognized for its stock option
compensation plans. Had the fair value method of accounting been
applied to the company's stock option plans, the tax-effected impact
would be as follows:
<TABLE>
<CAPTION>
------------------ -------------------
(Thousands of dollars except per share amounts) 1997 1996
------------------ -------------------
<S> <C> <C>
Net loss as reported $2,832 $597
Estimated fair value of the year's option grants, net of tax
76 788
------------------ -------------------
Net loss adjusted
$2,908 $1,385
------------------ -------------------
Adjusted net loss per share
$.15 $.08
================== ===================
</TABLE>
F-18
<PAGE> 54
SCHEDULE I
DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(c) Additions (d)
(b) Balance Charged to Deductions -
at Beginning Costs and Net (e) Other (f) Balance
(a) Description of Year Expenses Write-Offs Adjustment at End of Year
- ------------------------------ --------------- --------------- -------------- --------------- ---------------
Allowance for doubtful
accounts, year ended-
<S> <C> <C> <C> <C> <C>
September 30, 1997 $339,000 $1,120,000 ($597,000) $0 $862,000
============= ============== ============== =============== =============
September 30, 1996 $150,000 $462,000 ($273,000) $0 $339,000
============= ============== ============== =============== =============
September 30, 1995 $99,000 $153,000 ($102,000) $0 $150,000
============= ============== ============== =============== =============
</TABLE>
S-20
<PAGE> 55
Exhibit Index
The exhibits designated with an asterisk (*) are filed herewith. All
other exhibits have been previously filed with the Commission and, pursuant to
17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the
document referenced in brackets following the descriptions of such exhibits.
EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (Exhibit A to
Definitive Proxy Material dated July 20, 1990)
3 (c) -- By-Laws of Registrant (Exhibit 10.1 to Form 8-K dated March 2l, 1990)
10.6.1 *-- Lease dated May 30, 1997 for office space at 300 Atrium, Somerset, New
Jersey
10.15.1 - Employment agreement between George J. Eklund and the Company dated March 12, 1996
10.15.2 *-- Amended employment agreement between George J. Eklund and the Company dated December 16, 1997
10.16.1 *-- Seventh amended Loan Agreement between Registrant and Summit Bank and sixth amended Promissory
Note
21.0 -- Subsidiaries (Exhibit 21 to Form 10-K for fiscal 1996)
23.1 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-85526.
23.2 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-70928.
23.3 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-91700.
23.4 *-- Consent of Arthur Andersen, LLP to the incorporation of
its report on the Company's financial statements for the
fiscal year ended 1997 into the Company's registration
Statement on form S-3 file number 33-09313.
27. *-- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.6.1
LEASE AGREEMENT BETWEEN
WHATR REAL ESTATE LIMITED PARTNERSHIP,
AS LANDLORD, AND
DIGITAL SOLUTIONS, INC., AS TENANT
DATED MAY 30, 1997
<PAGE> 2
TABLE OF CONTENTS
Page
----
1. Lease Grant 1
2. Term 1
3. Rent 1
(a) Basic Rent 1
(b) Payment 2
(c) Consumer Price Index Increases to Basic Rent 2
(d) Operating Costs 2
4. Delinquent Payment; Handling Charges 4
5. Security Deposit 5
6. Landlord's Obligations 5
(a) Services 5
(b) Excess Utility Use 6
(c) Restoration of Services; Abatement 6
7. Improvements; Alterations; Repairs; Maintenance 7
(a) Improvements; Alterations 7
(b) Repairs; Maintenance 7
(c) Performance of Work 7
(d) Mechanic's Liens 8
8. Use 8
9. Assignment and Subletting 8
(a) Transfers; Consent 8
(b) Cancellation 9
(c) Additional Compensation 10
10. Insurance; Waivers; Subrogation; Indemnity 10
(a) Insurance 10
(b) Waiver of Negligence; No Subrogation 10
(c) Indemnity 11
11. Subordination; Attornment; Notice to Landlord's Mortgagee 11
(a) Subordination 11
(b) Attornment 11
2
<PAGE> 3
(c) Notice to Landlord's Mortgagee 11
(d) Current Status; Future Landlord's Mortgagee 11
12. Rules and Regulations 11
13. Condemnation 12
(a) Total Taking 12
(b) Partial Taking - Tenant's Rights 12
(c) Partial Taking - Landlord's Rights 12
(d) Award 12
14. Fire or Other Casualty 12
(a) Repair Estimate 12
(b) Landlord's and Tenant's Rights 12
(c) Landlord's Rights 13
(d) Repair Obligation 13
15. Personal Property Taxes 13
16. Events of Default 13
17. Remedies 14
18. Payment by Tenant; Non-Waiver 15
(a) Payment by Tenant 15
(b) No Waiver 15
19. Landlord's Lien 15
20. Surrender of Premises 16
21. Holding Over 16
22. Certain Rights Reserved by Landlord 16
23. Substitution Space 17
24. Miscellaneous 17
(a) Landlord Transfer 17
(b) Landlord's Liability 17
(c) Force Majeure 17
(d) Brokerage 17
(e) Estoppel Certificates 17
(f) Notices 18
3
<PAGE> 4
(g) Separability 18
(h) Amendments; and Binding Effect 18
(i) Quiet Enjoyment 18
(j) No Merger 18
(k) No Offer 18
(l) Entire Agreement 18
(m) Waiver of Jury Trial 19
(n) Governing Law 19
(o) Joint and Several Liability 19
(p) Financial Reports 19
(q) Landlord's Fees 19
(r) Telecommunications 19
(s) General Definitions 19
(t) Confidentiality 20
(u) List of Exhibits 20
25. Other Provisions 20
(a) Hazardous Substances 20
(b) ISRA Obligations 21
(c) Indemnity 21
(d) Environmental Report 22
(e) Landlord's Environmental Representation 22
(f) Vending Machine Area 23
(g) Landlord's Work 23
(h) Signage Rights 23
4
<PAGE> 5
LIST OF DEFINED TERMS
Page
----
Additional Rent 2
Affiliate 19
Basic Rent 1
Building 1
Casualty 12
Collateral 15
Commencement Date 1
Construction Allowance D-2
Consultant 22
Damage Notice 12
Electrical Costs 4
Event of Default 13
Expense Stop 2
Hazardous Substance 21
including 20
Interest Rate 4
ISRA 21
Landlord 1
Landlord's Mortgagee 11
Law 19
Laws 19
Lease 1
Loss 10
Operating Costs 2
Operating Costs and Tax Statement 4
Parking Area E-1
PCBs 21
Permitted Use 8
Premises 1
Proportionate Share 4
Rent 2
Report 22
Security Deposit 5
Taking 12
Taxes 3
Tenant 1
Tenant Delay Day D-2
Tenant Party 20
Term 1
5
<PAGE> 6
Third Party Offer 10
Total Construction Costs D-2
Transfer 8
UCC 15
Work D-1
Working Drawings D-1
6
<PAGE> 7
LEASE
THIS LEASE AGREEMENT (this "LEASE") is entered into as of May , 1997,
between WHATR REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership
("LANDLORD"), and DIGITAL SOLUTIONS, INC., a New Jersey corporation ("TENANT").
1. LEASE GRANT. Subject to the terms of this Lease, Landlord leases to
Tenant, and Tenant leases from Landlord, Suite No. 103 (the "PREMISES") as
depicted in the plan attached as Exhibit A in the office building (the
"BUILDING") located at 300 Atrium Drive, Franklin Township, Somerset County, New
Jersey 08873. The land on which the Building is located is described on Exhibit
B. The term "BUILDING" includes the related land, driveways, parking facilities,
and similar improvements.
2. TERM. The term of this Lease shall be approximately 120 months,
commencing on the earlier of (a) the date on which Landlord would have delivered
the Premises with the Work (as defined in Exhibit D hereto) substantially
completed but for Tenant Delay Days (as defined in Exhibit D hereto), if any, or
(b) the date on which Tenant occupies the Premises and begins conducting
business therein (such earlier date being referred to herein as the
"COMMENCEMENT DATE"), and expiring at 5:00 p.m., Somerset, New Jersey time on
the last day of the 120th full calendar month following the Commencement Date
(the "TERM", which definition shall include all renewals of the initial Term).
If the Premises are not ready for occupancy by Tenant on the Commencement Date,
then (b) Tenant's obligation to pay Basic Rent and Additional Rent (as defined
in Section 3) shall be waived until Landlord tenders possession of the Premises
to Tenant, (c) the Term shall be extended by the time between the scheduled
Commencement Date and the date on which Landlord tenders possession of the
Premises to Tenant, (d) Landlord shall not be in default hereunder or be liable
for damages therefor, and (e) Tenant shall accept possession of the Premises
when Landlord tenders possession thereof to Tenant.
3. RENT.
(a) BASIC RENT. "BASIC RENT" (herein so called) shall be the
following amounts for the following periods of time:
<TABLE>
<CAPTION>
LEASE MONTH MONTHLY BASIC RENT
----------- ------------------
<S> <C> <C>
1 - 60 $23,818.75
61 - 120 $26,677.00
</TABLE>
As used herein, the term "LEASE MONTH" shall mean each calendar month during the
Term (and if the Commencement Date does not occur on the first day of a calendar
month, the period from
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<PAGE> 8
the Commencement Date to the first day of the next calendar month shall be
included in the first Lease Month).
(b) PAYMENT. Tenant shall timely pay to Landlord Basic Rent and all
additional sums to be paid by Tenant to Landlord under this Lease (collectively,
the "RENT"), without deduction or set off, at Landlord's address provided for in
this Lease or as otherwise specified by Landlord. Basic Rent, adjusted as herein
provided, shall be payable monthly in advance, and shall be accompanied by all
applicable state and local sales or use taxes. The first monthly installment of
Basic Rent shall be payable contemporaneously with the execution of this Lease;
thereafter, Basic Rent shall be payable on the first day of each month beginning
on the first day of the second full calendar month of the Term. The monthly
Basic Rent for any partial month at the beginning of the Term shall equal the
product of 1/365 of the annual Basic Rent in effect during the partial month and
the number of days in the partial month from and after the Commencement Date,
and shall be due on the Commencement Date.
(c) CONSUMER PRICE INDEX INCREASES TO BASIC RENT. [Intentionally
deleted].
(d) OPERATING COSTS.
(1) Tenant shall pay an amount (per each rentable square foot
in the Premises) ("ADDITIONAL RENT") equal to the difference between the
Operating Costs (defined below) per rentable square foot in the Building
and the actual Operating Costs for the calendar year 1997 (the "EXPENSE
STOP"). Landlord may collect such amount in a lump sum, which shall be due
within 30 days after Landlord furnishes to Tenant the Operating Costs and
Tax Statement (defined below). Alternatively, Landlord may make a good
faith estimate of the Additional Rent to be due by Tenant for any calendar
year or part thereof during the Term, and Tenant shall pay to Landlord, on
the Commencement Date and on the first day of each calendar month
thereafter, an amount equal to the estimated Additional Rent for such
calendar year or part thereof divided by the number of months therein.
From time to time, Landlord may estimate and re-estimate the Additional
Rent to be due by Tenant and deliver a copy of the estimate or re-estimate
to Tenant. Thereafter, but no sooner than 30 days after Landlord's
delivery of Landlord's estimate or re-estimate of the Additional Rent, the
monthly installments of Additional Rent payable by Tenant shall be
appropriately adjusted in accordance with the estimations so that, by the
end of the calendar year in question, Tenant shall have paid all of the
Additional Rent as estimated by Landlord. Any amounts paid based on such
an estimate shall be subject to adjustment as herein provided when actual
Operating Costs are available for each calendar year.
(2) The term "OPERATING COSTS" shall mean all expenses and
disbursements (subject to the limitations set forth below) that Landlord
incurs in connection with the ownership, operation, and maintenance of the
Building, determined in accordance with generally accepted accounting
principles applicable to real estate consistently applied, including, but
not limited to, the following costs: (A) wages and
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<PAGE> 9
salaries (including reasonable management fees) of all employees engaged
in the operation, maintenance, and security of the Building, including
taxes, insurance and benefits relating thereto; (B) all supplies and
materials used in the operation, maintenance, repair, replacement, and
security of the Building; (C) costs for improvements made to the Building
which, although capital in nature, are expected to reduce the normal
operating costs of the Building, as well as capital improvements made in
order to comply with any law hereafter promulgated by any governmental
authority, as amortized over the useful economic life of such improvements
as determined by Landlord in its reasonable discretion; (D) cost of all
utilities, except the cost of utilities reimbursable to Landlord by the
Building's tenants other than pursuant to a provision similar to this
Section 3.(d); (E) insurance expenses; (F) repairs, replacements, and
general maintenance of the Building; and (G) service or maintenance
contracts with independent contractors for the operation, maintenance,
repair, replacement, or security of the Building (including, without
limitation, alarm service, window cleaning, and elevator maintenance).
Operating Costs shall not include costs for (i) capital improvements
made to the Building, other than capital improvements described in Section
3.(d)(2)(C) and except for items which are generally considered
maintenance and repair items, such as painting of common areas,
replacement of carpet in elevator lobbies, decorating, redecorating, or
special cleaning or other services not provided on a regular basis to
tenants of the Building, and the like; (ii) repair, replacements and
general maintenance paid by proceeds of insurance or by Tenant or other
third parties; (iii) interest, amortization or other payments on loans to
Landlord; (iv) legal expenses for services, other than those that benefit
the Building tenants generally (e.g., tax disputes); (v) renovating or
otherwise improving space for occupants of the Building or vacant space in
the Building; (vi) Taxes (defined below), (vii) federal income taxes
imposed on or measured by the income of Landlord from the operation of the
Building; (viii) any charge for depreciation of the Building or equipment
and any interest or other financing charge; (ix) any charge for Landlord's
income taxes, excess profit taxes, franchise taxes, or similar taxes on
Landlord's business; (x) all costs relating to activities for the
solicitation and execution of leases of space in the Building, including
leasing commissions; (xi) the cost of correcting defects in the
construction of the Building or in the building equipment (except that
conditions not occasioned by construction defects resulting from ordinary
wear and tear will not be deemed defects for the purpose of this
category); (xii) the cost of any repair made by Landlord because of the
total or partial destruction of the Building or the condemnation of a
portion of the Building; (xiii) the cost of any items for which Landlord
is reimbursed by insurance or otherwise compensated by parties other than
tenants of the Building pursuant to clauses similar to this Section; (xiv)
any operating expense representing an amount paid to a related
corporation, entity or person which is in excess of the amount which would
be paid in the absence of such relationship; and (xv) the cost of overtime
or other expense to Landlord in curing its defaults or performing work
expressly provided in this Lease to be borne at Landlord's expense.
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<PAGE> 10
(3) Tenant shall also pay its Proportionate Share (defined
below) of any increase in Taxes for each year and partial year falling
within the Term, which shall be determined by multiplying the difference
between (A) the Taxes for the year in question and (B) the Taxes for the
year 1997 by Tenant's Proportionate Share. Tenant shall pay its
Proportionate Share of Taxes in the same manner as provided above for
Additional Rent with regard to Operating Costs. "TAXES" shall mean taxes,
assessments, and governmental charges whether federal, state, county or
municipal, and whether they be by taxing districts or authorities
presently taxing or by others, subsequently created or otherwise, and any
other taxes and assessments attributable to the Building (or its
operation), excluding, however, penalties and interest thereon and federal
and state taxes on income (if the present method of taxation changes so
that in lieu of the whole or any part of any Taxes, there is levied on
Landlord a capital tax directly on the rents received therefrom or a
franchise tax, assessment, or charge based, in whole or in part, upon such
rents for the Building, then all such taxes, assessments, or charges, or
the part thereof so based, shall be deemed to be included within the term
"Taxes" for purposes hereof). Taxes shall include the costs of consultants
retained in an effort to lower taxes and all costs incurred in disputing
any taxes or in seeking to lower the tax valuation of the Building. If
Landlord is successful in lowering the Taxes for the Building, Landlord
shall calculate Tenant's Proportionate Share of Taxes based upon the
revised tax valuation of the Building.
(4) Tenant shall also pay to Landlord an amount equal to the
product of (A) the cost of all electricity used by the Building
("ELECTRICAL COSTS") multiplied by (B) Tenant's Proportionate Share.
Tenant shall pay its Proportionate Share of Electrical Costs in the same
manner as provided above for Additional Rent with regard to Operating
Costs. Tenant's Proportionate Share of Electrical Costs shall be included
in the definition of Additional Rent under this Lease.
(5) By April 1 of each calendar year, or as soon thereafter as
practicable, but in no event later than June 30th of each calendar year,
Landlord shall furnish to Tenant a statement of Operating Costs and
Electrical Costs for the previous year, in each case adjusted as provided
in Section 3.(d)(7), and of the Taxes for the previous year (the
"OPERATING COSTS AND TAX STATEMENT"). If the Operating Costs and Tax
Statement reveals that Tenant paid more for Operating Costs than the
actual amount for the year for which such statement was prepared, or more
than its actual share of Taxes for such year, then Landlord shall promptly
credit or reimburse Tenant for such excess; likewise, if Tenant paid less
than Tenant's actual Proportionate Share of Additional Rent or share of
Taxes due, then Tenant shall promptly pay Landlord such deficiency.
(6) As used herein, Tenant's "PROPORTIONATE SHARE" shall be
10.2063%, which is the percentage obtained by dividing the rentable square
feet of area in the Premises, which is stipulated to be 15,244 rentable
square feet, by the total number of square feet of area in the Building,
which is stipulated to be 149,359 rentable square feet.
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<PAGE> 11
(7) With respect to any calendar year or partial calendar year
in which the Building is not occupied to the extent of 95% of the rentable
area thereof, the Operating Costs and Electrical Costs for such period
shall, for the purposes hereof, be increased to the amount which would
have been incurred had the Building been occupied to the extent of 95% of
the rentable area thereof.
4. DELINQUENT PAYMENT; HANDLING CHARGES. All past due payments required of
Tenant hereunder shall bear interest from the date due until paid at the lesser
of 18% per annum (the "INTEREST RATE") or the maximum lawful rate of interest;
additionally, after Landlord has delivered to Tenant written notice of its
failure to pay Rent when due, then Landlord may, without delivering to Tenant
notice of such delinquency, charge Tenant a fee equal to 5% of any future
delinquent payment during the 12-month period following such delinquency to
reimburse Landlord for its cost and inconvenience incurred as a consequence of
Tenant's delinquency. In no event, however, shall the charges permitted under
this Section 4 or elsewhere in this Lease, to the extent they are considered to
be interest under law, exceed the maximum lawful rate of interest.
5. SECURITY DEPOSIT. Contemporaneously with the execution of this Lease,
Tenant shall pay to Landlord $23,818.75 (the "SECURITY DEPOSIT"), which shall be
held by Landlord to secure Tenant's performance of its obligations under this
Lease. The Security Deposit is not an advance payment of Rent or a measure or
limit of Landlord's damages upon an Event of Default (defined in Section 16).
Landlord may, from time to time and without prejudice to any other remedy, use
all or a part of the Security Deposit to perform any obligation Tenant fails to
perform hereunder (after the expiration of any applicable notice and opportunity
to cure provisions expressly set forth herein). Following any such application
of the Security Deposit, Tenant shall pay to Landlord on demand the amount so
applied in order to restore the Security Deposit to its original amount.
Provided that Tenant has performed all of its obligations hereunder, Landlord
shall, within 30 days after the Term ends, return to Tenant the portion of the
Security Deposit which was not applied to satisfy Tenant's obligations. The
Security Deposit may be commingled with other funds, and no interest shall be
paid thereon. If Landlord transfers its interest in the Premises and the
transferee assumes Landlord's obligations under this Lease, then Landlord may
assign the Security Deposit to the transferee and Landlord thereafter shall have
no further liability for the return of the Security Deposit. So long as no Event
of Default has occurred under this Lease, Landlord shall, upon Tenant's written
request therefor, apply the Security Deposit toward Tenant's Rent obligations on
the 13th full calendar month following the Commencement Date.
6. LANDLORD'S OBLIGATIONS.
(a) SERVICES. Landlord shall furnish to Tenant (1) water at those
points of supply provided for general use of tenants of the Building; (2) heated
and refrigerated air conditioning as appropriate, at such temperatures and in
such amounts as are standard for comparable buildings in the vicinity of the
Building; (3) janitorial service to the Premises on
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<PAGE> 12
weekdays, other than holidays, for Building-standard installations and such
window washing as may from time to time be reasonably required; (4) elevators
for ingress and egress to the floor on which the Premises are located, in common
with other tenants, provided that Landlord may reasonably limit the number of
operating elevators during non-business hours and holidays; and (5) electrical
current during normal business hours for equipment that does not require more
than 110 volts and whose electrical energy consumption does not exceed normal
office usage and for purposes incidental to such normal office usage. Landlord
shall maintain the common areas of the Building (including any restrooms not
contained within the Premises and the structure of the Building) in reasonably
good order and condition, except for damage caused by a Tenant Party. If Tenant
desires any of the services specified in Section 6.(a)(2) at any time other than
(A) between 8:00 a.m. and 6:00 p.m. on weekdays, (B) between 8:00 a.m. and 1:00
p.m. on Saturday, or (C) on Sunday or holidays, then such services shall be
supplied to Tenant upon the written request of Tenant delivered to Landlord
before 3:00 p.m. on the business day preceding such extra usage, and Tenant
shall pay to Landlord the cost of such services within 30 days after Landlord
has delivered to Tenant an invoice therefor. The costs incurred by Landlord in
providing after-hour HVAC service to Tenant shall include costs for electricity,
water, sewage, water treatment, labor, metering, filtering, and maintenance
reasonably allocated by Landlord to providing such service. Landlord's
after-normal business hour charges for HVAC for 1997 is $75.00 per hour per air
conditioning zone in the Building; however, Landlord and Tenant agree that such
figure shall not be interpreted as a maximum amount which may be charged to
Tenant for such services.
(b) EXCESS UTILITY USE. Landlord shall not be required to furnish
electrical current for equipment that requires more than 110 volts or other
equipment whose electrical energy consumption exceeds normal office usage. If
Tenant's requirements for or consumption of electricity exceed the electricity
to be provided by Landlord as described in Section 6.(a), Landlord shall, at
Tenant's expense, make reasonable efforts to supply such service through the
then-existing feeders and risers serving the Building and the Premises, and
Tenant shall pay to Landlord the cost of such service within 30 days after
Landlord has delivered to Tenant an invoice therefor. Landlord may determine the
amount of such additional consumption and potential consumption by any
reasonable and verifiable method, including installation of a separate meter in
the Premises installed, maintained, and read by Landlord, at Tenant's expense.
Tenant shall not install any electrical equipment requiring special wiring or
requiring voltage in excess of 110 volts or otherwise exceeding Building
capacity unless approved in advance by Landlord, which approval shall not be
unreasonably withheld, delayed or conditioned. The use of electricity in the
Premises shall not exceed the capacity of existing feeders and risers to or
wiring in the Premises. Any risers or wiring required to meet Tenant's excess
electrical requirements shall, upon Tenant's written request, be installed by
Landlord, at Tenant's cost, if, in Landlord's reasonable judgment, the same are
necessary and shall not cause permanent damage to the Building or the Premises,
cause or create a dangerous or hazardous condition, entail excessive or
unreasonable alterations, repairs, or expenses, or interfere with or disturb
other tenants of the Building. If Tenant uses machines or equipment in the
Premises which affect the temperature otherwise maintained by the air
conditioning system or otherwise overload any utility, Landlord may install
supplemental air conditioning units or other supplemental
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<PAGE> 13
equipment in the Premises, and the cost thereof, including the cost of
installation, operation, use, and maintenance, shall be paid by Tenant to
Landlord within 30 days after Landlord has delivered to Tenant an invoice
therefor.
(c) RESTORATION OF SERVICES; ABATEMENT. Landlord shall use
reasonable efforts to restore any service required of it that becomes
unavailable; however, such unavailability shall not render Landlord liable for
any damages caused thereby, be a constructive eviction of Tenant, constitute a
breach of any implied warranty, or, except as provided in the next sentence,
entitle Tenant to any abatement of Tenant's obligations hereunder. If, however,
Tenant is prevented from using the Premises for more than 15 consecutive
business days because of the unavailability of any such service and such
unavailability was not caused by a Tenant Party, then Tenant shall, as its
exclusive remedy be entitled to a reasonable abatement of Rent for each
consecutive day (after such 15-day period) that Tenant is so prevented from
using the Premises.
7. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE.
(a) IMPROVEMENTS; ALTERATIONS. Improvements to the Premises shall be
installed at Tenant's expense only in accordance with plans and specifications
which have been previously submitted to and approved in writing by Landlord. No
alterations or physical additions in or to the Premises may be made without
Landlord's prior written consent, which shall not be unreasonably withheld or
delayed; however, Landlord may withhold its consent to any alteration or
addition that would affect the Building's structure or its HVAC, plumbing,
electrical, or mechanical systems. Notwithstanding the foregoing, Tenant shall
not be required to obtain Landlord's consent for repainting, recarpeting, or
other cosmetic alterations totaling less than $5,000 in any single instance or
series of related alterations performed within a six-month period, provided that
such alterations do not affect the configuration or location of any exterior or
interior walls of the Building, the HVAC system, the Building's structure, or
the Building's electrical, plumbing, or other mechanical systems. Tenant shall
not paint or install lighting or decorations, signs, window or door lettering,
or advertising media of any type on or about the Premises without the prior
written consent of Landlord, which shall not be unreasonably withheld or
delayed; however, Landlord may withhold its consent to any such painting or
installation which would affect the appearance of the exterior of the Building
or of any common areas of the Building. For taxation purposes only, any
additions or alterations to the Premises will be deemed to be the property of
Tenant during the Term of this Lease, and Tenant may claim any tax credits and
depreciate such property. All alterations, additions, or improvements made in or
upon the Premises shall, at Landlord's option, either be removed by Tenant prior
to the end of the Term (and Tenant shall repair all damage caused thereby), or
shall remain on the Premises at the end of the Term without compensation to
Tenant. All alterations, additions, and improvements shall be constructed,
maintained, and used by Tenant, at its risk and expense, in accordance with all
Laws; Landlord's approval of the plans and specifications therefor shall not be
a representation by Landlord that such alterations, additions, or improvements
comply with any Law.
(b) REPAIRS; MAINTENANCE. Tenant shall maintain the Premises in a
clean,
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safe, and operable condition, ordinary wear and tear and damage by Casualty
(defined below) excepted, and shall not permit or allow to remain any waste or
damage to any portion of the Premises. Tenant shall repair or replace, subject
to Landlord's direction and supervision, any damage to the Building caused by a
Tenant Party. If Tenant fails to make such repairs or replacements within 15
days after the occurrence of such damage, or if such damage occurred in a common
area, within 15 days of written notice by Landlord of such damage, then Landlord
may make the same at Tenant's cost. If any such damage occurs outside of the
Premises, then Landlord may elect to repair such damage at Tenant's expense,
rather than having Tenant repair such damage. The cost of all repair or
replacement work performed by Landlord under this Section 7 shall be paid by
Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor.
(c) PERFORMANCE OF WORK. All work described in this Section 7 shall
be performed only by Landlord or by contractors and subcontractors approved in
writing by Landlord, which approval shall not be unreasonably withheld, delayed
or conditioned. Tenant shall cause all contractors and subcontractors to procure
and maintain insurance coverage naming Landlord as an additional insured against
such risks, in such amounts, and with such companies as Landlord may reasonably
require. All such work shall be performed in accordance with all Laws and in a
good and workmanlike manner so as not to damage the Premises, the Building, or
the components thereof.
(d) MECHANIC'S LIENS. Tenant shall not permit any mechanic's liens
to be filed against the Premises or the Building for any work performed,
materials furnished, or obligation incurred by or at the request of Tenant. If
such a lien is filed, then Tenant shall, within ten days after Landlord has
delivered notice of the filing thereof to Tenant, either pay the amount of the
lien or diligently contest such lien and deliver to Landlord a bond or other
security reasonably satisfactory to Landlord. If Tenant fails to timely take
either such action, then Landlord may pay the lien claim, and any amounts so
paid, including expenses and interest, shall be paid by Tenant to Landlord
within ten days after Landlord has invoiced Tenant therefor.
8. USE. Tenant shall continuously occupy and use the Premises only for
general office use and purposes incidental to such general office use (the
"PERMITTED USE") and shall comply with all Laws relating to the use, condition,
access to, and occupancy of the Premises. The Premises shall not be used for any
use which is disreputable, creates extraordinary fire hazards, or results in an
increased rate of insurance on the Building or its contents, or for the storage
of any hazardous materials or substances. If, because of a Tenant Party's acts,
the rate of insurance on the Building or its contents increases, then such acts
shall be an Event of Default, Tenant shall pay to Landlord the amount of such
increase on demand, and acceptance of such payment shall not waive any of
Landlord's other rights. Tenant shall conduct its business and control each
other Tenant Party so as not to create any nuisance or unreasonably interfere
with other tenants or Landlord in its management of the Building.
9. ASSIGNMENT AND SUBLETTING.
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<PAGE> 15
(a) TRANSFERS; CONSENT. Tenant shall not, without the prior written
consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate
or interest herein, whether directly or by operation of law, (2) permit any
other entity to become Tenant hereunder by merger, consolidation, or other
reorganization, (3) if Tenant is an entity other than a corporation whose stock
is publicly traded, permit the transfer of an ownership interest in Tenant so as
to result in a change in the current control of Tenant, (4) sublet any portion
of the Premises, (5) grant any license, concession, or other right of occupancy
of any portion of the Premises, or (6) permit the use of the Premises by any
parties other than Tenant (any of the events listed in Section 9.(a)(1) through
9.(a)(6) being a "TRANSFER"). If Tenant requests Landlord's consent to a
Transfer, then Tenant shall provide Landlord with a written description of all
terms and conditions of the proposed Transfer, copies of the proposed
documentation, and the following information about the proposed transferee: name
and address; reasonably satisfactory information about its business and business
history; its proposed use of the Premises; banking, financial, and other credit
information; and general references sufficient to enable Landlord to determine
the proposed transferee's creditworthiness and character. Landlord shall not
unreasonably withhold its consent to any assignment or subletting of the
Premises, provided that the proposed transferee (A) is creditworthy, (B) has a
good reputation in the business community, (C) does not engage in business
similar to those of other tenants in the Building, and (D) is not another
occupant of the Building or person or entity with whom Landlord is negotiating
to lease space in the Building; otherwise, Landlord may withhold its consent in
its sole discretion. Concurrently with Tenant's notice of any request for
consent to a Transfer, Tenant shall pay to Landlord a fee of $750 to defray
Landlord's expenses in reviewing such request, and Tenant shall also reimburse
Landlord immediately upon request for its attorneys' fees incurred in connection
with considering any request for consent to a Transfer. If Landlord consents to
a proposed Transfer, then the proposed transferee shall deliver to Landlord a
written agreement whereby it expressly assumes Tenant's obligations hereunder;
however, any transferee of less than all of the space in the Premises shall be
liable only for obligations under this Lease that are properly allocable to the
space subject to the Transfer for the period of the Transfer. Notwithstanding
the foregoing, Tenant may assign its interest in this Lease or sublet the
Premises to an affiliate of Tenant without Landlord's prior written consent,
provided that Tenant promptly notifies Landlord thereof after such assignment or
subletting. No Transfer shall release Tenant from its obligations under this
Lease, but rather Tenant and its transferee shall be jointly and severally
liable therefor. Landlord's consent to any Transfer shall not waive Landlord's
rights as to any subsequent Transfers. If an Event of Default occurs while the
Premises or any part thereof are subject to a Transfer, then Landlord, in
addition to its other remedies, may collect directly from such transferee all
rents becoming due to Tenant and apply such rents against Rent. Tenant
authorizes its transferees to make payments of rent directly to Landlord upon
receipt of notice from Landlord to do so. Tenant shall pay for the cost of any
demising walls or other improvements necessitated by a proposed subletting or
assignment.
(b) CANCELLATION. Landlord may, within 30 days after submission of
Tenant's written request for Landlord's consent to an assignment or subletting,
cancel this Lease as to the portion of the Premises proposed to be sublet or
assigned (the "CANCELED SPACE") as of the date the proposed Transfer is to be
effective. If Landlord cancels this Lease as to any portion of the
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Premises, then this Lease shall cease for such portion of the Premises, Tenant
shall pay to Landlord all Rent accrued through the cancellation date relating to
the portion of the Premises covered by the proposed Transfer, and thereafter
Tenant shall be relieved of all further liabilities arising with respect to the
portion of the Premises so cancelled following the cancellation date.
Thereafter, Landlord may lease such portion of the Premises to the prospective
transferee (or to any other person) without liability to Tenant. If Landlord
cancels this Lease as to less than all of the Premises, after the initial
leasing of such Canceled Space to the prospective transferee (or to any other
person) following Landlord's termination thereof and at least twenty four full
calendar months then remains in the Term of this Lease, Landlord shall first
offer (the "OFFER NOTICE") to lease to Tenant the Canceled Space in its then
"as-is" condition and otherwise on the terms and conditions contained in this
Lease (provided that the Term hereof has not expired or been terminated). Tenant
shall notify Landlord in writing whether Tenant elects to lease the entire
Canceled Space within five business days after Landlord delivers to Tenant the
Offer Notice. If Tenant timely elects to lease such Canceled Space, then
Landlord and Tenant shall execute an amendment to this Lease, effective as of
the date such Canceled Space is to be included in the Premises, on the same
terms as this Lease except that (i) the square feet of the Premises shall be
increased by the number of square feet in the Canceled Space (and Tenant's
Proportionate Share shall be adjusted accordingly), (ii) the Basic Rent shall be
increased taking into consideration the increased number of square feet in the
Premises, and (iii) Landlord shall not provide to Tenant any allowances
(construction allowance and the like) or other tenant inducements. If Tenant
fails or is unable to timely exercise its rights hereunder, then such right
shall lapse, time being of the essence with respect to the exercise thereof, and
Landlord may lease the Canceled Space to third parties on such terms as Landlord
may elect without liability to Tenant. Notwithstanding the foregoing, if prior
to Landlord's delivery to Tenant of the Offer Notice, Landlord has received an
offer to lease all or part of the Canceled Space from a third party (a "THIRD
PARTY OFFER") and such Third Party Offer includes space in excess of the
Canceled Space or for a term in excess of the remaining Term of this Lease,
Tenant must exercise its rights hereunder, if at all, as to (i) all of the space
contained in the Third Party Offer and/or (ii) the extended lease term, as
applicable.
(c) ADDITIONAL COMPENSATION. Tenant shall pay to Landlord,
immediately upon receipt thereof, the excess of (1) all compensation received by
Tenant for a Transfer less the costs reasonably incurred by Tenant with
unaffiliated third parties in connection with such Transfer (i.e., brokerage
commissions, tenant finish work, and the like) over (2) the Rent allocable to
the portion of the Premises covered thereby.
10. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY.
(a) INSURANCE. Tenant shall maintain throughout the Term the
following insurance policies: (1) comprehensive general liability insurance in
amounts of $1,000,000 per occurrence with $2,000,000 in the aggregate or such
other amounts as Landlord may from time to time reasonably require, insuring
Tenant, Landlord, Landlord's agents and their respective affiliates against all
liability for injury to or death of a person or persons or damage to property
arising from the use and occupancy of the Premises, (2) insurance covering the
full value of Tenant's property and improvements, and other property (including
property of others) in the
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Premises, (3) contractual liability insurance sufficient to cover Tenant's
indemnity obligations hereunder, (4) worker's compensation insurance, containing
a waiver of subrogation endorsement acceptable to Landlord, and (5) business
interruption insurance or, at Tenant's option, extra expense insurance. Tenant's
insurance shall provide primary coverage to Landlord when any policy issued to
Landlord provides duplicate or similar coverage, and in such circumstance
Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to
Landlord certificates of such insurance and such other evidence satisfactory to
Landlord of the maintenance of all insurance coverages required hereunder, and
Tenant shall obtain a written obligation on the part of each insurance company
to notify Landlord at least 30 days before cancellation or a material change of
any such insurance policies. All such insurance policies shall be in form, and
issued by companies, reasonably satisfactory to Landlord.
(b) WAIVER OF NEGLIGENCE; NO SUBROGATION. Landlord and Tenant each
waives any claim it might have against the other for any injury to or death of
any person or persons or damage to or theft, destruction, loss, or loss of use
of any property (a "LOSS"), to the extent the same is insured against under any
insurance policy that covers the Building, the Premises, Landlord's or Tenant's
fixtures, personal property, leasehold improvements, or business, or, in the
case of Tenant's waiver, is required to be insured against under the terms
hereof, REGARDLESS OF WHETHER THE NEGLIGENCE OF THE OTHER PARTY CAUSED SUCH
LOSS; however, Landlord's waiver shall not include any deductible amounts on
insurance policies carried by Landlord. Each party shall cause its insurance
carrier to endorse all applicable policies waiving the carrier's rights of
recovery under subrogation or otherwise against the other party.
(c) INDEMNITY. Subject to Section 10.(b), Tenant shall defend,
indemnify, and hold harmless Landlord and its representatives and agents from
and against all claims, demands, liabilities, causes of action, suits,
judgments, damages, and expenses (including attorneys' fees) arising from (1)
any Loss arising from any occurrence on the Premises (other than a Loss arising
from the sole or gross negligence or willful misconduct of Landlord) or (2)
Tenant's failure to perform its obligations under this Lease. Subject to Section
10.(b), Landlord shall defend, indemnify, and hold harmless Tenant and its
representatives and agents from and against all claims, demands, liabilities,
causes of action, suits, judgments, damages and expenses (including attorneys'
fees) arising from any loss, arising from any occurrence in the Building's
common areas (other than a Loss arising from the sole or gross negligence or
willful misconduct of a Tenant Party). The indemnities set forth in this Section
10.(c) shall survive termination or expiration of this Lease. If any proceeding
is filed for which indemnity is required hereunder, the indemnifying party
agrees, upon request therefor, to defend the indemnified party in such
proceeding at its sole cost utilizing counsel satisfactory to the indemnified
party.
11. SUBORDINATION; ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE.
(a) SUBORDINATION. This Lease shall be subordinate to any deed of
trust, mortgage, or other security instrument, or any ground lease, master
lease, or primary lease, that now or hereafter covers all or any part of the
Premises (the mortgagee under any such mortgage
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or the lessor under any such lease is referred to herein as a "LANDLORD'S
MORTGAGEE"). Any Landlord's Mortgagee may elect, at any time, unilaterally, to
make this Lease superior to its mortgage, ground lease, or other interest in the
Premises by so notifying Tenant in writing.
(b) ATTORNMENT. Tenant shall attorn to any party succeeding to
Landlord's interest in the Premises, whether by purchase, foreclosure, deed in
lieu of foreclosure, power of sale, termination of lease, or otherwise, upon
such party's request, and shall execute such agreements confirming such
attornment as such party may reasonably request.
(c) NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek to enforce
any remedy it may have for any default on the part of Landlord without first
giving written notice by certified mail, return receipt requested, specifying
the default in reasonable detail, to any Landlord's Mortgagee whose address has
been given to Tenant, and affording such Landlord's Mortgagee a reasonable
opportunity to perform Landlord's obligations hereunder.
(d) CURRENT STATUS; FUTURE LANDLORD'S MORTGAGEE. Landlord represents
and warrants to Tenant that there is currently no existing Landlord's Mortgagee.
Upon written request from Tenant, Landlord shall use reasonable efforts to
obtain a Subordination, Non-Disturbance and Attornment Agreement from any future
Landlord's Mortgagee in a form reasonably acceptable to Tenant and such
Landlord's Mortgagee; however, Landlord's failure to deliver such agreement
shall not constitute a default by Landlord hereunder, prohibit the mortgaging of
the Building, or otherwise affect the subordination of Tenant's rights
hereunder.
12. RULES AND REGULATIONS. Tenant shall comply with the rules and
regulations of the Building which are attached hereto as Exhibit C. Landlord
may, from time to time, change such rules and regulations for the safety, care,
or cleanliness of the Building and related facilities, provided that such
changes are applicable to all tenants of the Building and will not unreasonably
interfere with Tenant's use of the Premises. Tenant shall be responsible for the
compliance with such rules and regulations by each Tenant Party.
13. CONDEMNATION.
(a) TOTAL TAKING. If the entire Building or Premises are taken by
right of eminent domain or conveyed in lieu thereof (a "TAKING"), this Lease
shall terminate as of the date of the Taking.
(b) PARTIAL TAKING - TENANT'S RIGHTS. If any part of the Building
becomes subject to a Taking and such Taking will prevent Tenant from conducting
its business in the Premises in a manner reasonably comparable to that conducted
immediately before such Taking for a period of more than 180 days, then Tenant
may terminate this Lease as of the date of such Taking by giving written notice
to Landlord within 30 days after the Taking, and Rent shall be apportioned as of
the date of such Taking. If Tenant does not terminate this Lease, then Rent
shall be abated on a reasonable basis as to that portion of the Premises
rendered untenantable by the Taking.
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(c) PARTIAL TAKING - LANDLORD'S RIGHTS. If any material portion, but
less than all, of the Building becomes subject to a Taking, or if Landlord is
required to pay any of the proceeds received for a Taking to a Landlord's
Mortgagee, then Landlord may terminate this Lease by delivering written notice
thereof to Tenant within 30 days after such Taking, and Rent shall be
apportioned as of the date of such Taking. If Landlord does not so terminate
this Lease, then this Lease will continue, but if any portion of the Premises
has been taken, Rent shall abate as provided in the last sentence of Section
13.(b).
(d) AWARD. If any Taking occurs, then Landlord shall receive the
entire award or other compensation for the land on which the Building is
situated, the Building, and other improvements taken, and Tenant may separately
pursue a claim (to the extent it will not reduce Landlord's award) against the
condemnor for the value of Tenant's personal property which Tenant is entitled
to remove under this Lease, moving costs, loss of business, and other claims it
may have.
14. FIRE OR OTHER CASUALTY.
(a) REPAIR ESTIMATE. If the Premises or the Building are damaged by
fire or other casualty (a "CASUALTY"), Landlord shall, within 90 days after such
Casualty, deliver to Tenant a good faith estimate (the "DAMAGE NOTICE") of the
time needed to repair the damage caused by such Casualty.
(b) LANDLORD'S AND TENANT'S RIGHTS. If a material portion of the
Premises or the Building is damaged by Casualty such that Tenant is prevented
from conducting its business in the Premises in a manner reasonably comparable
to that conducted immediately before such Casualty and Landlord estimates that
the damage caused thereby cannot be repaired within 240 days after the Casualty,
then Tenant may terminate this Lease by delivering written notice to Landlord of
its election to terminate within 30 days after the Damage Notice has been
delivered to Tenant. If Tenant does not so timely terminate this Lease, then
(subject to Section 14.(c)) Landlord shall repair the Building or the Premises,
as the case may be, as provided below, and Rent for the portion of the Premises
rendered untenantable and inaccessible by the damage shall be abated on a
reasonable basis from the date of damage until the completion of the repair,
unless a Tenant Party caused such damage, in which case, Tenant shall continue
to pay Rent without abatement.
(c) LANDLORD'S RIGHTS. If a Casualty damages a material portion of
the Building, and Landlord makes a good faith determination that restoring the
Premises would be uneconomical, or if Landlord is required to pay any insurance
proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord
may terminate this Lease by giving written notice of its election to terminate
within 30 days after the Damage Notice has been delivered to Tenant, and Basic
Rent and Additional Rent shall be abated as of the date of the Casualty.
(d) REPAIR OBLIGATION. If neither party elects to terminate this
Lease
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following a Casualty, then Landlord shall, within a reasonable time after such
Casualty, begin to repair the Building and the Premises and shall proceed with
reasonable diligence to restore the Building and Premises to substantially the
same condition as they existed immediately before such Casualty; however,
Landlord shall not be required to repair or replace any of the furniture,
equipment, fixtures, and other improvements which may have been placed by, or at
the request of, Tenant or other occupants in the Building or the Premises, and
Landlord's obligation to repair or restore the Building or Premises shall be
limited to the extent of the insurance proceeds actually received by Landlord
for the Casualty in question.
15. PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied
or assessed against personal property, furniture, or fixtures placed by Tenant
in the Premises. If any taxes for which Tenant is liable are levied or assessed
against Landlord or Landlord's property and Landlord elects to pay the same, or
if the assessed value of Landlord's property is increased by inclusion of such
personal property, furniture or fixtures and Landlord elects to pay the taxes
based on such increase, then Tenant shall pay to Landlord, upon demand, the part
of such taxes for which Tenant is primarily liable hereunder; however, Landlord
shall not pay such amount if Tenant notifies Landlord that it will contest the
validity or amount of such taxes before Landlord makes such payment, and
thereafter diligently proceeds with such contest in accordance with law and if
the non-payment thereof does not pose a threat of loss or seizure of the
Building or interest of Landlord therein or impose any fee or penalty against
Landlord.
16. EVENTS OF DEFAULT. Each of the following occurrences shall be an
"EVENT OF DEFAULT":
(a) Tenant's failure to pay Rent within five days after Landlord has
delivered written notice to Tenant that the same is due; however, an Event of
Default shall occur hereunder without any obligation of Landlord to give any
notice if Landlord has given Tenant written notice under this Section 16.(a) on
more than two occasions during the twelve (12) month interval preceding such
failure by Tenant;
(b) Tenant (1) abandons or vacates the Premises or any substantial
portion thereof or (2) fails to continuously operate its business in the
Premises for the Permitted Use set forth herein;
(c) Tenant fails to provide any estoppel certificate as called for
in this Lease and such failure shall continue for 5 days after written notice
thereof from Landlord to Tenant;
(d) Tenant's failure to perform, comply with, or observe any other
agreement or obligation of Tenant under this Lease and the continuance of such
failure for a period of more than 30 days after Landlord has delivered to Tenant
written notice thereof; and
(e) The filing of a petition by or against Tenant (the term "TENANT"
shall include, for the purpose of this Section 16.(e), any guarantor of Tenant's
obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2)
seeking any relief under any state or
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federal debtor relief law; (3) for the appointment of a liquidator or receiver
for all or substantially all of Tenant's property or for Tenant's interest in
this Lease; or (4) for the reorganization or modification of Tenant's capital
structure; however, if such a petition is filed against Tenant, then such filing
shall not be an Event of Default unless Tenant fails to have the proceedings
initiated by such petition dismissed within 90 days after the filing thereof.
17. REMEDIES. Upon any Event of Default, Landlord may, in addition to all
other rights and remedies afforded Landlord hereunder or by law or equity, take
any of the following actions:
(a) Terminate this Lease by giving Tenant written notice thereof, in
which event Tenant shall pay to Landlord the sum of (1) all Rent accrued
hereunder through the date of termination, (2) all amounts due under Section
18.(a), and (3) an amount equal to the total Rent that Tenant would have been
required to pay for the remainder of the Term;
(b) Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (1) all Rent and other amounts accrued
hereunder to the date of termination of possession, (2) all amounts due from
time to time under Section 18.(a), and (3) all Rent and other net sums required
hereunder to be paid by Tenant during the remainder of the Term, diminished by
any net sums thereafter received by Landlord through reletting the Premises
during such period, after deducting all costs incurred by Landlord in reletting
the Premises. Landlord shall use reasonable efforts to relet the Premises on
such terms as Landlord in its sole discretion may determine (including a term
different from the Term, rental concessions, and alterations to, and improvement
of, the Premises); however, Landlord shall not be obligated to relet the
Premises before leasing other portions of the Building. Landlord shall not be
liable for, nor shall Tenant's obligations hereunder be diminished because of,
Landlord's failure to relet the Premises or to collect rent due for such
reletting. Tenant shall not be entitled to the excess of any consideration
obtained by reletting over the Rent due hereunder. Reentry by Landlord in the
Premises shall not affect Tenant's obligations hereunder for the unexpired Term;
rather, Landlord may, from time to time, bring an action against Tenant to
collect amounts due by Tenant, without the necessity of Landlord's waiting until
the expiration of the Term. Unless Landlord delivers written notice to Tenant
expressly stating that it has elected to terminate this Lease, all actions taken
by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to
be taken under this Section 17.(b). If Landlord elects to proceed under this
Section 17.(b), it may at any time elect to terminate this Lease under Section
17.(a); or
(c) Additionally, without notice, Landlord may alter locks or other
security devices at the Premises to deprive Tenant of access thereto, and
Landlord shall not be required to provide a new key or right of access to
Tenant.
18. PAYMENT BY TENANT; NON-WAIVER.
(a) PAYMENT BY TENANT. Upon any Event of Default, Tenant shall pay
to
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Landlord all costs incurred by Landlord (including court costs and reasonable
attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2)
removing and storing Tenant's or any other occupant's property, (3) repairing,
restoring, altering, remodeling, or otherwise putting the Premises into
condition acceptable to a new tenant, (4) if Tenant is dispossessed of the
Premises and this Lease is not terminated, reletting all or any part of the
Premises (including brokerage commissions, cost of tenant finish work, and other
costs incidental to such reletting), (5) performing Tenant's obligations which
Tenant failed to perform, and (6) enforcing, or advising Landlord of, its
rights, remedies, and recourses arising out of the Event of Default. To the full
extent permitted by law, Landlord and Tenant agree the federal and state courts
of New Jersey shall have exclusive jurisdiction over any matter relating to or
arising from this Lease and the parties' rights and obligations under this
Lease.
(b) NO WAIVER. Landlord's acceptance of Rent following an Event of
Default shall not waive Landlord's rights regarding such Event of Default. No
waiver by Landlord of any violation or breach of any of the terms contained
herein shall waive Landlord's rights regarding any future violation of such
term. Landlord's acceptance of any partial payment of Rent shall not waive
Landlord's rights with regard to the remaining portion of the Rent that is due,
regardless of any endorsement or other statement on any instrument delivered in
payment of Rent or any writing delivered in connection therewith; accordingly,
Landlord's acceptance of a partial payment of Rent shall not constitute an
accord and satisfaction of the full amount of the Rent that is due.
19. LANDLORD'S LIEN. In addition to the statutory landlord's lien, Tenant
grants to Landlord, to secure performance of Tenant's obligations hereunder, a
security interest in all goods (including equipment and inventory), fixtures,
and other personal property of Tenant situated on the Premises, and all proceeds
thereof (the "COLLATERAL"), and the Collateral shall not be removed from the
Premises without the prior written consent of Landlord (other than in Tenant's
ordinary course of business) until all obligations of Tenant have been fully
performed. Upon the occurrence of an Event of Default, Landlord may, in addition
to all other remedies, without notice or demand except as provided below,
exercise the rights afforded to a secured party under the New Jersey Uniform
Commercial Code (the "UCC"). To the extent the UCC requires Landlord to give to
Tenant notice of any act or event and such notice cannot be validly waived
before a default occurs, then five-days' prior written notice thereof shall be
reasonable notice of the act or event. Tenant grants to Landlord a power of
attorney to execute and file any financing statement or other instrument
necessary to perfect Landlord's security interest under this Section 19, which
power is coupled with an interest and is irrevocable during the Term. Landlord
may also file a copy of this Lease as a financing statement to perfect its
security interest in the Collateral.
20. SURRENDER OF PREMISES. No act by Landlord shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender of the Premises shall be valid unless it is in writing and signed by
Landlord. At the expiration or termination of this Lease, Tenant shall deliver
to Landlord the Premises with all improvements located therein in good repair
and condition, broom-clean, reasonable wear and tear (and condemnation and
Casualty
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damage not caused by Tenant, as to which Sections 13 and 14 shall control)
excepted, and shall deliver to Landlord all keys to the Premises. Provided that
Tenant has performed all of its obligations hereunder, Tenant may remove all
unattached trade fixtures, furniture, and personal property placed in the
Premises by Tenant, and shall remove such alterations, additions, improvements,
trade fixtures, personal property, equipment, wiring, and furniture as Landlord
may request. Tenant shall repair all damage caused by such removal. All items
not so removed shall be deemed to have been abandoned by Tenant and may be
appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord
without notice to Tenant and without any obligation to account for such items.
The provisions of this Section 20 shall survive the end of the Term.
21. HOLDING OVER. If Tenant fails to vacate the Premises at the end of the
Term, then Tenant shall be a tenant at will and, in addition to all other
damages and remedies to which Landlord may be entitled for such holding over,
Tenant shall pay, in addition to the other Rent, a daily Basic Rent equal to the
greater of (a) 150% of the daily Basic Rent payable during the last month of the
Term, or (b) 125% of the prevailing rental rate paid by other tenants under
recent, comparable leases in the Building for similar space. The provisions of
this Section 21 shall not be deemed to limit or constitute a waiver of any other
rights or remedies of Landlord provided herein or at law. If Tenant fails to
surrender the Premises upon the termination or expiration of this Lease, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from all loss, costs
(including reasonable attorneys' fees) and liability resulting from such
failure, including, without limiting the generality of the foregoing, any claims
made by any succeeding tenant founded upon such failure to surrender, and any
lost profits to Landlord resulting therefrom.
22. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise of
such rights does not unreasonably interfere with Tenant's occupancy of the
Premises, Landlord shall have the following rights:
(a) To decorate and to make inspections, repairs, alterations,
additions, changes, or improvements, whether structural or otherwise, in and
about the Building, or any part thereof; to enter upon the Premises and, during
the continuance of any such work, to temporarily close doors, entryways, public
space, and corridors in the Building; to interrupt or temporarily suspend for a
commercially reasonable time period Building services and facilities; to change
the name of the Building; and to change the arrangement and location of
entrances or passageways, doors, and doorways, corridors, elevators, stairs,
restrooms, or other public parts of the Building;
(b) To take such reasonable measures as Landlord deems advisable for
the security of the Building and its occupants; evacuating the Building for
cause, suspected cause, or for drill purposes; temporarily denying access to the
Building; and closing the Building after normal business hours and on Sundays
and holidays, subject, however, to Tenant's right to enter when the Building is
closed after normal business hours under such reasonable regulations as Landlord
may prescribe from time to time; and
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(c) To enter the Premises at reasonable hours to show the Premises
to prospective purchasers, lenders, or, during the last 12 months of the Term,
tenants.
23. SUBSTITUTION SPACE. [Intentionally Deleted.]
24. MISCELLANEOUS.
(a) LANDLORD TRANSFER. Landlord may transfer any portion of the
Building and any of its rights under this Lease. If Landlord assigns its rights
under this Lease, then Landlord shall thereby be released from any further
obligations hereunder, provided that the assignee assumes Landlord's obligations
hereunder in writing.
(b) LANDLORD'S LIABILITY. The liability of Landlord to Tenant for
any default by Landlord under the terms of this Lease shall be limited to
Tenant's actual direct, but not consequential, damages therefor and shall be
recoverable only from the interest of Landlord in the Building, and Landlord
shall not be personally liable for any deficiency. This Section shall not limit
any remedies which Tenant may have for Landlord's defaults which do not involve
the personal liability of Landlord.
(c) FORCE MAJEURE. Other than for Tenant's obligations under this
Lease that can be performed by the payment of money (e.g., payment of Rent and
maintenance of insurance), whenever a period of time is herein prescribed for
action to be taken by either party hereto, such party shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations, or restrictions, or any
other causes of any kind whatsoever which are beyond the control of such party.
(d) BROKERAGE. Neither Landlord nor Tenant has dealt with any broker
or agent in connection with the negotiation or execution of this Lease, other
than Insignia/Edward S. Gordon Company, Inc. and Koll Management Services, Inc.,
whose commissions shall be paid by Landlord. Tenant and Landlord shall each
indemnify the other against all costs, expenses, attorneys' fees, and other
liability for commissions or other compensation claimed by any broker or agent
claiming the same by, through, or under the indemnifying party.
(e) ESTOPPEL CERTIFICATES. From time to time, Tenant shall furnish
to any party designated by Landlord, within ten days after Landlord has made a
written request therefor, a certificate signed by Tenant confirming and
containing such factual certifications and representations as to this Lease as
Landlord may reasonably request.
(f) NOTICES. All notices and other communications given pursuant to
this Lease shall be in writing and shall be (1) mailed by first class, United
States Mail, postage prepaid, certified, with return receipt requested, and
addressed to the parties hereto at the address specified next to their signature
block, (2) hand delivered to the intended address, or (3) sent by prepaid
telegram, cable, facsimile transmission, or telex followed by a confirmatory
letter. All notices shall be effective upon delivery to the address of the
addressee. The parties hereto may
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change their addresses by giving notice thereof to the other in conformity with
this provision.
(g) SEPARABILITY. If any clause or provision of this Lease is
illegal, invalid, or unenforceable under present or future laws, then the
remainder of this Lease shall not be affected thereby and in lieu of such clause
or provision, there shall be added as a part of this Lease a clause or provision
as similar in terms to such illegal, invalid, or unenforceable clause or
provision as may be possible and be legal, valid, and enforceable.
(h) AMENDMENTS; AND BINDING EFFECT. This Lease may not be amended
except by instrument in writing signed by Landlord and Tenant. No provision of
this Lease shall be deemed to have been waived by Landlord unless such waiver is
in writing signed by Landlord, and no custom or practice which may evolve
between the parties in the administration of the terms hereof shall waive or
diminish the right of Landlord to insist upon the performance by Tenant in
strict accordance with the terms hereof. The terms and conditions contained in
this Lease shall inure to the benefit of and be binding upon the parties hereto,
and upon their respective successors in interest and legal representatives,
except as otherwise herein expressly provided. This Lease is for the sole
benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third
party shall be deemed a third party beneficiary hereof.
(i) QUIET ENJOYMENT. Provided Tenant has performed all of its
obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the
Premises for the Term, without hindrance from Landlord or any party claiming by,
through, or under Landlord, but not otherwise, subject to the terms and
conditions of this Lease.
(j) NO MERGER. There shall be no merger of the leasehold estate
hereby created with the fee estate in the Premises or any part thereof if the
same person acquires or holds, directly or indirectly, this Lease or any
interest in this Lease and the fee estate in the leasehold Premises or any
interest in such fee estate.
(k) NO OFFER. The submission of this Lease to Tenant shall not be
construed as an offer, and Tenant shall not have any rights under this Lease
unless Landlord executes a copy of this Lease and delivers it to Tenant.
(l) ENTIRE AGREEMENT. This Lease constitutes the entire agreement
between Landlord and Tenant regarding the subject matter hereof and supersedes
all oral statements and prior writings relating thereto. Except for those set
forth in this Lease, no representations, warranties, or agreements have been
made by Landlord or Tenant to the other with respect to this Lease or the
obligations of Landlord or Tenant in connection therewith. The normal rule of
construction that any ambiguities be resolved against the drafting party shall
not apply to the interpretation of this Lease or any exhibits or amendments
hereto.
(m) WAIVER OF JURY TRIAL. To the maximum extent permitted by law,
Landlord and Tenant each waive right to trial by jury in any litigation arising
out of or with respect to this Lease.
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(n) GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State in which the Premises are located.
(o) JOINT AND SEVERAL LIABILITY. If Tenant is comprised of more than
one party, each such party shall be jointly and severally liable for Tenant's
obligations under this Lease.
(p) FINANCIAL REPORTS. Within 15 days after Landlord's written
request, Tenant will furnish Tenant's most recent audited financial statements
(including any notes to them) to Landlord, or, if no such audited statements
have been prepared, such other financial statements (and notes to them) as may
have been prepared by an independent certified public accountant or, failing
those, Tenant's internally prepared financial statements. Tenant will discuss
its financial statements with Landlord and will give Landlord access to Tenant's
books and records in order to enable Landlord to verify the financial
statements. Landlord will not disclose any aspect of Tenant's financial
statements that Tenant designates to Landlord as confidential except (1) to
Landlord's lenders or prospective purchasers of the Building, (2) in litigation
between Landlord and Tenant, and (3) if required by court order.
(q) LANDLORD'S FEES. Whenever Tenant requests Landlord to take any
action or give any consent required or permitted under this Lease, Tenant will
reimburse Landlord for Landlord's reasonable costs incurred in reviewing the
proposed action or consent, including without limitation reasonable attorneys',
engineers' or architects' fees, within 30 days after Landlord's delivery to
Tenant of a statement of such costs. Tenant will be obligated to make such
reimbursement without regard to whether Landlord consents to any such proposed
action.
(r) TELECOMMUNICATIONS. Tenant and its telecommunications companies,
including but not limited to local exchange telecommunications companies and
alternative access vendor services companies shall have no right of access to
and within the Building, for the installation and operation of
telecommunications systems including but not limited to voice, video, data, and
any other telecommunications services provided over wire, fiber optic,
microwave, wireless, and any other transmission systems, for part or all of
Tenant's telecommunications within the Building and from the Building to any
other location without Landlord's prior written consent, which shall not be
unreasonably withheld, delayed or conditioned.
(s) GENERAL DEFINITIONS. The following terms shall have the
following meanings: "LAWS" means all federal, state, and local laws, rules and
regulations, all court orders, all governmental directives and governmental
orders, and all restrictive covenants affecting the Property, and "LAW" means
any of the foregoing; "AFFILIATE" means any person or entity which, directly or
indirectly, controls, is controlled by, or is under common control with the
party in question; "TENANT PARTY" shall include Tenant, any assignees claiming
by, through, or under Tenant, any subtenants claiming by, through, or under
Tenant, and any agents, contractors, employees, invitees of the foregoing
parties; and "INCLUDING" means including, without
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limitation.
(t) CONFIDENTIALITY. Tenant acknowledges that the terms and
conditions of this Lease are to remain confidential for Landlord's benefit, and
may not be disclosed by Tenant to anyone, by any manner or means, directly or
indirectly, without Landlord's prior written consent. The consent by Landlord to
any disclosures shall not be deemed to be a waiver on the part of Landlord of
any prohibition against any future disclosure.
(u) LIST OF EXHIBITS. All exhibits and attachments attached hereto
are incorporated herein by this reference.
Exhibit A - Outline of Premises
Exhibit B - Legal Description of Building
Exhibit C - Building Rules and Regulations
Exhibit D - Tenant Finish-Work: Allowance
Exhibit E - Parking
Exhibit F - Renewal Option
(v) ATTORNEYS' FEES. In the event of any action or proceeding
brought by either party against the other under this Lease, the prevailing party
shall be entitled to recover its actual out-of-pocket attorneys' fees in such
action or proceeding.
25. OTHER PROVISIONS.
(a) HAZARDOUS SUBSTANCES. Neither Tenant nor any Tenant Party shall
cause or permit any Hazardous Substance to be used, stored, generated, or
disposed of on, in or about the Property by Tenant or any Tenant Party without
first obtaining Landlord's written consent. If Hazardous Substances are used,
stored, generated, or disposed of on, in or about the Property by Tenant or any
Tenant Party or if the Premises becomes contaminated in any manner by Tenant or
any Tenant Party, Tenant shall indemnify, defend and hold harmless the Landlord
(and its agents and employees) for any and all claims, damages, fines,
judgments, penalties, costs, liabilities, or losses (including, without
limitation, a decrease in value of the Premises or the Land or Building of which
they are a part, damages caused by loss or restriction of rentable or usable
space, or any damages cause by adverse impact on marketing of the space, and any
and all sums paid for settlement of claims, attorney's fees, consultant, and
expert fees) arising during or after the Term and arising as a result of any
use, storage, generation or disposal of any Hazardous Substance or any such
contamination by Tenant or any Tenant Party. This indemnification includes,
without limitation, any and all costs incurred because of any investigation in
connection with Tenant or any Tenant Party of the site or any cleanup, removal,
or restoration mandated by a federal, state, or local agency or political
subdivision. If Tenant or any Tenant Party causes or permits the present of any
Hazardous Substance on the Property that results in contamination, Tenant shall
promptly, at its sole expense, take any and all necessary actions to return the
Property to the condition existing prior to the presence of any such Hazardous
Substance on the Property. Tenant shall first obtain Landlord's approval for any
such remedial action, which approval shall
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not be unreasonably withheld, delayed or conditioned. As used herein, "HAZARDOUS
SUBSTANCE" means any substance that is toxic, ignitable, reactive, or corrosive
regardless whether same is regulated by any local government, the State of New
Jersey, or the United States Government, other than normal cleaning materials
customarily used in cleaning office buildings so long as such materials are
stored and used in compliance with all Laws. "HAZARDOUS SUBSTANCE" includes, but
is not limited to any toxic or hazardous substance and any and all material or
substances that are defined as "hazardous waste," "extremely hazardous waste",
or a "hazardous substance" pursuant to state, federal, or local governmental law
including but not limited to the Spill and Compensation and Control Act,
N.J.S.A. 58:10-23.11 et seq. "HAZARDOUS SUBSTANCE" includes but is not
restricted to asbestos, polycholorbiphenyls ("PCBS"), petroleum and petroleum
products. Tenant may use toners in copying operations and ammonium in blue
printing, provided such use and the storage and disposal of same are in
compliance with Law.
(b) ISRA OBLIGATIONS. Tenant will not engage in any activity which
would subject Tenant to the provisions of the Industrial Site Recovery Act
N.J.S.A. 13-1K-6 et and the regulations promulgated thereunder (collectively,
"ISRA") if applicable to the occupancy of the Premises by Tenant pursuant to
this Lease or otherwise. If, for any reason, Tenant is hereafter subjected to
the provisions of ISRA, Tenant shall, at its sole cost and expense, comply
therewith. Tenant will not engage in any activity which would subject the Tenant
to the provisions of the Federal Comprehensive Environmental Response, Liability
and Clean-Up Act, 42 U.S.C.A. Section 9601 et seq, the Resource Conservation and
Recovery Act, 42 U.S.C.A. Section 6901 et seq, the Toxic Substances Control Act,
7 U.S.C.A. Section 136 et seq, the Occupations Safety and Health Act of 1970, 29
U.S.C.A. Section 651 et seq, the Emergency Planning and Community Right to Know
Act of 1986, 42 U.S.C.A. Section 11001 et seq, the Safe Drinking Water Act 42
U.S.C.A. Section 300f et seq, the Hazardous and Solid Waste Amendments of 1984,
P.I. 86-616, the Hazardous Materials Transportation Act, 49 U.S.C.A. Section
1801 et seq, the Federal Clean Air Act, 42 U.S.C.A. Section 7401 et seq, the
Federal Water Pollution Control Act, 33 U.S.C.A. Section 1151 et seq, the Clean
Water Act of 1977, 33 U.S.C.A., 1251 et seq, the Underground Storage of
Hazardous Substances Act, N.J.S.A. Section 58:10A-21 et seq, the Spill
Compensation and Control Act, N.J.S.A. Section 58:10A-23.11 et seq, the Water
Pollution Control Act N.J.S.A. Section 58:10A-1 et seq, or any other federal,
state or local environmental law, regulation, or ordinance.
(c) INDEMNITY. Tenant shall indemnify, defend and save harmless
Landlord from and against all fines, suits, procedures, claims, actions,
damages, liabilities, judgments, costs and expenses (including, without
limitation reasonable attorneys' fees) of any kind arising out of or in any way
connected with Tenant's any other Tenant Party whose actions or omissions or
failure to maintain the Premises results in any spills or discharges of
Hazardous Substances, hazardous wastes or pollutants at or within the Premises,
the Building, or the property which occur during the term of this Lease; and
from all fines, suites, procedures, claims, actions, damages, liabilities,
judgements, costs and expense (including but not limited to reasonable
attorney's fees) of any kind arising out of Tenant's failure to provide all
information, make all submissions, and take all actions necessary to comply with
all of the provisions of all applicable federal, state, and local environmental
laws, regulations, rules, and ordinances, whether or not
28
<PAGE> 29
specifically described in this Section 25.(c) Tenant's obligations and
liabilities under this Section 25.(c) shall continue after expiration of the
term of this Lease, including any extensions thereof for so long as Landlord
remains liable or responsible for any spills or discharges of Hazardous
Substances or wastes or other pollutants at the Premises or the Building of the
property which occur during the term of this Lease.
(d) ENVIRONMENTAL REPORT. Landlord has provided to Tenant a copy of
a Phase I Environmental Site Assessment (Fugro Job No. 16-90-1469), ("REPORT")
with respect to the Land, dated February 19, 1997, prepared by Fugro East, Inc.
("CONSULTANT"). Tenant agrees not to release the Report, or a copy of it, or any
part of it, or disclose any of the information contained in the Report to any
third party (other than Tenant's counsel) without the express prior written
consent of Landlord. Such consent shall not be unreasonably withheld as long as
the proposed party to whom the report is given executes a letter agreement
containing covenants similar to this Section 25.(d). Tenant releases Landlord
for any inaccuracies, omissions, or errors contained in the Report. Tenant
agrees that it will not rely on the Report and it will make whatever independent
investigation it feels is necessary to investigate the environmental and other
conditions of the Land. Tenant agrees that Landlord has no duty to provide it
with the Report, to correct any inaccuracies, errors, or omission in the Report,
to supplement the Report with any additional information, or to provide Tenant
with any information concerning the environmental conditions of the Land. Tenant
agrees that Landlord considers the Report to be confidential proprietary
information and Tenant agrees to maintain the confidentiality and security of
the Report information in accordance with the highest standards of
confidentiality and security associated with the protection of "trade secrets."
Landlord hereby expressly disclaims responsibility for the investigation of the
Land by Tenant and further disclaims any responsibility for the contents of the
Report. Tenant's obligations pursuant to this Section 25.(d) shall survive the
expiration or termination of this Lease.
(e) LANDLORD'S ENVIRONMENTAL REPRESENTATION. Landlord represents and
warrants to Tenant that to the best of Landlord's actual knowledge, Landlord has
not received written notice of any Hazardous Substance on the Land or the
Premises in violation of any Environmental Law except as may be disclosed in the
Report. Landlord and Tenant each specifically acknowledge and agree that all
references in this Lease to the phrase "to the best of Landlord's actual
knowledge" (or other similar phrase) (1) shall mean the actual (not
constructive) personal knowledge of Wm. David Lawson of Archon Group, L.P.
("LANDLORD'S PERSONNEL"), without any duty of inquiry; (2) shall in no case mean
or refer to the actual or constructive knowledge of any other employee, trustee,
partner, agent or partner of a partner, officer, director or other
representative of Landlord, Archon Group, L.P. or any investment advisor,
attorney, contractor or representative of Landlord (together with Landlord's
Personnel, "LANDLORD'S REPRESENTATIVES"); and (3) shall in no event or
circumstance impose upon Landlord or any of Landlord's Representatives any duty
or obligation to verify, inquire or make any independent inquiry or
investigation of any such representation, warranty or statement, or to otherwise
investigate the facts or circumstances relating or otherwise pertinent thereto.
Tenant further acknowledges and agrees that none of Landlord's Representatives
shall be personally liable, or otherwise have any personal liability, under or
in connection with this Lease, including
29
<PAGE> 30
without limitation, in connection with any of the representations, warranties or
statements made in connection with, or pursuant to, this Lease.
(f) VENDING MACHINE AREA. Prior to August 1, 1997, Landlord shall
install a vending machine area in the common areas of the Building for the
common use of tenants in the Building.
(g) LANDLORD'S WORK. Contemporaneously with the performance of the
Work (as defined in Exhibit D hereto), Landlord shall remove, at its sole cost
and expense, (1) the existing internal stairway affecting the Premises, and (2)
the existing Liebert units in the Premises and the raised flooring, together
with any piping or wiring equipment associated with such Liebert units.
(h) SIGNAGE RIGHTS. Landlord shall provide Tenant directory signage
in the lobby area of the Building and any other additional signage rights
similarly given to all of the tenants in the Building.
LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE
PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S
OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE
PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND,
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE
RENT, WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY
LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.
NOTHING IN THIS PARAGRAPH SHALL BE CONSTRUED TO DIMINISH THE OBLIGATIONS OF
LANDLORD THAT ARE EXPRESSLY SET FORTH ELSEWHERE IN THIS LEASE.
30
<PAGE> 31
Dated as of the date first above written.
TENANT:
DIGITAL SOLUTIONS, INC.
By:
George J. Eklund
President and CEO
Prior to Commencement Date:
- ---------------------------
Digital Solutions, Inc.
4041 F Hadley Road
South Plainfield, New Jersey 07080
Attention: Stuart Rosen, Project Manager
Telecopy: 908-561-5327
After Commencement Date:
------------------------
Digital Solutions, Inc.
300 Atrium Drive, Suite 103
Franklin Township, New Jersey 08873
Attention: Stuart Rosen, Project Manager
Telecopy:
---------------------
LANDLORD:
WHATR REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership
By: WHATR Gen-Par, Inc., a Delaware
corporation, General Partner
By:
Name:
Title:
Address: WHATR Real Estate Limited
Partnership
c/o Koll Management Services, Inc.
One Mack Centre Drive
Paramus, New Jersey 07652
31
<PAGE> 32
Telecopy: (201) 967-1500
Telecopy: (201) 967-8685 (fax)
With a copy to:
Archon Group, L.P.
600 Las Colinas Boulevard,
Suite 1900
Irving, Texas 75039
Attention: Asset Manager
Telecopy: 972-831-2507
32
<PAGE> 33
EXHIBIT A
[OUTLINE OF PREMISES]
A-1
<PAGE> 34
EXHIBIT B
[LEGAL DESCRIPTION OF BUILDING]
All that certain tract, parcel and lot of land lying and being situate in the
Township of Franklin, County of Somerset, State of New Jersey, being more
particularly described as follows:
Being known as Block 468.01, Lot 21.06 as shown on a map entitled "amended
Section Two of the Atrium at Somerset, Township of Franklin, Somerset County,
New Jersey" filed in the Somerset County Clerk's office December 14, 1983 as Map
Number 2067. Being further described as beginning at a point in the most
southeasterly line of the whole tract of which this is a part being distant
1050.23 feet along said outside line on a course of North 48 degrees 54 minutes
40 seconds East from the most southerly corner of the whole tract of which this
is a part and corner of the lands of Worlds Fair Associates and running; thence
1. Along the northeasterly line of Lot 21.08 as shown on said map on a course
of North 40 degrees 51 minutes 00 seconds West a distance of 308.94 feet
to a point; thence
2. Still along said line of Lot 21.08 in a northwesterly direction along a
curve to the right having a radius of 60.00 feet an arc distance of
79.54 feet to a point; thence
3. Along the southeasterly line of Lot 21.07 as shown on said map on a course
of North 48 degrees 44 minutes 36 seconds East a distance of 115.14 feet
to a point; thence
4. Along the northeasterly line of lot 21.07 as shown on said map in a
northwesterly direction along a curve to the left having a radius of
60.00 feet an arc distance of 30.17 feet to a point; thence
5. Still along said line of Lot 21.07 in a northwesterly direction along a
curve to the right having a radius of 40.00 feet an arc distance of
31.82 feet to a point; thence
6. Still along said line of Lot 21.07 on a course of North 40 degrees 51
minutes 00 seconds West a distance of 319.66 feet to a point; thence
7. On a course of North 48 degrees 49 minutes 16 seconds East a distance
of 58.43 feet to a point; thence
8. Still along the southeasterly line of Lot 21.03 as shown on a map entitled
"amended section one of the atrium at Somerset" filed in the Somerset
County Clerk's office June 4, 1982 as Map Number 1963, on a course of
North 48 degrees 35 minutes 40 seconds East a distance of 324.59 feet to a
point; thence
B-3
<PAGE> 35
9. Still along said line of Lot 21.03 in a northerly direction along a
curve to the left having a radius of 195.00 feet an arc distance of
192.08 feet to a point; thence
10. Still along said line of Lot 21.03 on a course of North 7 degrees 50
minutes 38 seconds West a distance of 7.40 feet to a point; thence
11. Still along said line of Lot 21.03 in a northwesterly direction along a
curve to the left having a radius of 35.00 feet an arc distance of
48.34 feet to a point; thence
12. Still along a line of Lot 21.03 on a course of North 3 degrees 00
minutes 57 seconds East a distance of 60.00 feet; thence
13. Along the southerly line of Lot 21.04 as shown on said map of Section One
in an easterly direction along a curve to the left having a radius of
250.00 feet an arc distance of 193.82 feet to a point; thence
14. Still along said line of Lot 21.04 on a course of North 48 degrees 35
minutes 40 seconds East a distance of 175.00 feet to a point; thence
15. Along the southwesterly line of Lot 21.05 as shown on said map of Section
Two in an easterly direction along a curve to the right having a radius of
110.00 feet an arc distance of 172.79 feet to a point; thence
16. Still along said line of Lot 21.05 on a course of South 41 degrees 24
minutes 20 seconds East a distance of 250.00 feet to a point; thence
17. Still along said line of Lot 21.05 and the southwesterly line of Lot 21.09
in a southeasterly direction along a curve to the left having a radius of
40.00 feet an arc distance of 31.82 feet to a point; thence
18. Still along said line of Lot 21.09 in a southeasterly direction along a
curve to the right having a radius of 60.00 feet an arc distance of
99.02 feet to a point; thence
19. Still along said line of Lot 21.09 South 55 degrees 57 minutes 41
seconds East a distance of 290.11 feet to a point; thence
20. Along an outside line of the whole tract of which this is a part on a
course of South 15 degrees 35 minutes 50 seconds East a distance of 97.02
feet to a point; thence
21. Still along an outside line of the whole tract on a course of South 48
degrees 37 minutes 00 seconds West a distance of 904.26 feet to a
point; thence
22. Still along an outside line of the whole tract on a course of South 39
degrees 47 minutes 00 seconds East a distance of 17.16 feet to a point;
thence
B-4
<PAGE> 36
23. Still along an outside line of the whole tract on a course of South 48
degrees 54 minutes 40 seconds West a distance of 249.51 feet to a point
being the point or place of beginning.
Together with an easement being identified as follows:
Together with an subject to all of the right title and interest of S/A
Associates In, to and under that certain Declaration of Easements dated April
15, 1982 by S/A Associates recorded in Deed Book 1457 Page 828 on April 20,
1982, as amended by Amendment to Declaration of Easements dated April 15, 1983
by S/A Associates and recorded in Deed Book 1488 Page 315 on September 16, 1983
The above description is in accordance with a survey prepared by Joseph D.
Greenaway, P.L.S. dated July 30, 1996 and last revised to August 22, 1996.
Lot 21.06, Block 468.1, on the Official Tax Map of Franklin Township
B-5
<PAGE> 37
EXHIBIT C
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply to the Premises, the
Building, the parking garage associated therewith, and the appurtenances
thereto:
1. Sidewalks, doorways, vestibules, halls, stairways, and other similar
areas shall not be obstructed by tenants or used by any tenant for purposes
other than ingress and egress to and from their respective leased premises and
for going from one to another part of the Building.
2. Plumbing, fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags or other unsuitable material
shall be thrown or deposited therein. Damage resulting to any such fixtures or
appliances from misuse by a tenant or its agents, employees or invitees, shall
be paid by such tenant.
3. No signs, advertisements or notices shall be painted or affixed on or
to any windows or doors or other part of the Building without the prior written
consent of Landlord. No nails, hooks or screws shall be driven or inserted in
any part of the Building except by Building maintenance personnel. No curtains
or other window treatments shall be placed between the glass and the Building
standard window treatments.
4. Landlord shall provide and maintain an alphabetical directory for all
tenants in the main lobby of the Building.
5. Landlord shall provide all door locks in each tenant's leased premises,
at the cost of such tenant, and no tenant shall place any additional door locks
in its leased premises without Landlord's prior written consent, which consent
shall not be unreasonably withheld, delayed or conditioned. Landlord shall
furnish to each tenant a reasonable number of keys to such tenant's leased
premises, at such tenant's cost, and no tenant shall make a duplicate thereof.
6. Movement in or out of the Building of furniture or office equipment, or
dispatch or receipt by tenants of any bulky material, merchandise or materials
which require use of elevators or stairways, or movement through the Building
entrances or lobby shall be conducted under Landlord's supervision at such times
and in such a manner as Landlord may reasonably require. Each tenant assumes all
risks of and shall be liable for all damage to articles moved and injury to
persons or public engaged or not engaged in such movement, including equipment,
property and personnel of Landlord if damaged or injured as a result of acts in
connection with carrying out this service for such tenant.
7. Landlord may prescribe weight limitations and determine the locations
for safes and other heavy equipment or items, which shall in all cases be placed
in the Building so as to distribute weight in a manner acceptable to Landlord
which may include the use of such
C-2
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supporting devices as Landlord may require. All damages to the Building caused
by the installation or removal of any property of a tenant, or done by a
tenant's property while in the Building, shall be repaired at the expense of
such tenant.
8. Corridor doors, when not in use, shall be kept closed. Nothing shall be
swept or thrown into the corridors, halls, elevator shafts or stairways. No
birds or animals shall be brought into or kept in, on or about any tenant's
leased premises. No portion of any tenant's leased premises shall at any time be
used or occupied as sleeping or lodging quarters.
9. Tenant shall cooperate with Landlord's employees in keeping its leased
premises neat and clean. Tenants shall not employ any person for the purpose of
such cleaning other than the Building's cleaning and maintenance personnel.
10. To ensure orderly operation of the Building, no ice, mineral or other
water, towels, newspapers, etc. shall be delivered to any leased area except by
persons approved by Landlord.
11. Tenant shall not make or permit any vibration or improper,
objectionable or unpleasant noises or odors in the Building or otherwise
interfere in any way with other tenants or persons having business with them.
12. No machinery of any kind (other than normal office equipment) shall be
operated by any tenant on its leased area without Landlord's prior written
consent, which consent shall not be unreasonable withheld, delayed or
conditioned, nor shall any tenant use or keep in the Building any flammable or
explosive fluid or substance.
13. Landlord will not be responsible for lost or stolen personal property,
money or jewelry from tenant's leased premises or public or common areas
regardless of whether such loss occurs when the area is locked against entry or
not.
14. No vending or dispensing machines of any kind may be maintained in any
leased premises without the prior written permission of Landlord.
15. Tenant shall not conduct any activity on or about the Premises or
Building which will draw pickets, demonstrators, or the like.
16. All vehicles are to be currently licensed, in good operating
condition, parked for business purposes having to do with Tenant's business
operated in the Premises, parked within designated parking spaces, one vehicle
to each space. No vehicle shall be parked as a "billboard" vehicle in the
parking lot. Any vehicle parked improperly may be towed away. Tenant, Tenant's
agents, employees, vendors and customers who do not operate or park their
vehicles as required shall subject the vehicle to being towed at the expense of
the owner or driver. Landlord may place a "boot" on the vehicle to immobilize it
and may levy a charge of $50.00 to remove the "boot." Tenant shall indemnify,
hold and save harmless Landlord of any liability arising from
C-3
<PAGE> 39
the towing or booting of any vehicles belonging to a Tenant Party.
C-4
<PAGE> 40
EXHIBIT D
TENANT FINISH-WORK: ALLOWANCE
1. Except as set forth in this Exhibit, Tenant accepts the Premises in
their "AS-IS" condition on the date that this lease is entered into.
2. On or before ________________, 1997, Tenant shall provide to Landlord
for its approval final working drawings, prepared by an architect that has been
approved by Landlord (which approval shall not unreasonably be withheld), of all
improvements that Tenant proposes to install in the Premises; such working
drawings shall include the partition layout, ceiling plan, electrical outlets
and switches, telephone outlets, drawings for any modifications to the
mechanical and plumbing systems of the Building, and detailed plans and
specifications for the construction of the improvements called for under this
Exhibit in accordance with all applicable governmental laws, codes, rules, and
regulations. If Tenant fails to timely deliver such drawings, then each day
after _____________, 1997, that such drawings are not delivered to Landlord
shall be a Tenant Delay Day (defined below). Further, if any of Tenant's
proposed construction work will affect the Building's HVAC, electrical,
mechanical, or plumbing systems, then the working drawings pertaining thereto
must be approved by the Building's engineer of record. Landlord's approval of
such working drawings shall not be unreasonably withheld, provided that (a) they
comply with all laws, rules, and regulations, (b) such working drawings are
sufficiently detailed to allow construction of the improvements in a good and
workmanlike manner, and (c) the improvements depicted thereon conform to the
rules and regulations promulgated from time to time by Landlord for the
construction of tenant improvements (a copy of which has been delivered to
Tenant). As used herein, "WORKING DRAWINGS" shall mean the final working
drawings approved by Landlord, as amended from time to time by any approved
changes thereto, and "WORK" shall mean all improvements to be constructed in
accordance with and as indicated on the Working Drawings. Landlord's approval of
the Working Drawings shall not be a representation or warranty of Landlord that
such drawings are adequate for any use or comply with any law, but shall merely
be the consent of Landlord thereto. Tenant shall, at Landlord's request, sign
the Working Drawings to evidence its review and approval thereof. All changes in
the Work must receive the prior written approval of Landlord, and in the event
of any such approved change Tenant shall, upon completion of the Work, furnish
Landlord with an accurate, reproducible "as-built" plan of the improvements as
constructed.
3. The Work shall be performed only by contractors and subcontractors
approved in writing by Landlord, which approval shall not be unreasonably
withheld. All contractors and subcontractors shall be required to procure and
maintain insurance against such risks, in such amounts, and with such companies
as Landlord may reasonably require. Certificates of such insurance, with paid
receipts therefor, must be received by Landlord before the Work is commenced.
The Work shall be performed in a good and workmanlike manner free of defects,
shall conform strictly with the Working Drawings, and shall be performed in such
a manner and at such times as and not to interfere with or delay Landlord's
other contractors, the operation of
D-2
<PAGE> 41
the Building, and the occupancy thereof by other tenants. All contractors and
subcontractors shall contact Landlord and schedule time periods during which
they may use Building facilities in connection with the Work (e.g., elevators,
excess electricity, etc.).
4. If a delay in the performance of the Work occurs (a) because of any
change by Tenant to the Space Plans or the Working Drawings, (b) because of any
specification by Tenant of materials or installations in addition to or other
than Landlord's standard finish-out materials, or (c) if Tenant or Tenant's
agents otherwise delays completion of the Work, then, notwithstanding any
provision to the contrary in this Lease, Tenant's obligation to pay Rent
hereunder shall commence on the scheduled Commencement Date (each day of delay
caused by any such event shall be a "TENANT DELAY DAY"). If the Premises are not
ready for occupancy and the Work is not substantially completed (as reasonably
determined by Landlord, but in no event earlier than the date on which Landlord
obtains a preliminary or permanent certificate of occupancy for the Premises) on
the scheduled Commencement Date for any reason other than the reasons specified
in the immediately preceding sentence, then the obligations of Landlord and
Tenant shall continue in full force and Rent shall be abated until the date the
Work is substantially completed less the number of Tenant Delay Days, which date
shall be the Commencement Date.
5. The entire cost of performing the Work (including, without limitation,
design of the Work and preparation of the Working Drawings, costs of
construction labor and materials, electrical usage during construction,
additional janitorial services, general tenant signage, related taxes and
insurance costs, all of which costs are herein collectively called the "TOTAL
CONSTRUCTION COSTS") in excess of the Construction Allowance (hereinafter
defined) shall be paid by Tenant. Upon approval of the Working Drawings and
selection of a contractor, Tenant shall promptly (a) execute a work order
agreement prepared by Landlord which identifies such drawings and itemizes the
Total Construction Costs and sets forth the Construction Allowance, and (b) pay
to Landlord 50% of the amount by which Total Construction Costs exceed the
Construction Allowance. Upon substantial completion of the Work, Tenant shall
pay to Landlord an amount equal to the Total Construction Costs (as adjusted for
any approved changes to the Work), less (1) the amount of the advance payment
already made by Tenant, (2) the amount of the Construction Allowance, and (3)
the cost reasonably estimated by Landlord for completing all "punch list" items.
Tenant shall pay to Landlord the costs incurred in completing the punch list
items upon completion thereof.
6. Landlord shall provide to Tenant a construction allowance (the
"CONSTRUCTION ALLOWANCE") equal to the lesser of (a) $26.00 per rentable square
foot in the Premises or (b) the Total Construction Costs, as adjusted for any
approved changes to the Work.
7. To the extent not inconsistent with this Exhibit, Section 7.(a) of this
Lease shall govern the performance of the Work and Landlord's and Tenant's
respective rights and obligations regarding the improvements installed pursuant
thereto.
D-3
<PAGE> 42
EXHIBIT E
PARKING
Tenant may use fifty-one (51) undesignated parking spaces in the parking
area associated with the Building (the "PARKING AREA") during the initial Term
at no cost to Tenant and subject to such terms, conditions and regulations as
are from time to time charged or applicable to patrons of the Parking Area.
E-1
<PAGE> 43
EXHIBIT F
RENEWAL OPTION
Provided no Event of Default exists and Tenant is occupying the entire
Premises at the time of such election, Tenant may renew this Lease for two (2)
additional periods of five (5) years each, by delivering written notice of the
exercise thereof to Landlord not later than nine (9) months before the
expiration of the initial Term. On or before the commencement date of the
extended Term in question, Landlord and Tenant shall execute an amendment to
this Lease extending the Term on the same terms provided in this Lease, except
as follows:
(a) The Basic Rent payable for each month during the first extended
Term shall be ninety-five percent (95%) of the prevailing rental rate, at the
commencement of such extended Term, for space of equivalent quality, size,
utility and location, with the length of the extended Term and the credit
standing of Tenant to be taken into account;
(b) The Basic Rent payable for each month during the second extended
Term shall be one hundred percent (100%) of the prevailing rental rate, at the
commencement of such extended Term, for space of equivalent quality, size,
utility and location, with the length of the extended Term and the credit
standing of Tenant to be taken into account;
(c) Tenant shall have no further renewal options unless expressly
granted by Landlord in writing; and
(d) Landlord shall lease to Tenant the Premises in their
then-current condition, and Landlord shall not provide to Tenant any allowances
(e.g., moving allowance, construction allowance, and the like) or other tenant
inducements.
Tenant's rights under this Exhibit shall terminate if (1) this Lease or
Tenant's right to possession of the Premises is terminated, (2) Tenant assigns
any of its interest in this Lease or sublets any portion of the Premises or (3)
Tenant fails to timely exercise its option under this Exhibit, time being of the
essence with respect to Tenant's exercise thereof.
F-1
<PAGE> 1
EXHIBIT 10.15.2
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 16th day of December, 1997 by and between
Digital Solutions Inc. (the "Company"), a New Jersey corporation, with principal
offices at 300 Atrium Drive, Somerset, New Jersey 08873, and George J. Eklund
("Eklund"), an individual residing at 5 Green Hills Road, Mendham, New Jersey
07945.
W I T N E S S E T H :
WHEREAS, the Company and Eklund entered into an employment Agreement
as of the 12th day of March, 1996 (the "Employment Agreement"), pursuant to
which Eklund was employed as President and Chief Executive Officer of the
Company; and
WHEREAS, Eklund was diagnosed with a malignant brain tumor in June
1997 and has undergone, and continues to undergo, treatment for this condition;
and
WHEREAS, Eklund's current condition renders him unable to perform all
of his usual duties and will continue to prevent him from performing such duties
for at least the immediate future within the contemplation of paragraph VIII of
the Employment Agreement; and
WHEREAS, the Company and Eklund desire to relieve Eklund of his
responsibilities as President and Chief Executive Officer on the ground of
Eklund's disability, and assign new responsibilities to Eklund, and amend and
supersede the terms of the Employment Agreement with the terms set forth
<PAGE> 2
below,
IT IS NOW AGREED:
Subject to the terms and conditions set forth below, Eklund and
the Company hereby agree to change Eklund's position with the Company and amend
the Employment Agreement effective as of the date first set forth above due to
Eklund's disability (the "Effective Date").
Eklund and the Company hereby agree to change Eklund's position,
as of the Effective Date, from President and Chief Executive Officer of the
Company to special assistant on particular projects as reasonably specified by
the Company. Eklund shall remain as a member of the Board of Directors until the
end of his current term.
In settlement of any and all compensation and reimbursement for
expenses due Eklund under the terms of the Employment Agreement or otherwise
from the Company, the Company agrees to pay to Eklund the following amounts on
the terms set forth below:
An amount equal to the cost during the period from the date
hereof through a date ending 18 months from the expiration of the original term
of the Employment Agreement (March 11, 1999), less the amount of such cost
currently paid by Eklund, for medical, dental and life insurance currently
provided to Eklund to be paid directly to the insurer on behalf of Eklund by the
Company in payment of the continuation of such benefits and Eklund's COBRA
<PAGE> 3
responsibility; provided, that the Company's obligation under this subparagraph
3(a) is contingent upon Eklund continuing to timely pay to the Company the
amount of such insurance costs currently paid by Eklund either by deduction from
Eklund's compensation paid hereunder and/or direct payment by Eklund to the
Company;
b. Eklund shall continue to receive his Base Salary as defined in
the Employment Agreement payable in accordance with the Company's normal pay
periods until the expiration of the original term of the Employment Agreement;
provided, however, the Company shall receive a credit for all disability
insurance payments paid directly to Eklund by any disability insurance policy
maintained by the Company on Eklund. Eklund further agrees that he will
cooperate with the Company in the Company's efforts to process any claim for
benefits under such policies, including, if requested by the carrier, to furnish
medical records and/or submit to a physical examination.
Eklund's employee stock options shall continue to vest and be
exercisable in accordance with their original terms. The original terms of such
options were for a period of five years; however, upon termination of
employment, the options which were exercisable on the date of termination are
only exercisable for a period of 90 days from such date of termination, not to
exceed the original term of the option; and upon death of the employee, all
options exercisable upon the date of death are exercisable by the estate of the
employee for a period of one year from the date of death.
The Company will indemnify and hold Eklund harmless from any
<PAGE> 4
and all claims, liabilities, expenses or responsibilities arising out of the
actions commenced by any party arising out of Eklund's employment with the
Company, including costs of collection and reasonable attorneys' fees; provided,
however, that Eklund shall not engage independent counsel unless the Company
consents to same or the representation of Eklund in the matter for which Eklund
intends to engage counsel would constitute a conflict of interest if Eklund was
represented by counsel engaged by the Company.
6. Article V of the Employment Agreement (Non-Disclosure) shall be
deemed to remain in full force and effect.
7. Article VI of the Employment Agreement (Restrictive Covenant) shall
continue in full force and effect and Eklund shall be deemed as if he had
voluntarily resigned for the purposes of such Article on March 11, 1999.
8. This Agreement is the entire agreement and supersedes any previous
agreement, understanding or representations between Eklund and the Company with
respect to the subject matter. This Agreement may not be modified in any respect
except by a written agreement signed by both parties.
9. The provisions of this Agreement shall be binding upon the parties
and their respective agents, employees, directors, officers, shareholders,
heirs, executors, administrators, legal representatives, successors and assigns.
Specifically, and without limitation, in the event of Eklund's death, Eklund's
heirs shall receive all the benefits set forth in paragraphs 3(b) and 4 herein
through March 11, 1999.
10. In the event this Agreement, or any portion thereof, is held
invalid, illegal or unenforceable, the validity, legality or enforceability of
the remainder of
<PAGE> 5
this Agreement shall not in any way be affected or impaired thereby.
11. This Agreement shall not be transferred or assigned without the
written consent of both parties.
12. All notices and other communications permitted or required under
this Agreement shall be in writing and shall be sufficiently given if and when
hand delivered to the persons set forth below, or if sent by registered or
certified mail, postage prepaid, return receipt requested, or by facsimile,
addressed as set forth below or to such other person or persons and/or at such
other address or addresses as shall be furnished in writing by any party to the
others or by personal delivery thereof. Any such notice or communication which
is mailed or faxed shall be deemed to have been given as of the date received or
delivery was attempted, as evidenced by the return receipt with respect to a
letter or the official notation of time and date of delivery of a facsimile.
If to Eklund: George J. Eklund
5 Green Hills Road
Mendham, New Jersey 07945
If to The Company: Digital Solutions, Inc.
300 Atrium Drive
Somerset, New Jersey 08873
with a copy to: Goldstein & DiGioia, LLP
369 Lexington Avenue
New York, NY 10017
Attention: Victor J. DiGioia, Esq.
13. This Agreement shall be binding, governed by, and construed and
enforced under the Federal Arbitration Act and the laws of New Jersey, excluding
those laws of New Jersey related to conflict of laws.
14. All disputes arising between the Company and Eklund, or their
<PAGE> 6
respective agents, employees, directors, officers, shareholders, heirs,
executors, administrators, legal representatives, successors and assigns, shall
be settled exclusively through arbitration administered by the American
Arbitration Association under its Commercial Arbitration Rules and under the
Federal Arbitration Act. Judgment on the award rendered by the arbitrator(s) may
be entered in any court having jurisdiction thereof The arbitrator(s) shall be
bound by applicable federal law and the substantive law of the State of New
Jersey, other than conflicts of law rules which shall not apply. Any claim or
demand exceeding twenty five thousand dollars ($25,000.00) shall be heard by a
panel of three arbitrators. The demand for arbitration must be filed with the
American Arbitration Association within the applicable statute of limitations.
This agreement to arbitrate shall survive the expiration, breach or
<PAGE> 7
termination of this Agreement.
Digital Solutions, Inc.
By:
---------------------------
Karl Dieckmann
Chairman of the Board
---------------------------
George J. Eklund
<PAGE> 1
EXHIBIT 10.16.1
SEVENTH AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AND NOTE
BY AND BETWEEN
SUMMIT BANK, FORMERLY UNITED JERSEY BANK
AND
DIGITAL SOLUTIONS, INC.
AND ITS SUBSIDIARIES
DATED: AS OF OCTOBER 31, 1997
<PAGE> 2
SEVENTH AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT AND NOTE
THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT AND NOTE (this "Amendment") is made as of October 31, 1997,
BY AND
AMONG SUMMIT BANK, formerly UNITED JERSEY BANK, a New Jersey
banking corporation having a place of business at 210 Main
Street, Hackensack, New Jersey 07602 ("UJB" or the "Bank"),
AND DIGITAL SOLUTIONS, INC., a New Jersey corporation, having
its principal place of business at 300 Atrium Drive,
Somerset, New Jersey 08873, (together with its successors
and assigns, hereafter referred to as "DIGITAL");
DSI STAFF CONNXIONS OF MISSISSIPPI, INC., a Mississippi
corporation, having its principal place of business at 2
Northpoint Drive, Suite 110, Houston, Texas 77060 (together
with its successors and assigns, hereafter referred to as
"DSI-MISSISSIPPI");
DSI STAFF CONNXIONS-SOUTHWEST, INC., a Texas corporation,
having its principal place of business at 2 Northpoint
Drive, Suite 110, Houston, Texas 77060, (together with its
successors and assigns, hereafter referred to as
"DSI-SOUTHWEST");
RAM TECHNICAL SERVICES, INC., a Texas corporation, having
its principal place of business at 2 Northpoint Drive,
Suite 110, Houston, Texas 77060, (together with its
successors and assigns, hereafter referred to as "RAM");
MLB MEDICAL STAFFING, INC., a Texas corporation, having its
principal place of business at 2 Northpoint Drive, Suite
110, Houston, Texas 77060, (together with its successors
and assigns, hereafter referred to as "MLB");
<PAGE> 3
DIGITAL INSURANCE SERVICES, INC., a New Jersey corporation,
having its principal place of business at 300 Atrium Drive,
Somerset, New Jersey 08873, (together with its successors
and assigns, hereafter referred to as "DIGITAL INSURANCE");
STAFF CONNXIONS, INC., a New Jersey corporation, having its
principal place of business at 300 Atrium Drive, Somerset,
New Jersey 08873, (together with its successors and
assigns, hereafter referred to as "STAFF CONNXIONS");
DSI-CONTRACT STAFFING, INC., a New Jersey corporation,
having its principal place of business at 300 Atrium Drive,
Somerset, New Jersey 08873, (together with its successors
and assigns, hereafter referred to as "DSI-CONTRACT");
DSI STAFF RX, INC., a Texas corporation, having its
principal place of business at 2 Northpoint Drive, Suite
110, Houston, Texas 77060, (together with its successors
and assigns, hereafter referred to as "STAFF RX"); and
DSI STAFF CONNXIONS NORTHEAST, INC., a New Jersey
corporation, having its principal place of business at 300
Atrium Drive, Somerset, New Jersey 08873, (together with
its successors and assigns, hereafter referred to as "DSI
NORTHEAST");
The corporations listed above (except the Bank) shall hereinafter be
collectively referred to as the "Co-Borrowers".
RECITALS
A. Co-Borrowers and the Bank are parties to a certain Amended and
Restated Loan and Security Agreement, dated as of February 27, 1995 (as amended,
restated or modified up to the date hereof, the "Loan Agreement"). Capitalized
terms used herein and not defined shall have the meanings ascribed to them
-3-
<PAGE> 4
in the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, the Bank made to the
Co-Borrowers a certain revolving loan in the original principal amount of up to
$3,500,000, as evidenced by a certain letter of credit in the present amount of
$455,301.00 and a note in the present principal amount of $2,657,030.00 (as
modified, increased or extended, the "Loan").
C. To evidence the Loan, Co-Borrowers executed and delivered to the
Bank the Replacement Line of Credit Note, dated as of February 27, 1995, (the
"Note") in the original principal amount of up to $3,500,000.
D. As security for the repayment of the "Obligations" (as that term
is defined in the Loan Agreement), the Co-Borrowers executed and delivered
certain UCC-1 Financing Statements (the "UCC-1's) in favor of the Bank, which
UCC-1's were recorded in the appropriate county and state offices and which
UCC-1's were represented by Co-Borrowers to constitute valid and legally binding
priority security interests in and to the "Collateral" (as that term is defined
in the Loan Agreement).
E. At times and from time to time, the Bank and the Co-Borrowers have
amended the Loan Agreement, and the other documents executed in connection
therewith.
F. Pursuant to the terms of a certain amendment to the Amended and
Restated Loan and Security Agreement, dated as of September 29, 1995, the Bank
and the Co-Borrowers modified the terms of the Loan Agreement to include a
covenant that the Co-Borrowers shall maintain a ratio of total maximum
liabilities less subordinated debt to net worth plus subordinated debt of not
greater than 0.90 to 1.0 and to amend the definition of "Tangible Capital Funds"
(as that term is defined in the Loan Agreement).
G. Pursuant to the terms of a certain second amendment to the Amended
and Restated Loan and Security Agreement, dated as of April 29, 1996, the Bank
and the Co-Borrowers modified the terms of the Loan Agreement to (i) extend the
maturity date of the Loan Agreement and Note; (ii) confirm all security
interests heretofore granted by the Co-Borrowers to the Bank; (iii) add to or
revise certain covenants in the Loan Agreement; (iv) add to or
-4-
<PAGE> 5
revise certain terms and conditions of the Loan; (v) fix the amount of the
existing Letter of Credit at $455,301.00; (vi) reduce the accounts receivables
advance rate of the Loan to seventy-five percent (75%); (vii) require the
payment by Co-Borrowers under the Loan of a principal reduction in the minimum
amount of $1.1 million on or before May 30, 1996; and (viii) waive the
applicability of a certain financial covenant of Co-Borrowers under the Loan
Agreement to maintain minimum "Tangible Capital Funds" (as that term is defined
in the Loan Agreement) of $3,395,000.00 for the Fiscal Quarters commencing
10/1/95 through 3/31/96.
H. To evidence the above, Co-Borrowers executed and delivered to the
Bank the Amended Replacement Line of Credit Note, dated as of April 29, 1996, in
the original principal amount of up to $3,500,000.
I. Pursuant to the terms of a certain third amendment to the Amended
and Restated Loan and Security Agreement, dated as of August 31, 1996, the Bank
and the Co-Borrowers modified the terms of the Loan Agreement to extend the
maturity date of the Loan Agreement and Note, as amended, to October 31, 1996.
J. To evidence the above, Co-Borrowers executed and delivered to the
Bank the Second Amended Replacement Line of Credit Note, dated as of August 31,
1996, in the original principal amount of up to $3,500,000.
K. Pursuant to the terms of a certain fourth amendment to the Amended
and Restated Loan and Security Agreement, dated as of October 31, 1996, the Bank
and the Co-Borrowers modified the terms of the Loan Agreement to: (i) extend the
maturity date to December 31, 1996; (ii) increase the interest rate of the Loan
from one and one-half (1.5%) percent above the Bank's Floating Base Rate to two
and one-half (2.5%) percent above the Bank's Floating Base Rate; and (iii) alter
certain other provisions of the Loan Documents as more particularly set forth
therein.
L. To evidence the above, Co-Borrowers executed and delivered to the
Bank the Third Amended Replacement Line of Credit Note, dated as of October 31,
1996, in the original principal amount of up to $3,500,000.
-5-
<PAGE> 6
M. Pursuant to the terms of a certain fifth amendment to the Amended
and Restated Loan and Security Agreement, dated as of December 31, 1996, the
Bank and the Co-Borrowers modified the terms of the Loan Agreement to: (i)
extend the maturity dates of the Loan Agreement and Note to April 30, 1997; (ii)
provide for the payment of weekly principal reductions and a term-out of the
Loan; and (iii) alter certain other provisions of the Loan Documents as more
particularly set forth therein.
N. To evidence the above, Co-Borrowers executed and delivered to the
Bank the Fourth Amended Replacement Line of Credit Note, dated as of December
31, 1996, in the original principal amount of up to $3,500,000.
O. Pursuant to the terms of a certain sixth amendment to the Amended
and Restated Loan and Security Agreement, dated as of April 30, 1997, the Bank
and the Co-Borrowers modified the terms of the Loan Agreement to: (i) extend the
maturity dates of the Loan Agreement and Note to October 31, 1997; (ii) provide
for an audit of the Co-Borrowers; (iii) continue weekly principal reductions and
a term-out of the Loan; (iv) increase the interest rate of the Loan from two and
one-half (2.5%) percent above the Bank's Floating Base Rate to three (3.0%)
percent above the Bank's Floating Base Rate; and (v) alter certain other
provisions of the Loan Documents as more particularly set forth therein.
P. To evidence the above, Co-Borrowers executed and delivered to the
Bank the Fifth Amended Replacement Line of Credit Note, dated as of April 30,
1997, in the original principal amount of up to $3,500,000.
Q. The Fifth Amended Note and the Sixth Amended and Restated Loan
Agreement matured on October 31, 1997. The Co-Borrowers agree, admit and
acknowledge that the Fifth Amended Note and the Sixth Amended and Restated Loan
Agreement have matured and that they have no defense, counterclaim, offset or
right of recoupment to the aforesaid maturity. Notwithstanding the above, the
Co-Borrowers are attempting to repay the Loan and otherwise meet their
obligations under the Fifth Amended Note and the Sixth Amended and Restated Loan
Agreement. The Co-Borrowers have asked the Bank to temporarily forbear from the
exercise of any rights and remedies under the Fifth Amended Note and the Sixth
Amended and Restated Loan Agreement and the Bank has agreed
-6-
<PAGE> 7
subject to the terms and conditions of this Agreement.
R. This Amendment is intended to alter certain terms of the Loan
Agreement and Note in order to: (i) extend the maturity dates of the Loan
Agreement and Note to October 31, 1998; (ii) provide for an infusion capital of
$250,000.00 by the Co-Borrowers; (iii) continue weekly principal reductions and
a term-out of the Loan; (iv) continue interest at the rate of three (3.0%)
percent above the Bank's Floating Base Rate; (v) provide for the grant to Bank
of certain warrants to purchase stock of the Co-Borrowers; and (vi) alter
certain other provisions of the Loan Documents as more particularly set forth
herein.
S. The Bank and the Co-Borrowers have agreed to execute this
Amendment and to enter into the transactions, and execute and deliver the
documents provided for herein, all on and subject to the terms hereof.
NOW, THEREFORE, IN CONSIDERATION OF THE LOAN, THE NOTE, THE LOAN
AGREEMENT AND THE OTHER MUTUAL PROMISES SET FORTH HEREIN, THE BANK AND THE
CO-BORROWERS DO HEREBY AGREE AS FOLLOWS:
1. INCORPORATION OF RECITALS: The Recitals set forth above are hereby
incorporated by reference in the Loan Agreement and this Amendment.
2. AMENDMENTS TO LOAN AGREEMENT AND NOTE:
(a) The Bank and the Co-Borrowers hereby agree that as of October 31,
1997, the outstanding principal balance of the Note is Two Million, Six Hundred
Thirty-Seven Thousand, Thirty Dollars and 00/100 Dollars ($2,657,030.00), plus
interest and the outstanding principal balance of the Letter of Credit is Four
Hundred Fifty-Five Thousand, Three Hundred and One Dollars and No Cents
($455,301.00), plus interest, if any, and that the Co-Borrowers admit and
acknowledge that these sums are due and owing to the Bank in full, without
defense, counterclaim, offset and right of recoupment and that Co-Borrowers
hereby irrevocably waive any right to raise such defense, offset, counterclaim
and right of recoupment.
(b) The maturity dates of the Loan Agreement and the Note, as each of
the same have been previously amended and modified and
-7-
<PAGE> 8
are modified hereby, are hereby extended to October 31, 1998. There shall be no
further extensions of the Loan Documents.
(c) The definition of "Note" contained in Article I, Section 1.1,
subparagraph 26 of the Loan Agreement shall mean the Sixth Amended
Replacement/Term Line of Credit Note attached hereto as Exhibit "A" and made a
part hereof.
(d) Article I, Section 1.1 of the Loan Agreement is amended to
include as a defined term "Maturity Date." The definition of "Maturity Date"
shall be October 31, 1998.
(e) Article II, Section 2.1, subparagraphs A-H of the Loan Agreement
is amended to reflect the new "Maturity Date" of October 31, 1998 in the place
and stead of October 31, 1997.
(f) Article V of the Loan Agreement is amended to reflect that the
Co-Borrowers are required to pay the amounts due and owing under the Note, as
amended herewith, in full on or before October 31, 1998. It is also be amended
to reflect that commencing on November 1, 1997, and on a weekly basis thereafter
until maturity, Co-Borrowers are required to make principal payments in the
amount of $10,000. Such payments shall be made by way of an automatic charge by
the Bank to the DDA account of Co-Borrowers, number 967703980. Any and all
principal payments shall not be reborrowed by Co-Borrowers. All principal and
accrued interest shall be paid in full on the Maturity Date.
(g) Article VII, Section 7.3 of the Loan Agreement is amended to
reflect that the Co-Borrowers individually, jointly and severally covenant and
agree that, from the date hereof until payment in full of the principal of and
interest on the Sixth Amended Replacement/Term Line of Credit Note, they shall
provide to the Bank:
1. Monthly management prepared financial statements;
2. Quarterly management prepared 10K and 10Q Securities and
Exchange Commission filings, together with all exhibits, addenda and attachments
thereto and materials and information filed therewith;
-8-
<PAGE> 9
3. Monthly Borrowing Base Certificates on the Bank's form.
Moreover, upon written request by the Bank, Co-Borrowers shall provide a
detailed accounts receivable aging report setting forth the amount due and owing
on Receivables for the preceding week, together with a reconciliation report
reasonably satisfactory to the Bank showing all sales, collections, payments and
adjustments to receivables on their respective books as of the last business day
of the preceding week.
(h) On the date of the execution of this Amendment, the Co-Borrowers
shall execute and deliver to the Bank the Sixth Amended Replacement/Term Note in
the form attached hereto as Exhibit "A" and made a part hereof. All sums due and
owing under the Sixth Amended Replacement/Term Note shall be paid in accordance
with the terms of that Note and this Amendment.
(i) The Note shall bear interest at the fluctuating rate of three
percent (3.0%) in excess of the Bank's Floating Base Rate. All accrued and
unpaid interest shall be paid by Co-Borrowers in accordance with the terms of
the Note, i.e., beginning on November 1, 1997 and on the first day of each month
thereafter. All principal and accrued and unpaid interest shall be paid in full
on the earlier of an Event of Default (as defined in the Loan Agreement, as
amended) or on the Maturity Date.
(j) On the date of the execution of this Amendment, the Co-Borrowers
shall execute and deliver to the Bank Warrants to Purchase 500,000 shares of
Digital's stock in the form attached hereto as Exhibit "C" and made a part
hereof. The Exercise Price of the Warrants shall be $2.4375 per share. If
Co-Borrowers' obligations to the Bank hereunder are indefeasibly repaid in full
on or before April 30, 1998 and all commitments and letter of credit obligations
terminated on or before such date, all of the warrants shall expire. If the
Co-Borrowers' obligations hereunder to the Bank are not indefeasibly paid in
full and/or terminated on or before April 30, 1998 and all commitments and
letter of credit obligations terminated on or before such date, then 200,000
warrants shall immediately, and without further action, vest. If, thereafter,
the Co-Borrowers' obligations hereunder to the Bank are indefeasibly paid in
full on or before October 31, 1998 and all commitments and letter of credit
obligations terminated on or before such date, the remaining 300,000 warrants
shall expire. If, however, the Co-Borrowers'
-9-
<PAGE> 10
obligations hereunder are not indefeasibly paid in full and/or terminated on or
before October 31, 1998, the remaining 300,000 warrants shall vest. The warrants
shall be exercisable for a period of three years from May 1, 1998.
(k) On or before December 1, 1997, the Co-Borrowers shall obtain from
their shareholders an investment of equity or subordinated debt in the amount of
$250,000.00.
(l) Article X of the Loan Agreement is amended to reflect that upon
an Event of Default hereunder and/or as defined in the Loan Agreement, in
addition to all of the rights and remedies available to the Bank under the Loan
Agreement, all 500,000 Warrants discussed in subsection (j) above shall be
immediately vested.
(m) Article VII, Section 7.9 ("Financial Covenants"), as amended from
time to time, is deleted in its entirety.
3. REAFFIRMATION AND CONFIRMATION OF TERMS OF THE LOAN AGREEMENT, THE
AMENDED AND RESTATED LOAN AGREEMENT, THE SECOND AMENDED AND RESTATED LOAN
AGREEMENT, THE THIRD AMENDED AND RESTATED LOAN AGREEMENT, THE FOURTH AMENDED AND
RESTATED LOAN AGREEMENT, THE FIFTH AMENDED AND RESTATED LOAN AGREEMENT AND THE
SIXTH AMENDED AND RESTATED LOAN AGREEMENT: The Co-Borrowers hereby confirm and
reaffirm all unaltered by previous amendment or amendment hereof terms,
representations, interests, conditions and warranties contained in the Loan
Agreement, as amended, and the other Loan Documents (as that term is defined in
the Loan Agreement).
4. REAFFIRMATION OF NEGATIVE COVENANTS: The Co-Borrowers hereby
reaffirm the Negative Covenants contained in the Loan Agreement (Sections 8.1 -
8.12), as amended, and hereby agree to be bound by and to abide by the terms and
obligations contained therein, particularly that the provision that they shall
obtain Bank approval prior to undertaking any activities identified in Sections
8.1 - 8.12. Bank understands that Co-Borrowers have relocated their business.
Bank consents to the relocation of Co-Borrowers and to an increase in the
capitalized lease provisions of the Loan Documents up to the amount of $400,000.
Co-Borrowers affirm and represent that they will obtain from their Landlord a
subordination agreement as to Landlord's security interests under
-10-
<PAGE> 11
the lease. Co-Borrowers further affirm and represent that any security interest
of Landlord under the lease shall be and is subordinate to the priority security
interest of the Bank.
5. SIXTH AMENDED REPLACEMENT/TERM NOTE: The Loan, as modified and
amended pursuant to the terms of this Amendment, shall be evidenced by the Sixth
Amended Replacement/Term Note. The Sixth Amended Replacement Note replaces,
amends, restates, and continues (but does not constitute a repayment or novation
of) the Note. Amounts due and owing under the Note shall be deemed to be owing
under the Sixth Amended Replacement Note.
6. CONDITIONS PRECEDENT: As conditions precedent to the effectiveness
of this Amendment and the provisions set forth herein, the Bank shall have
received from the Co-Borrowers the following items, in form and substance
acceptable to the Bank and its counsel:
(a) This Amendment, duly executed by all parties hereto,
except for the certificates of good standing for the
companies as set forth in Exhibit "B" attached hereto,
which certificates shall be delivered as soon as is
reasonably practical, but in any event not later than
March 1, 1998;
(b) The Sixth Amended Replacement/Term Note, duly executed by
the Co-Borrowers;
(c) The Warrants to Purchase the Stock of the Co-Borrowers,
duly executed by the Co-Borrowers;
(d) A confirmation from the Co-Borrowers, dated the date of
this Amendment, stating that (i) the representations and
warranties contained in the Loan Agreement and the other
Loan Documents (as that term is defined in the Loan
Agreement) are correct as of the date of this Amendment;
(ii) no Event of Default or an event which with the
passage of time or the giving of notice or both would
constitute an Event of Default, has occurred or is
continuing; and (iii) none of the Co-Borrowers have any
defenses, offsets or claims against the Bank in connection
with the Loan, the Note, the Loan Agreement, the Loan
Documents (as that term is defined
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<PAGE> 12
in the Loan Agreement) and their respective obligations to
the Bank under the Sixth Amended Replacement Note, this
Amendment and any other Loan Documents (as that term is
defined in the Loan Agreement). By executing this
Amendment, the Co-Borrowers hereby confirm the matters
described in this paragraph (c) and certify to the Bank
that the matters contained in this paragraph (c) are true
and correct on the date hereof;
(e) Certified copies of the resolutions of the Boards of
Directors of the Co-Borrowers approving this Amendment,
the Sixth Amended Replacement/Term Note and all documents
evidencing other necessary corporate action and
governmental approvals, if any, with respect to this
Amendment, the Sixth Amended Replacement/Term Note and any
documents incident hereto within three days of the date of
execution of the Amendment;
(f) Certificates of the Secretaries or Assistant Secretaries
of the Co-Borrowers certifying the names and true
signatures of the officers of the Co-Borrowers authorized
to sign this Amendment, the Sixth Amended Replacement/Term
Note and any documents incident hereto within thirty days
of the date of execution of this Amendment.
(g) On the date hereof, Co-Borrowers shall pay an extension
fee of $20,000.00. In addition, Co-Borrowers shall pay any
and all fees and expenses of counsel to the Bank incurred
in connection with the extension of the maturity of the
Loan Documents and any audit fees to date. These fees and
expenses shall be paid from the equity infusion referred
to in Section 2 above. However, the Co-Borrowers agree
that they will attempt to pay at least one half of the
attorney and auditor fees within seven(7) days of the
execution of this Amendment. In addition, during the term
of the extension, Co-Borrowers shall pay any and all costs
and fees incurred by the Bank in connection with the
Indebtedness in the Bank's sole and absolute discretion.
These fees shall include, but not be limited to,
additional attorney and/or auditor fees;
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<PAGE> 13
(h) Receipt on or before December 18, 1997 of a certification
from Co-Borrowers' Chief Financial Officer that all
county, state and/or federal withholding taxes are current
and have been paid in full through the date of the
execution of this Amendment;
(i) Such other approvals, opinions of counsel or documents as
the Bank may reasonably request.
In the event that any of the above items are not received by the Bank
in accordance with time-frames set forth above, such failure shall constitute an
Event of Default as defined in Article X of the Loan Agreement and the Bank
shall have available to it all rights and remedies thereunder.
7. SECURITY INTERESTS: (a) The Co-Borrowers do hereby confirm the
security interests which they have granted to the Bank under the Loan Agreement,
as amended, and do hereby confirm and agree that the same continue to secure the
repayment and performance of all Obligations, including, without limitation,
under the Note, and the Loan Agreement, as amended, and the other Loan Documents
(as that term is defined in the Loan Agreement), as each of the same have been
amended and modified hereby.
(b) In addition to the foregoing, the Co-Borrowers do
hereby grant to the Bank a lien upon and a security interest in and to any and
all of their now owned or hereafter acquired assets (including, without
limitation, all Collateral), to secure the repayment and performance of all
Obligations, including, without limitation, under the Sixth Amended
Replacement/Term Line of Credit Note (the "Sixth Amended Replacement/Term
Note"), attached hereto as Exhibit "A" and made a part hereof, the Loan
Agreement, as amended, this Amendment and the other Loan Documents (as that term
is defined in the Loan Agreement), as each of the same have been amended and
modified hereby. Such lien and security interests shall be deemed to be "Liens"
for all purposes of the Loan Agreement and the other Loan Documents (as that
term is defined in the Loan Agreement).
8. REAFFIRMATION OF JOINT AND SEVERAL LIABILITY: Each of the
Co-Borrowers, jointly and severally, hereby agree and
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<PAGE> 14
reaffirm their agreements to make full and prompt payment when due, and to
fully, promptly and unconditionally perform each and every term and condition of
all Obligations including all indebtedness of any Obligor arising in the future.
The Obligations are a primary obligation of each of the Co-Borrowers, regardless
of whether such Co-Borrowers receive the proceeds of any Loan under the Loan
Agreement, and shall continue without limitation of amount or duration until all
Obligations shall have been paid in full.
9. RELEASE: Effective on the date hereof, each of the Co-Borrowers
(collectively, the "Releasors") do hereby release, acquit, and forever discharge
the Bank and the Bank's subsidiaries, affiliates, officers, directors, agents,
employees, servants, attorneys, and representatives, as well as the respective
heirs, personal representatives, predecessors, successors, and assigns of any
and all of them (hereafter collectively called the "Released Lender Parties")
from any and all claims, demands, debts, actions, causes of action, suits,
contracts, agreements, obligations, accounts, defenses, offsets against all
amounts due and owing to the Bank and liabilities of any kind or character
whatsoever, known or unknown, suspected or unsuspected, in contract or in tort,
at law or in equity, including without implied limitations, such claims and
defenses as fraud, mistake, duress, and usury, which any of the Co-Borrowers
ever had, now has, or might hereafter have against any of the Released Lender
Parties, jointly or severally, for or by reason of any matter, cause, or thing
whatsoever occurring before and up to the date hereof, any including, without
limitation, and all claims, demands, debts, actions, causes of action, suits,
contracts, agreements, obligations, accounts, defenses, offsets including
arising in connection with: (a) the Loan; (b) the Loan Documents; or (c) any
Collateral. In addition, the Releasors agree not to commence, join in,
prosecute, or participate in any suit or other proceeding in a position that is
adverse to any of the Released Lender Parties arising directly or indirectly
from any of the foregoing matters. This Release shall bind the Releasors and
their respective heirs, personal representatives, successors and assigns, and
shall inure to the benefit of the Bank, its successors and assigns. The terms of
this Section 9 shall survive the execution and delivery of this Amendment and
the other Loan Documents (as that term is defined in the Loan Agreement).
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<PAGE> 15
10. PUNITIVE DAMAGES: The Co-Borrowers hereby waive any rights that
they or it may have to claim or recover in any suit, action or proceeding
whatsoever any special, exemplary or punitive damages.
11. REPRESENTATION: The Co-Borrowers and the Bank hereby represent
and warrant to each other that it or he has been represented by counsel of his
or its choice in connection with its or his execution of (as applicable) this
Amendment, the Sixth Amended Replacement Note, and the other documents executed
in connection therewith, and his or its performance hereunder and thereunder.
12. THIRD PARTIES: This Amendment shall not be construed to create
any rights against the Bank in favor of any third parties.
13. MISCELLANEOUS:
(a) INCORPORATION BY REFERENCE. This Amendment is
incorporated by reference into the Loan Agreement, as amended, and the other
Loan Documents (as that term is defined in the Loan Agreement). Except as
otherwise provided herein, all other provisions of the Loan Agreement, as
amended, and the other Loan Documents (as that term is defined in the Loan
Agreement) are hereby affirmed and ratified and shall remain in full force and
effect as of the date of this Amendment.
(b) APPLICABLE LAW. This Amendment, the Loan Agreement, as
amended, and any other loan documents executed in connection herewith shall be
governed by and construed in accordance with the laws of the State of New
Jersey.
(c) JURISDICTION. In any litigation relating to any loan
document, including this Amendment, Co-Borrowers and each Obligor hereby consent
to the personal jurisdiction of the state and federal courts of the State of New
Jersey.
(d) SUCCESSORS AND ASSIGNS. All of the terms and conditions
contained herein, in the Loan Agreement, as amended, and in the other loan
documents executed and delivered in connection herewith, shall be for and shall
inure to the benefit
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<PAGE> 16
of and shall bind the respective parties hereto and thereto and their respective
successors and assigns and heirs, personal representatives, administrators and
executors, as the case may be.
(e) SEVERABILITY. In the event any provision of this
Amendment or any other loan document executed and delivered in connection
herewith shall be held invalid or unenforceable by a court of competent
jurisdiction, such holdings shall not invalidate or render unenforceable any
other provision hereof or thereof.
14. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
15. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO DOES HEREBY
WAIVE ANY RIGHT TO A JURY TRIAL IN CONNECTION WITH THIS AMENDMENT, THE LOAN
AGREEMENT, AS AMENDED, THE THIRD AMENDED REPLACEMENT NOTE, THE OTHER LOAN
DOCUMENTS AND DOES HEREBY ACKNOWLEDGE AND AGREE THAT HE OR IT HAS CONSULTED WITH
COUNSEL OF HIS OR ITS CHOICE IN CONNECTION WITH THE MATTERS DESCRIBED HEREIN AND
SPECIFICALLY AS TO THIS WAIVER OF JURY TRIAL.
IN WITNESS WHEREOF, this Seventh Amendment to the Amended
and Restated Loan and Security Agreement and Note has been executed as of the
date first written above.
ATTEST/WITNESS: DIGITAL SOLUTIONS, INC.,
a New Jersey Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
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<PAGE> 17
ATTEST/WITNESS DSI STAFF CONNXIONS OF MISSISSIPPI,
INC., a Mississippi Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: DSI STAFF CONNXIONS-SOUTHWEST,
INC., a Texas Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: RAM TECHNICAL SERVICES, INC.,
a Texas Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: MLB MEDICAL STAFFING, INC.
a Texas Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
-17-
<PAGE> 18
-18-
<PAGE> 19
ATTEST/WITNESS: DIGITAL INSURANCE SERVICES, INC.,
a New Jersey Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: STAFF CONNXIONS, INC.,
a New Jersey Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: DSI-CONTRACT STAFFING, INC.,
a New Jersey Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST/WITNESS: DSI STAFF RX, INC.,
a Texas Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
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<PAGE> 20
[SEAL]
-20-
<PAGE> 21
ATTEST/WITNESS: DSI STAFF CONNXIONS NORTHEAST, INC.,
a New Jersey Corporation
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
SUMMIT BANK, formerly UNITED JERSEY
BANK
a New Jersey Banking Corporation
By:________________________________
Name:______________________________
Title:_____________________________
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<PAGE> 22
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DIGITAL SOLUTIONS, INC., the corporation named in this
document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
____________________________________
NOTARY PUBLIC
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<PAGE> 23
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DIGITAL INSURANCE SERVICES, INC., the corporation
named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
__________________________________
NOTARY PUBLIC
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<PAGE> 24
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of STAFF CONNXIONS, INC., the corporation named in this
document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
__________________________________
NOTARY PUBLIC
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<PAGE> 25
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of MLB MEDICAL STAFFING, INC., the corporation named in
this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
________________________________
NOTARY PUBLIC
-25-
<PAGE> 26
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DSI STAFF CONNXIONS-MISSISSIPPI, the corporation named
in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
____________________________
NOTARY PUBLIC
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<PAGE> 27
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DSI STAFF CONNXIONS-SOUTHWEST, the corporation named
in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
___________________________
NOTARY PUBLIC
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<PAGE> 28
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of RAM TECHNICAL SERVICES, INC., the corporation named in
this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
________________________________
NOTARY PUBLIC
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<PAGE> 29
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DSI-CONTACT STAFFING, INC., the corporation named in
this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
________________________________
NOTARY PUBLIC
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<PAGE> 30
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DSI STAFF RX, INC., the corporation named in this
document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
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<PAGE> 31
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October , 1997, ______________________ personally
came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document as
______________________ of DSI STAFF CONNXIONS NORTHEAST, INC., the corporation
named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as its
voluntary act and deed by virtue of authority from its Board of Directors.
______________________________
NOTARY PUBLIC
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<PAGE> 32
EXHIBIT A
Sixth Amended Replacement/Term Note
-32-
<PAGE> 33
EXHIBIT B
List of Companies/Good Standing Status
-33-
<PAGE> 34
EXHIBIT C
Warrants to Bank for Purchase of Stock
-34-
<PAGE> 35
EXHIBIT 10.16.1
SIXTH AMENDED PROMISSORY/TERM GRID NOTE
(THE "SIXTH AMENDED REPLACEMENT/TERM LINE OF CREDIT NOTE")
Up To $3,500,000.00 Dated as of: October 31, 1997
FOR VALUE RECEIVED, DIGITAL SOLUTIONS, INC., a corporation
duly organized and validly existing under the laws of the State of New Jersey,
having its principal office at 300 Atrium Drive, Somerset, New Jersey 08873
(together with its successors and assigns, hereinafter referred to as
"Digital"), DSI STAFF CONNXIONS OF MISSISSIPPI, INC., a corporation duly
organized and validly existing under the laws of the State of Mississippi,
having its principal office at 2 Northpoint Drive, Suite 110, Houston, Texas
77060 (together with its successors and assigns, hereinafter referred to as
"DSI-Mississippi"), DSI STAFF CONNXIONS-SOUTHWEST INC., a corporation duly
organized and validly existing under the laws of the State of Texas, having its
principal office at 2 Northpoint Drive, Suite 110, Houston, Texas 77060
(together with its successors and assigns, hereinafter referred to as
"DSI-Southwest"), RAM TECHNICAL SERVICES, INC., a corporation duly organized and
validly existing under the laws of the State of Texas, having its principal
office at 2 Northpoint Drive, Suite 110, Houston, Texas 77060 (together with its
successors and assigns, hereinafter referred to as "RAM"), MLB MEDICAL STAFFING,
INC., a corporation duly organized and validly existing under the laws of the
State of Texas having its principal office at 2 Northpoint Drive, Suite 110,
Houston, Texas 77060 (together with its successors and assigns, hereinafter
referred to as "MLB"), DIGITAL INSURANCE SERVICES, INC., a corporation duly
organized and validly existing under the laws of the State of New Jersey, having
its principal office at 300 Atrium Drive, Somerset, New Jersey 08873 (together
with its successors and assigns, hereinafter referred to as "Digital
Insurance"), STAFF CONNXIONS, INC., a corporation duly organized and validly
existing under the laws of the State of New Jersey, having its principal office
at 300 Atrium Drive, Somerset, New Jersey 08873 (together with its successors
and assigns, hereinafter referred to as "Staff Connxions"), DSI-CONTRACT
STAFFING, INC., a corporation duly organized and validly existing under the laws
of the State of New Jersey, having its principal office at 300 Atrium Drive,
Somerset, New Jersey 08873 (together
<PAGE> 36
with its successors and assigns sometimes hereinafter referred to as
"Staffing"), DSI STAFF RX, INC., a corporation duly organized and validly
existing under the laws of the State of Texas, having its principal office at 2
Northpoint Drive, Suite 110, Houston, Texas 77060 (together with its successors
and assigns, hereinafter referred to as "Staff RX") and DSI STAFF CONNXIONS
NORTHEAST, INC., a corporation duly organized and validly existing under the
laws of the State of New Jersey, having its principal office at 300 Atrium
Drive, Somerset, New Jersey 08873 (together with its successors and assigns
sometimes hereinafter referred to as "DSI-Northeast") (Digital, DSI-Mississippi,
DSI-Southwest, Staffing, RAM, MLB, Digital Insurance, Staff Connxions, Staff RX
and DSI-Northeast are hereinafter referred to collectively as the
"Co-Borrowers"), hereby individually, jointly, severally and unconditionally
promise to pay to the order of SUMMIT BANK, formerly known as UNITED JERSEY
BANK, a banking corporation duly organized and validly existing under the laws
of the State of New Jersey, having its principal office at 210 Main Street,
Hackensack, New Jersey 07601 (together with its successors and assigns,
hereinafter the "Bank") on the earlier of (i) October 31, 1998, or the date of
an event of default (as such term is defined in the Amended and Restated Loan
and Security Agreement, dated as of February 27, 1995, as amended by the Second
Amendment to the Amended and Restated Loan and Security Agreement, the Third
Amendment to the Amended and Restated Loan and Security Agreement, the Fourth
Amendment to the Amended and Restated Loan and Security Agreement, the Fifth
Amendment to the Amended and Restated Loan and Security Agreement, the Sixth
Amendment to the Amended and Restated Loan and Security Agreement and the
Seventh Amendment to the Amended and Restated Loan and Security Agreement), the
sum of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000.00), or, if less,
then the aggregate unpaid principal amount of all Advances made by the Bank to
the Co-Borrowers pursuant to Section 2.1 of the Amended and Restated Loan and
Security Agreement, as amended by the Second Amendment to the Amended and
Restated Loan and Security Agreement, the Third Amendment to the Amended and
Restated Loan and Security Agreement, the Fourth Amendment to the Amended and
Restated Loan and Security Agreement, the Fifth Amendment to the Amended and
Restated Loan and Security Agreement, the Sixth Amendment to the Amended and
Restated Loan and Security Agreement and the Seventh Amendment to the Amended
and Restated Loan and Security Agreement, in lawful money of the United States
of America, in
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<PAGE> 37
immediately available funds, and to pay interest thereon at a fluctuating rate
equal to the sum of Three Percent (3.0%) in excess of the Bank's Floating Base
Rate.
Capitalized terms in this Sixth Amended Replacement Note
shall have the meanings ascribed to them in that certain amended and restated
loan and security agreement, dated as of February 27, 1995 (the "Loan
Agreement"), as amended by the Second Amendment to the Loan Agreement (the
"Amendment"), dated as of April 29, 1996, the Third Amendment to the Loan
Agreement (the "Second Amendment"), dated as of August 31, 1996, the Fourth
Amendment to the Loan Agreement (the "Third Amendment"), dated as of October 31,
1996, the Fifth Amendment to the Amended and Restated Loan and Security
Agreement (the "Fourth Amendment"), dated as of December 31, 1996, the Sixth
Amendment to the Amended and Restated Loan and Security Agreement (the "Fifth
Amendment"), dated April 30, 1997 and the Seventh Amendment to Loan and Security
Agreement dated even date, by and among the Bank and the Co-Borrowers, which are
hereby incorporated verbatim herein in their entireties and made a part hereof,
unless a different meaning clearly appears from the context hereof. This Sixth
Amended Replacement Note is the "Note" defined in and referred to in the Seventh
Amendment. This Sixth Amended Replacement Note substitutes for and is now the
"Note" dated as of February 27, 1995, as amended (the "Note") in the original
principal amount of up to $3,500,000.00, referred to in the Loan Agreement and
is subject to all its terms and conditions. This Sixth Amended Replacement Note
is not, and shall not be construed to be, a repayment or novation of the Note,
as amended. Any and all amounts due and owing under the Note, as amended, shall
be deemed to be owing hereunder. All accrued and unpaid interest under the Note,
as amended, shall be due and payable in full at the time that the first payment
of interest hereunder is due and payable.
Interest on the unpaid principal, at the rate described
hereinabove, shall accrue from the last date of the last payment of interest
through maturity. Interest only on the aggregate amount of the principal shall
be payable monthly, in arrears, on the first day each calendar month, commencing
November 1, 1997, and continuing thereafter on the first day of each succeeding
calendar month, through and including October 1, 1998. Thereafter, on October
31, 1998, or, if sooner, on the date of an event of default, all unpaid
principal and accrued and unpaid
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<PAGE> 38
interest hereon shall be due and payable in full. Interest hereon shall be
computed on the basis of the actual number of days elapsed over a year
consisting of 360 days.
Principal payments hereunder in the amount of $10,000 on a
weekly basis shall be due and payable commencing on November 1, 1997 and
continuing throughout until maturity. The principal payments due hereunder shall
be made by way of an automatic charge to the DDA account of Co-Borrowers,
bearing account number 967703980, located at the Bank. All principal sums repaid
hereunder shall not be reborrowed by Co-Borrowers. Thereafter, all unpaid
principal and accrued interest shall be due and payable in full on October 31,
1998, or, if sooner, on the date of an event of default.
The Co-Borrowers hereby jointly, severally, and irrevocably
authorize and direct the Bank, on the due date of any payment, to charge any
account which shall then be maintained by any of the Co-Borrowers at the Bank,
for the full amount thereof provided, however, that in the event there shall be
insufficient or no funds remaining in any of said accounts on said due date, the
Co-Borrowers shall nevertheless be irrevocably and fully obligated to make
payment to the Bank of such amounts as are then due hereunder in accordance with
the terms hereof.
The Bank shall maintain an account record of the amount of
principal owed by the Co-Borrowers and payments of principal and interest made
by the Co-Borrowers in connection herewith, which account record shall serve as
prima facie evidence of the aggregate amount of outstanding money under the Line
of Credit and accrued and unpaid interest thereon from time to time. The failure
of the Bank to maintain such an account record, however, shall not alter or
impair the rights and remedies of the Bank nor shall the failure of the Bank to
maintain such an account record alter the right of the Co-Borrowers to receive
credit for the payment of principal or interest made in accordance with the
provisions of this Sixth Amended Replacement Note and the Loan Agreement, as
amended.
In the event that any payment required hereunder shall not
be received by the Bank within ten (10) days of the due date thereof, the
Co-Borrowers shall, to the extent permitted by law, pay Bank a late charge of
Five Percent (5%) of the overdue
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<PAGE> 39
payment (but in no event to be less than $25.00 nor more than $2,500.00). Any
such late charge shall be immediately due and payable.
Payment of the principal of and accrued interest on this
Sixth Amended Replacement Note is secured by a first priority security interest
in the lien upon certain of the Collateral granted by the Co-Borrowers to the
Bank pursuant to the Amended and Restated Loan and Security Agreement, as
amended. Reference is hereby made to the Amended and Restated Loan and Security
Agreement, as amended, for a more complete description of the security for the
Obligations of the Co-Borrowers including, without limitation, repayment of
principal and interest on this Note, the rights and Obligations of the
Co-Borrowers in connection therewith and other matters affecting the
Indebtedness evidenced by this Note.
Upon the occurrence of an event of default, as defined in
the Amended and Restated Loan and Security Agreement, in addition to any and all
other remedies available hereunder, under any of the Loan Documents or by
statute, at law, in equity or otherwise, the principal amount hereof, together
with accrued interest thereon, may become, or may be declared to be, immediately
due and payable in the manner, upon the conditions and with the effect provided
herein and/or the Amended and Restated Loan and Security Agreement, as amended.
Each Co-Borrower acknowledges that the Bank does not intend
for the aggregate principal amount of the Outstanding Advances under Section 2.1
of the Amended and Restated Loan and Security Agreement, as amended by the
Second, Third, Fourth, Fifth, Sixth and Seventh Amendments to the Loan
Agreement, to exceed, at any time, the Advances Limit (including the Letter of
Credit Sublimit), which is specifically defined in Section 2.1(A) of the Amended
and Restated Loan and Security Agreement, as amended by the Second, Third,
Fourth, Fifth, Sixth and Seventh Amendments to the Loan Agreement.
This Sixth Amended Replacement Note shall be governed by
and construed in accordance with the laws of the State of New Jersey.
Upon the occurrence of an Event of Default, with
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<PAGE> 40
respect to the payment of any installment of principal, interest or principal
and interest hereunder and until such Event of Default shall be cured, the Bank
shall be entitled to collect interest on the then outstanding principal amount
of the Loan, at a rate equal to Five Percent (5%) above the then applicable rate
set forth in this Note; provided, however, that such rate of interest shall
never exceed the maximum rate of interest permissible under the laws of the
State of New Jersey.
Each of the Co-Borrowers and all guarantors and/or
endorsers of this Note hereby waive presentment, demand for payment, protest and
notice of protest and all other demands and notices in connection with the
payment and enforcement of this Note and consent to extensions of time in the
payment of any moneys payable under this Note, or forbearance of their
indulgence, without notice.
WAIVER OF JURY TRIAL. EACH CO-BORROWER WAIVES TRIAL BY JURY
AND CONSENTS TO AND CONFERS PERSONAL JURISDICTION ON COURTS OF THE STATE OF NEW
JERSEY OR OF THE FEDERAL GOVERNMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS AS TO
VENUE IN ANY OF SUCH COURTS AND AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON
IT BY MAILING A COPY OF THE SUMMONS BY UNITED STATES CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO ITS ADDRESS. THE BANK LIKEWISE WAIVES TRIAL BY JURY.
IN WITNESS WHEREOF, each of the undersigned have caused
this Note to be duly executed on the day and year first above written.
ATTEST: DIGITAL SOLUTIONS, INC.
A New Jersey Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
-6-
<PAGE> 41
ATTEST: DIGITAL INSURANCE SERVICES, INC.
A New Jersey Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: STAFF CONNXIONS, INC.
A New Jersey Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: MLB MEDICAL STAFFING, INC.
A Texas Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: DSI STAFF CONNXIONS-MISSISSIPPI
A Mississippi Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
-7-
<PAGE> 42
[SEAL]
ATTEST: DSI STAFF CONNXIONS-SOUTHWEST
A Texas Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: RAM TECHNICAL SERVICES, INC.
A Texas Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: DSI-CONTACT STAFFING, INC.
A Texas Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: DSI STAFF RX, INC.
A Texas Corporation
-8-
<PAGE> 43
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
ATTEST: DSI STAFF CONNXIONS NORTHEAST, INC.
A New Jersey Corporation
Co-Borrower
__________________________ By:________________________________
Name:_____________________ Name:______________________________
Title:____________________ Title:_____________________________
[SEAL]
-9-
<PAGE> 44
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, ____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DIGITAL SOLUTIONS, INC., the corporation named in
this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
________________________
NOTARY PUBLIC
-10-
<PAGE> 45
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DIGITAL INSURANCE SERVICES, INC., the corporation
named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_______________________
NOTARY PUBLIC
-11-
<PAGE> 46
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of STAFF CONNXIONS, INC., the corporation named in
this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
-12-
<PAGE> 47
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of MLB MEDICAL STAFFING, INC., the corporation named
in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
-13-
<PAGE> 48
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DSI STAFF CONNXIONS-MISSISSIPPI, the corporation
named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
__________________________
NOTARY PUBLIC
-14-
<PAGE> 49
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DSI STAFF CONNXIONS-SOUTHWEST, the corporation
named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
-15-
<PAGE> 50
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of RAM TECHNICAL SERVICES, INC., the corporation named
in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
-16-
<PAGE> 51
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DSI-CONTACT STAFFING, INC., the corporation named
in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_______________________
NOTARY PUBLIC
-17-
<PAGE> 52
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DSI STAFF RX, INC., the corporation named in this
document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_________________________
NOTARY PUBLIC
-18-
<PAGE> 53
STATE OF ___________)
) SS.:
COUNTY OF __________)
I CERTIFY that on October __, 1997, _____________________
personally came before me and acknowledged under oath, to my satisfaction that:
(a) he signed, sealed and delivered the attached document
as ______________________ of DSI STAFF CONNXIONS NORTHEAST, INC., the
corporation named in this document;
(b) the proper corporate seal was affixed; and
(c) this document was signed and made by the corporation as
its voluntary act and deed by virtue of authority from its Board of Directors.
_______________________
NOTARY PUBLIC
-19-
<PAGE> 54
-20-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No. 33-85526).
Arthur Andersen LLP
Roseland, New Jersey
January 13, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No. 33-70928).
Arthur Andersen LLP
Roseland, New Jersey
January 13, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No. 33-91700).
Arthur Andersen LLP
Roseland, New Jersey
January 13, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-3 (File No. 33-09313).
Arthur Andersen LLP
Roseland, New Jersey
January 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 841,000
<SECURITIES> 0
<RECEIVABLES> 6,682,000
<ALLOWANCES> (862,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,801,000
<PP&E> 3,217,000
<DEPRECIATION> (2,310,000)
<TOTAL-ASSETS> 14,163,000
<CURRENT-LIABILITIES> 9,202,000
<BONDS> 0
0
0
<COMMON> (19,000)
<OTHER-SE> (4,853,000)
<TOTAL-LIABILITY-AND-EQUITY> 14,163,000
<SALES> 0
<TOTAL-REVENUES> 122,695,000
<CGS> 0
<TOTAL-COSTS> 113,894,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,120,000)
<INTEREST-EXPENSE> (377,000)
<INCOME-PRETAX> (2,832,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,832,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,832,000)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
