Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-20468
3NET SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
629 J STREET, SACRAMENTO, CA 95814
(Address of principal executive offices) (zip code)
(916) 498-3900
(Issuer's telephone number, including area code)
Securities registered under Section 12 (b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $1,781,226
The approximate aggregate market value of the Registrant's common voting stock
held by non-affiliates of the Registrant on September 16, 1996 was $5,784,356
(based on the final trading price on that date).
Number of shares of Common Stock outstanding at September 16, 1996: 200,000,000
Transitional Small Business Disclosure Format (Check One): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders to be held on November 21, 1996 (which will be filed
within 120 days of the Company's fiscal year end) and are incorporated by
reference into Part III.
Exhibit index is located on page 25.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
3Net Systems, Inc. ("3Net" or the "Company") provides contract computer
programming and consulting services to an expanding base and variety of
industrial customers. These services include: the provision of alternative
programming resources to domestic customers through the recruitment,
training, importation and contractual deployment of foreign information
technology professionals, drawing prospective contractors primarily from
selected areas within the former Soviet Union; software development and
implementation services for customers who desire new applications which are
based on personal computer ("PC") network, client-server and/or Internet
technology platforms; and software and hardware support and maintenance
services for customers who license and use the Company's proprietary
application system products. These services are provided by virtue of the
Company's depth of knowledge and experience in PC networks, client-server
technologies, object-oriented technologies, Internet technologies, system
integration, laboratory information systems, application systems
development, and international business development.
Previously, the Company focused on the design, development and marketing of
integrated computer application systems, with particular emphasis on the
automation of medical/clinical/insurance laboratories through its
laboratory information system products ("Cortex LIS" and "PrismCare LIS",
or "FAILSAFE LIS"). These products collect and validate test request and
test result data, interface with and respond to requests for information
from laboratory instruments, organize data, communicate it to various user
departments of a hospital, and provide quality control and assurance
functions. The 3Net Cortex LIS includes clinical, microbiology, and
laboratory communications applications designed for small/medium-sized
customer installations, and is licensed by a substantial majority of the
Company's current laboratory information system customers. By comparison,
the 3Net PrismCare LIS includes clinical, microbiology, and laboratory
communications applications designed for medium/large-sized customer
installations. As discussed below, due to the continuing losses attributed
to the development and sales of medical software, the Company has decided
it will no longer devote any dedicated resources to the marketing or
selling of these products.
In fiscal 1995 and early fiscal 1996, a significant portion of the
Company's resources were also devoted to its automated timekeeping
("TimeNet") and universal resource scheduler ("RUMS") products. TimeNet
automates the time and attendance record-keeping functions typically
maintained either manually or by a card-punch clock system. The Company
sold and installed four TimeNet Systems in hospitals during fiscal 1994-96;
additionally, two systems had already been installed in hospitals when the
marketing rights to TimeNet were acquired by the Company. RUMS is an
object-oriented system that simulates highly complex, real-time resource
scheduling circumstances, such as scheduling all facets of patient care at
a hospital. In December 1993, the Company purchased an exclusive license
to the proprietary software development methodology and for the use and
resale, into the health care market, of RUMS from TransMillenial Resources
Corporation in exchange for 1,000,000 shares of Common Stock. Further, in
February 1995, the Company entered into an agreement to purchase rights to
use and resell, into any market, the proprietary software acquired in
fiscal 1994 for the health care market. Since its acquisition of said
rights to RUMS, the Company has marketed RUMS through its strategic
alliances and business partnerships. However, the Company has sold no
customer licenses to RUMS to date.
During the second half of fiscal 1996, the Company began to redirect its
strategic focus away from product development/sales in order to concentrate
it resources on its contract services businesses. This change in strategy
was effected by the Company as a direct result of several critical factors.
First, the Company had been largely unsuccessful in selling new customer
licenses to its primary products, PrismCare LIS and TimeNet. Concerning
PrismCare LIS, this lack of new sales resulted from the significant delay
experienced by the Company in completing the development and implementation
of the system at the initial customer site. This delay resulted in
significant losses and severe liquidity problems. Cost cutting required by
negative cash flows resulted in further delays in software development and
implementation. When PrismCare LIS was finally implemented at the first
customer site in fiscal 1995, its overall marketability was limited by its
commercial insurance laboratory design. Therefore, significant additional
time and investment would be required to bring the product up to
competitive clinical laboratory market standards. Concerning TimeNet, the
lack of new sales was related to a dramatic increase in the number of
competitive offerings in the time and attendance system market, TimeNet's
lack of a graphical user interface, and customer reluctance to contract
with 3Net based upon the Company's financial condition.
Second, the markets in which the Company sold products offered the Company
little opportunity for significant growth in sales and market share. The
domestic laboratory information system market had become highly saturated
so that the majority of system sales opportunities were to replace
customers' old existing systems. This proved to be difficult considering
the long-standing loyalty and investments of these customers with their
existing laboratory system vendors. The negative cash flow associated with
the lack of new sales and the significant remaining investment required to
bring PrismCare LIS and TimeNet up to competitive market standards combined
to bring about the suspension of all existing product sales efforts in the
Company by the end of fiscal 1996.
Third, in fiscal 1996, the Company recognized that contract programming and
consulting services offered the greatest potential for profitability and
improved shareholder value. Although the Company had earlier ceased its
product development efforts in Cortex LIS and PrismCare LIS, 12 customers
continued to renew their system license and/or hardware/software
maintenance support agreements each year. Although the total number of
such customer license/maintenance contracts has slowly decreased during the
past two years, the Company expects this line of business to remain
profitable for at least the next year.
More importantly for the future, however, the Company has begun to
determine the market potential for its alternative programming resources
business since its inception in fiscal 1995. Based upon its experience in
the market and critical industry forecasts, the Company believes that this
line of business is the best vehicle for financial recovery and the
development of a viable ongoing enterprise for the future. By focusing its
operations on providing contract programming and consulting services, the
Company has begun to generate new revenues and has reduced expenses, thus
reducing its operating losses. These actions substantially reduced the
Company's level of cash consumption in fiscal 1996 as compared to fiscal
1995. However, the Company did not generate sufficient cash flow in fiscal
1996 to support its operations.
The Company has incurred operating losses since inception which have
resulted in an accumulated deficit of $33,207,699 at June 30, 1996. In
addition, at June 30, 1996 the Company has a working capital deficit of
$3,406,254 and a stockholders' deficit of $3,255,515. In fiscal 1993 and
fiscal 1994, the Company experienced delays in completion of its products
which resulted in an inability to timely install ordered systems and an
inability to close new orders. In fiscal 1995, the Company succeeded in
receiving acceptance of its products by some of its customers; however,
sales momentum had been lost because of the extended delays. During
fiscal 1995, the Company wrote off software development costs and
purchased software costs because the cost reduction strategies employed by
the Company included reduction of sales and marketing staff and related
activities. In fiscal 1996, the Company wrote off the remaining net book
value of purchased software. In fiscal 1996, the closing of new orders
continued to be impacted by this lack of momentum and by the Company's
financial status. In order to reduce its losses, the Company no longer
markets its medical software and related products and has taken steps to
decrease expenses and generate revenues by providing contract programming
and consulting services and by acting as an intermediary in providing such
services.
The Company's operating growth strategy includes the expansion of its
marketing efforts through strategic alliances and the development of new
customers with the expenditure of a minimum of resources. During fiscal
1996, the Company reduced its staff by 50% and lowered operating expenses
by 64%; however, such cost saving moves will not be sufficient to allow the
Company to timely meet all of its obligations while attempting to grow
revenue to a level necessary to generate cash from operations; therefore,
the Company is pursuing additional funds through private equity financings
or additional debt financings. Although there can be no assurances that
additional financing can be obtained or that if obtained, it will be
sufficient to prevent the Company from having to further materially reduce
its level of operations, management of the Company believes that sufficient
financing will be available until operations can be funded through
providing contract programming and consulting services. Ultimately, the
Company will need to achieve a profitable level of operations to fund
growth and to meet its obligations when they become due.
3Net was incorporated in California in August 1989 and effected a
reincorporation in Delaware on April 9, 1992 through a merger with a wholly
owned Delaware subsidiary. Its principal executive offices are located at
629 J Street, Sacramento, California 95814 and its telephone number is
(916) 498-3900.
SERVICES
ALTERNATIVE PROGRAMMING RESOURCE SERVICES
According to Staffing Industry Report, a staffing services industry
publication, the temporary staffing industry was estimated to have 1995
revenues of approximately $40 billion and a compound growth rate of
approximately 18% over the past four years. The information technology
services sector, one of the fastest growing sectors of the temporary
staffing industry, was estimated to have 1995 revenues of approximately $9
billion, which represents a 25% increase per year for the past two years.
The prodigious growth rate of the information technology staffing services
sector is being driven by several important corporate strategic trends.
Corporate restructuring, downsizing, government regulations, rapid advances
in technology, and the desire by many companies to shift employee costs
from a fixed to a variable expense basis have resulted in the use of a wide
range of staffing alternatives by businesses. Over the last decade, the
increased use of technology has led to a dramatic rise in demand for
technical project support, software development, and other computer-related
services. Corporations have outsourced many of these departments and/or
have utilized the employees of staffing firms in an attempt to meet the
increased demand for computer-skilled personnel.
Since fiscal 1995, the Company has developed a growing niche business
within the information technology sector by providing alternative
programming resources (APR) to domestic and international customers. The
Company achieves this by recruiting, training, importing and contractually
deploying foreign information technology professionals from the former
Soviet Union (FSU) for direct assignment to customer programming projects.
The mechanism by which such prospective foreign contractors are identified
and prepared for assignment to U.S. company projects is the Company's
cooperative business relationship with a technology firm based in Riga,
Latvia. Originally affiliated with the Riga Institute for Civil Aviation
Automation and Controls during the days of the Soviet Union, these
information technology professionals are highly-educated and have extensive
experience in multiple programming languages, operating systems and
hardware platforms. With the breadth of their technical backgrounds in
mainframe, mid-frame and PC client-server environments, they are
immediately available to work in analogous computing environments in the
West; or, are easily and quickly trained in emerging technologies for which
personnel shortages exist in the U.S.
The Company's first target of opportunity for the contractual placement of
these FSU computer specialists in U.S.-based computing assignments is in
the area of legacy system support and maintenance. A "legacy system" is
defined as a business application system developed ten or more years ago in
an older computer language (such as COBOL, PL/1 or Assembler Language) that
continues to operate on a mainframe or mid-frame hardware platform. The
cost of maintenance for such systems has steadily risen over the years.
Even more problematic for the U.S. companies operating legacy systems today
is the ever-decreasing domestic labor pool of programmers who are
technically qualified and who desire to perform software maintenance tasks.
The increasing disparity between the amount of legacy system maintenance
demand and the supply of qualified, motivated programmers to perform it is
further exacerbated by the Year 2000 conversion issue. Also known as "the
millennium bug", this problem arises from the widespread use of only two
digits to represent the year in computer programs performing date
computations and decision-making functions. Unless these programs are
modified, many will fail due to their inability to properly interpret these
date fields (e.g., such programs may interpret "00" as the year "1900"
rather than "2000"). The Gartner Group, an information technology market
research firm, has estimated that it will cost the public and private
sectors between $300 and $600 billion worldwide to perform the necessary
Year 2000 conversions. The cost to the U.S. federal government alone is
estimated to be over $30 billion.
With the further expansion of its APR business and associated contacts
throughout the FSU, the Company believes it can offer American businesses a
viable legacy system maintenance staffing alternative. Contractual
engagements are arranged either directly by the Company with individual
customers or through the sales and marketing efforts of third-party
business partners. When the Company receives orders for such foreign
contractors from the customer, it arranges for their work visas, their
transportation to the U.S., and their housing and local transportation
needs in the customer's city/state of business. While working under
customer contracts, the foreign contractors generate revenues at market
rates for their time, from which the Company pays them a basic salary that
includes cash and payments-in-kind for basic necessities (i.e., housing,
utilities, transportation, etc.) according to the prevailing wage
determined by the local state government.
As of September 1996, the Company had 30 foreign contractors actively
employed in U.S.-based contracts at five different customer business
locations in California, Minnesota and Georgia.
The Company has recently entered into a joint marketing agreement with
Technical Directions, Inc. ("TDI". TDI is a professional contract services
company, and under the five year joint marketing agreement, TDI will market
the Company's personnel resources. The Company will be the preferred provider
of foreign workers to TDI. The joint marketing agreement is in its initial
stages and no assurances can be given that TDI will be successful in placing
the Company's personnel resources or that the Company will find qualified
technical personnel to fulfill TDI's clients' needs.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
The Company provides software development and implementation services for
customers who desire new customized applications which are based on PC
network, client-server and/or Internet technology platforms. These
engagements are contracted on an individual customer basis and generate
revenues at market rates for required time and materials.
SOFTWARE/HARDWARE MAINTENANCE SUPPORT SERVICES
The Company provides software and hardware maintenance support services to
customers who have licensed one or more of its proprietary system products
on the basis of annually renewable contracts. Products for which
maintenance support service contracts are available include 3Net PrismCare
LIS and 3Net Cortex LIS. Maintenance support services are no longer
provided by the Company to TimeNet customers.
These maintenance support services are available to such customers 24 hours
per day seven days per week. In addition, overnight delivery of hardware
is available when needed.
PRODUCTS
TIMENET TIMEKEEPING SYSTEM
In fiscal 1993, the Company acquired all of the marketing rights to an
automated timekeeping system known as "TimeNet" formerly "IntelliTime".
This system automates the time and attendance record-keeping functions
maintained either manually or by a card-punch clock system. Time and
attendance information (as well as information regarding the worker's
location in the hospital, office or plant) is taken directly from a
magnetically encoded or bar-coded badge. As consideration for the
marketing rights to the system, the Company agreed to pay $40,000 and a
royalty of 10% of gross software and hardware sales through February 12,
1995 up to a cumulative total of $100,000, related to TimeNet. The Company
has an additional commitment to pay royalties to St. Agnes Hospital, on
software sales related to the TimeNet product, at 15% of related sales, but
in any event not less than $75,000 for a three year period ending December
22, 1995. The Company has sold and installed four TimeNet systems to
hospitals to date; additionally, two systems had already been installed in
hospitals when the marketing rights were acquired. However, TimeNet
development, sales and marketing efforts were suspended indefinitely in
April, 1996, and all existing TimeNet customer maintenance support service
contracts terminated.
RESOURCE UTILIZATION MANAGEMENT SYSTEM (RUMS)
In December 1993, the Company purchased an exclusive license to a
proprietary software development methodology and for the use and resale,
into the health care market, of a proprietary universal scheduler software
package ("Resource Utilization Management System" or "RUMS") from
TransMillenial Resources Corporation ("TMRC") in exchange for 1,000,000
shares of Common Stock. RUMS is an object-oriented system that simulates
highly-complex, real-time resource scheduling circumstances, such as
scheduling all facets of patient care in a hospital. In so doing, this
product addresses the most critical management problem faced by hospitals,
clinics and health maintenance organizations today: the need for
improvements in the methods of organizing, managing and accounting for all
aspects of patient care.
This agreement with TMRC also included compensation for past services. In
connection with this agreement, the Company recorded in December 1993,
$550,000 in consulting expenses and $1,000,000 as an asset for the
purchased software. In February 1995, the Company entered into an
agreement to purchase rights to use and resell, into any market, the
proprietary universal scheduling software acquired in fiscal 1994 for the
health care market. The agreement required the Company to issue 100,000
shares of its Common Stock and a warrant to purchase 400,000 shares of its
Common Stock at $0.001 per share with a fair market value of $500,000 as
consideration for these rights. At June 30, 1995, the Company expensed the
remaining asset value of $1,156,522 related to RUMS because the cost
reduction strategies employed by the Company included reduction of sales
and marketing staff and activities. The Company will continue to market
RUMS through its strategic alliances and business partnerships.
ACCELERATOR
The Company developed a proprietary memory resident data base management
software for intercepting and processing file requests from a workstation
in a computer data communications network which reduces network traffic and
file server activity. Since pre-allocation of memory is not required and
memory can be released to the workstation when no longer in use, programs
running against data base servers or file managers achieve a reduction in
network traffic and provide for high speed network communications. The
Accelerator overcomes the deficiencies found in conventional network
management devices and methods by eliminating network latency and
measurably increasing file access speed by storing files in local memory.
The Accelerator software is embedded in the Company's 3Net PrismCare LIS
application software to enhance its run-time performance. During fiscal
1994-1995, the Company submitted a patent application for the Accelerator
and began market research efforts to determine whether it could
successfully be marketed either as a stand-alone product or as a component
of other vendors' product offerings. However, to date, the Accelerator has
not been sold, licensed or installed in any customer sites other than as a
component of the 3Net PrismCare LIS.
3NET PRISMCARE LIS
The 3Net PrismCare LIS applications automate the various functions of the
laboratory and track the flow of events within the laboratory departments.
The Company has previously marketed, and may continue to market, the 3Net
PrismCare LIS as 3Net FAILSAFE LIS. The 3Net PrismCare LIS applications
collect and validate data; interface with and respond to requests for
information from laboratory instruments; organize data to ease their
interpretation and to facilitate presentation; generate reports; provide
quality control and assurance functions; and communicate data and results
to various other departments of the hospital. Specifically, the 3Net
PrismCare LIS includes the following three applications, each of which can
operate independently or as a part of an integrated information system:
clinical, microbiology (not yet completed) and communications modules.
The Company capitalized approximately $2,483,000 in software development
cost through December 31, 1992 and began amortizing those costs over five
years in fiscal 1993. At June 30, 1995, the Company expensed the remaining
asset value of approximately $914,000 because the cost reduction strategies
employed by the Company included reduction of sales and marketing staff and
related activities.
In 1994, the Company completed one installation of the 3Net PrismCare LIS
which comprised the clinical and communications applications, has sold an
additional license to the user based on throughput volume, and entered into
an agreement with the licensee pursuant to which the Company provided
modifications and new features customized to the customer's specifications
during fiscal 1995 and fiscal 1996.
CORTEX LIS
Cortex LIS is also a client-server based system which is written in a
combination of programming languages and utilizes Novell NetWare and MS DOS
operating systems. It contains clinical, microbiology and communications
software applications which have fewer functions and run on smaller local
area networks with less powerful file servers and without the larger
storage capacity of the 3Net PrismCare LIS. Cortex LIS has disk duplexing
operation protection features similar to those of the 3Net PrismCare LIS.
Cortex LIS is more suitable and affordable for smaller health care
facilities which do not handle the volume of transactions of larger
facilities. A substantial majority of the Company's customers currently
have Cortex LIS installed. The Company has sold no new Cortex LIS system
licenses since fiscal 1992, but has continued to provide annually renewable
software and hardware maintenance support service contracts to its existing
Cortex LIS customer base.
CUSTOMERS
The Company's present customer base includes those companies to which it is
providing services in one of the previously-described three service
categories: alternative programming resource services, software development
and implementation services, and software/hardware maintenance support
services. A small number of customers has made up a relatively large
percentage of the Company's total revenues for each of its fiscal years.
The Company's principal customers (i.e., accounting for more than 10% of
its revenues) in fiscal 1996 were Osborn Laboratories, Inc. and EDS which
constituted approximately 41% and 36% of the Company's total revenues,
respectively. In fiscal 1995, Osborn Laboratories, Inc., Cameron &
Associates, Inc. (owned by affiliates), and Southside Hospital constituted
approximately 27%, 17% and 14% of the Company's total revenues. The loss
of any significant customer through cancellation may have a material and
adverse effect on the Company's operating results.
Revenues from sales to customers located outside the U.S., all of which
were sales to Canadian customers, accounted for approximately 5% of total
revenues in fiscal 1995. There were no revenues from sales to customers
located outside the U.S. in fiscal 1996.
In July 1994, the Company entered into a strategic alliance with Electronic
Data Systems Corporation ("EDS") pursuant to which EDS was to provide
product development and other support to 3Net and cooperate in the
development and marketing of certain 3Net products. The products under
discussion were TimeNet and RUMS. 3Net has not recorded any product
revenue under this agreement; however, 3Net is providing contract
programming and consulting services to EDS.
SALES
During fiscal 1996 in connection with the Company's shift in focus to
contract programming and consulting, one product sales staff position and
three sales support staff positions were eliminated. The Company's
executive officers and certain technical staff members currently
participate in selling efforts by directly contacting potential customers.
More importantly, the Company relies upon and benefits from the efforts of
third-party business partners in the sale and placement of foreign
contractors in new customer contracts and the management of such accounts
after the sale.
During fiscal 1995 all of the Company's business came from direct sales
made by the Company's sales representatives or by supplementary sales to
existing customers.
COMPETITION
ALTERNATIVE PROGRAMMING RESOURCE SERVICES
The information technology temporary services industry is highly
competitive with limited barriers to entry. Within local markets, smaller
firms actively compete with the Company for business, and in most of these
markets no single company has a dominant share of the market. The Company
also competes with larger full-service and specialized competitors in
national, regional, and local markets which have significantly greater
marketing, financial and other resources than the Company.
However, due to the niche definition of its APR market segment and the
growing general shortage of legacy system maintenance programmers, the
Company does not believe that external competition represents the primary
impediment to its placement of FSU programmers in customer contracts.
Rather, the Company's APR business is limited primarily by its ability to
recruit, train and present qualified FSU contractor candidates to the
customer. Qualification attributes for placement in U.S. customer
contracts include the particular technical skills and experience
corresponding to the customer's requirements and sufficient English
language skills to communicate effectively in an American business
environment.
SOFTWARE DEVELOPMENT AND IMPLEMENTATION SERVICES
The market for providing such generalized applications software development
and implementation services is highly competitive and fragmented along
industrial and technical specialty lines. Competitive advantage is earned
by developing core competencies in particular industry applications and in
specific technology skill areas.
The Company's industrial/application core competencies are in the areas of
laboratory information systems and complex, rules-based applications.
Complementing its application expertise is a depth of technical knowledge
and experience in PC networks, client-server technologies, object oriented
technologies, Internet technologies and system integration.
SOFTWARE/HARDWARE MAINTENANCE SUPPORT SERVICES
The Company has a virtually exclusive market offering in this component of
its services business because it owns the licensing rights to the Cortex
LIS software being maintained and supported. Therefore, customers must
renew the Company's software license and maintenance support service
agreements each year in order to legally continue to operate the system.
Although the Company has experienced a slow erosion of this customer base
during the past two years as some former customers have chosen to replace
Cortex LIS with new laboratory information systems, 12 customers have
continued to renew their license and/or maintenance support service
agreements each year.
The Company faces competition from a large number of hardware service
providers of many different sizes and specialties. However, since most of
the remaining Cortex LIS customers desire single vendor support for
software and hardware, the Company has also retained the hardware
maintenance business of most of these customers.
PROPRIETARY RIGHTS
All of the Company's software systems have only limited proprietary
protection, so it is possible that a competitor may develop systems similar
to the Company's based on its independent research and development. The
Company also believes that the size and complexity of the software
encompassing its applications would make unauthorized use of its systems
difficult. Additionally, the Company includes confidentiality provisions
and proprietary ownership disclosures in its customer and distributor
agreements, and its software includes anti-pirating features to further
protect the Company's proprietary rights.
GOVERNMENT REGULATION
The Company's operations are subject to various federal and state laws.
The Company believes that its operations currently comply with such laws,
but, there can be no assurance that subsequent laws, subsequent changes in
present laws or interpretations of law will not adversely affect the
Company's operations. Certain applicable laws and regulations are
described below.
3Net's recent focus on providing contract programming resources from the
FSU requires that U.S. Department of Justice, Immigration and
Naturalization Service (INS), regulations relative to foreign workers be
followed. The Company has engaged the services of a business immigration
lawyer to assist in the filing of all appropriate documents necessary for
3Net to invite foreign workers to the United States for contract
programming assignments. While 3Net and its immigration lawyer are very
familiar with the current rules and regulations, there can be no guarantee
that the immigration laws of the United States will not be changed thereby
having a negative impact on 3Net's business.
As it may relate to the Company's computer application systems at customer
sites. the FDA has indicated that it may further regulate health care
systems beyond the blood bank area through its regional FDA offices.
Additionally, the Company is subject to certain laws regulating clinical
laboratories under the Clinical Laboratory Improvement Amendments of 1968
(42 C.F.R. Part 405, et. al.), which are enforced by the various states'
Departments of Health Services. These laws set forth standards which must
be complied with by laboratories and include the laboratory systems
provided by the Company. The Company believes that its laboratory systems
are currently in compliance with such laws.
RESEARCH AND DEVELOPMENT
In fiscal 1996, the Company incurred research and development expenses
totaling $657,437. In fiscal 1995, the Company incurred research and
development expenses totaling $2,017,876. The Company discontinued
research and development during fiscal 1996 and reassigned employees to
contract programming or service and support activities.
HUMAN RESOURCES
At September 16, 1996, the Company had 39 employees, consisting of 2
executive officers, 5 contract programming and service/support personnel,
30 contract programming and service/support personnel in the United States
on visa from the former Soviet Union, and 2 administrative persons. There
are 11 employees employed at the Company's headquarters in Sacramento, 8 at
customer locations in the Sacramento area, 9 at customer locations in
Georgia, 6 at customer locations in Minnesota, and 5 at customer locations
in El Segundo, California. None of the Company's employees is represented
by a labor union. Management considers its employee relations to be good.
INSURANCE
The annual coverage limits for the Company's general premises liability and
workers' compensation insurance policies are $2,000,000 for liability
insurance policies and $1,000,000 for workers' compensation. Management
believes such limits are adequate for the Company's business. However,
there can be no assurance that potential claims will not exceed the limits
on these policies.
The Company does not currently have product errors and omissions insurance.
A defect in the design or configuration of the company's products or in the
failure of a system to perform the use which the Company specifies for the
system may subject the Company to claims of liability. Although as of the
date of this filing, the Company has not experienced any such claims, there
can be no assurances that claims will not arise in the future.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's headquarters are located in Sacramento, California and occupy
approximately 9,000 square feet of office space which it leases from James
W. Cameron, Jr., a substantial stockholder, under a one year lease, with
monthly rent of $8,925, that expires in November 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company was notified on March 16, 1995 by the staff of the regional
office of the Securities and Exchange Commission ("Commission"), that they
intended to recommend that the Commission file a civil action against the
Company seeking injunctive and other relief. The staff indicated that the
complaint would allege violation of various disclosure provisions of the
federal securities laws in connection with the Company's registration
statement on Form S-18 that became effective in August 1992.
The Company and its attorney have met with the Commission staff and the
Company has proposed a settlement of the complaint which, without
admitting or denying the findings, the Company shall consent to an order of
the Commission that the Company cease and desist from committing or causing
any violation of certain provisions of the securities laws. As of June 30,
1996, the Company's proposed settlement has not yet been formally accepted
by the Commission.
In November 1993, a dispute arose between the Company and its Canadian
distributor, Centre de Traitement I.T.I Omnitech Inc. ("Omnitech"), which
was settled in April 1994 and resulted in, among other things, a renewal of
the Company's distribution agreement with Omnitech. The Company entered
into discussions to renegotiate its contractual relationship with Omnitech.
These discussions led to the execution of a letter agreement on January 27,
1995 that modified certain provisions of the April 1994 agreement. In
addition, certain minor changes were agreed to in a letter dated March 22,
1995. On May 15, 1995, the Company received a letter from Omnitech
declaring an event of default based on the Company's alleged failure to
deliver a specified number of shares of the Company's Common Stock pursuant
to the agreement. Within approximately sixty days, the subject stock
certificates issuable to Omnitech were delivered by the transfer agent to
Omnitech. On January 5, 1996, Omnitech sent a letter to the Company
indicating that Omnitech intended to file a lawsuit against the Company and
others, stating a number of claims. Omnitech indicated their belief that
the value of these claims exceeds $5.0 million. The Company believes that
Omnitech has breached the contract and intends to vigorously defend itself
if a lawsuit is filed. The Company has offered to settle the dispute, but
Omnitech has not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement will
place additional strains on the Company's resources and cash position and
the Company may be required to seek protection under federal bankruptcy law
should the Distributor pursue its claims through litigation. Moreover, due
to the Company's current and projected cash position, the Company may not
be able to satisfy an adverse verdict in this matter that obligates the
Company to pay any significant damages to Omnitech. In the event an
adverse verdict is the result of this dispute, the Company may be required
to seek protection under federal bankruptcy law.
The Company was served with a lawsuit filed on September 17, 1993 in
Sacramento County Superior Court against it and others by a former
employee. The lawsuit alleged sexual harassment and wrongful termination
and sought general and special damages of $2.0 million plus undisclosed
punitive damages. On May 27, 1995, the Company reached a settlement with
the former employee under which the Company caused its insurer to deliver a
cash payment to the former employee. The Company issued 250,000 shares of
unregistered common stock to the former employee subsequent to the
settlement being approved by the Superior Court in July 1995.
In July 1994, the Company received a formal request for indemnification
from one of the individual defendants as it pertains to the lawsuit filed
on September 17, 1993 in Sacramento County Superior Court discussed above.
The Company denied that it had any obligation and the matter was submitted
for determination by an arbitrator in accordance with certain
indemnification agreements between the Company and the individual. The
arbitrator determined that the Company had an obligation to pay for the
cost of defense of the individual. Based on this ruling, the Company
reimbursed the individual approximately $93,000 for expenses he had
incurred in defending the action and will pay his continuing defense costs.
However, the Company has reserved its right to seek reimbursement of these
amounts from the individual under appropriate circumstances. On June 19,
1995, the Company received a demand by the individual seeking reimbursement
of fees and settlement costs incurred by the individual and his insurer.
On August 18, 1995, the Company formally rejected that demand. The Company
does not believe that the outcome of this matter will have a material
adverse impact on its financial position or results of operations.
The Company also received a demand for indemnification of legal expenses
for separate counsel from the other individual defendant in the lawsuit
filed on September 17, 1993 in Sacramento County Superior Court discussed
above. The Company had been providing a defense to this individual through
its counsel and disputed that it had an obligation to provide for separate
counsel. This matter was resolved by the Company's agreement to provide
for separate counsel. The Company has reimbursed the former officer
approximately $41,000 for expenses he had incurred in defending the action.
In August 1995, the Company received notification from the individual's law
firm that the Company was in arrears of approximately $12,000 in its
obligation to reimburse the firm for fees and expenses in defending the
individual and has arranged for terms under which such amount will be paid.
The Company does not believe that the outcome of this matter will have a
material adverse impact on its financial position or results of operations.
In April 1994, the Company entered into a settlement agreement with a
former officer and director (the "Former Officer") and a former consultant,
officer and director (the "Former Consultant") in connection with disputes
concerning outstanding compensation, expense reimbursement, equity
entitlement issues and ownership of the Company's proprietary software. In
November 1994, the Former Officer and Former Consultant asserted that the
Company had breached certain of its obligations under the settlement
agreement. In February 1995, the Company believes it cured any alleged
default under the settlement agreement by fulfilling certain nonmaterial
obligations to the Former Officer and the Former Consultant. In addition,
the Former Consultant asserted claims against the Company and numerous
other parties under a variety of legal theories. On June 12, 1995, the
Former Consultant filed a lawsuit in Sacramento County Superior Court
against the Company, its then-current directors, James Cameron, Jr., the
Former Consultant's stockbroker and brokerage firm and one of the Company's
large customers. The lawsuit set forth twenty causes of action based on a
variety of legal theories and sought in excess of $15.0 million in damages,
plus punitive damages. On August 21, 1995, the Superior Court granted
petitions to compel arbitration filed by the 3Net defendants and Mr.
Cameron which petitions were based on the arbitration provision of the
April 1994 settlement agreement. The Court also granted a similar motion
filed by the Former Consultant's stockbroker and brokerage firm. The
litigation of the case in Superior Court was stayed pending the outcome of
the arbitration of all claims set forth in the action. In February 1996
the Arbitration Panel entered its order dismissing with prejudice all of
the claims made against the 3Net defendants and Mr. Cameron and awarded
3Net recovery of a portion of its fees and costs. On July 26, 1996, the
Superior Court confirmed the Arbitration Panel's order of dismissal and
award. On September 10, 1996, the Company was notified that the Former
Consultant had filed a Notice of Appeal with the 3rd District Appellate
Court. The Company does not believe that the outcome of this matter will
have a material adverse impact on its financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the quarter ended June 30, 1996 to a vote
of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
During fiscal 1995, the Common Stock of the Company, $.01 par value, was
traded on the NASDAQ SmallCap Market under the symbol "TNET". The
Company's shares were de-listed by NASDAQ on August 16, 1995 due to the
Company's failure to maintain a closing inside bid price of its Common
Stock at or above $1.00 per share. The Company's shares have continued to
trade on the OTC Bulletin Board since August 16, 1995. The loss of listing
on the NASDAQ SmallCap Market has resulted in transactions in the Common
Stock becoming subject to the "penny stock" disclosure requirements of Rule
15g-9 under the Exchange Act and reduced liquidity in the trading market
for the Common Stock.
Set forth below are the high ask and low bids for the Common Stock of the
Company for each of the last eight quarters. The quotations are derived
either from the IDD Information Services, Tradeline Database or the
National Association of Securities Dealers, Inc. and reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions in the Common Stock. There is
no public market for the Company's Preferred Stock.
PERIOD HIGH LOW
Quarter ending September 30, 1994 $2.25 $1.03
Quarter ended December 31, 1994 $1.56 $0.63
Quarter ended March 31, 1995 $1.56 $0.63
Quarter ended June 30, 1995 $0.91 $0.38
Quarter ending September 30, 1995 $0.63 $0.13
Quarter ended December 31, 1995 $0.19 $0.05
Quarter ended March 31, 1996 $0.13 $0.03
Quarter ended June 30, 1996 $0.28 $0.05
The Company had approximately 182 Common Stockholders of record and 3
Preferred Stockholders of record as of September 16, 1996. The last
reported sales price for the Company's Common Stock was $0.23 on September
16, 1996.
At its meeting on September 17, 1996, the Company's Board of Directors
voted to recommend to the shareholders that they approve an amendment to
Article Fourth of the Company's Amended and Restated Certificate of
Incorporation increasing the authorized shares of Common Stock, par value
$0.01 per share, from 200,000,000 to 300,000,000. In addition, they also
voted to recommend to the shareholders that they approve a consolidation of
the Company's outstanding Common Stock on a ratio of 10 for 1. The
amendment to the Certificate of Incorporation and consolidation of the
Company's outstanding Common Stock is subject to stockholder approval.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable
future. The Company's Series D Preferred Stock carries a cumulative
dividend of $0.60 per year per share which accrues beginning July 1, 1994
and is payable quarterly to the extent permitted by law.
The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including the Company's results
of operations, financial condition, capital requirements and other relevant
factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
3Net Systems, Inc. provides contract computer programming and consulting
services and acts as an intermediary in providing such services. During
fiscal years 1995 and 1996, the Company developed and implemented a program
where 3Net recruits qualified personnel from the former Soviet Union,
obtains necessary visas, and places them for assignment in the United
States. 3Net has chosen to emphasize this program because of the
significant growth dynamics of the high technology temporary placement
industry and to de-emphasize the laboratory software and service business
upon which it was originally founded in 1989.
The Company was founded in 1989 to focus on the design, development and
sale of integrated computer network systems primarily for use by hospitals,
commercial and insurance laboratories and physician clinics. The Company
effected a public Common Stock offering in August 1992. Fiscal 1993 and
fiscal 1994 operating results were adversely affected by significant delays
by the Company in finishing development and implementation of its LIS
systems. The delays resulted in significant losses and severe liquidity
problems. Cost cutting required by the cash flow situation resulted in
additional software development and implementation delays. As a result,
the Company recognized no material revenue in fiscal 1993 or fiscal 1994
and significant losses in both of those years. The Company received
acceptance of LIS at one customer site in fiscal 1995; but the Company had
lost sales momentum due to the earlier delays and now no longer devotes any
dedicated resources to the marketing or selling of this product. The
Company successfully installed four of its TimeNet systems in fiscal 1995;
however, the Company's continuing lack of financial strength negatively
affected the Company's ability to close new TimeNet business in fiscal 1995
and fiscal 1996. In January 1996, the Company decided to no longer devote
any dedicated resources to the marketing or selling of TimeNet. The
Company has also suspended further development of the product and is no
longer providing service support on TimeNet systems that have been sold.
During fiscal 1996, the Company wrote off TimeNet purchased software with a
net book value of $45,000.
The Company's inability to close new business in fiscal 1995 and fiscal
1996 and the resulting lack of revenues caused the Company to recognize
significant losses in fiscal 1995 and fiscal 1996. In order to reduce its
losses, the Company has taken steps to reduce expenses and generate
revenues by focusing its operations on providing contract programming and
consulting services, and acting as an intermediary in providing such
services. These actions have substantially reduced the Company's level of
cash consumption in fiscal 1996 as compared to fiscal 1995. However, the
Company did not generate sufficient cash flow in fiscal 1996 to support its
operations.
RESULTS OF OPERATIONS
REVENUES
Revenues decreased $546,940 or 23.5% in fiscal 1996 as compared to fiscal
1995. The lower level of revenue in fiscal 1996 was due in part to
management's decision that the Company's long-term prospects were best
served by concentrating existing resources on providing contract computer
programming and consulting services in the high technology temporary
placement industry. The following is an analysis of the Company's
revenues by category:
CONTRACT PROGRAMMING REVENUE. Contract programming revenue increased
$1,103,860 or 625.62% in fiscal 1996 from fiscal 1995. This increase is
due in part to the growth in the number of contract programmers placed at
customer sites in fiscal 1996 compared to fiscal 1995 and to the length of
time contract programmers were at customer sites during each of the fiscal
years. At June 30, 1996, there were 25 programmers at 6 sites compared to
3 programmers who were at 3 sites for slightly over 1 month during fiscal
1995. The remaining increase is due to quadrupling the amount of custom
programming and development services performed for an existing LIS customer
in fiscal 1996 compared to fiscal 1995. The Company is focusing its
efforts on expanding contract programming revenues in fiscal 1997.
SERVICE REVENUE. Service revenue (sales of annually renewable maintenance
contracts for software support and hardware services and the sale of non-
contract programming and software development services) decreased $685,949
or 59.9% in fiscal 1996 from fiscal 1995. This decrease was primarily the
result of non-recurring revenue related to the fiscal 1995 interim working
agreement with Cameron & Associates, Inc. for system integration and
detailed design activities in connection with the development of health
care information systems in Russia. Under this agreement, the Company
recognized approximately $380,000 in fiscal 1995. Additionally, the Company
recognized approximately $226,000 of revenue in fiscal 1995 for system
enhancements for a current 3Net LIS customer. Such revenues were not
received in fiscal 1996 because of the discontinuation of the Russian
project and because additional system enhancement work for the LIS customer
was not performed in fiscal 1996, but contract programming was performed
for this customer in fiscal 1996. The Company believes that service
revenues will decline in fiscal 1997.
SYSTEM SALES. System sales (sales of information systems including
hardware, software, installation and training) accounted for 2.4% of total
revenue for fiscal 1996 as compared with 43.3% for the previous fiscal
year. System sales in fiscal 1996 decreased $964,851, or 95.8%, from
system sales in fiscal 1995 due to recognition of the sale of four TimeNet
systems and the sale of an additional 3Net LIS license to an existing
customer in fiscal 1995. No such sales were made in fiscal 1996. The
Company has discontinued marketing its TimeNet and RUMS products and its
3Net LIS systems and does not expect to derive revenues from these products
in fiscal 1997.
COST OF REVENUES
CONTRACT PROGRAMMING REVENUE. Gross margins on contract programming
revenues were $301,908 or 23.6% in fiscal 1996 compared to $57,396 or 32.5%
in fiscal 1995. This increase in total margin dollars is due to the
significant increase in custom programming and development services
performed for an existing LIS customer in fiscal 1996 compared to fiscal
1995. The decrease in margin percentage in fiscal 1996 is due to a greater
use in fiscal 1996 of higher paid, more technical employees compared to the
employees performing the work in fiscal 1995.
SERVICE REVENUE. Gross margins on service revenue were 27.1% for fiscal
1996 versus 31.8% for fiscal 1995. The decreased margin on service revenue
in fiscal 1996 is due primarily to incurring fixed salary costs during a
period of lower revenues.
SYSTEM SALES. Gross margins on system sales were negative ($72,447) for
fiscal 1996 and ($2,103,657) for fiscal 1995. System sales gross margins
were negative for fiscal year 1996 due to the write down of the remaining
net book value of purchased system software and the write down of hardware
inventory, while system sales were insignificant. In fiscal 1995, the
Company wrote off software development costs and purchased software costs
totaling approximately $2,070,000 because the cost reduction strategies
employed by the Company included reduction of sales and marketing staff and
related activities.
EXPENSES
RESEARCH AND DEVELOPMENT. Research and Development ("R&D") expenses
decreased $1,360,439 or 67.4% in fiscal 1996 as compared to fiscal 1995.
As a percentage of revenue, R&D expenses were 36.9% in fiscal 1996 as
compared with 86.7% in fiscal 1995. These decreases are primarily due to
reductions in the Company's system development staff related to 3Net LIS
systems and due to using a larger percentage of the remaining technical
staff to generate contract and service revenues.
MARKETING. Marketing expenses decreased $660,066 or 77.3% compared to
fiscal 1995. This decrease resulted primarily from reductions in the
Company's sales and marketing staff and related marketing activities.
GENERAL AND ADMINISTRATIVE ("G&A"). G&A expenses were $1,119,787 for
fiscal 1996 as compared with $2,622,455 for fiscal 1995, a decrease of
$1,502,668, or 57.3%. G&A expenses in fiscal 1995 included a charge of
$345,000 related to the valuation of warrants to purchase common stock to
be issued in connection with the strategic alliance entered into with EDS.
Due to a reduction of personnel and moving to a less expensive facility,
the Company reduced G&A personnel and facility costs by approximately
$312,000 in fiscal 1996. The Company also incurred approximately $552,000
less in legal, accounting and filing fees in fiscal 1996 compared to fiscal
1995.
SETTLEMENT EXPENSES. Expenses incurred to settle various claims and
disputes amounted to $78,125 for fiscal 1996 versus $133,287 for fiscal
1995. During fiscal 1996, the Company recorded $78,125 of expense for
settlement of a lawsuit by a former employee which alleged sexual
harassment and wrongful termination. During fiscal 1995, the Company
recorded approximately $96,000 of expense for settlement of a customer
dispute and approximately $200,000 of expense for settlement of a dispute
with a distributor offset by the reversal of a reserve in the amount of
approximately $170,000 covering these disputes.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. As of June 30, 1996, the Company had a net
operating loss carryforward for federal and state income tax purposes of
approximately $23 million and $11 million, respectively. The federal net
operating loss carryforward expires in the years 2005 through 2011 and the
state net operating loss carryforward expires in 1997 through 2001. In
connection with the Company's initial public offering, a change of
ownership (as defined in Section 382 of the Internal Revenue Code of 1986,
as amended), occurred. As a result, the Company's net operating loss
carryforwards generated through August 10, 1992 are subject to an annual
limitation of approximately $300,000.
In August and September 1993, a controlling interest of the Company's
stock was purchased, resulting in a second annual limitation of
approximately $398,000 on the Company's ability to utilize net operating
loss carryforwards generated between August 11, 1992 and September 13,
1993. The Company expects that the aforementioned annual limitations will
result in approximately $3.6 million of net operating loss carryovers which
may not be utilized prior to the expiration of the carryover period.
NET LOSS
Net loss decreased to $1,847,812 for fiscal 1996 from $7,525,367 for fiscal
1995. The Company expects to report losses during at least the first half
of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund research and development, support
operations, obtain capital equipment, and finance inventory and accounts
receivable. The Company expects to continue to be a net user of cash for
operations in the near future. In fiscal 1996 the Company used an average
of $53,000 per month of cash for operating activities, as compared with an
average of approximately $337,000 per month of cash for operating and
investing activities in fiscal 1995. The Company expects that the average
rate at which cash is used during fiscal 1997 will decrease as a direct
result of the change in its emphasis to providing contract computer
programming and consulting services.
The Company encountered serious financial difficulties in fiscal 1993 and
incurred significant losses in fiscal years 1993 through 1996. As a
result, beginning in July 1993 and extending through February 1995, the
Company entered into a series of agreements with one or more groups of
investors including James W. Cameron, Jr. Mr. Cameron and those investors
have invested a total of approximately $9,640,000 in 3Net Common Stock,
Preferred Stock and Warrants, and Mr. Cameron has guaranteed bank loans
totaling $1,000,000 as of June 30, 1996. Mr. Cameron currently owns or
controls 200,536,766 shares of Common Stock and holds approximately 79.34%
of the total voting power of the Company's capital stock.
In February 1994, the Company entered into a revolving line of credit with
Bank of America, NT&SA (the "Bank") in the amount of $2,000,000 with a
maturity date of August 1, 1994. Since July 1994, the maturity date of
the line of credit has been extended several times, and in March 1995 the
Bank agreed to extend the maturity date of the line of credit but reduced
the line of credit to $1,000,000. After several extensions, the maturity
date of the line of credit is now January 1, 1997 and is fully utilized at
$1,000,000 as of June 30, 1996. The Company's obligations under the line
of credit have been guaranteed by James W. Cameron, Jr. (The "Continuing
Guaranty"). Interest under the line of credit is payable monthly at a rate
of 1% in excess of the Bank's Reference Rate. At June 30, 1996, the
Company was in default under the terms of the line of credit because
additional debt was incurred during fiscal year 1996. There can be no
assurance that the Company will be able to pay off this debt or negotiate
an extension of the due date. The line of credit is secured by
substantially all assets of the Company.
As consideration for the execution of the Continuing Guaranty, the Company
entered into a Reimbursement Agreement with Mr. Cameron pursuant to which a
designee of Mr. Cameron received a warrant to purchase 100,000 shares of
the Company's Common Stock at an exercise price of $1.50 per share.
Additionally, pursuant to the Reimbursement Agreement, in the event that
Mr. Cameron is required to repay the Bank any moneys under the Continuing
Guaranty, the Company is required to repay Mr. Cameron the amount of each
payment by either i) paying an equal cash amount or ii) issuing to Mr.
Cameron a non-convertible note (the "Straight Note") in the principal
amount of such payment by Mr. Cameron, bearing interest at an interest rate
equal to the interest rate of the line of credit on the date of such
payment and subject to adjustment when and to the extent that the interest
rate prevailing under the line of credit may change. Furthermore, under the
terms of the Reimbursement Agreement, upon written demand by Mr. Cameron,
the Straight Note will be replaced by a convertible note (the "Convertible
Note") in a principal amount equal to the Straight Note and bearing
interest at the same rate. The conversion price of the Convertible Note is
equal to the Applicable Percentage, as defined in the Reimbursement
Agreement, of the average trading price of the Company's Common Stock over
the period of ten trading days ending on the trading day next preceding the
date of issuance of such Convertible Note. As a result of the maturity
date of the line of credit being extended by the Bank each six months since
signing of the Reimbursement Agreement, at June 30, 1996, the Applicable
Percentage is 20% and cannot be reduced below this percentage by terms of
the agreement.
In January and February 1994, the Company received $720,000 from
Mr. Cameron and signed a note payable to him. The note payable, including
unpaid interest, was converted into Series E Preferred Stock in connection
with the Series E equity financing in November 1994, described below. In
June 1994, the Company sold 204,167 shares of Series D Preferred Stock for
approximately $1,225,000 to certain investors, including James W. Cameron,
Jr.
From September through November 1994, and prior to the consummation of the
Series E equity financing, the Company received $1,450,000 in advances from
Mr. Cameron which were subsequently converted into Series E Preferred Stock
in November 1994, described below.
In November 1994, the Company received $301,250 in a private sale of a
combination of Common Stock and warrants to purchase Common Stock. This
transaction consisted of the purchase of 335,000 shares of the Company's
Common Stock at $0.75 per share and the purchase of 50,000 units at $1.00
per unit, each unit consisting of one share of Common Stock and a warrant
to purchase one share of Common Stock at an exercise price of $1.50 per
share.
Also in 1994, the Company entered into a series of agreements for the
purchase of Series E Convertible Preferred Stock with two existing
stockholders. The transaction included a debt to equity conversion of
$2,232,856 and an additional aggregate cash investment of $1,215,004 in
exchange for the issuance of 287,322 shares of Series E Preferred Stock.
In February 1995, the Company received commitments from several investors,
including a foundation controlled by James W. Cameron, Jr., to invest
$1,475,000 in a private sale of 1,475,000 units at $1.00 per unit, each
unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $1.50 per share or $0.75 per
share below the last trading price on the date of the notice of exercise,
whichever is lower. The Company received $1,475,000 prior to June 30, 1995
and issued 1,475,000 shares pursuant to these agreements
On December 1, 1995, the holders of all the outstanding shares of the
Company's Series E Preferred Stock tendered those shares for conversion
into 223,359,332 shares of the Company's Common Stock pursuant to the terms
of the Series E Preferred Stock Purchase Agreement. As of the conversion
date, 200,000,000 common shares were authorized; therefore, 52,186,768
shares were recorded as Common Stock to be issued until such time as the
number of authorized shares can be increased.
In fiscal 1996, the Company again suffered significant losses from
operations. As of June 30, 1996, the Company had a net working capital
deficit of $3,406,254 and an accumulated deficit of $33,207,669. The
Company was unable to generate adequate cash flow from operations to meet
its cash flow requirements and, as a result, the Company met its cash flow
requirements primarily through short term financing from 2 stockholders.
During fiscal 1995, the Company met its cash flow requirements primarily
through the sale of equity securities and debt financing. During fiscal
1996, the Company generated approximately $646,000 from financing
activities, generated approximately $5,000 on investing activities and
consumed approximately $638,000 on operating activities. During fiscal
1995, the Company generated approximately $3.7 million from financing
activities, consumed approximately $15,000 on investing activities and
consumed approximately $4.0 million on operating activities.
The report of the independent auditors on the Company's June 30, 1996
financial statements includes an explanatory paragraph regarding the
Company's potential inability to continue as a going concern. The
financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the
inability of the Company to continue as a going concern. Based on the
recent steps the Company has taken to reduce its expenses and refocus its
operations, the Company believes that it has developed a viable plan to
address the Company's ability to continue as a going concern and that this
plan will enable the Company to continue as a going concern through the end
of fiscal year 1997. However, considering, among other things, the
Company's historical operating losses, its lack of experience in the
contract computer programming industry, and anticipated negative cash flow
from operations, there can be no assurance that this plan will be
successfully implemented. The Company does not expect to generate
sufficient cash flow from operations to sustain its operations until
sometime after the first half of fiscal 1997. The Company contemplates
needing to raise additional financing during fiscal 1997. There can be no
assurance, however, that any of such proceeds will be obtained, or that if
obtained, adequate capital will be raised and, in either event, the Company
may experience significant cash flow problems which could cause the Company
to materially reduce the level of its operating activities or be forced
into seeking protection under federal bankruptcy laws.
Subsequent to June 30, 1996, two stockholders advanced $173,000 to the
Company. The Company executed unsecured notes payables for these amounts
that include, among other requirements, an interest rate of 10.25% per
annum and a maturity date of December 31, 1996.
EQUITY FOR DEBT AGREEMENTS
In June 1995, the Company negotiated an equity for debt swap agreement with
a service provider whereby the service provider agreed to accept a warrant
to purchase, at $0.10 per share, the number of shares of the Common Stock
of the Company equal to 1.85% of the number of issued and outstanding
shares of Common Stock plus the number of shares of Common Stock issuable
pursuant to outstanding options, warrants, conversion provisions and other
rights to purchase Common Stock as full payment of approximately $522,000
in total debt.
EFFECTS OF INFLATION
Management does not expect inflation to have a material effect on the
Company's operating expenses.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the notes thereto and
report of the independent auditors thereon, are attached hereto as exhibits
following page number 31.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on November 21, 1996 under the Captions "Election of Directors",
"Further Information concerning the Board of Directors" and "Section 16(a)
Information." The Proxy Statement will be filed within 120 days of the
Company's fiscal year end.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on November 21, 1996 under the caption "Executive Compensation."
The Proxy Statement will be filed within 120 days of the Company's fiscal
year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on November 21, 1996 under the caption "Principal Stockholders."
The Proxy Statement will be filed within 120 days of the Company's fiscal
year end.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on November 21, 1996 under the caption "Certain Relationships
and Related Transactions." The Proxy Statement will be filed within 120
days of the Company's fiscal year end.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement
on Form S-18, Reg. No. 33-48666).
3.2 Amendment to Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 of the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1994).
3.3 Amendment to Amended and Restated Certificate of Incorporation of
Registrant, dated November 27, 1995.
3.4 Amended and Restated Certificate of Incorporation of Registrant
4.1 Amended and Restated Certificate of Incorporation of Registrant,
including Certificates of Designation with respect to Series A, Series
B, Series C, Series D, and Series E Preferred Stock, including any
amendments thereto (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3, Reg. No. 33-86962).
10.1 Form of Director and Executive Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.19 to Registration Statement
on Form S-18, Reg. No. 33-48666).
10.2 Sublease, dated July 29, 1992, between the Registrant and Progressive
Casualty Insurance Company (redacted portions of Exhibit 10.30
are unavailable to the Company) (incorporated by reference to Exhibit
10.30 to Registration Statement on Form SB-2, Reg. No. 33-56074).
10.3 Amended and Restated Purchase Agreement, dated July 16, 1993, between
the Registrant and James W. Cameron, Jr. (incorporated by reference
to Exhibit 10.1 to Form 8-K filed on August 19, 1993).
10.4 Form of Registration Rights Agreement (incorporated by reference to
Exhibit 10.2 to Form 8-K filed on August 19, 1993).
10.5 First Amendment to Amended and Restated Purchase Agreement, dated
September 15, 1993, between the Registrant and James W. Cameron,
Jr. (incorporated by reference to Exhibit 10.3 to Form 8-K filed on
October 8, 1993).
10.6 Form of Reimbursement Agreement, dated February 28, 1994, between the
Registrant and James W. Cameron, Jr. (incorporated by reference to
Exhibit 10.29 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.7 Form of First Amendment entered into as of February 28, 1994, to
Registration Rights Agreement dated as of September 15, 1993
(incorporated by reference to Exhibit 10.30 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.8 Form of Stock Purchase Warrant issued in connection with the
Confidential Private Placement Memorandum of the Registrant, dated
February 13, 1992 (Class A Warrant) (incorporated by reference to
Exhibit 10.31 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.9 Form of Stock Purchase Warrant issued April 22, 1993 (Class B Warrant)
(incorporated by reference to Exhibit 10.32 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.10* Stock Purchase Warrant issued to William T. Manak on April 6, 1994
for the purchase of 200,000 shares of the Registrant's Common
Stock (incorporated by reference to Exhibit 10.33 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.11* Stock Purchase Warrant issued to William T. Manak on April 6, 1994
for the purchase of 572,856 shares of the Registrant's Common
Stock (incorporated by reference to Exhibit 10.34 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.12 Stock Purchase Warrant issued to Dennis L. Montgomery on April 6, 1994
for the purchase of 125,000 shares of the Registrant's Common
Stock (incorporated by reference to Exhibit 10.35 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.13 Stock Purchase Warrant issued to Dennis L. Montgomery on April 6, 1994
for the purchase of 580,000 shares of the Registrant's Common
Stock (incorporated by reference to Exhibit 10.36 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.14 Form of Amended Stock Purchase Warrant issued to certain Class A,
Class B, Class C and Class D Warrant Holders (incorporated by reference
to Exhibit 10.37 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.15 Form of Stock Purchase Warrant, dated June 30, 1994, issued to
stockholders of record on September 7, 1993 (incorporated by reference
to Exhibit 10.38 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.16 Form of Stock Purchase Warrant to Max Negri as designee for James W.
Cameron, Jr. (incorporated by reference to Exhibit 10.40 to Form 10-KSB
for the fiscal year ended June 30, 1994).
10.17* Settlement Agreement, dated April 6, 1994, between the Registrant and
William T. Manak and Dennis L. Montgomery (incorporated by reference
to Exhibit 28 to Form 8-K filed on April 6, 1994).
10.18 Amended and Restated Employee Savings Plan, dated July 1, 1993
(incorporated by reference to Exhibit 10.45 to Form 10-KSB for the
fiscal year ended June 30, 1994).
10.19* Special Stock Option Plan (incorporated by reference to Exhibit 10.46
to Form 10-KSB for the fiscal year ended June 30, 1994).
10.20* 1993 Stock Option/Stock Issuance Plan (incorporated by reference to
Exhibit 10.47 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.21* Form of Non-Employee Director Automatic Stock Option Agreement under
the 1993 Stock Option/Stock Issuance Plan (incorporated by reference
to Exhibit 10.48 to Form 10-KSB for the fiscal year ended June 30, 1994).
10.22 Form of Stock Purchase Agreement under the 1993 Stock Option/Stock
Issuance Plan (incorporated by reference to Exhibit 10.49 to Form 10-
KSB for the fiscal year ended June 30, 1994).
10.23* Stock Option Agreement, dated August 11, 1993, between the Registrant
and Russell J. Harrison (incorporated by reference to Exhibit 10.51 to
Form 10-KSB for the fiscal year ended June 30, 1994).
10.24 Business Loan Agreement, dated as of February 28, 1994, between the
Registrant and Bank of America National Trust and Savings
Association (incorporated by reference to Exhibit 10.45 to
Amendment No. 4 to Registration Statement on Form SB-2, Reg. No.
33-72566).
10.25 Amendment No. 1, dated July 26, 1994, to Business Loan Agreement,
dated as of February 28, 1994, between the Registrant and Bank of
America National Trust and Savings Association. (incorporated by
reference to Exhibit 10.55 to Form 10-KSB for the fiscal year ended
June 30, 1994).
10.26 Distributor and Co-Development Agreement, dated April 1, 1994, between
the Registrant and Centre de Traitment I.T.I. Omnitech, Inc.
(incorporated by reference to Exhibit 10.56 to Form 10-KSB for the fiscal
year ended June 30, 1994).
10.27* Debt/Equity Agreement, entered into as of October 19, 1994, between
the Company and Mr. James W. Cameron, Jr. (incorporated by reference
to Exhibit 10.57 to Form 8-K filed on October 20, 1994).
10.28* Debt/Equity Agreement, entered into as of November 18, 1994, between
the Company and Mr. James W. Cameron, Jr. (incorporated by reference
to Exhibit 10.58 to Form 8-K filed on December 20, 1994).
10.29 Equity Agreement, entered into as of November 16, 1994, between the
Company and Dr. Max Negri (incorporated by reference to Exhibit 10.59
to Form 8-K filed on December 20, 1994).
10.30 Subscription Agreement, entered into as of November 11, 1994, between
the Company and R.L. Wiggins, Trustee (incorporated by reference to
Exhibit 10.60 to Form 8-K filed on December 20, 1994).
10.31 Subscription Agreement, entered into as of November 11, 1994, between
the Company and Porter Partners, L. P. (incorporated by reference
to Exhibit 10.61 to Form 8-K filed on December 20, 1994).
10.32 Consent by Holders of 3Net Systems, Inc. Preferred Stock, Series D
(incorporated by reference to Exhibit 10.62 to Form 8-K filed on
December 20, 1994).
10.33 Software License Agreement dated February 13, 1995 between the
Registrant and John E. Forge (incorporated by reference to Exhibit 10.64
to Form 8-K filed on February 21, 1995).
10.34 Subscription Agreement, entered into as of February 13, 1995, between
the Company and certain investors (incorporated by reference to
Exhibit 10.63 to Form 8-K filed on February 21, 1995).
10.35 Amendments to the Distributor and Co-Development agreement dated
January 27, 1995 and March 22, 1995 between the Registrant and Centre
de Traitment I.T.I. Omnitech, Inc. (incorporated by reference to Exhibit
10.66 to Form 10QSB for the quarter ended March 31, 1995).
10.36 Amendment No. 2 to Business Loan Agreement dated January 31, 1995
between the Registrant and Bank of America National Trust and
Savings Association. (incorporated by reference to Exhibit 10.67 to Form
10QSB for the quarter ended March 31, 1995).
10.37 Amendment No. 3 to Business Loan Agreement dated March 30, 1995
between the Registrant and Bank of America National Trust and
Savings Association. (incorporated by reference to Exhibit 10.68 to
Form 10QSB for the quarter ended March 31, 1995).
10.38 Personal Service Agreement dated May 1, 1995 between the Registrant
and Electronic Data Systems Corporation (incorporated by reference
to Exhibit 10.69 to Form 10-KSB for the fiscal year ended June 30, 1995).
10.39 Settlement Agreement dated July 26, 1995 between the Registrant and
Penne M. Page (incorporated by reference to Exhibit 10.70 to Form 10QSB
for the quarter ended September 30, 1995).
10.40 Amendment No. 4 to Business Loan Agreement dated October 18, 1995
between the Registrant and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit 10.71 to Form
10QSB for the quarter ended December 31, 1995).
10.41 Amendment No. 5 to Business Loan Agreement dated December 13, 1995
between the Registrant and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit 10.72 to Form
10QSB for the quarter ended December 31, 1995).
10.42 Contractor Agreement, dated June 3, 1996, between the Registrant and
The Systems Group, Inc.
10.43 Amendment No. 6 to Business Loan Agreement dated June 12, 1996 between
the Registrant and Bank of America National Trust and Savings
Association.
10.44 Note Payable between the Registrant and the Cameron Foundation dated
June 30, 1996.
10.45 Note Payable between the Registrant and the Negri Foundation dated
June 30, 1996.
10.46 Lease, dated November 6, 1995, between the Registrant and James W.
Cameron, Jr.
10.47 Agreement with Technical Directions, Inc.
23.1 Consent of Independent Auditors
* Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant: 3Net Systems, Inc., a Delaware Corporation
By GEORGE R. VAN DERVEN
George R. Van Derven,
President and Chief Executive Officer
Date:September 30, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
GEORGE R. VAN DERVEN President and Chief Executive Officer September 30, 1996
George R. Van Derven (Principal Executive Officer)
EDWARD L. LAMMERDING Director and Chairman of the Board September 30, 1996
Edward L. Lammerding and Chief Financial Officer
(Principal Financial Officer)
GERALD W. FAUST Director September 30, 1996
Gerald W. Faust
THOMAS W. O'NEIL, JR. Director September 30, 1996
Thomas W. O'Neil, Jr.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
3Net Systems, Inc.
PAGE
Report of Independent Auditors F-1
Balance Sheet at June 30, 1996 F-2
Statements of Operations for the Years Ended June 30, 1996 and 1995 F-3
Statements of Stockholders' Deficit for the Years Ended June 30,
1996 and 1995 F-4
Statements of Cash Flows for the Years Ended June 30, 1996 and 1995 F-5
Notes to Financial Statements F-7
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
3Net Systems, Inc.
We have audited the accompanying balance sheet of 3Net Systems, Inc. as of June
30, 1996, and the related statements of operations, stockholders' deficit, and
cash flows for the years ended June 30, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 3Net Systems, Inc. at June 30,
1996, and the results of its operations and its cash flows for the years ended
June 30, 1996 and 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that 3Net
Systems, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has a working
capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the uncertainties related to the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Sacramento, California
September 13, 1996
<PAGE>
3Net Systems, Inc.
Balance Sheet
June 30, 1996
ASSETS
Current assets:
Cash $ 52,106
Accounts receivable, net of allowance for
doubtful accounts of $7,449 110,506
Prepaid expenses 16,565
Deposits 36,431
Total current assets 215,608
Property and equipment:
Purchased software 233,873
Equipment 966,734
Furniture and fixtures 148,446
1,349,053
Accumulated depreciation and amortization (1,202,451)
Property and equipment, net 146,602
Other assets 4,137
$ 366,347
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $1,000,000
Notes payable to stockholders 738,752
Accounts payable to stockholder 308,650
Accounts payable 621,602
Accrued payroll and related expenses 143,647
Deferred revenue 180,254
Accrued customer obligations 242,848
Accrued preferred stock dividends 245,000
Other current liabilities 62,499
Other notes payable 68,451
Obligations under capital leases 10,159
Total current liabilities 3,621,862
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $6.00 par value -- 1,200,000 shares
authorized, 204,167 shares designated Series D
issued and outstanding; liquidation preference
value of $1,470,002 1,225,002
Common stock, $0.01 par value -- 200,000,000 shares
authorized, 200,000,000 shares issued and
outstanding 2,000,000
Common stock to be issued 680,101
Additional paid-in capital 26,047,081
Accumulated deficit (33,207,699)
Total stockholders' deficit (3,255,515)
$366,347
SEE ACCOMPANYING NOTES.
<PAGE>
3Net Systems, Inc.
Statements of Operations
YEAR ENDED JUNE 30,
1996 1995
Revenues:
Contract programming revenue $ 1,280,303 176,443
Service revenue 458,633 1,144,582
System sales 42,290 1,007,141
Total revenues 1,781,226 2,328,166
Costs and expenses: 978,395 119,047
Cost of revenues
Contract programming revenue 978,395 119,047
Service revenue 334,512 780,328
System sales 114,737 3,110,798
Research and development 657,437 2,017,876
Marketing 193,329 853,395
General and administrative 1,119,787 2,622,455
Settlement expenses 78,125 133,287
Total costs and expenses 3,476,322 9,637,186
Loss from operations (1,695,096) (7,309,020)
Other income (expense):
Interest income 7,054 2,652
Interest expense (162,626) (218,970)
Other, net 2,856 (29)
(152,716) (216,347)
Net loss $(1,847,812) $(7,525,367)
Preferred stock dividends in arrears (122,500) (122,500)
Net loss applicable to common
stockholders $(1,970,312) $(7,647,867)
Net loss per share $(0.01) $ (0.30)
Shares used in per share
calculations 161,240,556 25,198,749
SEE ACCOMPANYING NOTES.
<PAGE>
3Net Systems, Inc.
Statements of Stockholders' Deficit
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL Accumulated Total
SHARES Amount SHARES Amount TO BE ISSUED PAID IN Deficit Stockholders'
CAPITAL Deficit
Balance, June 30, 1994 204,167 $1,225,002 $23,180,642 $231,806 $1,875,000 $19,669,731 (23,834,520) (832,981)
Sale of preferred stock
and conversion of debt to
equity 287,322 1,723,930 - - - 1,723,930 - 3,447,860
Sale of common stock and
common stock warrants 1,860,000 18,600 - 1,757,650 - 1,776,250
Options and warrants
exercised - - 76,152 761 - 98,316 - 99,077
Issuance of common stock
for services rendered and
software purchased - - 1,200,000 12,000 (1,875,000) 1,863,000 - -
Issuance of common stock
and common stock warrants
for software purchased - - 100,000 1,000 - 499,000 - 500,000
Issuance of warrants and
cancellation of common
stock previously issued to
service provider in
settlement disputes - - (57,142) (571) - 521,510 - 520,939
Common stock warrants issued
at below fair market value - - - - - 345,000 - 345,000
Sale of common stock warrants - - - - - 2,154 - 2,154
Common stock issued/issuable
to a service provider and a
customer in settlement of
disputes - - 200,000 2,000 225,000 198,000 - 425,000
Preferred stock dividends - - - - - (122,500) - (122,500)
Net loss - - - - - - (7,525,367) (7,525,367)
Balance, June 30, 1995 491,489 2,948,932 26,559,652 265,596 225,000 26,555,791 (31,359,887) (1,364,568)
Conversion of preferred
stock into common stock (287,322) (1,723,930) 171,172,564 1,711,726 521,867 (509,663) - -
Warrants and options
exercised - - 1,625,045 16,251 - (15,011) - 1,240
Issuance of common stock
in settlement of disputes
and claims - - 642,739 6,427 (66,766) 138,464 - 78,125
Preferred stock dividends - - - - - (122,500) - (122,500)
Net loss - - - - - - 1,847,812) (1,847,812)
Balance, June 30, 1996 204,167 $1,225,002 $200,000,000 2,000,000 680,101 26,047,081 33,207,699) (3,255,515)
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
3Net Systems, Inc.
Statements of Cash Flows
Increase (decrease) in Cash
YEAR ENDED JUNE 30,
1996 1995
Cash flows from operating activities:
Net loss $ (1,847,812) $ (7,525,367)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 300,986 1,031,297
Write off of assets 79,680 2,070,837
Common stock issued/issuable in
settlement of disputes 78,125 425,000
Common stock options and warrants
issued at below fair market value - 345,000
Changes in operating assets and liabilities:
Accounts receivable 231,448 112,552
Inventory 28,518 167,761
Other current assets 114,545 (55,294)
Accounts payable to stockholder 308,650 -
Accounts payable 201,349 113,433
Accrued payroll and relted expenses (26,807) (188,529)
Accrued customer obligations - (184,999)
Deferred revenue 5,379 (90,110)
Other current liabilities (112,024) (251,955)
Net cash used in operating activities (637,963) (4,030,374)
Cash flows from investing activities:
Purchases of property and equipment (22,367) (33,233)
Decrease in other assets 27,216 18,001
Net cash provided (used) in investing
activities 4,849 (15,232)
<PAGE>
3Net Systems, Inc.
Statements of Cash Flows
Increase (decrease) in Cash
(continued)
YEAR ENDED JUNE 30,
1996 1995
Cash flows from financing activities:
Proceeds from sale of stock $ - $ 2,993,406
Proceeds from exercise of common stock
warrants and options 1,240 99,077
Proceeds from lines of credit - 950,000
Payments on lines of credit (1,650,000)
Proceeds from notes payable to stockholders 738,752 1,450,000
Proceeds from other notes payable 33,806
Payments on other notes payable (81,022) (81,643)
Payments on capital lease obligations (46,469) (45,762)
Net cash provided by financing activities 646,307 3,715,078
Net increase (decrease) in cash 13,193 (330,528)
Cash at beginning of period 38,913 369,441
Cash at end of period $52,106 $ 38,913
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $106,462 $ 184,924
SEE ACCOMPANYING NOTES.
<PAGE>
3Net Systems, Inc.
Notes to Financial Statements
June 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
3Net Systems, Inc. ("3Net" or the "Company") provides contract computer
programming and consulting services and acts as an intermediary in providing
such services. During fiscal years 1995 and 1996, the Company developed and
implemented a program where 3Net recruits qualified personnel from the former
Soviet Union, obtains necessary visas, and places them for assignment in the
United States. 3Net has now chosen to emphasize this program because of the
perceived opportunity in the high technology temporary placement industry and
to de-emphasize the laboratory software and service business upon which it was
originally founded in 1989.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company has incurred operating
losses since inception which have resulted in an accumulated deficit of
$33,207,699 at June 30, 1996. In addition, at June 30, 1996 the Company has a
working capital deficit of $3,406,254 and a stockholders' deficit of
$3,255,515. In fiscal 1993 and fiscal 1994, the Company experienced delays in
completion of its products which resulted in an inability to timely install
ordered systems and an inability to close new orders. In fiscal 1995, the
Company succeeded in receiving acceptance of its products by some of its
customers; however, sales momentum had been lost because of the extended
delays. During fiscal 1995, the Company wrote off software development costs
and purchased software costs totaling $2,070,837 because the cost reduction
strategies employed by the Company included reduction of sales and marketing
staff and related activities. In fiscal 1996, the Company wrote off $45,000,
which was the remaining net book value of purchased software. In fiscal 1996,
the closing of new orders continued to be impacted by this lack of momentum and
by the Company's financial status. In order to reduce its losses, the Company
has taken steps to decrease expenses and generate revenues by providing
contract programming and consulting services and by acting as an intermediary
in providing such services.
The Company's operating growth strategy includes the expansion of its marketing
efforts through strategic alliances and the development of new customers with
the expenditure of a minimum of resources. During fiscal 1996, the Company
reduced its staff by 50 percent and lowered operating expenses by 64 %;
however, such cost saving
moves will not be sufficient to allow the Company to timely meet all of its
obligations while attempting to grow revenue to a level necessary to generate
cash from operations; therefore, the Company is pursuing additional funds
through private equity financings or additional debt financings. Although
there can be no assurances that additional financing can be obtained or that if
obtained, it will be sufficient to prevent the Company from having to further
materially reduce its level of operations, management of the Company believes
that sufficient financing will be available until operations can be funded
through providing contract programming and consulting services. Ultimately, the
Company will need to achieve a profitable level of operations to fund growth
and to meet its obligations when they become due. The financial statements do
not include any adjustments to reflect the uncertainties related to the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the inability of the Company to continue as
a going concern.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated or amortized on
a straight-line basis over the estimated useful lives of the assets or the
lease term, whichever is shorter. The estimated useful lives range from three
to five years.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred subsequent to the determination of the
software product's technological feasibility, and prior to the product's
general release to customers, were capitalized in accordance with Statement of
Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" until fiscal 1995. In
fiscal 1995 because of the Company's inability to market products, it expensed
to cost of system sales all remaining capitalized software development costs of
$914,315 in addition to the amortization expense charged to operations during
fiscal 1995 of $496,542.
REVENUE RECOGNITION
Contract programming revenue represents work performed for customers, primarily
on a time and materials basis, and is recorded when the related services are
rendered. Service revenues are derived from support and maintenance contracts
which are deferred when billed and recognized ratably over the contract term
which is generally one year. Revenues from system sales without significant
Company obligations beyond delivery are recognized upon delivery of the
products net of revenues attributable to insignificant customer obligations and
net of any deferrals for estimated future returns under contractual product
return privileges. System sales revenues pursuant to agreements which include
significant Company obligations beyond delivery and normal installation
services are deferred, net of related hardware costs, until the Company's
remaining obligations are insignificant.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under
Statement 109, the liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are primarily with companies in the health
care industry. The Company performs periodic credit evaluations of its
customers and generally does not require collateral. The Company believes that
adequate provision for uncollectable accounts receivable has been made in the
accompanying financial statements. The Company maintains substantially all of
its cash at one financial institution.
NET LOSS PER SHARE
The Company's net loss per share has been computed by dividing net loss after
deducting Preferred Stock dividends ($122,500 in each of the fiscal years 1996
and 1995) by the weighted average number of shares of Common Stock outstanding
during the periods presented, including Common Stock to be issued. Common
Stock issuable upon conversion of Preferred Stock (including Preferred Stock
options), Common Stock options and Common Stock warrants have been excluded
from the net loss per share calculations since their inclusion would be anti-
dilutive. As described in Note 8, certain of the Company's Preferred Stock was
converted into Common Stock during the year ended June 30, 1996. Net loss per
share would not have differed for the year ended June 30, 1996 had these
conversions occurred on the date of issuance of the Preferred Stock.
SIGNIFICANT CUSTOMERS AND EXPORT SALES
During the year ended June 30, 1996, two customers individually accounted for
more than 10% of total revenues with 41% and 36%, respectively. During the year
ended June 30, 1995, three customers individually accounted for more than 10%
of total revenues with 27%, 17% and 14%, respectively. In addition, the 17%
customer in the year ended June 30, 1995, is a related party and the related
project was discontinued during fiscal 1995. Total export sales during the year
ended June 30, 1995, all of which were sales to Canadian customers, comprised
approximately 5%. There were no export sales during fiscal 1996.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported as of and for the
year ended June 30, 1995 to conform with the June 30, 1996 presentation.
2. INVESTOR GROUP TRANSACTIONS
In fiscal 1994, the Company entered into a series of agreements with James W.
Cameron, Jr. pursuant to which Mr. Cameron and a group of investors
(collectively referred to herein as the "Investor Group") purchased 418,332
shares of Series B Preferred Stock for $2,509,992, 50,000 shares of Series C
Preferred Stock for $625,000, and 6,000,000 shares of Common Stock for $60,000.
The Series B and Series C Preferred Stock purchased by the investor group was
converted into 12,539,968 shares of Common Stock in March and June, 1994.
As a condition of the agreements between the Company and the Investor Group,
the Company granted to its former Chief Executive Officer and director, stock
options for 4,000,000 shares of Common Stock exercisable at $0.01 per share.
The options are fully vested as of June 30, 1996 and expire on August 10, 2003.
Compensation expense of $4,080,000 related to this stock option was recorded in
fiscal 1994. Also in conjunction with the agreements, the Company granted
options to purchase a total of 1,400,000 shares of Common Stock at $0.50 per
share to two new officers. Compensation expense of $1,400,000 related to these
stock options was recorded in fiscal 1994. 700,000 of these options are fully
vested as of June 30, 1996 and expire on October 6, 2003; the other 700,000
options were canceled in May 1995 after the departure of one of the officers.
In January and February 1994, Mr. Cameron advanced $720,000 in bridge financing
to the Company in exchange for a note. This note, along with accrued interest,
was converted into Series E Preferred Stock in November 1994. From September
through
November 1994, and prior to the consummation of the Series E Preferred Stock
financing, the Company received $1,450,000 in advances from Mr. Cameron which
were subsequently converted into Series E Preferred Stock in November 1994
(Note 8).
Additionally, Mr. Cameron is the guarantor of the line of credit with a bank
(the "Continuing Guaranty") (Note 4). As consideration for the execution of
the Continuing Guaranty, the Company entered into a Reimbursement Agreement
with Mr. Cameron pursuant to which a designee of Mr. Cameron received a warrant
to purchase 100,000 shares of the Company's Common Stock at an exercise price
of $1.50 per share (Note 8).
Additionally, pursuant to the Reimbursement Agreement, in the event that Mr.
Cameron is required to pay the bank any monies under the Continuing Guaranty,
the Company is required to repay Mr. Cameron the amount of each payment by
either 1) paying an equal cash amount or 2) issuing to Mr. Cameron a non-
convertible note (the "Straight Note") in the principal amount of such payment
by Mr. Cameron, bearing interest at an interest rate equal to the interest rate
of the line of credit on the date of such payment and subject to adjustment
when and to the extent that the interest rate prevailing under the line of
credit may change.
Furthermore, under the terms of the Reimbursement Agreement, upon written
demand by Mr. Cameron, the Straight Note will be replaced by a convertible note
(the "Convertible Note") in a principal amount equal to the Straight Note and
bearing interest at the same rate. The conversion price of the Convertible
Note is equal to the Applicable Percentage, as defined in the Reimbursement
Agreement, of the average trading price of the Company's common stock over the
period of ten trading days ending on the trading day next preceding the date of
issuance of such Convertible Note. As a result of the maturity date of the
line of credit being extended by the Bank each six months since signing of the
Reimbursement Agreement, the Applicable Percentage at June 30, 1996, is 20% and
cannot be reduced below this percentage by terms of the agreement.
3. PURCHASED INTANGIBLES
In December 1993, the Company entered into an agreement to purchase an
exclusive license to proprietary software development methodology and for the
use, development and resale, into the healthcare market, of a proprietary
universal scheduling software package from TransMillenial Resources Corporation
in exchange for 1,000,000 shares of the Company's Common Stock with an
estimated fair market value of $1,550,000. The shares were issued by the
Company in July 1994.
In February 1995, the Company entered into an agreement to purchase rights to
use and resell, into any market, the proprietary universal scheduling software
acquired in fiscal 1994 for the healthcare market. The Company issued 100,000
shares of its Common Stock and a warrant to purchase 400,000 shares of its
Common Stock at $0.001 per share with a total fair market value of $500,000 as
the consideration for these rights.
At June 30, 1995, the Company expensed the remaining asset value of $1,156,522
to costs of system sales because the cost reduction strategies employed by the
Company include reduction of sales and marketing staff and activities. The
Company is no longer actively marketing the software.
4. FINANCING ARRANGEMENTS
The Company has a $1,000,000 revolving line of credit with a bank, due in
monthly installments of interest only at the bank's reference rate plus 1.0%
(9.25% at June 30, 1996), with a maturity date of January 1, 1997. The
outstanding balance on the line of credit as of June 30, 1996 was $1,000,000.
The line of credit is secured by substantially all of the assets of the Company
and is guaranteed by James W. Cameron, Jr. (Note 2). At June 30, 1996, the
Company was in default under the terms of the line of credit because additional
debt was incurred during fiscal year 1996.
During fiscal 1996, the Company borrowed $738,752 from two existing
stockholders pursuant to three unsecured promissory notes. All three notes
mature on December 31, 1996 and bear interest at 10.25%. Beginning in October
1996, the Company is required to make monthly interest payments on the notes
totaling $12,724.
5. EQUITY FOR DEBT AGREEMENT
In June 1995, the Company negotiated an equity for debt swap agreement with a
service provider whereby the service provider agreed to accept a warrant to
purchase, at $0.10 per share, the number of shares of the Common Stock of the
Company equal to 1.85% of the number of issued and outstanding shares of Common
Stock plus the number of shares of Common Stock issuable pursuant to
outstanding options, warrants, conversion provisions and other rights to
purchase Common Stock, as of the date of exercise (Note 8). The amount of debt
converted into equity as a result of this transaction was $521,510.
6. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $8,515,000
Research credits 115,000
Common Stock options 2,369,000
Common Stock warrants 733,000
Deferred revenues 104,000
Depreciation 15,000
Other - net 137,000
Total deferred tax assets 11,988,000
Valuation allowance for deferred tax assets (11,988,000)
Net deferred tax assets $ -
The Company's valuation allowance as of June 30, 1995 was $11,426,000,
resulting in a net change in the valuation allowance of $562,000.
As of June 30, 1996 the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $23 million and $11
million, respectively. The federal net operating loss carryforward expires in
2005 through 2011 and the state net operating loss carryforward expires in 1997
through 2001. The Company also has approximately $98,000 and $25,000 of
research and development tax credit carryforwards for federal and state income
tax purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.
In connection with the Company's initial public offering in August 1992, a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) will
be subject to an annual limitation in the amount of approximately $300,000.
In August and September of 1993, a controlling interest of the Company's stock
was purchased, resulting in a second annual limitation in the amount of
approximately $398,000 on the Company's ability to utilize net operating loss
carryforwards generated between August 11, 1992 and September 13, 1993
(approximately $7,700,000).
The Company expects that the aforementioned annual limitations will result in
approximately $3,600,000 of net operating loss carryovers which may not be
utilized prior to the expiration of the carryover period.
7. COMMITMENTS
OPERATING LEASES
In November 1995, the Company entered into a lease agreement for its current
facility under a one year lease with a stockholder. At June 30, 1996, $107,100
of rent owed for fiscal 1996 is included in the balance of accounts payable to
stockholder. Rental expense for all operating leases was approximately $70,000
and $343,000 for the years ended June 30, 1996 and 1995, respectively. Annual
minimum rental payments for all non-cancelable operating leases for fiscal 1997
are approximately $46,000, net of sublease payments to be received by the
Company of approximately $54,000.
CAPITAL LEASES
The Company leases certain equipment under capital lease agreements. The future
minimum lease payments in fiscal 1997 under capital leases are $10,817, less
$658 representing interest, which results in the present value of the net
minimum lease payments of $10,159 at June 30, 1996. There are no commitments
beyond fiscal 1997.
The cost of leased assets and related accumulated depreciation included in
property and equipment at June 30, 1996 is $173,526 and $169,598, respectively.
Depreciation expense charged to operations in fiscal 1996 and 1995 relating to
leased assets was $34,705 and $34,705, respectively.
ROYALTY COMMITMENTS
The Company had a commitment to pay royalties to Time Technologies of 10% of
hardware and software sales generated through February 12, 1995 related to the
TimeNet product, up to a cumulative total of $100,000. The Company had an
additional commitment to pay royalties to St. Agnes Hospital on software sales
related to the TimeNet product, at 15% of related sales, but in any event not
less than $75,000 for a three year period ended December 22, 1995. During
fiscal 1996, the Company entered into an agreement with St. Agnes Hospital
which provides for the Company's payment of 24 monthly principal and interest
payments of $3,277 in satisfaction of all obligations under the agreement.
Interest accrues at 10% per annum, and the outstanding balance of the
obligation at June 30, 1996, is $54,567.
8. STOCKHOLDERS' DEFICIT
In November 1994, the Company received $301,250 in a private sale of a
combination of Common Stock and warrants to purchase Common Stock. This
transaction consisted of the purchase of 335,000 shares of the Company's Common
Stock at $0.75 per share and the purchase of 50,000 units at $1.00 per unit,
each unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $1.50 per share.
In February 1995, the Company received commitments from several investors to
invest $1,475,000 in a private sale of 1,475,000 units at $1.00 per unit, each
unit consisting of one share of Common Stock and a warrant to purchase one
share of Common Stock at an exercise price of $1.50 per share or $0.75 below
the last trading price on the date of the notice of exercise, whichever is
lower. The warrants expire on February 13, 2000. The Company received
$1,475,000 prior to June 30, 1995 and issued 1,475,000 shares pursuant to these
agreements.
The Company was served with a lawsuit filed on September 17, 1993 in Sacramento
County Superior Court against it and others by a former employee. The lawsuit
alleged sexual harassment and wrongful termination and sought general and
special damages of $2.0 million plus undisclosed punitive damages. On May 27,
1995, the Company reached a settlement with the former employee under which the
Company caused its insurer to deliver a cash payment to the former employee.
The Company issued 250,000 shares of unregistered common stock with a fair
value of $78,125 to the former employee subsequent to the settlement being
approved by the Superior Court in July 1995.
In June 1996, the Company issued 392,739 shares of its Common Stock to a
customer in connection with a settlement agreement entered into in fiscal 1995
(Note 9).
SERIES D PREFERRED STOCK
In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible Preferred Stock for $1,225,002. The Company is required to pay
cumulative preferential dividends to holders of Series D Preferred Stock on a
quarterly basis beginning July 1, 1994, at a rate of $0.60 per year per share.
As of June 30, 1996, cumulative unpaid, undeclared dividends were $245,000.
Each share of Series D Preferred Stock is convertible, at the option of the
stockholder, into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing the sum of $6.00 and the accrued but unpaid
dividends by the Series D Conversion Price, as defined in the agreement, in
effect on the conversion date. The Series D Conversion Price shall initially
be $1.00 per share. Additionally, the Series D Preferred Stock is redeemable
at any time, at the Company's option, at a price of $6.00 per share plus
accrued but unpaid dividends. The liquidation preference is $6.00 per share
plus accrued but unpaid dividends.
SERIES E PREFERRED STOCK
On November 18, 1994, the Company entered into a series of agreements for the
purchase of Series E Convertible Preferred Stock with two existing
stockholders. The transaction included a debt to equity conversion of
$2,232,856 and an additional aggregate cash investment of $1,215,004 in
exchange for the issuance of 287,322 shares of Series E Preferred Stock.
On December 1,1995, the holders of all the outstanding shares of the Company's
Series E Preferred Stock tendered those shares for conversion into 223,359,332
shares of the Company's Common Stock pursuant to the terms of the Series E
Preferred Stock Purchase Agreement. As of the conversion date, 200,000,000
common shares were authorized; therefore, 52,186,768 shares were recorded as
Common Stock to be issued until such time as the number of authorized shares
can be increased.
WARRANTS
In connection with the private sale of Preferred Stock in March 1992, the
Company sold Class A Warrants to purchase 400,000 shares of Common Stock which
resulted in net proceeds to the Company of approximately $81,000. In January of
1994, Class A Warrants to purchase 344,000 shares of Common Stock were amended
into new warrants (the "Conversion Warrants") exercisable at $1.50 per share
(see below). The remaining Class A Warrants are exercisable at $2.50 per
share. In the event the Company attains net income after provision for income
taxes in excess of $500,000 in a quarterly period (the "Quarterly Goal"), the
Company will have 15 days to notify the warrant holders of any intent it may
have to redeem all Class A Warrants which are not exercised by the end of a
specified period (not less than 30 days from delivery of such notice). The
redemption price of the Class A Warrants will be $.02 per share. If the Company
fails to deliver such notice within the required 15-day period, it will lose
its right to redeem the outstanding Class A Warrants until the next quarter in
which the Company reaches the Quarterly Goal.
In May 1992, the Company issued additional Class A Warrants to purchase 40,000
shares of Common Stock to an individual in consideration for certain financial
consulting services. All of these warrants were amended into Conversion
Warrants in January of 1994 (see below).
In June 1992, the Company issued additional Class A Warrants to purchase 62,500
shares of Common Stock to stockholders in exchange for loan guarantees in the
aggregate amount of $250,000. All of these warrants were amended into
Conversion Warrants in January of 1994 (see below).
Prior to the Company's offer to amend the Class A Warrants into Conversion
Warrants, the Company offered each of the Class A Warrant holders a non-
redeemable
Class B Warrant to purchase 50% of the number of shares that they were entitled
to purchase through the exercise of their Class A Warrants, equal to an
aggregate of 251,250 shares of Common Stock, in exchange for the execution and
delivery by each Class A Warrant holder of a release of any claims that he or
she may have against the Company for the late registration of the Common Stock
underlying the Class A Warrants. Holders of 31 Class A Warrants covering
478,400 shares signed releases and 239,250 Class B Warrants were issued. In
January of 1994, Class B Warrants to purchase 223,250 shares of Common Stock
were amended into Conversion Warrants exercisable at $1.50 per share (see
below). The remaining Class B Warrants are exercisable through April 22, 1998
at a price of $2.88 per share. As of June 30, 1996, the Company has not
received claims from any of the warrant holders who did not sign releases, nor
does the Company believe that the ultimate outcome of this matter will have a
material effect on its results of operations or financial position.
On February 16, 1993, the Company issued an aggregate of five Class C Warrants
to purchase an aggregate of 75,000 shares of Common Stock in settlement of a
dispute with a group of individuals and an organization who have claimed that
they were entitled to receive a finder's fee in connection with the Company's
March 1992 private placement. In January of 1994, all of the Class C Warrants
were amended into Conversion Warrants exercisable at $1.50 per share (see
below).
In connection with the Company's initial public offering, the Company issued
Class D Warrants to purchase 100,000 shares of Common Stock to the underwriter.
In January of 1994, all of the Class D Warrants were amended into 84,000
Conversion Warrants exercisable at $1.50 per share (see below).
In December of 1993, the Company offered the holders of the Class A, B, C and D
Warrants the right to have their warrants amended to reduce the exercise price
to $1.50, to provide an early termination (call) feature at the Company's
option and to change the number of shares subject to warrant. The amended
warrants, (the "Conversion Warrants"), were issued in January of 1994.
The following table summarizes the number of shares subject to outstanding
warrants at June 30, 1996:
Original Amended Terms-
TERMS CONVERSION WARRANTS
Class A 56,000 852,000
Class B 16,000 370,620
Class C - 75,000
Class D - 84,000
The Conversion Warrants are immediately callable by the Company at its sole
discretion; however, in no event may the Conversion Warrants be exercised later
than December 31, 1997. During fiscal year 1995, Conversion Warrants to
purchase 24,485 shares of common stock were exercised.
On June 16, 1993, the Company issued two Class E Warrants to purchase an
aggregate of 14,546 shares of Common Stock in connection with note payable
agreements with an
officer and an employee of the Company. The notes payable were repaid by the
Company during fiscal 1994. The warrants are immediately exercisable at a
price of $1.375 per share through June 15, 1998. During fiscal year 1996,
warrants to purchase 10 shares of common stock were exercised and the Company
received $14.
On July 7, 1993, the Company issued two warrants to purchase an aggregate of
80,000 shares of Common Stock in connection with note payable agreements with
an officer and an employee of the Company. The notes payable were repaid by
the Company during fiscal 1994. The warrants are immediately exercisable at a
price of $.50 per share through July 7, 1998. During fiscal year 1996,
warrants to purchase 20 shares of common stock were exercised and the Company
received $10.
On February 28, 1994, the Company issued a warrant to purchase an aggregate of
100,000 shares of Common Stock to the designee of James W. Cameron, Jr. in
exchange for a line of credit guarantee in the amount of $2,000,000 (Note 2).
The warrant is immediately exercisable at a price of $1.50 per share through
February 28, 1999.
On April 6, 1994, the Company issued two warrants to purchase an aggregate of
1,152,856 shares of Common Stock to a former officer and a former consultant in
connection with the settlement of a claim by the former officer and the former
consultant. The warrants are exercisable at a price of $1.50 per share and had
an estimated fair market value of $645,599 which was charged to operations in
fiscal 1994. In addition, the Company issued two warrants to purchase an
aggregate of 325,000 shares of Common Stock at an exercise price of $0.001 per
share to these individuals in connection with the same settlement agreement.
These warrants had an estimated fair market value of $438,750 which was charged
to operations in fiscal 1994. All of the warrants are immediately exercisable
through April 15, 1999. In August 1995, the former officer exercised one of
these warrants for 200,000 shares of Common Stock for an aggregate price of
$200, and in December 1995 he exercised another warrant for 15 shares of Common
Stock.
In August 1993, the Board of Directors approved the issuance to stockholders of
record on September 7, 1993 a Common Stock warrant with an exercise price of
$2.50 per share for the same number of shares of Common Stock which each
stockholder of record held on September 7, 1993, which totaled 3,213,080 shares
(the "Special Warrants"). The Special Warrants are immediately exercisable and
are subject to an early termination (call) feature by the Company. The Special
Warrants are callable by the Company if the Market Price of the Company's
Common Stock, as defined in the warrant, is $3.25 per share for any ten
consecutive trading days. In no event may the Special Warrants be exercised
later than December 31, 1997.
In July 1994, the Company agreed to issue two warrants to a strategic partner
each exercisable for 1,326,180 shares at $3.00 per share and $5.00 per share,
respectively. The warrant agreements have not been finalized; however, the
Company recorded $345,000 in expense during the first quarter of fiscal 1995
for these warrants.
In November 1994, the Company issued a warrant to purchase 50,000 shares of
Common Stock at an exercise price of $1.50 per share as part of the sale of
units sold to an investor in a private placement. The warrant is immediately
exercisable through December 31, 1997.
The Company sold a warrant to purchase 42,000 shares of Common Stock at an
exercise price of $2.50 per share in February 1995 to a brokerage firm. The
warrant is immediately exercisable through December 31, 1997. The Company
received $2,100 and a release of all claims by the brokerage firm.
The Company sold a warrant to purchase 1,069 shares of Common Stock at an
exercise price of $2.50 per share in June 1995 to a brokerage firm. The
warrant is immediately exercisable through December 31, 1997. The Company
received $54 and a release of all claims by the brokerage firm.
In February 1995, the Company issued warrants to purchase 1,475,000 shares of
Common Stock as part of the sale of units sold to several investors in a
private placement at the exercise price of $1.50 per share or $0.75 below the
last trading price on the date of the notice of exercise, whichever is lower.
These warrants expire February 13, 2000. During fiscal 1996, several investors
exercised warrants for 1,325,000 shares of unregistered Common Stock. The
Company received no proceeds upon the exercise of these warrants since the
trading price at the time of exercise was less than $0.75 per share.
In June 1995, the Company negotiated an equity for debt swap agreement with a
service provider whereby the service provider agreed to accept a warrant to
purchase, at $0.10 per share, the number of shares of the Common Stock of the
Company equal to 1.85% of the number of issued and outstanding shares of Common
Stock plus the number of shares of Common Stock issuable pursuant to
outstanding options, warrants, conversion provisions and other rights to
purchase Common Stock as of the date of exercise (Note 5). This warrant
expires on December 31, 2004. The amount of debt converted into equity as a
result of this transaction was $521,510.
STOCK OPTIONS
In fiscal 1994 as a condition of the agreements between the Company and the
Investor Group (see Note 2), the Company granted to its then-new Chief
Executive Officer and director, stock options for 4,000,000 shares of Common
Stock exercisable at $0.01 per share. The options are fully vested as of June
30, 1996 and expire on August 10, 2003. In April 1996, 100,000 options were
exercised.
SPECIAL STOCK OPTION PLAN
In June 1993 the Board of Directors adopted the 3Net Systems, Inc. Special
Stock Option Plan which authorizes 188,000 shares of Common Stock for the grant
of options. In June 1993 the Board of Directors granted options with respect
to 187,145 shares of Common Stock to approximately 43 employees. Options to
purchase 138,012 shares of Common Stock under the Special Stock Option
Plan were canceled through April 10, 1996, at which time the
remaining 49,133 options were canceled and reissued under the 1993 Stock
Option/Stock Issuance Plan. The reissued options have an exercise price of
$0.078125, the closing market price on that day.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"), pursuant to which
key employees (including officers) and consultants of the Company and the non-
employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on August 31, 1993 and
became effective at that time.
An aggregate of 4,000,000 shares of Common Stock are reserved for issuance over
the ten year term of the 1993 Plan. However, no officer of the Company may be
issued more than 2,000,000 shares of Common Stock under the 1993 Plan. The
shares issuable under the 1993 Plan will either be shares of the Company's
authorized but previously unissued Common Stock or shares of Common Stock
reacquired by the Company, including shares purchased on the open market and
held as treasury shares.
During fiscal 1994, the Company granted options to purchase 1,820,000 shares of
the Company's Common Stock, at exercise prices ranging from $0.50 to $1.375 per
share, to six employees under the 1993 Plan, including two new officers in
conjunction with the agreements with the Investor Group (Note 2). During
fiscal 1995, the Company granted additional options to purchase 578,901 shares
of the Company's Common Stock, at exercise prices ranging from $0.625 to $1.00,
to employees and officers. Options to purchase 260,684 and 879,000 shares were
canceled in fiscal 1996 and 1995, respectively. On April 10, 1996, the Board
of Directors agreed to adjust the exercise price for 1,159,217 options to
$0.078125 per share, the closing market price on that day.
In November 1993, the Company granted two options to purchase an aggregate of
100,000 shares of the Company's Common Stock, at an exercise price of $0.162
per share to two non-employees elected as directors at the 1993 Annual
Stockholders Meeting. In June 1994, the Company granted an option to purchase
50,000 shares of Common Stock, at an exercise price of $1.31 per share to an
individual elected as a director who is not an employee. In April 1995, 16,667
options were exercised at $0.162 per share and 33,333 options were canceled.
On November 20, 1995 the Company granted options to purchase 50,000 shares of
Common Stock, at an exercise price of $0.10 per share to an individual elected
as a director who is not an employee.
On April 10, 1996, the Board of Directors agreed to adjust the exercise price
of $1.31 per share for an option to purchase 50,000 shares of Common Stock,
originally issued to a director in June 1994, to $0.078125 per share, the
closing market price on April 10, 1996.
On April 10, 1996, the Company granted options to purchase 1,667,870 shares of
the Company's Common Stock at an exercise price of $0.078125 per share to
eleven employees, including two officers.
Of the 3,126,220 options outstanding at June 30, 1996, options to purchase
1,458,350 shares were immediately exercisable at prices ranging from $0.078125
to $1.31 per share. Approximately 857,113 shares are still available for grant
under the 1993 Plan at June 30, 1996.
STOCK RESERVED FOR ISSUANCE
As of June 30, 1996, the Company has reserved a total of 23,785,823 shares of
Common Stock pursuant to outstanding warrants, options, conversion of Series D
Preferred Stock, and future issuance of options to employees and non-employee
directors. In addition, at June 30, 1996, the Company has an additional
52,186,768 shares recorded as Common Stock to be issued until such time as the
number of authorized shares can be increased.
9. SETTLEMENT OF CUSTOMER CLAIMS
In April 1995, the Company reached a letter agreement with a customer that
mutually acknowledges that contributions beyond the scope of the original
customer agreement, as amended, had been made by both parties and that any
obligations for such contributions were mutually satisfied by the fulfillment
of the terms of the letter agreement. The letter agreement required the
Company to issue shares of its Common Stock, within 90 days of the agreement,
to the customer with a market value at the time of issuance of $225,000. The
Company recorded $225,000 of settlement expense during the year ended June 30,
1995, pursuant to this agreement, but, had previously reserved approximately
$130,000 specifically for this customer. During fiscal 1996, the Company
issued 392,739 shares of its Common Stock to this customer in satisfaction of
its obligations under the letter agreement.
10. CONTINGENCIES
SUIT FROM FORMER CONSULTANT
In April 1994, the Company entered into a settlement agreement with a former
officer and director (the "Former Officer") and a former consultant, officer
and director (the "Former Consultant") in connection with disputes concerning
outstanding compensation, expense reimbursement, equity entitlement issues and
ownership of the Company's proprietary software. In November 1994, the Former
Officer and Former Consultant asserted that the Company had breached certain of
its obligations under the settlement agreement. In February 1995, the Company
believes it cured any alleged default under the settlement agreement by
fulfilling certain nonmaterial obligations to the Former Officer and the Former
Consultant. In addition, the Former Consultant asserted claims against the
Company and numerous other parties under a variety of legal theories. On June
12, 1995, the Former Consultant filed a lawsuit in Sacramento County Superior
Court against the Company, its then-current directors, James W. Cameron, Jr.,
the Former Consultant's stockbroker and brokerage firm and one of the Company's
largest customers. The lawsuit set forth twenty causes of action based on a
variety of legal theories and sought in excess of $15.0 million in damages plus
punitive damages. In August 1995, the Superior Court granted petitions to
compel arbitration filed by the 3Net defendants and Mr. Cameron which petitions
were based on the arbitration provision of the April 1994 settlement agreement.
The Court also granted a similar motion filed by the Former Consultant's
stockbroker and brokerage firm. The litigation of the case in Superior Court
was stayed pending the outcome of the arbitration of all claims set forth in
the action. In February 1996 the Arbitration Panel entered its order
dismissing with prejudice all of the Former Consultant's claims made against
the 3Net defendants and Mr. Cameron and awarded 3Net recovery of a portion of
its fees and costs. On July 26, 1996, the Superior Court confirmed the
Arbitration Panel's order of dismissal and award. At June 30, 1996 legal
expenses and costs of $201,550 incurred by the Company related to this
litigation are included in the balance of accounts payable to shareholder.
On September 10, 1996, the Company was notified that the Former Consultant had
filed a Notice of Appeal with the 3rd District Appellate Court. The Company
does not believe that the outcome of this matter will have a material adverse
impact on its financial position or results of operations.
DEMAND LETTER
The Company purchased and licensed various assets from Barrett Laboratories,
Inc. ("Barrett"). In fiscal 1993, a major creditor of Barrett asserted that
the Company was liable for $2,460,000 owed by Barrett. No basis for this
assertion has been provided to the Company nor has the Company had any
communications with Barrett's creditor in fiscal 1995 or fiscal 1996. The
documentation on which the Barrett liability is based was signed in 1986, three
years before the Company was formed. The Company does not believe that it has
any obligation with respect to the debts of Barrett and the Company and its
counsel believe that the statute of limitations has run on any claim that the
creditor may have had against the Company.
DEMANDS FOR INDEMNIFICATION
In July 1994, the Company received a formal request for indemnification from
one of the individual defendants as it pertains to a the wrongful termination
lawsuit filed on September 17, 1993 in Sacramento County Superior Court (Note
8). The Company denied that it had any obligation and the matter was submitted
for determination by an arbitrator in accordance with certain indemnification
agreements between the Company and the individual. The arbitrator determined
that the Company had an obligation to pay for the cost of defense of the
individual. Based on this ruling, the Company reimbursed the individual
approximately $93,000 for the expenses he had incurred in defending the action
and will pay his continuing defense costs. However, the Company has reserved
its right to seek reimbursement of these amounts from the individual under
appropriate circumstances. On June 19, 1995, the Company received a demand by
the individual seeking reimbursement of fees and settlement costs
incurred by the individual and his insurer. On August 18, 1995, the Company
formally rejected that demand. The Company does not believe that the outcome
of this matter will have a material adverse impact on its financial position or
results of operations.
The Company also received a demand for indemnification of legal expenses for
separate counsel from the other individual defendant in the lawsuit filed on
September 17, 1993 in Sacramento County Superior Court, discussed above. The
Company had been providing a defense to this individual through its counsel and
disputes that it had an obligation to provide for separate counsel. This
matter was resolved by the Company's agreement to provide for separate counsel.
The Company has reimbursed the former officer approximately $41,000 for
expenses he incurred in defending the action. In August 1995, the Company
received notification from the individual's law firm that the Company was in
arrears of approximately $12,000 in its obligation to reimburse the firm for
fees and expenses in defending the individual, and has arranged for terms under
which such amount will be paid. The Company does not believe that the outcome
of this matter will have a material adverse impact on its financial position or
results of operations.
11. DISTRIBUTOR AND CO-DEVELOPMENT AGREEMENT
In November 1993, a dispute arose between the Company and its Canadian
distributor (the "Distributor") which was settled in April 1994. This
settlement agreement encompassed a cash payment of $50,000 for consulting
services and the issuance of 200,000 shares of the Company's Common Stock
(estimated fair market value of $325,000) as an incentive for entry into a
renewal of the Distributor and Co-Development Agreement. Accordingly, the
Company recorded $50,000 in general and
administrative expense and $325,000 in marketing and sales expense during
fiscal 1994.
The Company entered into discussions to renegotiate its contractual
relationship with the Distributor. These discussions led to the execution of a
letter agreement on January 27, 1995 that modified certain provisions of the
April 1994 agreement. In addition, certain minor changes were agreed to in a
letter dated March 22, 1995. These agreements called for, among other things,
issuance of an additional 200,000 shares of the Company's Common Stock to the
Distributor, if the Distributor successfully developed a pilot site for the
Canadian version of 3Net software the Distributor was developing. Accordingly,
the Company recorded $200,000 of settlement expense in fiscal 1995 which was
offset by a reduction in reserves of approximately $170,000. On May 15,
1995, the Company received a letter from the Distributor declaring an event of
default based on the Company's alleged failure to deliver a specified number of
shares of the Company's Common Stock pursuant to the agreement. Within
approximately sixty days, the subject stock certificates issuable to the
Distributor were delivered by the transfer agent to the Distributor. On
January 5, 1996, the Distributor sent a letter to the Company indicating that
the Distributor intended to file a lawsuit against the Company and others,
stating a number of claims. The Distributor indicated their belief that the
value of these claims exceeds $5.0 million. The Company believes that the
Distributor has breached the contract and intends to vigorously defend itself
if a lawsuit is filed. The Company has offered to settle the dispute, but the
Distributor has not responded to the Company's offer.
The expense of defending any lawsuit in connection with this agreement will
place additional strains on the Company's resources and cash position and the
Company may be required to seek protection under federal bankruptcy law should
the Distributor pursue its claims through litigation. Moreover, due to the
Company's current and projected cash position, the Company may not be able to
satisfy an adverse verdict in this matter that obligates the Company to pay any
significant damages to the Distributor. In the event an adverse verdict is the
result of this dispute, the Company may be required to seek protection under
federal bankruptcy law.
EXHIBIT 3.3
AMENDMENT TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF 3NET SYSTEMS, INC.
3NET SYSTEMS, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
1. That the present name of the Corporation is 3NET SYSTEMS, INC.,
which is the name under which the Corporation was originally
incorporated; and the date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State
of Delaware was January 16, 1992.
2. That on October 11, 1995, in lieu of a meeting of the Board of
Directors of the Corporation, a resolution was adopted by unanimous
written consent in accordance with Section 141(f) of the General
Corporation Law of the State of Delaware approving the amendment of
Article Fourth of the Corporation's Certificate of Incorporation to read
in its entirety as follows:
"FOURTH: This Corporation is authorized to issue a
total of Two Hundred One Million Two Hundred Thousand
(201,200,000) shares of stock consisting of two classes of
shares to be designated "Common Stock" and "Preferred Stock,"
respectively. The number of shares of Common Stock authorized
to be issued is Two Hundred Million (200,000,000), each with a
par value of one cent ($0.01) and the number of shares of
Preferred Stock authorized to be issued is One Million Two
Hundred Thousand (1,200,000), each with a par value of six
dollars ($6.00). The Preferred Stock may be issued in series.
The board of directors is authorized to fix the number of
shares of any series of Preferred Stock and the designation of
any such series of Preferred Stock. The board of directors is
also authorized to determine, fix, alter or revoke the rights,
preferences, privileges and restrictions granted to and imposed
upon the Preferred Stock or any series thereof with respect to
any wholly unissued class or series of Preferred Stock, and
within the limits and restrictions stated in any resolution or
resolutions of the board of directors originally fixing the
number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series
then outstanding) the number of shares of any series subsequent
to the issue of shares of that series."
3. That on November 20, 1995, at the annual meeting of the
stockholders of the Corporation, the immediately foregoing amendment was
approved by the stockholders of the Corporation.
4. That the foregoing amendment was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to
be executed and attested by its duly authorized officers this 27th day of
November 1995.
3NET SYSTEMS, INC.
By GEORGE R. VAN DERVEN
George R. Van Derven
President
ATTEST:
By JAMES D. ALEXANDER
James D. Alexander
Secretary
EXHIBIT 3.4
AMENDMENT TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF 3NET SYSTEMS, INC.
FIRST: The name of the Corporation is 3Net Systems, Inc.
SECOND: The registered office of the Corporation is located at 1013
Centre Road, County of New Castle, City of Wilmington, Delaware 19805.
The name of the registered agent is The Prentice-Hall Corporation System,
Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation law of Delaware.
FOURTH: This Corporation is authorized to issue a total of Two
Hundred One Million Two Hundred Thousand (201,200,000) shares of stock
consisting of two classes of shares to be designated "Common Stock" and
"Preferred Stock," respectively. The number of shares of Common Stock
authorized to be issued is Two Hundred Million (200,000,000), each with a
par value of one cent ($0.01) and the number of shares of Preferred Stock
authorized to be issued is One Million Two Hundred Thousand (1,200,000),
each with a par value of six dollars ($6.00). The Preferred Stock may be
issued in series. The board of directors is authorized to fix the number
of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The board of directors is also authorized
to determine, fix, alter or revoke the rights, preferences, privileges
and restrictions granted to and imposed upon the Preferred Stock or any
series thereof with respect to any wholly unissued class or series of
Preferred Stock, and within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally fixing the
number of shares constituting any series, to increase or decrease (but
not below the number of shares of such series then outstanding) the
number of shares of any series subsequent to the issue of shares of that
series.
FIFTH: The directors of the Corporation shall have the power to
adopt, amend or repeal the Bylaws of the Corporation without requiring a
vote of the stockholders therefor.
SIXTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware,
as the same may be amended and supplemented.
SEVENTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as the same may
be amended and supplemented,
indemnify any and all persons whom it shall have power to indemnify under
said section from and against any and all of the expenses, liabilities or
other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any Bylaw,
agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a
person.
EXHIBIT 10.42
CONTRACTOR AGREEMENT
COPYRIGHT 1988 NACCB, 1995 NACCB
The terms of this Agreement are based upon an Agreement Prepared by The
National Association of Computer Consultant Businesses and are subject to the
copyright of that Association. Any use of any language in this agreement by
anyone who is not a member in good standing of that Association is prohibited
and will subject the user to damages as well as other civil penalties.
An Agreement made this 3rd day of June, 1996, between The Systems Group,
Inc., 3030 LBJ #910, Dallas, TX 75234, and 3Net Systems, Inc., at 629 J
Street, Sacramento, CA 95814, ("Contractor"), wherein the parties agree as
follows:
1. SCOPE
The terms of this Agreement apply in a situation where Contractor agrees to
provide programming , systems analysis, engineering , technical writing or
other specialized services as an independent contractor directly to the third
party user client ("client") who has requested The Systems Group, Inc.,
("TSG"), locate temporary staffing for the client's project according to the
training, skills, abilities and experience required by the client. TSG agrees
to examine Contractor's background for providing services to client, to refer
Contractor to the client for further evaluation and possible retention of
Contractor's services, to negotiate a rate for those services in accordance
with Contractor's directions, and to otherwise perform as stated herein.
2. TERM OF AGREEMENT
Nothing in this Agreement obligates Contractor to accept any offer to
provide services. However, all terms and conditions of the Agreement shall
remain in force during any and all periods for which Contractor's services are
provided to the client and for any other periods before and/or thereafter as
stated herein. In addition, paragraphs 4, 5, 8, 15 and 16 shall apply even if
Contractor rejects an offer to provide services on a client project, in which
case TSG shall have no further obligation to Contractor.
Prior to the commencement of any services, TSG and Contractor will execute a
Purchase Order on the form attached as Exhibit A to this Agreement which shall
be considered part of this Agreement and binding upon both parties.
Contractor's services under this Agreement will terminate at the end of the
minimum time requirement covered by the Purchase Order and any renewals or
extensions thereof ("end date"), or upon notice if for any reason the client no
longer desires the services of Contractor. Contractor may not voluntarily
terminate its services under this Agreement before the end date unless, as
stated in writing by the client, the project has been completed or the services
are no longer required.
In the event that Contractor voluntarily terminates its services before the
end date in violation of this Agreement, in addition to other damages and
relief afforded to TSG under Paragraphs 9 and 15, Contractor may be liable for
liquidated damages in the amount of $100.00 per day for each non-holiday
weekday between the date of termination and the end date to compensate TSG for
its lost commission.
3. ASSIGNMENT OF CONTRACT
Contractor is to provide services through its personnel named in paragraph
7 of the Purchase Order, for whom it is responsible, and may not assign its
rights under this Agreement or any Purchase Order.
4. FEES FOR USE OF TSG CLIENTS AND CONTRACTORS
During the term of this Agreement and any renewals thereof, and for six (6)
months after the expiration of the initial and renewal periods, Contractor
agrees that it will pay a finder's fee to TSG if (a) Contractor or any of its
personnel within a restricted area (i) provides or attempts to provide (or
advises others of the opportunity to provide), directly or indirectly, any
services to any client to which Contractor has been introduced or about which
Contractor has received information through TSG or through any client for
which Contractor has performed services or to which Contractor was introduced
under this Agreement; or (ii) retains or attempts to retain, directly or
indirectly, for itself or for another party, the services of another one of the
TSG's Contractors or employees to which Contractor has been introduced or has
received information about through TSG or through any client for which
Contractor has performed services or to which Contractor was introduced under
this Agreement; and (b) such services are provided or such other Contractor or
employee is retained in any capacity whatsoever, including as a Contractor or
employee. The "restricted area" referred to above is the area within a 50
mile radius.
For the purposes of the above, the term "client" includes any affiliates,
customers and clients of the client. This provision may be waived only on a
case-by-case basis in writing by an executive officer of TSG, in its sole
discretion, prior to Contractor taking the action for which waiver is sought.
The parties agree that the finder's fee shall be paid immediately upon
commencement of the services and shall be $5,000.00.
5. REPRESENTATIONS
Contractor acknowledges for itself and its personnel that information
provided by it (including, but not limited to, resume, interview, references)
in consideration for providing services to or on behalf of the client is true
to the best of Contractor's knowledge and that it is not restricted by any
employment or other Contractor agreement from providing services in any
attached Purchase Order. Contractor understands that any misstatements or lack
of candor by Contractor of the qualifications or availability of it or its
personnel constitutes a breach of this Agreement and may be grounds for
immediate termination of Contractor's services by the client .
6. PAYMENT FOR SERVICES
Payment for services will be made in the corporate or business name of
Contractor on the periodic basis set forth in the Purchase Order that is based
upon remittance of funds to TSG from the client covered by that Purchase Order.
Payment to Contractor will be in accordance with the terms in the Purchase
Order and up to the amount authorized in that Purchase Order for the client
project. No other compensation in any form, including benefits, will be
provided by TSG or anyone else. For billing and payment purposes, Contractor
shall maintain records of the hours that services have been performed, have a
client representative verify those hours by signing the records, and submit to
TSG those records for the amount due to Contractor for the hours worked and
verified. Contractor will also invoice TSG only for the hours covered by such
records.
Payment to Contractor per its invoice shall be made in accordance with the
following: TSG will bill the client based upon the hours contained in
Contractor's invoice at a rate agreed upon between TSG and the client. The
difference between the amount paid to TSG by the client and the amount due to
Contractor per its invoice shall be retained by TSG as a commission from the
client to TSG for locating Contractor, arranging for interviews between
Contractor and the client, and performing associated administrative functions.
Contractor is entitled to compensation per its invoice only upon TSG receipt of
funds from the client for that invoice, and with no TSG liability otherwise,
because Contractor agrees that the client controls the payment of consulting
fees to Contractor.
At the request of and as a convenience to Contractor, TSG may deliver funds
to it prior to receiving funds from the client (see Exhibit B). In that event,
if TSG does not receive funds from the client that cover all hours set forth in
Contractor's invoice to TSG for which such delivery of funds was made, then
Contractor must pay TSG an amount equal to any funds delivered by TSG to
Contractor based upon hours set forth in that invoice for which the client has
not made payments to TSG. Such repayments shall be due immediately upon
written demand mailed to Contractor.
7. TRAVEL, LIVING AND OTHER COSTS
No travel, living, entertainment or other costs of Contractors will be paid
by TSG. Whether the client for whom Contractor is performing services will
pay any such costs is a matter between Contractor and the client and should be
included in Contractor's invoice only if authorized by the client in accordance
with industry practice to reimburse Contractor for such costs. TSG will
provide no training, tools, equipment or other materials to Contractor.
Contractor's invoiced hours will include no time spent in formal training and
Contractor represents that it is not being provided such formal training by the
TSG, the client or anyone on behalf of TSG or client.
8. CONFIDENTIALITY
Contractor agrees that neither it nor its personnel will disclose to any
third party, without the prior written consent of an executive officer of TSG,
any information relating to the business of TSG, the client, the customers and
clients of the client, or other TSG Contractors or employees, if such
information could reasonably be construed as confidential and was obtained in
the course of Contractor's providing services on client's project,
interviewing with TSG or client, or contracting with TSG. Contractor further
agrees neither it nor its personnel will reproduce in any way, divulge, or
remove from the premises of TSG, any client, or the customers and clients of
any client, at any time during the interview, or during or after providing
services, any tangible or intangible property whatsoever (except personal
effects) which could reasonably be construed as constituting confidential
information of TSG, the client, or the customers or clients of the client.
9. CONDUCT, INDEPENDENT STATUS, AND BENEFITS
Contractor shall provide competent, professional services in the required
disciplines, using its own appropriate independent skill and judgment, and the
manner and means that appear best suitable to it to perform the work, and TSG
shall have no right to and shall not interfere. Evaluation of Contractor's
performance, if any, shall be made by the client . TSG shall have no right or
responsibility hereunder to and shall not review such performances, require
progress reports, set the order or sequence for performing of services, or set
Contractor's hours or location of work except that Contractor shall not perform
services on TSG's premises.
Contractor is a valid corporation existing under the laws of the State of
Delaware, doing business with the corporate name or business name 3Net Systems,
Inc., and certifies its federal employer identification number (EIN)
68-0195770.
Contractor warrants that it maintains a set of books and records which
reflect items of income and expenses of its trade or business.
The parties to this Agreement agree that the relationship created by this
Agreement is that of TSG-independent contractor. Contractor agrees and has
advised its personnel that Contractor and its personnel are not employee(s)
of TSG or the client and are not entitled to (and also hereby waive) any
benefits provided or rights guaranteed by TSG or the client, or by operation of
law, to their respective employees, including but not limited to group
insurance, liability insurance, disability insurance, paid vacations, sick
leave or other leave, retirement plans, health plans, premium "overtime" pay,
and the like. It is understood and agreed that since the Contractor is an
independent contractor, TSG will make no deductions from fees paid to
Contractor for any federal or state taxes or FICA, and TSG and the client have
no obligation to provide Worker's Compensation coverage for Contractor or to
make any premium "overtime" payments at any rate other than the normal rate
agreed to in the Purchase Order. It shall be the Contractor's responsibility
to provide Worker's Compensation and, if applicable, pay any premium "overtime"
rate, for its employees who work on the project covered by this Agreement and
to make required FICA, FUTA, income tax withholding or other payments related
to such employees, and to provide TSG with suitable evidence of the same
whenever requested. In the event of any claims brought or threatened by any
party against TSG or the client relating to the status, acts or omissions of
Contractor or its personnel, Contractor agrees to cooperate in all reasonable
respects, including to support the assertions of employment status made in this
Agreement.
10. SERVICES TO OTHERS
Contractor may provide services for others and through other service firms
or Brokers.
11. LIABILITY
Because of the independent status of Contractor, it is solely and completely
accountable for the services it provides to the client, and neither the client
nor its customers and clients, nor TSG, shall have any liability whatsoever to
any party for such services provided by Contractor or its personnel. TSG will
not indemnify Contractor for any liability incurred by Contractor, its agents
or employees. Contractor understands that TSG will act in good faith to
describe the task requirements set forth by the client, but that because
Contractor has the opportunity to discuss directly with the client these task
requirements prior to acceptance of the project offered by the client, and
because TSG has no right to control any aspect of the project on which
Contractor will be working, Contractor hereby releases TSG from any liability
relating to representations about the task requirements or to the conditions
under which Contractor will be working. Contractor also agrees to release TSG
from any liability for statements made by TSG, without malice, to third parties
who inquire about Contractor's performance.
12. OWNERSHIP OF INTELLECTUAL PROPERTY, ETC.
Unless Contractor and the client reach a written agreement to the contrary,
in which case Contractor agrees to provide a copy to TSG for its files,
Contractor agrees for itself and its personnel that pursuant to the client's
requirement (a) all documents, deliverables, software, systems designs, disks,
tapes and any other materials (collectively, "materials") created in whole or
in part by Contractor in the course of or related to providing services to the
client shall be treated as if it were "work for hire" for the client, and
(b) Contractor will immediately disclose to the client all discoveries,
inventions, enhancements, improvements and similar creations (collectively,
"creations") made, in whole or in part, by Contractor in the course of or
related to providing services to the client.
All ownership and control of the above materials and creations, including
any copyright, patent rights and all other intellectual property rights
therein, shall vest exclusively with the client, and Contractor hereby assigns
to the client all right, title and interest that Contractor may have in such
materials and creations to the client, without any additional compensation and
free of all liens and encumbrances of any type. Contractor affirms that the
fee it has negotiated for the services performed under this Agreement includes
payment for assigning such rights to the client. Contractor agrees to execute
any documents required by the client to register its rights and to implement
the provisions herein.
13. INSURANCE
Contractor will obtain for itself and its personnel before providing
services, at its own expense, comprehensive General Liability (GL) insurance
coverage for projects covered by this Agreement, for limits of liability not
less than $500,000, and (if available under state law) worker's compensation
coverage with limits of not less than $500,000 and will name TSG as an
Additional Insured and provide a copy of the binder, the policy or a
certificate of insurance to TSG upon request.
14. INDEMNIFICATION
Contractor shall indemnify and hold harmless TSG and client, and their
officers, directors, agents, owners, and employees, for any claims brought or
liabilities imposed against TSG or client by Contractor's employees or by any
other party (including private parties, governmental bodies and courts),
including claims related to worker's compensation, wage and hour laws,
employment taxes, and benefits, and whether relating to Contractor's status as
an independent contractor, the status of its personnel, or any other matters
involving the acts or omissions of Contractor and its personnel.
Indemnification shall be for any and all loss, including costs and attorneys
fees.
15. BREACH
Any breach of any provision of this Agreement by Contractor or its personnel
entitles TSG to recover from Contractor damages and injunctive relief.
Contractor agrees that because monetary damages are likely to be inadequate,
TSG shall be entitled to temporary injunctive relief (by proving to a court a
likelihood of breach by Contractor) and to permanent injunctive relief (by
proving to a court such breach). If TSG is successful in recovering damages or
obtaining injunctive relief, Contractor agrees to be responsible for paying all
of TSG'S expenses in seeking such relief, including all costs of bringing suit
and all reasonable attorneys' fees.
16. ARBITRATION
Any dispute hereunder shall be submitted to arbitration. Such arbitration
shall be conducted, in accordance with the rules of the American Arbitration
Association by three persons, one to be appointed by TSG, one by Contractor and
the third to be appointed by the two so appointed. If the two persons
appointed by TSG and the Contractor, respectively, fail to agree upon the
appointment of a third arbitrator within a reasonable period of time, then such
third arbitrator shall be appointed by the Chief Justice of The United States
District Court, Northern District of Texas, Dallas Division. Such arbitration
shall be conducted in Dallas, Texas unless otherwise agreed to in writing. The
cost of the Arbitration shall be shared equally by TSG and the Contractor. The
judgment of the arbitrators shall be final and enforceable.
17. MISCELLANEOUS
This Agreement and any attached Purchase Order(s) and Exhibit(s), including
those relating to separate requirements imposed by the client, represent the
entire agreement and understanding of the parties and any modification thereof
shall not be effective unless contained in writing signed by both parties. No
other document, including any agreement between the TSG and the client, shall
be deemed to modify any terms of this Agreement unless expressly stated in
writing to do so and signed by both TSG and Contractor.
Contractor agrees that all of its personnel working on client projects
covered by this Agreement shall sign an "Employee Consent" form in the form of
Exhibit X, agreeing to the terms of paragraphs 4, 5, 8, 9, 12 and 14 of this
Agreement. The Employee Consent form will be delivered to TSG before such
personnel begin work under any Purchase Order.
Each provision of the Agreement shall be considered severable such that if
any one provision or clause conflicts with existing or future applicable law,
or may not be given full effect because of such law, it shall not affect any
other provision of the Agreement which can be given effect without the
conflicting provision or clause. To the extent that there may be any conflict
between the terms of this Agreement and of the Purchase Order, this Agreement
shall take precedence.
Contractor represents that Contractor has read and understands the terms of
this Agreement, has had an opportunity to ask any questions and to seek the
assistance of legal counsel regarding these terms, and is not relying upon any
advice from TSG in this regard.
This Agreement shall be governed by the laws of the State of Texas, except
for its choice of law principles, regardless of where Contractor's work is
performed, and any litigation shall be brought in the state or federal courts
of the State of Texas. Contractor agrees to the exercise of personal
jurisdiction over it by such courts to the full extent permitted by law.
BARBARA A. MARTIN GEORGE VAN DERVEN
The Systems Group, Inc. 3Net Systems, Inc.
By: BARBARA A. MARTIN By: GEORGE R. VAN DERVEN
EXHIBIT 10.43
Bank of America Amendment to Documents
AMENDMENT NO. 6 TO BUSINESS LOAN AGREEMENT
This Amendment No. 6 (the "Amendment") dated as of June 12, 1996 is
between Bank of America National Trust and Savings Association (the
"Bank") and 3Net Systems, Inc. (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of February 28, 1994, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in the
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.2, the date "January 1, 1997" is substituted
for the date "July 1, 1996."
2.2 Paragraph 8.14 is amended to read in its entirety as follows:
8.14 GUARANTOR COVENANT. James W. Cameron, Jr. ("JWC")
fails to comply with the following covenant:
(A) LIQUIDITY. To maintain unemcumbered liquid assets
equal to at least three times the aggregate amount of all
direct and contingent non-real estate secured indebtedness
of JWC and all non-real estate secured indebtedness which
JWC has guaranteed, including but not limited to JWC's
obligation under this Agreement. One third of the amount
of liquid assets must consist of cash, money market funds
acceptable to the Bank, and marketable securities (as
described in subparagraphs (ii) through (v) below).
"Liquid assets" means the following assets of JWC:
(i) cash and certificates of deposit;
(ii) U.S. treasury bills and other obligations of the
federal government;
(iii) readily marketable securities (including commercial
paper, but excluding restricted stock and stock subject
to the provisions of Rule 144 of the Securities and
Exchange Commission) rated at least A by Standard &
Poor's Ratings Group or at least A by Moody's Investors
Service;
(iv) bankers' acceptances issued by financial institutions;
(v) repurchase agreements covering U.S. government
securities;
(vi) other readily marketable securities acceptable to the
Bank.
Within 30 days of each calendar quarter end, JWC shall
provide to the Bank copies of statements from depository
institutions or brokerage firms, or other evidence
acceptable to the Bank of JWC's liquid assets. If more
than 25% of the value of JWC's liquid assets is represented
by margin stock, the Borrower will provide the Bank a Form
U-1 Purpose Statement, and the Bank and the Borrower will
comply with the restrictions imposed by Regulation U of the
Federal Reserve, which may require a reduction in the
amount of credit provided to the Borrower.
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning
of this Amendment.
BANK OF AMERICA
National Trust and Savings Association 3NET SYSTEMS, INC.
X BETH LEONARD, VICE PRESIDENT X JAMES W. CAMERON, JR.
BY: BETH LEONARD, VICE PRESIDENT BY:
EXHIBIT 10.44
PROMISSORY NOTE
U.S. $461,167.00 June 30, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to the Cameron Foundation ("Cameron"), Four Hundred
Sixty-One Thousand One Hundred Sixty-Seven Dollars ($461,167.00), such
amount referred to herein as the "Principal". This Promissory Note is
given as a replacement for and in consideration of Cameron canceling the
Promissory Notes listed on the attached Schedule. Interest payments of
Seven Thousand Nine Hundred Forty-Three Dollars ($7,943.00) are to be
paid October 31, 1996, November 30, 1996 and December 31, 1996. The
Principal, together with any remaining unpaid interest accrued thereon
from June 30, 1996, at an annual rate of ten and one quarter percent
(10.25%), shall be due and payable on December 31, 1996 (the "Maturity
Date").
1. No failure by Cameron to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise by Cameron of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Cameron
within ten (10) days after the Maturity Date, in addition to his other
remedies, Cameron may collect, and the Company shall pay on demand, a
late charge equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance
with this Note, and such default shall not have been remedied within ten
(10) days after Cameron notifies the Company in writing of such default,
then Cameron, in addition to all remedies conferred upon Cameron by law,
shall have the option to declare this Note and any and all promissory
notes issued by the Company to Cameron to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without a
prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in the
lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company
and its successors and assigns and the terms and provisions of this Note
shall inure to the benefit of Cameron and Cameron's successors and
assigns. This Note may be amended, supplemented, or changed, and any
provision hereof waived, only by a written instrument making specific
reference to this Note signed by the party against whom enforcement of
any such amendment, supplement, change, or waiver is sought. The Company
agrees to pay all costs of collection, including, without limitation,
attorney's fees, in the event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: GEORGE R. VAN DERVEN
Name: George Van Derven
Title: President & CEO
EXHIBIT 10.45
PROMISSORY NOTE
U.S. $241,718.00 June 30, 1996
3NET SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
promises to pay to The Negri Foundation ("Negri"), Two Hundred Forty-One
Thousand Seven Hundred Eighteen Dollars ($241,718.00), such amount
referred to herein as the "Principal". This Promissory Note is given as
a replacement for and in consideration of Negri canceling the Promissory
Notes listed on the attached Schedule. Interest payments of Four
Thousand One Hundred Sixty-Three Dollars ($4,163.00) are to be paid
October 31, 1996, November 30, 1996 and December 31, 1996. The
Principal, together with any remaining unpaid interest accrued thereon
from June 30, 1996, at an annual rate of ten and one quarter percent
(10.25%), shall be due and payable on December 31, 1996 (the "Maturity
Date").
1. No failure by Negri to exercise, and no delay in exercising,
any right or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise by Negri of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy.
2. Time is of the essence of this Note.
3. If principal and interest shall not be received by Negri within
ten (10) days after the Maturity Date, in addition to his other remedies,
Negri may collect, and the Company shall pay on demand, a late charge
equal to two (2) percent of the amount overdue.
4. If the Company defaults in the performance of or compliance
with this Note, and such default shall not have been remedied within ten
(10) days after Negri notifies the Company in writing of such default,
then Negri, in addition to all remedies conferred upon Negri by law,
shall have the option to declare this Note and any and all promissory
notes issued by the Company to Negri to be due and payable, without
presentment, demand for payment, protest, or notice of any kind, all of
which are hereby expressly waived upon maturity by acceleration or
otherwise.
5. Except as otherwise provided herein, the Company waives
presentment, demand for payment, protest, or notice of any kind.
6. The Company may prepay this Note in whole or in part without a
prepayment charge. Partial payments shall first be applied to accrued
interest and the balance to principal.
7. Principal and accrued interest shall be payable only in the
lawful money of the United States.
8. The provisions of the Note shall be binding upon the Company
and its successors and assigns and the terms and provisions of this Note
shall inure to the benefit of Negri and Negri's successors and assigns.
This Note may be amended, supplemented, or changed, and any provision
hereof waived, only by a written instrument making specific reference to
this Note signed by the party against whom enforcement of any such
amendment, supplement, change, or waiver is sought. The Company agrees
to pay all costs of collection, including, without limitation, attorney's
fees, in the event this Note is not paid when due.
9. If any provision of this Note is held by a court of competent
jurisdiction to be void or unenforceable for any reason, the remaining
provisions of this Note shall continue with full force and effect.
10. This Note shall be governed by and constructed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Note to be executed
and delivered on the date and year first above written.
3NET SYSTEMS, INC.
By: GEORGE R. VAN DERVEN
Name: George Van Derven
Title: President & CEO
EXHIBIT 10.46
LEASE BETWEEN REGISTRANT AND JAMES W. CAMERON, JR.
TABLE OF CONTENTS
PAGE
Article 1 LEASE OF PREMISES..............................3
Article 2 DEFINITIONS....................................3
Article 3 EXHIBITS AND ADDENDA...........................4
Article 4 DELIVERY OF POSSESSION.........................4
Article 5 RENT...........................................5
Article 6 INTEREST AND LATE CHARGES......................6
Article 7 SECURITY DEPOSIT...............................6
Article 8 TENANT'S USE OF THE PREMISES...................7
Article 9 SERVICES AND UTILITIES.........................8
Article 10 CONDITION OF THE PREMISES......................9
Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE..........9
Article 12 ALTERATIONS AND ADDITIONS.....................11
Article 13 LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY.....12
Article 14 RULES AND REGULATIONS.........................13
Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD...........13
Article 16 ASSIGNMENT AND SUBLETTING.....................14
Article 17 HOLDING OVER..................................16
Article 18 SURRENDER OF PREMISES.........................16
Article 19 DESTRUCTION OR DAMAGE.........................16
Article 20 EMINENT DOMAIN................................17
Article 21 INDEMNIFICATION...............................18
Article 22 TENANT'S INSURANCE............................19
Article 23 WAIVER OF SUBROGATION.........................20
Article 24 SUBORDINATION AND ATTORNMENT..................21
Article 25 TENANT ESTOPPEL CERTIFICATES..................21
Article 26 TRANSFER OF LANDLORD'S INTEREST...............22
Article 27 DEFAULT.......................................22
Article 28 BROKERAGE FEES................................25
Article 29 NOTICES.......................................25
Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS.........25
Article 31 RELOCATION OF PREMISES........................26
Article 32 QUIET ENJOYMENT...............................26
Article 33 OBSERVANCE OF LAW.............................27
Article 34 FORCE MAJEURE.................................27
Article 35 CURING TENANT'S DEFAULTS......................27
Article 36 SIGN CONTROL..................................27
Article 37 MISCELLANEOUS.................................28
This Lease between James W. Cameron, Jr., an individual ("Landlord"), and 3Net
Systems, Inc. a California Corporation,("Tenant"), is dated November 7, 1995.
1. LEASE OF PREMISES.
In consideration of the Rent (as defined at Section 5.4) and the provisions of
this Lease, Landlord leases to Tenant and Tenant leases from Landlord the
Premises shown by diagonal lines on the floor plan attached hereto as Exhibit
"A", and further described at Section 2l. The Premises are located within the
Building and Project described in Section 2m. Tenant shall have the non-
exclusive right (unless otherwise provided herein) in common with Landlord,
other tenants, subtenants and invitees, to use of the Common Areas (as defined
at Section 2e) and shall have reception and phone reception provided for Tenant
on the 5th floor by Landlord.
2. DEFINITIONS
As used in this Lease, the following terms shall have the following meanings:
a. Base Rent (initial): $107,100.00 per year.
b. Base Year: The calendar year of 1995.
c. Broker(s)
Landlord's: N/A .
Tenant's: N/A .
d. Commencement Date: November 7, 1995
e. Common Areas: the building lobbies, common corridors and hallways,
restrooms, garage and parking areas, if any, stairways, elevators and
other generally understood public or common areas. Landlord shall have
the right to regulate or restrict the use of the Common Areas.
f. Expense Stop: (fill in if applicable): N/A.
g. Expiration Date: November 6, 1996, unless otherwise sooner terminated in
accordance with the provisions of this Lease.
h. Landlord's Mailing Address: 629 J Street, Suite 500, Sacramento, CA
95814.
Tenant's Mailing Address: 629 J Street, Suite 350, Sacramento, CA
95814.
i. Monthly Installments of base Rent (initial): $8,925.00 per month.
j. Parking: Tenant is responsible for its parking.
k. Premises: that portion of the Building containing approximately 9,191
square feet of Rentable Area, shown by diagonal lines on Exhibit "A",
located on the Basement, 2nd floor, and 3rd floor of the Building and
known as Suite 350.
l. Project: the building of which the Premises are a part (the "Building")
and any other buildings or improvements on the real property (the
"Property") located at 629 J Street and further described at Exhibit "B".
The Project is known as The D.O. Mills Bank Building.
m. Rentable Area: as to both the Premises and the Project, the respective
measurements of floor area as may from time to time be subject to lease
by Tenant and all tenants of the Project, respectively, as determined by
Landlord and applied on a consistent basis throughout the Project.
n. Security Deposit (Section 7):$ -0-.
o. State: the State of California.
p. Tenant's Use Clause (Article 8): For purposes of office use and related
storage.
q. Term: the period commencing on the Commencement Date and expiring at
midnight on the Expiration Date.
3. EXHIBITS AND ADDENDA.
The exhibits and addenda listed below (unless lined out) are incorporated by
reference in this Lease:
a. Exhibit "A" - Floor Plan showing the Premises.
b. Exhibit "B" - Site Plan of the Project.
c. Addenda: N/A
4. DELIVERY OF POSSESSION.
If for any reason Landlord does not deliver possession of the Premises to
Tenant on the Commencement Date, Landlord shall not be subject to any liability
for such failure, the Expiration Date shall not change and the validity of this
Lease shall not be impaired, but Rent shall be abated until delivery
possession. If Landlord permits Tenant to enter into possession of the Premises
before the Commencement Date, such possession shall be subject to the
provisions of this Lease, including, without limitation, the payment of Rent.
5. RENT.
5.1 Payment of Base Rent. Tenant agrees to pay the Base Rent for the
Premises. Monthly installments of Base Rent shall be payable in advance on the
first day of each calendar month of the Term. If the Term begins (or ends) on
other than the first (or last) day of a calendar month, the Base Rent for the
partial month shall be prorated on a per diem basis. Tenant shall pay Landlord
the first Monthly Installment of Base Rent when Tenant executes the Lease.
5.2 Rent Arrearages. Tenant agrees that arrearages which remain unpaid for
its occupancy for the period from 11/7/94 through 11/6/95 are $37,485, plus
applicable interest and late charges, and hereby acknowledges that said amount
is now due and payable.
5.3 Definition of Rent. All costs and expenses which Tenant assumes or
agrees to pay to Landlord under this Lease shall be deemed additional rent
(which, together with the Base Rent is sometimes referred to as the "Rent").
The Rent shall be paid to the building manager (or other person) and at such
place, as Landlord may from time to time designate in writing, without any
prior demand therefor and without deduction or offset, in lawful money of the
United States of America.
5.4 Rent Control. If the amount of Rent or any other payment due under this
Lease violates the terms of any governmental restrictions on such Rent or
payment, then the Rent or payment due during the period of such restrictions
shall be the maximum amount allowable under those restrictions. Upon
termination of the restrictions, Landlord shall, to the extent it is legally
permitted, recover from Tenant the difference between the amounts received
during the period of the restrictions and the amount Landlord would have
received had there been no restrictions.
5.5 Taxes Payable by Tenant. In addition to the Rent and any other charges
to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for
any and all taxes payable by Landlord (other than net income taxes) which are
not otherwise reimbursable under this Lease, whether or not now customary or
within the contemplation of the parties, where such taxes are upon, measured by
or reasonably attributable to (a) the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the Premises, or the
cost or value of any leasehold improvements made in or to the Premises by or
for Tenant, other than Building Standard Work made by Landlord, regardless of
whether title to such improvements is held by Tenant or Landlord; (b) the
gross or net rent payable under this Lease, including, without limitation, any
rental or gross receipts tax levied by any taxing authority with respect to the
receipt of the Rent hereunder; (c) the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
Premises or any portion thereof; or (d) this transaction or any document to
which Tenant is a party creating or transferring an interest or an estate in
the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any
costs as required under this Lease, the Base Rent shall be revised to net
Landlord the same net Rent after imposition of any tax or other charge upon
Landlord as would have been payable to Landlord but for the reimbursement being
unlawful.
6. INTEREST AND LATE CHARGES.
If Tenant fails to pay when due any Rent or other amounts or charges which
Tenant is obligated to pay under the terms of this Lease, the unpaid amounts
shall bear interest at the maximum rate then allowed by law. Tenant
acknowledges that the late payment of any Monthly Installment of Base Rent will
cause Landlord to lose the use of that money and incur costs and expenses not
contemplated under this Lease, including without limitation, administrative and
collection costs and processing and accounting expenses, the exact amount of
which is extremely difficult to ascertain. Therefore, in addition to interest,
if any such installment is not received by Landlord within ten (10) days from
the date it is due, Tenant shall pay Landlord a late charge equal to ten
percent (10%) of such installment. Landlord and Tenant agreement that this
late charge represents a reasonable estimate of such costs and expenses and is
fair compensation to Landlord for the loss suffered from such nonpayment by
Tenant. Acceptance of any interest or late charge shall not constitute a
waiver of Tenant's default with respect to such nonpayment by Tenant nor
prevent Landlord from exercising any other rights or remedies available to
Landlord under this Lease.
7. SECURITY DEPOSIT.
Tenant agrees to deposit with Landlord the Security Deposit set forth at
Section 2.0 upon execution of this Lease, as security for Tenant's faithful
performance of its obligations under this Lease. Landlord and Tenant agree
that the Security Deposit may be commingled with funds of Landlord and Landlord
shall have no obligation or liability for payment of interest on such deposit.
Tenant shall not mortgage, assign, transfer or encumber the Security Deposit
without the prior written consent of Landlord and any attempt by Tenant to do
so shall be void, without force or effect and shall not be binding upon
Landlord.
If Tenant fails to pay any Rent or other amount when due and payable under this
Lease, or fails to perform any of the terms hereof, Landlord may appropriate
and apply or use all or any portion of the Security Deposit for Rent payments
or any other amount then due and unpaid, for payment of any amount for which
Landlord has become obligated as a result of Tenant's default or breach, and
for any loss or damage sustained by Landlord as a result of Tenant's default or
breach, and Landlord may so apply or use this deposit without prejudice to any
other remedy Landlord may have by reason of Tenant's default or breach. If
Landlord so uses any of the Security Deposit, Tenant shall, within ten (10)
days after written demand therefor, restore the Security Deposit to the full
amount originally deposited; Tenant's failure to do so shall constitute an act
of default hereunder and Landlord shall have the right to exercise any remedy
provided for at Article 27 hereof. Within fifteen (15) days after the Term (or
any extension thereof) has expired or Tenant has vacated the Premises,
whichever shall last occur, and provided Tenant is not then in default on any
of its obligations hereunder, Landlord shall return the Security Deposit to
Tenant, or, if Tenant has assigned its interest under this Lease, to the last
assignee of Tenant. If Landlord sells its interest in the Premises, Landlord
may deliver this deposit to the purchaser of Landlord's interest and thereupon
be relieved of any further obligation with respect to the Security Deposit.
8. TENANT'S USE OF THE PREMISES.
Tenant shall use the Premises solely for the purposes set forth in Tenant's Use
Clause. Tenant shall not use or occupy the Premise in violation of law or any
covenant condition or restriction affecting the Building or Project or the
certificate of occupancy issued for the Building or Project, and shall, upon
notice from Landlord, immediately discontinue any use of the Premises which is
declared by any governmental authority having jurisdiction to be a violation of
law or the certificate of occupancy. Tenant, at Tenant's own cost and expense,
shall comply with all laws, ordinances, regulations, rules and/or any
directions of any governmental agencies or authorities having jurisdiction
which shall, by reason of the nature of Tenant's use or occupancy of the
Premises, impose any duty upon Tenant or Landlord with respect to the Premises
or its use or occupation. A judgment of any court of competent jurisdiction or
the admission by Tenant in any action or proceeding against Tenant that Tenant
has violated any such laws, ordinances, regulations, rules and/or directions in
the use of the Premises shall be deemed to be a conclusive determination of
that fact as between Landlord and Tenant. Tenant shall not do or permit to be
done anything which will invalidate or increase the cost of any fire, extended
coverage or other insurance policy covering the Building or Project and/or
property located therein, and shall comply with all rules, orders, regulations,
requirements and recommendations of the Insurance Services Office or any other
organization performing a similar function. Tenant shall promptly upon demand
reimburse Landlord for any additional premium charged for such policy by reason
of Tenant's failure to comply with the provisions of this Article. Tenant
shall not do or permit anything to be done in or about the Premises which will
in any way obstruct or interfere with the rights of other tenants or occupants
of the building or Project, or injure or annoy them, or use or allow the
Premises to be used for any improper, immoral, unlawful or objectionable
purpose, no shall Tenant cause, maintain or permit any nuisance in, on or about
the Premises. Tenant shall not commit or suffer to be committed any waste in
or upon the Premises.
9. SERVICES AND UTILITIES.
Provided that Tenant is not in default hereunder, Landlord agrees to furnish to
the Premises during generally recognized business days, and during hours
determined by Landlord in its sole discretion, and subject to rules and
regulations of the Building or Project, electricity for normal desk top office
equipment and normal copying equipment, and heating ventilation and air
conditioning ("HVAC") as required in Landlord's judgment for the comfortable
use and occupancy of the Premises. If Tenant desires HVAC at any other time,
Landlord shall use reasonable efforts to furnish such service upon reasonable
notice from Tenant and Tenant shall pay Landlord's charges therefor on demand.
Landlord shall also maintain and keep lighted the common stairs, common entries
and restrooms in the Building. Landlord shall not be in default hereunder or
be liable for any damages directly or indirectly resulting from, nor shall the
Rent be abated by reason of (i) the installation, use or interruption of use of
any equipment in connection with the furnishing of any of the foregoing
services, (ii) failure to furnish or delay in furnishing any such services
where such failure or delay is caused by accident or any condition or event
beyond the reasonable control of Landlord, or by the making of necessary
repairs or improvements to the Premises, Building or Project, or (iii) the
limitation, curtailment or rationing of, or restrictions on, use of water,
electricity, gas or any other form of energy serving the Premises, Building or
Project. Landlord shall not be liable under any circumstances for a loss of or
injury to property or business, however occurring, through or in connection
with or incidental to failure to furnish any such services. If Tenant uses
heat generating machines or equipment in the Premises which affect the
temperature otherwise maintained by the HVAC system, Landlord reserves the
right to install supplementary air conditioning units in the Premises and the
cost thereof, including the cost of installation, operation and maintenance
thereof, shall be paid by Tenant to Landlord upon demand by Landlord.
Tenant shall not, without the written consent of Landlord, overload circuits,
use supplemental heating or cooling devices, use any apparatus or device in the
Premises, including without limitation, electronic data processing machines,
punch card machines or machines using in excess of 120 volts, which consumes
more electricity than is usually furnished or supplied for the use of Premises
as general office space, as determined by Landlord. Tenant shall not connect
any apparatus with electric current except through existing electrical outlets
in the Premises. Tenant shall not consume water or electric current in excess
of that usually furnished or supplied for the use of premises as general office
space (as determined by Landlord), without first procuring the written consent
of Landlord, which Landlord may refuse, and in the event of consent, Landlord
may have installed a water meter or electrical current meter in the Premises to
measure the amount of water or electric current consumed. The cost of any such
meter and of its installation, maintenance and repair shall be paid for by the
Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such
water and electric current consumed as shown by said meters, at the rates
charged for such services by the local public utility plus any additional
expense incurred in keeping account of the water and electric current so
consumed. If a separate meter is not installed, the excess cost for such water
and electric current shall be established by an estimate made by utility
company or electrical engineer hired by Landlord at Tenant's expense.
Nothing contained in this Article shall restrict Landlord's right to require at
any time separate metering of utilities furnished to the Premises. In the
event utilities are separately metered, Tenant shall pay promptly upon demand
for all utilities consumed at utility rates charged by the local public utility
plus any additional expense incurred by Landlord in keeping account of the
utilities so consumed. Tenant shall be responsible for the maintenance and
repair of any such meters at its sole cost.
Landlord shall furnish elevator service, lighting replacement for building
standard lights, restroom supplies, window washing and janitor services in a
manner that such services are customarily furnished to comparable office
buildings in the area.
10. CONDITION OF THE PREMISES.
Tenant's taking possession of the Premises shall be deemed conclusive evidence
that as of the date of taking possession the Premises are in good order and
satisfactory condition, except for such matters as to which Tenant gave
Landlord notice on or before the Commencement Date. No promise of Landlord to
alter, remodel, repair or improve the Premises, the Building or the Project and
no representation, express or implied, respecting any matter or thing relating
to the Premises, Building, Project or this Lease (including, without
limitation, the condition of the Premises, the Building or the Project) have
been made to Tenant by Landlord or its Broker or Sales Agent, other than as may
be contained herein or in a separate exhibit or addendum signed by Landlord and
Tenant.
11. CONSTRUCTION, REPAIRS AND MAINTENANCE.
a. Landlord's Obligations. Landlord shall perform Landlord's Work to
the Premises as described in Exhibit "C", if any. Landlord shall
maintain in good order, condition and repair the Building and all
other portions of the Premises not the obligation of Tenant or of
any other tenant in the Building.
b. Tenant's Obligations.
(1) Tenant shall perform Tenant's Work to the Premises as
described in Exhibit "C", if any.
(2) Tenant at Tenant's sole expense shall, except for services
furnished by Landlord pursuant to Article 9 hereof, maintain the
Premises in good order, condition and repair, including the
interior surfaces of the ceilings, walls and floors, all doors, all
interior and exterior windows, all plumbing, pipes and fixtures,
electrical wiring, switches and fixtures, Building Standard
furnishings and special items and equipment installed by or at the
expense of Tenant.
(3) Tenant shall be responsible for all repairs and alterations
in and to the Premises, Building and Project and the facilities and
systems thereof, the need for which arises out of (i) Tenant's use
or occupancy of the Premises, (ii) the installation, removal, use
or operation of Tenant's Property (as defined in Article 13) in the
Premises, (iii) the moving of Tenant's Property into or out of the
Building, or (iv) the act, omission, misuse or negligence of
Tenant, its agents, contractors, employees or invitees.
(4) If Tenant fails to maintain the Premises in good order,
condition and repair, Landlord shall give Tenant notice to do such
acts as are reasonably required to so maintain the Premises. If
Tenant fails to promptly commence such work and diligently
prosecute it to completion, then Landlord shall have the right to
do such acts and expend such funds at the expense of Tenant as are
reasonably required to perform such work. Any amount so expended
by Landlord shall be paid by Tenant promptly after demand with
interest at the prime commercial rate then being charge by Bank of
America NT & SA plus two percent (2%) per annum, from the date of
such work, but not to exceed the maximum rate then allowed by law.
Landlord shall have no liability to Tenant for any damage,
inconvenience, or interference with the use of the Premises by
Tenant as a result of performing any such work.
c. Compliance with Law. Landlord and Tenant shall each do all acts
required to comply with all applicable laws, ordinances, and rules of any
public authority relating to their respective maintenance obligations as
set forth herein.
d. Waiver by Tenant. Tenant expressly waives the benefits of any
statue now or hereafter in effect which would otherwise afford the Tenant
the right to make repairs at Landlord's expense or to terminate this
Lease because of Landlords failure to keep the Premises in good order,
condition and repair.
e. Load and Equipment Limits. Tenant shall not place a load upon any
floor of the Premises which exceeds the load per square foot which such
floor was designed to carry, as determined by Landlord or Landlord's
structural engineer. The cost of any such determination made by
Landlord's structural engineer shall be paid for by Tenant upon demand.
Tenant shall not install business machines or mechanical equipment which
cause noise or vibration to such a degree as to be objectionable to
Landlord or other Building tenants.
f. Except as otherwise expressly provided in this Lease, Landlord
shall have no liability to Tenant nor shall Tenant's obligations under
this Lease be reduced or abated in any manner whatsoever by reason of any
inconvenience, annoyance, interruption or injury to business arising from
Landlord's (i) making any repairs to Project, Building, Premises or
equipment or (ii) changes which Landlord is required or permitted by this
Lease or by any other tenant's lease or required by law to make in or to
any portion of the Project, Building or the Premises. Landlord shall
nevertheless use reasonable efforts to minimize any interference with
Tenant's business in the Premises.
g. Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Building's
mechanical, electrical, plumbing, HVAC or other systems serving, located
in, or passing through the Premises.
h. Upon the expiration or earlier termination of this Lease, Tenant
shall return the Premises to Landlord clean and in the same condition as
on the date Tenant took possession, except for normal wear and tear. Any
damage to the Premises, including any structural damage, resulting from
Tenant's use or from the removal of Tenant's fixtures, furnishings and
equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's
expense.
12. ALTERATIONS AND ADDITIONS.
a. Tenant shall not make any additions, alterations or improvements to
the Premises without obtaining the prior written consent of Landlord.
Landlord's consent may be conditioned on Tenant's removing any such
additions, alterations or improvements upon the expiration of the Term
and restoring the Premises to the same condition as on the date Tenant
took possession. All work with respect to any addition, alteration or
improvement shall be done in a good and workmanlike manner by properly
qualified and licensed personnel approved by Landlord, and such work
shall be diligently prosecuted to completion. Landlord may, at Landlord's
option, require that any such work be performed by Landlord's contractor,
in which case the cost of such work shall be paid for before commencement
of the work. Tenant shall pay to Landlord upon completion of any such
work by Landlord's contractor, an administrative fee of fifteen percent
(15%) of the cost of the work.
b. Tenant shall pay the costs of any work done on the Premises
pursuant to Section 12a, and shall keep the Premises, Building and
Project free and clear of liens of any kind. Tenant shall indemnify,
defend against and keep Landlord free and harmless from all liability,
loss, damage, costs, attorneys' fees and any other expense incurred on
account of claims by any person performing work or furnishing materials
or supplies for Tenant or any person claiming under Tenant.
Tenant shall keep Tenant's leasehold interest, and any additions or
improvements which are or become the property of Landlord under this
Lease, free and clear of all attachment or judgment liens. Before the
actual commencement of any work for which a claim or lien may be filed,
Tenant shall give Landlord notice of the intended commencement date a
sufficient time before that date to enable Landlord to post notices of
non-responsibility or any other notices which Landlord deems necessary
for the proper protection of Landlord's interest in the Premises,
Building or the Project, and Landlord shall have the right to enter the
Premises and post such notices at any reasonable time.
c. Landlord may require, at Landlord's sole option, that Tenant
provide to Landlord, at Tenant's expense, a lien and completion bond in
an amount equal to at lease one and one-hale (1 1/2) times the total
estimated cost of any additions, alterations or improvements to be made
in or to the Premises, to protect Landlord against any liability for
mechanic's and materialmen's liens and to insure timely completion of the
work. Nothing contained in this Section 12c shall relieve Tenant of its
obligation under Section 12b to keep the Premises, Building and Project
free of all liens.
d. Unless their removal is required by Landlord as provide in Section
12a, all additions, alterations and improvements made to the Premises
shall become the property of Landlord and be surrendered with the
Premises upon the expiration of the Term; provided, however, Tenant's
equipment, machinery and trade fixtures which can be removed without
damage to the Premises shall remain the property of Tenant and may be
removed, subject to the provisions of Section 13b.
13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY.
a. All fixtures, equipment, improvements and appurtenances attached to
or built into the Premises at the commencement of or during the Term,
whether or not by or at the expense of Tenant ("Leasehold Improvements"),
shall be and remain a part of the Premises, shall be the property of
Landlord and shall not be removed by Tenant, except as expressly provided
in Section 13b.
b. All movable partitions, business and trade fixtures, machinery and
equipment, communications equipment and office equipment located in the
Premises and acquired by or for the account of Tenant, without expense to
Landlord, which can be removed without structural damage to the Building,
and all furniture, furnishing and other articles of movable personal
property owned by Tenant and located in the Premises (collectively
"Tenant's Property") shall be and shall remain the property of Tenant and
may be removed by Tenant at any time during the Term; provided that if
any of Tenant's Property is removed, Tenant shall promptly repair any
damage to the Premises or to the Building resulting from such removal.
14. RULES AND REGULATIONS.
Tenant agrees to comply with (and cause its agents, contractors, employees and
invitees to comply with) the rules and regulations attached here to as Exhibit
"D", if any, and with such reasonable modifications thereof and additions
thereto as Landlord may from time to time make. Landlord shall not be
responsible for any violation of said rules and regulations by other tenants or
occupants of the Building or Project.
15. CERTAIN RIGHTS RESERVED BY LANDLORD.
Landlord reserves the following rights, exercisable without liability to Tenant
for (a) damage or injury to property, person or business, (b) causing an actual
or constructive eviction from the Premises, or (c) disturbing Tenant's use or
possession of the Premises:
a. To name the Building and Project and to change the name or street
address of the Building or Project;
b. To install and maintain all signs on the exterior and interior of
the Building and Project;
c. To have pass keys to the Premises and all doors within the
Premises, excluding Tenant's vaults and safes;
d. At any time during the Term, and on reasonable prior notice to
Tenant, to inspect the Premises, and to show the Premises to any
prospective purchaser or mortgagee of the Project, or to any assignee of
any mortgage on the Project, or to others having an interest in the
Project or Landlord, and during the last six months of the Term, to show
the Premises to prospective tenants thereof; and
e. To enter the Premises for the purpose of making inspections,
repairs, alterations, additions or improvements to the Premises or the
Building (including, without limitation, checking, calibrating, adjusting
or balancing controls and other parts of the HVAC system), and to take
all steps as may be necessary or desirable for the safety, protection,
maintenance or preservation of the Premises or the Building or Landlord's
interest therein, or as may be necessary or desirable for the operation
or improvement of the Building or other Tenants improvements, or in order
to comply with laws, orders or requirements of governmental or other
authority. Landlord agrees to use its best efforts (except in an
emergency) to minimize interference with Tenant's business in the
Premises in the course of any such entry, repairs, maintenance,
preservation, additions or improvements of any kind but in any event such
work shall not be deemed a violation of Tenants quiet enjoyment of its
Premises.
16. ASSIGNMENT AND SUBLETTING.
No assignment of this Lease or sublease of all or any part of the Premises
shall be permitted, except as provided in this Article 16.
a. Tenant shall not, without the prior written consent of Landlord,
assign or hypothecate this Lease or any interest herein or sublet the
Premises or any part thereof, or permit the use of the Premises by any
party other than Tenant. Any of the foregoing acts without such consent
shall be void and shall, at the option of Landlord, terminate this Lease.
This Lease shall not, nor shall any interest of Tenant herein, be
assignable by operation of law without the written consent of Landlord.
b. If at any time or from time to time during the Term Tenant desires
to assign this Lease or sublet all or any part of the Premises, Tenant
shall give notice to Landlord setting forth the terms and provisions of
the proposed assignment or sublessee, and the identity of the proposed
assignee or subtenant. Tenant shall promptly supply Landlord with such
information concerning the business background and financial condition of
such proposed assignee or subtenant as Landlord may reasonably request.
Landlord shall have the option, exercisable by notice given to Tenant
within twenty (20) days after Tenant's notice is given, either to sublet
such space from Tenant at the rental and on the other terms set forth in
this Lease for the term set forth in Tenant's notice, or, in the case of
an assignment, to terminate this Lease. If Landlord does not exercise
such option, Tenant may assign the Lease or sublet such space to such
proposed assignee or subtenant on the following conditions:
(1) Landlord shall have the right to approve such proposed
assignee or subtenant, which approval shall not be unreasonably
withheld;
(2) The assignment or sublease shall be on the same terms set
forth in the notice given to Landlord;
(3) No assignment or sublease shall be valid and no assignee or
sublessee shall take possession of the Premises until an executed
counterpart of such assignment or sublease has been delivered to
Landlord;
(4) No assignee or sublessee shall have a further right to assign
or sublet except on the terms herein contained; and
(5) Any sums or other economic consideration received by Tenant
as a result of such assignment or subletting, however denominated
under the assignment or sublease, which exceed, in the aggregate,
(i) the total sums which Tenant is obligated to pay Landlord under
this Lease (prorated to reflect obligations allocable to any
portion of the Premises subleased), plus (ii) any real estate
brokerage commissions or fees payable in connection with such
assignment or subletting, shall be paid to Landlord as additional
rent under this Lease without affecting or reducing any other
obligations of Tenant hereunder.
c. Notwithstanding the provisions of paragraphs a. and b. above,
Tenant may assign this Lease or sublet the Premises or any portion
thereof, without Landlord's consent and without extending any recapture
or termination option to Landlord, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any
corporation resulting from a merger or consolidation with Tenant, or to
any person or entity which acquires all the assets of Tenant's business
as a going concern, provided that (i) the assignee or sublessee assumes,
in full, the obligations of Tenant under this Lease, (ii) Tenant remains
fully liable under this Lease, and (iii) the use of the Premises under
Article 8 remains unchanged.
d. No subletting or assignment shall release Tenant of Tenant's
obligations under this Lease or alter the primary liability of Tenant to
pay the Rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other
person shall not be deemed to be a waiver by Landlord of any provision
hereof. Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of
default by an assignee or subtenant of Tenant or any successor of Tenant
in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies
against such assignee, subtenant or successor. Landlord may consent to
subsequent assignments of the Lease or sublettings or amendments or
modifications to the Lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their
consent thereto and any such actions shall not relieve Tenant of
liability under this Lease.
e. If Tenant assigns the Lease or sublets the Premises or requests the
consent of Landlord to any assignment or subletting or if Tenant requests
the consent of Landlord for any act that Tenant proposes to do, then
Tenant shall, upon demand, pay Landlord an administrative fee of One
Hundred Fifty and No/100th Dollars ($150.00) plus any attorneys' fees
reasonably incurred by Landlord in connection with such act or request.
17. HOLDING OVER.
If after expiration of the Term, Tenant remains in possession of the Premises
with Landlord's permission (express or implied), Tenant shall become a tenant
from month to month only, upon all the provisions of this Lease (except as to
term and Base Rent), but the "Monthly Installments of Base Rent" payable by
Tenant shall be increased to one hundred fifty percent (150%) of the Monthly
Installments of Base Rent payable by Tenant at the expiration of the Term.
Such monthly rent shall be payable in advance on or before the first day of
each month. If either party desires to terminate such month to month tenancy,
it shall give the other party not less than thirty (30) days advance written
notice of the date of termination.
18. SURRENDER OF PREMISES.
a. Tenant shall peaceably surrender the Premises to Landlord on the
Expiration Date, in broom-clean condition and in as good condition as
when Tenant took possession, except for (i) reasonable wear and tear,
(ii) loss by fire or other casualty, and (iii) loss by condemnation.
Tenant shall, on Landlord's request, remove Tenant's Property on or
before the Expiration Date and promptly repair all damage to the Premises
or Building caused by such removal.
b. If Tenant abandons or surrenders the Premises, or is dispossessed
by process of law or otherwise, any of Tenant's Property left on the
premises shall be deemed to be abandoned, and, at Landlord's option,
title shall pass to Landlord under this Lease as by a bill of sale. If
Landlord elects to remove all or any part of such Tenant's Property, the
cost of removal, including repairing any damage to the Premises or
Building caused by such removal, shall be paid by Tenant. On the
Expiration Date Tenant shall surrender all keys to the Premises.
19. DESTRUCTION OR DAMAGE.
a. If the Premises or the portion of the Building necessary for
Tenant's occupancy is damaged by fire, earthquake, act of God, the
elements of other casualty, Landlord shall, subject to the provisions of
this Article, promptly repair the damage, if such repairs can, in
Landlord's opinion, be completed within (90) ninety days. If Landlord
determines that repairs can be completed within ninety (90) days, this
Lease shall remain in full force and effect, except that if such damage
is not the result of the negligence or willful misconduct of Tenant or
Tenant's agents, employees, contractors, licensees or invitees, the Base
Rent shall be abated to the extent Tenant's use of the Premises is
impaired, commencing with the date of damage and continuing until
completion of the repairs required of Landlord under Section 19d.
b. If in Landlord's opinion, such repairs to the Premises or portion
of the Building necessary for Tenant's occupancy cannot be completed
within ninety (90) days, Landlord may elect, upon notice to Tenant given
within thirty (30) days after the date of such fire or other casualty,
to repair such damage, in which event this Lease shall continue in full
force and effect, but the Base Rent shall be partially abated as provided
in Section 19a. If Landlord does not so elect to make such repairs, this
Lease shall terminate as of the date of such fire or other casualty.
c. If any other portion of the Building or Project is totally
destroyed or damaged to the extent that in Landlord's opinion repair
thereof cannot be completed within ninety (90) days, Landlord may elect
upon notice to Tenant given within thirty (30) days after the date of
such fire or other casualty, to repair such damage, in which event this
Lease shall continue in full force and effect, but the Base Rent shall be
partially abated as provided in Section 19a. If Landlord does not elect
to make such repairs, this Lease shall terminate as of the date of such
fire or other casualty.
d. If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Building and
Building Standard Work in the Premises. Tenant shall be responsible at
its sole cost and expense for the repair, restoration and replacement of
any other Leasehold Improvements and Tenant's Property. Landlord shall
not be liable for any loss of business, inconvenience or annoyance
arising from any repair or restoration of any portion of the Premises,
Building or Project as a result of any damage from fire or other
casualty.
e. This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Premises, Building or Project by
fire or other casualty, and any present or future law which purports to
govern the rights of Landlord and Tenant in such circumstances in the
absence of express agreement, shall have no application.
20. EMINENT DOMAIN.
a. If the whole of the Building or Premises is lawfully taken by
condemnation or in any other manner for any public or quasipublic
purpose, this Lease shall terminate as of the date of such taking, and
Rent shall be prorated to such date. If less than the whole of the
Building or Premises is so taken, this Lease shall be unaffected by such
taking, provided that (i) Tenant shall have the right to terminate this
Lease by notice to Landlord given within ninety (90) days after the date
of such taking if twenty percent (20%) or more of the Premises is taken
and the remaining area of the Premises is not reasonably sufficient for
Tenant to continue operation of its business, and (ii) Landlord shall
have the right to terminate this Lease by notice to Tenant given within
ninety (90) days after the date of such taking. If either Landlord or
Tenant so elects to terminate this Lease, the Lease shall terminate on
the thirtieth (30th) day after either such notice. The Rent shall be
prorated to the date of termination. If this Lease continues in force
upon such partial taking, the Base Rent and Tenant's Proportionate Share
shall be equitably adjusted according to the remaining Rentable Area of
the Premises and Project.
b. In the event of any taking, partial or whole, all of the proceeds
of any award, judgment or settlement payable by the condemning authority
shall be the exclusive property of Landlord, and Tenant hereby assigns to
Landlord all of its right, title and interest in any award, judgment or
settlement from the condemning authority. Tenant, however, shall have
the right, to the extent that Landlord's award is not reduced or
prejudiced, to claim from the condemning authority (but not from
Landlord) such compensation as may be recoverable by Tenant in its own
right for relocation expenses and damage to Tenant's personal property.
c. In the event of a partial taking of the Premises which does not
result in a termination of this Lease, Landlord shall restore the
remaining portion of the Premises as nearly as practicable to its
condition prior to the condemnation or taking, but only to the extent of
Building Standard Work. Tenant shall be responsible at its sole cost and
expense for the repair, restoration and replacement of any other
Leasehold Improvements and Tenant's Property.
21. INDEMNIFICATION.
a. Tenant shall indemnify and hold Landlord harmless against and from
liability and claims of any kind for loss or damage to property of Tenant
or any other person, or for any injury to or death of any person, arising
out of: (1) Tenant's use and occupancy of the Premises, or any work,
activity or other things allowed or suffered by Tenant to be done in, on
or about the Premises; (2) any breach or default by Tenant of any of
Tenant's obligations under this Lease; or (3) any negligent or otherwise
tortious act or omission of Tenant, its agents, employees, invitees or
contractors. Tenant shall at Tenant's expense, and by counsel
satisfactory to Landlord, defend Landlord in any action or proceeding
arising from any such claim and shall indemnify Landlord against all
costs, attorneys' fees, expert witness fees and any other expenses
incurred in such action or proceeding. As a material part of the
consideration for Landlord's execution of this Lease, Tenant hereby
assumes all risk of damage or injury to any person or property in, on or
about the Premises from any cause.
b. Landlord shall not be liable for injury or damage which may be
sustained by the person or property of Tenant, its employees, invitees or
customers, or any other person in or about the Premises, caused by or
resulting from fire, steam, electricity, gas, water or rain which may
leak or flow from or into any part of the Premises, or from the breakage,
leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, whether such
damage or injury results from conditions arising upon the Premises or
upon other portions of the Building or Project or from other sources.
Landlord shall not be liable for any damages arising from any act or
omission of any other tenant of the Building or Project.
22. TENANT'S INSURANCE.
a. All insurance required to be carried by Tenant hereunder shall be
issued by responsible insurance companies acceptable to Landlord and
Landlord's lender and qualified to do business in the State. Each policy
shall name Landlord, and at Landlord's request any mortgagee of Landlord,
as an additional insured, as their respective interests may appear. Each
policy shall contain (i) a cross-liability endorsement, (ii) a provision
that such policy and the coverage evidenced thereby shall be primary and
non-contributing with respect to any policies carried by Landlord and
that any coverage carried by Landlord shall be excess insurance, and
(iii) a waiver by the insurer of any right of subrogation against
Landlord, its agents, employees and representatives, which arises or
might arise by reason of any payment under such policy or by reason of
any act or omission of Landlord, its agents, employees or
representatives. A copy of each paid policy (authenticated by the
insurer) or certificate of the insurer evidencing the existence and
amount of each insurance policy required hereunder shall be delivered to
Landlord before the date Tenant is first given the right of possession of
the Premises, and thereafter within thirty (30) days after any demand by
Landlord therefor. Landlord may, at any time and from time to time,
inspect and/or copy any insurance policies required to be maintained by
Tenant hereunder. No such policy shall be cancelable except after twenty
(20) days written notice to Landlord and Landlord's lender. Tenant shall
furnish Landlord with renewals or "binders" of any such policy at least
ten (10) days prior to the expiration thereof. Tenant agrees that if
Tenant does not take out and maintain such insurance, Landlord may (but
shall not be required to) procure said insurance on Tenant's behalf and
charge the Tenant the premiums together with a twenty-five percent (25%)
handling charge, payable upon demand. Tenant shall have the right to
provide such insurance coverage pursuant to blanket policies obtained by
the Tenant, provided such blanket policies expressly afford coverage to
the Premises, Landlord, Landlord's mortgagee and Tenant as required by
this Lease.
b. Beginning on the date Tenant is given access to the Premises for
any purpose and continuing until expiration of the Term, Tenant shall
procure, pay for and maintain in effect policies of casualty insurance
covering (i) all Leasehold Improvements (including any alterations,
additions or improvements as may be made by Tenant pursuant to the
provisions of Article 12 hereof), and (ii) trade fixtures, merchandise
and other personal property from time to time in, on or about the
Premises, in an amount not less than one hundred percent (100%) of their
actual replacement cost from time to time, providing protection against
any peril included within the classification "Fire and Extended Coverage"
together with insurance against sprinkler damage, vandalism and malicious
mischief. The proceeds of such insurance shall be used for the repair or
replacement of the property so insured. Upon termination of this Lease
following a casualty as set forth herein, the proceeds under (i) shall be
paid to Landlord, and the proceeds under (ii) above shall be paid to
Tenant.
c. Beginning on the date Tenant is given access to the Premises for
any purpose and continuing until expiration of the Term, Tenant shall
procure, pay for and maintain in effect workers' compensation insurance
as required by law and comprehensive public liability and property damage
insurance with respect to the construction of improvements on the
Premises, the use, operation condition of the Premises and the operations
of Tenant in, on or about the Premises, providing personal injury and
broad form property damage coverage for not less than One Million Dollars
($1,000,000.00) combined single limit for bodily injury, death and
property damage liability.
d. Not less than every three (3) years during the Term, Landlord and
Tenant shall mutually agree to increases in all of Tenant's insurance
policy limits for all insurance to be carried by Tenant as set forth in
this Article. In the event Landlord and Tenant cannot mutually agree
upon the amounts of said increases, then Tenant agrees that all insurance
policy limits as set forth in this Article shall be adjusted for
increases in the cost of living in the same manner as is set forth in
Section 5.2 hereof for the adjustment of the Base Rent.
23. WAIVER OF SUBROGATION.
Landlord and Tenant each hereby waive all rights of recovery against the other
and against the officers, employees, agents and representatives of the other,
on account of loss by or damage to the waiving party of its property or the
property of others under its control, to the extent that such loss or damage is
insured against under any fire and extended coverage insurance policy which
either may have in force at the time of the loss or damage. Tenant shall, upon
obtaining the policies of insurance required under this Lease, give notice to
its insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
24. SUBORDINATION AND ATTORNMENT.
Upon written request of Landlord, or any first mortgagee or first deed of trust
beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in
writing, subordinate its rights under this Lease to the lien of any first
mortgage or first deed of trust, or to the interest of any lease in which
Landlord is lessee, and to all advances made or hereafter to be made
thereunder. However, before signing any subordination agreement, Tenant shall
have the right to obtain from any lender or lessor or Landlord requesting such
subordination, an agreement in writing providing that, as long as Tenant is not
in default hereunder, this Lease shall remain in effect for the full Term. The
holder of any security interest may, upon written notice to Tenant, elect to
have this Lease prior to its security interest regardless of the time of the
granting or recording of such security interest.
In the event of any foreclosure sale, transfer in lieu of foreclosure or
termination of the lease in which Landlord is lessee, Tenant shall attorn to
the purchaser, transferee or lessor as the case may be, and recognize that
party as Landlord under this Lease, provided such party acquires and accepts
the Premises subject to this Lease.
25. TENANT ESTOPPEL CERTIFICATES.
Within ten (10) days after written request from Landlord, Tenant shall execute
and deliver to Landlord or Landlord's designee, a written statement certifying
(a) that this Lease is unmodified and in full force and effect, or is in full
force and effect as modified and stating the modifications; (b) the amount of
Base Rent and the date to which Base Rent and additional rent have been paid in
advance; (c) the amount of any security deposited with Landlord; and (d) that
Landlord is not in default hereunder or, if Landlord is claimed to be in
default, stating the nature of any claimed default. Any such statement may be
relied upon by a purchaser, assignee or lender. Tenant's failure to execute
and deliver such statement within the time required shall at Landlord's
election be a default under this Lease and shall also be conclusive upon Tenant
that: (1) this Lease is in full force and effect and has not been modified
except as represented by Landlord; (2) there are no uncured defaults in
Landlord's performance and that Tenant has no right of offset, counter-claim or
deduction against Rent; and (3) not more than one month's Rent has been paid
in advance.
26. TRANSFER OF LANDLORD'S INTEREST.
In the event of any sale or transfer by Landlord of the Premises, Building or
Project, and assignment of this Lease by Landlord, Landlord shall be and is
hereby entirely freed and relieved of any and all liability and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission relating to the Premises, Building, Project or Lease occurring after
the consummation of such sale or transfer, providing the purchaser shall
expressly assume all of the covenants and obligations of Landlord under this
Lease. If any security deposit or prepaid Rent has been paid by Tenant,
Landlord may transfer the security deposit or prepaid Rent to Landlord's
successor and upon such transfer, Landlord shall be relieved of any and all
further liability with respect thereto.
27. DEFAULT.
27.1 Tenant's Default. The occurrence of any one or more of the following
events shall constitute a default and breach of this Lease by Tenant:
a. If Tenant abandons or vacates the Premises; or
b. If Tenant fails to pay any Rent or any other charges required to be
paid by Tenant under this Lease and such failure continues for five (5)
days after such payment is due and payable; or
c. If Tenant fails to promptly and fully perform any other covenant,
condition or agreement contained in this Lease and such failure continues
for thirty (30) days after written notice thereof from Landlord to
Tenant; or
d. If a writ of attachment or execution is levied on this Lease or on
any of Tenant's Property; or
e. If Tenant makes a general assignment for the benefit of creditors,
or provides for an arrangement, composition, extension or adjustment with
its creditors; or
f. If Tenant files a voluntary petition for relief or if a petition
against Tenant in a proceeding under the federal bankruptcy laws or other
insolvency laws is filed and not withdrawn or dismissed within forty-five
(45) days thereafter, or if under the provisions of any law providing for
reorganization or winding up of corporations, any court of competent
jurisdiction assumes jurisdiction, custody or control of Tenant or any
substantial part of its property and such jurisdiction, custody or
control remains in force unrelinquished, unstayed or unterminated for a
period of forty-five (45) days or
g. If in any proceeding or action in which Tenant is a party, a
trustee, receiver, agent or custodian is appointed to take charge of the
Premises or Tenant's Property (or has the authority to do so) for the
purpose of enforcing a lien against the Premises or Tenant's Property;
or
h. If Tenant is a partnership or consists of more than one(1) person
or entity, if any partner of the partnership or other person or entity is
involved in any of the acts or events described in subparagraphs d
through g above.
27.2 Remedies. In the event of Tenant's default hereunder, then in addition
to any other rights or remedies Landlord may have under any law, Landlord shall
have the right, at Landlord's option, without further notice or demand of any
kind to do the following:
a. Terminate this Lease and Tenant's right to possession of the
Premises and reenter the Premises and take possession thereof, and Tenant
shall have no further claim to the Premises or under this Lease; or
b. Continue this Lease in effect, reenter and occupy the Premises for
the account of Tenant, and collect any unpaid Rent or other charges which
have or thereafter become due and payable; or
c. Reenter the Premises under the provisions of subparagraph b., and
thereafter elect to terminate this Lease and Tenant's right to possession
of the Premises.
If Landlord reenters the Premises under the provisions of subparagraphs b. or
c. above, Landlord shall not be deemed to have terminated this Lease or the
obligation of Tenant to pay any Rent or other charges thereafter accruing,
unless Landlord notifies Tenant in writing of Landlord's election to terminate
this Lease. In the event of any reentry or retaking of possession by Landlord,
Landlord shall have the right, but not the obligation, to remove all or any
part of Tenant's Property in the Premises and to place such property in storage
at a public warehouse at the expense and risk of Tenant. If Landlord elects to
relet the Premises for the account of Tenant, the rent received by Landlord
from such reletting shall be applied as follows: first, to the payment of any
indebtedness other than Rent due hereunder from Tenant to Landlord; second, to
the payment of any costs of such reletting; third, to the payment of the cost
of any alterations or repairs to the Premises; fourth to the payment of Rent
due and unpaid hereunder; and the balance, if any, shall be held by Landlord
and applied in payment of future Rent as it becomes due. If that portion of
rent received from the reletting which is applied against the Rent due
hereunder is less than the amount of the Rent due, Tenant shall pay the
deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall
be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
determined, any costs and expenses incurred by Landlord in connection with such
reletting or in making alterations and repairs to the Premises, which are not
covered by the rent received from the reletting.
Should Landlord elect to terminate this Lease under the provisions of
subparagraph a. or c. above, Landlord may recover as damages from Tenant the
following:
1. Past Rent. The worth at the time of the award of any unpaid Rent
which had been earned at the time of termination; plus
2. Rent Prior to Award. The worth at the time of the award of the
amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided; plus
3. Rent After Award. The worth at the time of the award of the amount
by which the unpaid Rent for the balance of the Term after the time of
award exceeds the amount of the rental loss that Tenant proves could be
reasonably avoided; plus
4. Proximately Caused Damages. Any other amount necessary to
compensate Landlord for all detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, including,
but not limited to, any costs or expenses (including attorneys' fees),
incurred by Landlord in (a) retaking possession of the Premises, (b)
maintaining the Premises after Tenant's default, (c) preparing the
Premises for reletting to a new tenant, including any repairs or
alterations, and (d) reletting the Premises, including broker's
commissions.
"The worth at the time of the award" as used in subparagraphs 1 and 2 above, is
to be computed by allowing interest at the rate of ten percent (10%) per annum.
"The worth at the time of the award" as used in subparagraph 3 above, is to be
computed by discounting the amount at the discount rate of the Federal Reserve
Bank situated nearest to the Premises at the time of the award plus one percent
(1%).
The waiver by Landlord of any breach of any term, covenant or condition of this
Lease shall not be deemed a waiver of such term, covenant or condition or of
any subsequent breach of the same or any other term, covenant or condition.
Acceptance of Rent by Landlord subsequent to any breach hereof shall not be
deemed a waiver of any preceding breach other than the failure to pay the
particular Rent so accepted, regardless of Landlord's knowledge of any breach
at the time of such acceptance of Rent. Landlord shall not be deemed to have
waived any term, covenant or condition unless Landlord gives Tenant written
notice of such waiver.
27.3 Landlord's default. If Landlord fails to perform any covenant, condition
or agreement contained in this Lease within thirty (30) days after receipt of
written notice from Tenant specifying such default, or if such default cannot
reasonably be cured within thirty (30) days, if Landlord fails to commence to
cure within that thirty (30) day period, then Landlord shall be liable to
Tenant for any damages sustained by Tenant as a result of Landlord's breach;
provided, however, it is expressly understood and agreed that if Tenant obtains
a money judgment against Landlord resulting from any default or other claim
arising under this Lease, that judgment shall be satisfied only out of the
rents, issues, profits, and other income actually received on account of
Landlord's right, title and interest in the Premises, Building or Project, and
no other real, personal or mixed property of Landlord (or of any of the
partners which comprise Landlord, if any) wherever situated, shall be subject
to levy to satisfy such judgment. If, after notice to Landlord of default,
Landlord (or any first mortgagee or first deed of trust beneficiary of
Landlord) fails to cure the default as provided herein, then Tenant shall have
the right to cure that default at Landlord's expense. Tenant shall have the
right to terminate this Lease or to withhold, reduce or offset any amount
against any payments of Rent or any other charges due and payable under this
Lease except as otherwise specifically provided herein.
28. BROKERAGE FEES.
Tenant warrants and represents that it has not dealt with any real estate
broker or agent in connection with this Lease or its negotiation except those
noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from
any cost, expense or liability (including costs of suit and reasonable
attorneys' fees) for any compensation, commission or fees claimed by any other
real estate broker or agent in connection with this Lease or its negotiation by
reason of any act of Tenant.
29. NOTICES.
All notices, approvals and demands permitted or required to be given under this
Lease shall be in writing and deemed duly served or given if personally
delivered or sent by certified or registered U.S. mail, postage prepaid, and
addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to
the Building manager, and (b) if to Tenant, to Tenant's Mailing Address;
provided, however, notices to Tenant shall be deemed duly served or given if
delivered or mailed to Tenant at the Premises. Landlord and Tenant may from
time to time by notice to the other designate another place for receipt of
future notices.
30. GOVERNMENT ENERGY OR UTILITY CONTROLS.
In the event of imposition of federal, state or local government controls,
rules, regulations, or restrictions on the use or consumption of energy or
other utilities during the Term, both Landlord and Tenant shall be bound
thereby. In the event of a difference in interpretation by Landlord and Tenant
of any such controls, the interpretation of Landlord shall prevail, and
Landlord shall have the right to enforce compliance therewith, including the
right of entry into the Premises to effect compliance.
31. RELOCATION OF PREMISES.
Landlord shall have the right to relocate the Premises to another part of the
Building in accordance with the following:
a. The new premises shall be substantially the same in size,
dimensions, configuration, decor and nature as the Premises described in
this Lease, and if the relocation occurs after the Commencement Date,
shall be placed in that condition by Landlord at its cost.
b. Landlord shall give Tenant at least thirty (30) days written notice
of Landlord's intention to relocate the Premises.
c. As nearly as practicable, the physical relocation of the Premises
shall take place on a weekend and shall be completed before the following
Monday. If the physical relocation has not been completed in that time,
Base Rent shall abate in full from the time the physical relocation
commences to the time it is completed. Upon completion of such
relocation, the new premises shall become the "Premises" under this
Lease.
d. All reasonable costs incurred by Tenant as a result of the
relocation shall be paid by Landlord.
e. If the new premises are smaller than the Premises as it existed
before the relocation, Base Rent shall be reduced proportionately.
f. The parties hereto shall immediately execute an amendment to this
Lease setting forth the relocation of the Premise and the reduction of
Base Rent, if any.
32. QUIET ENJOYMENT.
Except as otherwise provided in this Lease, Tenant, upon paying the Rent and
performing all of its obligations under this Lease, shall peaceably and quietly
enjoy the Premises, subject to the terms of this Lease and to any mortgage,
lease, or other agreement to which this Lease may be subordinate.
33. OBSERVANCE OF LAW.
Tenant shall not use the Premises or permit anything to be done in or about the
Premises which will in any way conflict with any law, statue, ordinance or
governmental rule or regulation now in force or which may hereafter be enacted
or promulgated. Tenant shall, at its sole cost and expense, promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force, and with the
requirements of any board of fire insurance underwriters or other similar
bodies now or hereafter constituted, relating to, or affecting the condition,
use or occupancy of the Premises, excluding structural changes not related to
or affected by Tenant's improvements or acts. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action against Tenant,
whether Landlord is a party thereto or not, that Tenant has violated any law,
ordinance or governmental rule, regulation or requirement, shall be conclusive
of that fact as between Landlord and Tenant.
34. FORCE MAJEURE.
Any prevention, delay or stoppage of work to be performed by Landlord or Tenant
which is due to strikes, labor disputes, inability to obtain labor, materials,
equipment or reasonable substitutes therefor, acts of God, governmental
restrictions or regulations or controls, judicial orders, enemy or hostile
government actions, civil commotion, fire or other casualty, or other causes
beyond the reasonable control of the party obligated to perform hereunder,
shall excuse performance of the work by that party for a period equal to the
duration of that prevention, delay or stoppage. Nothing in this Article 34
shall excuse or delay Tenant's obligation to pay Rent or other charges under
this Lease.
35. CURING TENANT'S DEFAULTS
If Tenant defaults in the performance of any of its obligations under this
Lease, Landlord may (but shall not be obligated to) without waiving such
default, perform the same for the account and at the expense of Tenant. Tenant
shall pay Landlord all costs of such performance promptly upon receipt of a
bill therefor.
36. SIGN CONTROL.
Tenant shall not affix, paint, erect or inscribe any sign, projection, awning,
signal or advertisement of any kind to any part of the Premises, Building or
Project, including without limitation, the inside or outside of windows or
doors, without the written consent of Landlord. Landlord shall have the right
to remove any signs or other matter, installed without Landlord's permission,
without being liable to Tenant by reason of such removal, and to charge the
cost of removal to Tenant as additional rent hereunder, payable within ten (10)
days of written demand by Landlord.
37. MISCELLANEOUS.
a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant
or receipt by Landlord of a lesser amount than the Rent provided for in this
lease shall be deemed to be other than on account of the earliest due Rent, nor
shall any endorsement or statement on any check or letter accompanying any
check or payment as Rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of the Rent or pursue any other remedy provided for in this Lease.
In connection with the foregoing, Landlord shall have the absolute right in its
sole discretion to apply any payment received from Tenant to any account or
other payment of Tenant then not current and due or delinquent.
b. Addenda. If any provision contained in an addendum to this Lease is
inconsistent with any other provision herein, the provision contained in the
addendum shall control, unless otherwise provided in the addendum.
c. Attorney's Fees. If any action or proceeding is brought by either party
against the other pertaining to or arising out of this Lease, the finally
prevailing party shall be entitled to recover all costs and expenses, including
reasonable attorneys' fees, incurred on account of such action or proceeding.
d. Captions, Articles and Section Numbers. The captions appearing within
the body of this Lease have been inserted as a matter of convenience and for
reference only and in no way define, limit or enlarge the scope or meaning of
this Lease. All references to Article and Section numbers refer to Articles
and Sections in this Lease.
e. Changes Requested by Lender. Neither Landlord or Tenant shall
unreasonably withhold its consent to changes or amendments to this Lease
requested by the lender on Landlord's interest, so long as these changes do not
alter the basic business terms of this Lease or otherwise materially diminish
any rights or materially increase any obligations of the party from whom
consent to such charge or amendment is requested.
f. Choice of Law. This Lease shall be construed and enforced in accordance
with the laws of the State.
g. Consent. Notwithstanding anything contained in this Lease to the
contrary, Tenant shall have no claim, and hereby waives the right to any claim
against Landlord for money damages by reason of any refusal, withholding or
delaying by Landlord of any consent, approval or statement of satisfaction, and
in such event, Tenant's only remedies therefor shall be an action for specific
performance, injunction or declaratory judgment to enforce any right to such
consent, etc.
h. Corporate Authority. If Tenant is a corporation, each individual signing
this Lease on behalf of Tenant represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation, and
that this Lease is binding on Tenant in accordance with its terms. Tenant
shall, at Landlord's request, deliver a certified copy of a resolution of its
Board of Directors authorizing such execution.
i. Counterparts. This Lease may be executed in multiple counterparts, all
of which shall constitute one and same Lease.
j. Execution of Lease; No Option. The submission of this Lease to Tenant
shall be for examination purposes only, and does not and shall not constitute a
reservation of or option for Tenant to lease, or otherwise create any interest
of Tenant in the Premises or any other premises within the Building or Project.
Execution of this Lease by Tenant and its return to Landlord shall not be
binding on Landlord notwithstanding any time interval, until Landlord has in
fact signed and delivered this Lease to Tenant.
k. Furnishing of Financial Statements; Tenant's Representations. In order
to induce Landlord to enter into this Lease, Tenant agrees that it shall
promptly furnish Landlord, from time to time, upon Landlord's written request,
with financial statements reflecting Tenant's current financial condition.
Tenant represents and warrants that all financial statements, records and
information furnished by Tenant to Landlord in connection with this Lease are
true, correct and complete in all respects.
l. Further Assurances. The parties agree to promptly sign all documents
reasonably requested to give effect to the provisions of this Lease.
m. Mortgagee Protection. Tenant agrees to send by certified or registered
mail to any first mortgagee or first deed of trust beneficiary of Landlord
whose address has been furnished to Tenant, a copy of any notice of default
served by Tenant on Landlord. If Landlord fails to cure such default within
the time provided for in this Lease, such mortgagee or beneficiary shall have
an additional thirty (30) days to cure such default; provided that if such
default cannot reasonably be cured within that thirty (30) day period, then
such mortgagee or beneficiary shall have such additional time to cure the
default as is reasonably necessary under successors in interest.
n. Prior Agreements; Amendments. This Lease contains all of the agreements
of the parties with respect to any matter covered or mentioned in this Lease,
and no prior agreement or understanding pertaining to such matter shall be
effective for any purpose. No provisions of this Lease may be amended or added
to except by an agreement in writing signed by the parties or their respective
successors in interest.
o. Recording. Tenant shall not record this Lease without the prior written
consent of Landlord. Tenant, upon the request of Landlord, shall execute and
acknowledge a "short form" memorandum of this Lease for recording purposes.
p. Severability. A final determination by a court of competent jurisdiction
that any provision of this Lease is invalid shall not affect the validity of
any other provision, and any provision so determined to be invalid shall, to
the extent possible, be construed to accomplish its intended effect.
q. Successors and Assigns. This Lease shall apply to and bind the heirs,
personal representatives, and permitted successors and assigns of the parties.
r. Time of the Essence. Time is of the essence of this Lease.
s. Waiver. No delay or omission in the exercise of any right or remedy of
Landlord upon any default by Tenant shall impair such right or remedy or be
construed as a waiver of such default.
t. Compliance. The parties hereto agree to comply with all applicable
federal, state and local laws, regulations, codes, ordinances and
administrative orders having jurisdiction over the parties, property or the
subject matter of this Agreement, including, but not limited to, the 1964 Civil
Rights Act and all amendments thereto, the Foreign Investment In Real Property
Tax Act, the Comprehensive Environmental Response Compensation and Liability
Act, and The Americans With Disabilities Act.
u. Additional terms, notwithstanding the terms and conditions agreed to
above, Tenant further agrees to do the following:
The receipt and acceptance by Landlord of delinquent Rent shall not constitute
a waiver of any default; it shall constitute only a waiver of timely payment
for the particular Rent payment involved.
No act or conduct of Landlord, including, without limitation, the acceptance of
keys to the Premises, shall constitute an acceptance of the surrender of the
Premises by Tenant before the expiration of the Term. Only a written notice
from Landlord to Tenant shall constitute acceptance of the surrender of the
Premises and accomplish a termination of the Lease.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of the
Lease.
The parties hereto have executed this Lease as of the dates set forth below.
Date: 11/7/95 Date: 11/7/95
Landlord: JAMES W. CAMERON, JR. Tenant: 3NET SYSTEMS, INC.
By: CLARK H. CAMERON By: GEORGE R. VAN DERVEN
Title: ATTORNEY IN FACT Title: PRESIDENT
By: By:
Title: Title:
[3Net Letterhead]
August 28, 1996
Mr. W. John Hammerbeck
President and Managing Partner
Technical Directions, Inc.
A Systems Group Company
3030 LBJ Fwy., Ste. 910, LB2
Dallas, TX 75234
Dear John:
Our discussions have progressed over the last several months to the point where
we are now ready to further define the roles, responsibilities, terms and
conditions of our relationship. This document describes to the best of our
current ability: the marketplace we are addressing; the value that Technical
Directions, Inc. and 3Net Systems bring to the relationship; the general
nature of our cooperation; and, some specific contract terms that we have
agreed. Our next step will be to develop an agreement organized in contract
format to further memorialize our understandings. Please review the following
information, and approve its content by signing in the appropriate space at
the end of this document.
INTRODUCTION
THE MARKET - In the United States today, there is a shortage of information
technology professionals who are trained and experienced in providing support
for large, main-frame, legacy computer systems that support the mission
critical business processing for thousands of major U.S. corporations. The
contract technical services industry has been requested by its customers
to provide these professional resources. However, the availability of people
with the requisite skills is in true short supply leaving both the providers
and consumers of contracted programming resources with few reasonable
alternatives. One alternative is the use of foreign workers to provide these
contracted technical services on a temporary basis until additional personnel
are available in this country, or until the critical need to support these
technologies passes, sometime after the year 2000.
TECHNICAL DIRECTIONS, Inc. (TDI) - TDI and its management team have
participated in the growth of the contract programming industry for over
twenty-five years providing professional recruiting services for permanent
placements and contract programming services for temporary assignments. As
an extremely successful regional player, TDI has set its sights on national
prominence through strategies of opening offices in active markets and through
acquisition of companies already participating in those markets. Even with
this growth strategy, TDI has the opportunity to add significant incremental
business by providing large numbers of information systems professionals
with the requisite skills necessary to support the large legacy systems so
prevalent in today's processing environment.
3NET SYSTEMS (3Net) - 3 Net and its management team have specific, long-term
experience in international information technology settings where global
workers have been provided to support domestic U.S. technology environments.
Moreover, through its cooperation with its partners in the (former) Soviet
Union, 3Net has the ability to provide access to significant numbers of foreign
workers skilled in the technologies so desperately needed to support
mainframe-oriented legacy systems in the United States.
THE COOPERATION - TDI has strong presence and access to the
contract services marketplace through its existing customers.
Furthermore, new customer relationships will become available to
TDI by virtue of its access to information technology personnel
resources supplied by 3Net. The functions of TDI, therefore, are
to address the sales opportunities of the marketplace while 3Net
concentrates on performing the recruiting functions necessary to
satisfy the personnel needs identified by TDI. While the size of
the market is not definitely known, TDI and 3Net have established
a goal for their cooperation of recruiting, placing and retaining
2-300 information technology professionals in contract
programming positions in the United States (on-shore) and in
locations in the (former) Soviet Union (off-shore) over the next
two years.
SPECIFIC CONTRACT TERMS
TERM - TDI and 3Net desire a long-term relationship reflecting
the fact that we are together creating an asset in customers and
people which has long-term value for both organizations.
Therefore, this agreement will be in effect for a period of five
years, with annual renewals based on the mutual agreement of the
parties.
TDI PREFERRED SELLER - TDI will be considered a preferred seller
of 3Net personnel resources in those cities where it does
business now and in the coming five years. Moreover, TDI will be
considered to have exclusive rights to market 3Net personnel
provided that 3Net has not previously established a relationship
with that customer. TDI will also develop and introduce other
companies of a similar nature to TDI for the purpose of establishing
a similar relationship with 3Net. TDI wil be compensated in some
mutually acceptable manner such as a referral fee for its assistance.
3NET PREFERRED PROVIDER - 3Net will be the preferred provider of
foreign workers to TDI and its customers. This means that TDI
will provide 3Net with job specifications and a reasonable amount
of time to fill the requests defined in the job specifications.
If 3Net is not able to fill the request in a mutually acceptable
period of time, TDI will be free to contact some other
organization specializing in the are of foreign workers for that
job specification for which 3Net was not able to provide support.
ANTICIPATED BUSINESS VOLUME - It is desirable for both TDI and
3Net to establish aggressive goals for recruitment and placement
without sacrificing quality or customer service. Our mutual
vision is that we anticipate placing at least 200 people within
two years, and that we will both make our best efforts to sell
our services, recruit the people, train the prople if necessary,
and place them with TDI customers.
MARKETING PLANS AND SALES MATERIALS - TDI and 3Net will cooperate
in the preparation of a specific marketing plan and sales
materials to be made available to both organizations in support
sales and placement of foreign workers.
RATE STRUCTURES - TDI and 3Net will cooperate on defining a
formalized strategy for market penetration followed by a strategy
for rate increases over time or at contract renewal. Moreoever,
as the marketplace recognizes the increased value of 3Net-
proviced foreign workers, by being willing to pay higher rates,
TDI and 3Net will have a process in place which will allow both
organizations to identify and share the icnreased revenue and
profit. It is the intention of both organizations to achieve
specified margins. Both parties will work together to ensure
that the best revenue and cost management opportunities are
pursued.
ON-SHORE/OFF-SHORE OPPORTUNITIES - It is the intention of both
organizations to provide services for customers in the United
States, and also off-shore at the Rige Software Development
Center, Riga, Latvia. Specific strategies including technical
feasibility and costs will be addressed in order to specifically
support the sale of the off-shore opportunities.
EMPLOYEE TRAINING AND RETENTION - TDI and 3Net will develop a
training and retention plan for the foreign workers that
advantages the worker wherever possible. Areas of current
examination include, but are not limited to, insurance benefits,
technical and professional training.
TDI/3NET/PRIZE TELECOMMUNICATIONS AND SOFTWARE INFRASTRUCTURE -
TDI and 3Net will work together to provide appropriate software
and telecommunications capabilities to facilitate the operation
of the business in the United States, Latvia, and elsewhere.
TDI PROVIDES RECRUITING STRATEGIES, ASSISTANCE, AND TRAINING-
TDI provides to 3Net assistance in developing specific recruiting
plans based upon TDI's current methods, processes, procedures and
software.
If the above information represents your understanding of our
current and future relationship, please sign acceptance in the
space below.
Sincerely,
/s/ George R. Van Derven
George R. Van Derven
President and Chief Executive Officer
ACCEPTED: /s/ W. John Hammberbeck DATE: 08/28/96
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements listed below of our report dated September 13, 1996, with
respect to the financial statements of 3Net Systems, Inc. included in the
Annual Report (Form 10-KSB) for the year ended June 30, 1996:
Form S-8 No. 33-60100 pertaining to the 3Net Systems, Inc. Employee
Savings Plan
Form S-8 No. 33-73166 pertaining to the 3Net Systems, Inc. Employee
Savings Plan
Form S-8 No. 33-81598 pertaining to the Nonstatutory Stock Option
Agreement by and between 3Net Systems, Inc. and Larry M. Gress
Form S-8 No. 33-80186 pertaining to the 3Net Systems, Inc. Special Stock
Option Plan
Form S-8 No. 33-80300 pertaining to the 3Net Systems, Inc. 1993 Stock
Option/Stock Issuance Plan
Form S-3 No. 33-86962
ERNST & YOUNG LLP
Sacramento, California
September 23, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1996 FOR 3NET SYSTEMS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> 3NET SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-END> JUN-30-1996
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