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As filed with the Securities and Exchange Commission on July 6, 1999
Registration No. 333-_______
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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WAREFORCE.COM, INC.
(Name of business issuer in its charter)
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Nevada 5045 87-0542988
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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2361 Rosecrans Avenue, Suite 155, El Segundo, California 90245
(310) 725-5555
(Address and telephone number of principal
executive offices and place of business)
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Dan J. Ricketts
2361 Rosecrans Avenue, Suite 155, El Segundo, California 90245
(310) 725-5555
(Name, address and telephone number of agent for service)
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Copies to:
Thomas G. Kimble & Van L. Butler
THOMAS G. KIMBLE & ASSOCIATES
311 South State Street, #440
Salt Lake City, Utah 84111
(801) 531-0066
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under SA, check the following box [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED UNIT PRICE FEE
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Common Stock $.001 par value, to be sold by
Selling Shareholders ...................... 971,448 $ 3.09* $ 3,001,774 $ 834.49
Common Stock $.001 par value, underlying
Series A Warrants.......................... 1,110,000 $ 6.00 $ 6,660,000 $1,851.48
Common Stock $.001 par value, underlying
Series B Warrants.......................... 1,110,000 $ 7.00 $ 7,770,000 $2,160.06
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TOTALS................................ 3,191,448 $17,431,774 $4,846.03
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* Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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WAREFORCE.COM, INC.
2,220,000 WARRANTS AND UNDERLYING SHARES OF COMMON STOCK AND
971,448 SELLING SHAREHOLDER SHARES
Our company, Wareforce.com, Inc., has registered:
o 1,110,000 Series A Warrants and 1,110,000 Series B Warrants, to be
distributed as soon as practicable after the date of this Prospectus, at
no cost to our common stockholders of record as of July 13, 1998.
o 2,220,000 shares of $.001 par value common stock, to be sold upon
exercise of the Warrants, at prices of $6.00 per share underlying Series
A Warrants and $7.00 per share underlying Series B Warrants.
o 971,448 shares of our common stock held by various selling shareholders
that may sell all or a potion of these shares in market transactions or
negotiated transactions.
Each Warrant you hold entitles you to purchase one share of our
common stock, at any time until [the date three years from the date hereof],
provided this Prospectus is still current or has been updated. Whether a current
prospectus is in effect or not, we can call and redeem the Warrants for $.01 per
Warrant, on 30 days notice, at any time after the date of this Prospectus.
Prior to this offering, only a limited public market has existed for our
common stock. You are not assured that such market will continue in the future.
Our common stock is quoted on the NASD Electronic Bulletin Board under the
Symbol "WFRC". The current bid price quotation is $3.06. We arbitrarily
determined the exercise and redemption prices of the Warrants, which bear no
relationship to assets, shareholders equity or any other objective criteria of
value.
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YOU SHOULD NOT PURCHASE THESE SECURITIES IF YOU CANNOT AFFORD TO RISK THE LOSS
OF YOUR ENTIRE INVESTMENT. INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL
RISKS, SUCH AS THOSE DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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We will not receive any of the proceeds from the shares sold by our Selling
Shareholders. Our Warrants are being distributed without cash consideration. The
shares underlying the Warrants are being offered only to the holders of the
Warrants, and will be sold by us without any underwriting discounts or other
commissions. The offering price of the shares is payable in cash upon exercise
of the Warrants. No minimum number of Warrants must be exercised, and no
assurance exists that any Warrants will be exercised.
The date of this Prospectus is ___________, 1999
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TABLE OF CONTENTS Page
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PROSPECTUS SUMMARY ..........................................................................3
RISK FACTORS.................................................................................6
DILUTION....................................................................................13
SELECTED FINANCIAL DATA.....................................................................14
USE OF PROCEEDS.............................................................................15
MARKET INFORMATION & DIVIDEND POLICY........................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................17
THE COMPANY.................................................................................26
AVAILABLE INFORMATION.......................................................................36
MANAGEMENT..................................................................................37
CERTAIN TRANSACTIONS........................................................................50
PRINCIPAL SHAREHOLDERS......................................................................52
DESCRIPTION OF SECURITIES...................................................................53
SELLING SHAREHOLDERS........................................................................56
PLAN OF DISTRIBUTION........................................................................57
LEGAL MATTERS...............................................................................59
EXPERTS.....................................................................................59
FINANCIAL STATEMENTS.......................................................................F-1
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PROSPECTUS SUMMARY
This summary highlights important information. As a summary, it is
necessarily incomplete and does not contain all the information you should
consider before investing. You should read the entire Prospectus carefully.
OUR COMPANY
Wareforce.com, Inc. (the Company) provides computer-related technical
services, support, hardware and software that clients need to design, develop,
manage and maintain their data processing and information systems. Our approach
to the market for information technology is to be a diversified information
technology (IT) organization and develop a complete single-source solution for
all IT requirements. Since 1990, our revenues have grown from $2 million in 1990
to $88.9 million in 1998. Our client base exceeded 1,500 customers in 1998, and
is composed of blue chip Fortune 1,000 corporations, state, county and local
governments and educational institutions such as:
o Pacific Bell,
o Universal Studios,
o Atlantic Richfield (Arco),
o Boeing/Rocketdyne,
o State of Florida,
o Los Angeles County and
o University of California University School System.
During 1998, we began implementing an electronic commerce and technical
services acquisition strategy. In September 1998, we completed the acquisition
of C.Y. Investment Inc. (CY) d/b/a Impres Technology (Impres) and d/b/a Advanced
Optical Distribution (AOD), a technical services/ computer products firm with
net revenues of $68 million in 1998. This doubled the size of our core business.
In March 1999, we completed the purchase of the assets and assumed the
liabilities of a second technical services firm, Kennsco, Inc. (Kennsco) that
generated $18 million in net revenues in fiscal year 1998 from its operations in
the Midwest and Florida. During 1998, we also launched our electronic commerce
web site, offering over 140,000 computer products from more than 900 vendors.
Our e-commerce web site enables customers' fast, efficient and cost-effective
electronic procurement of technology products and services while streamlining
the Company's internal operations and cost structure. In early 1999, we
bolstered our web presence and electronic commerce offerings in online auctions
and electronic commerce technology, primarily through our acquisition of 70% of
uMember.com, Inc.
Our principal executive office is at 2361 Rosecrans Avenue, Suite 155,
El Segundo, California 90245. Our telephone number is (310) 725-5555.
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THE OFFERING
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Securities Offered ....... 2,220,000 shares of our common stock, $.001 par value
underlying Series A and B Warrants.
971,448 shares of our common stock, $.001 par value being
sold by our Selling Shareholders. See "Description of
Securities".
Offering Prices........... $6.00 per share underlying Series A Warrants; $7.00 per
share underlying Series B Warrants. They can sell
these shares in the over-the-counter market or otherwise.
They may sell at market prices at the time of sale,
at prices related to the market price or at negotiated prices.
Plan of Distribution...... The shares underlying the Warrants will be offered and
sold without any discounts or other commissions, to the
holders of the Warrants, when they exercise them. The
shares of the selling stockholders can be sold in the
over-the-counter market or otherwise. They may sell at
market prices at the time of sale, at prices related to
the market price or at negotiated prices. See "Plan of
Distribution."
Use of Proceeds........... We could receive as much as $14,430,000 from sale of the
2,220,000 shares of common stock issuable upon exercise
of Series A and B Warrants, if all Warrants are
exercised. Any proceeds will be used generally to
provide additional working capital, but have not been
specifically allocated, since there is no assurance any
Warrants will be exercised. We will receive no proceeds
from the sell of the shares of the selling shareholders.
Transfer Agent............ Interwest Transfer Company, Inc., 1981 East 4800 South,
Suite 100, Salt Lake City, Utah 84117, phone (801)
272-9294.
Securities Outstanding.... We are authorized to issue up to 50,000,000 shares
of common stock, and 5,000,000 shares of Preferred
Stock in one or more series with such rights and
preferences as the board of directors may designate.
10,831,948 shares of common stock were issued and
outstanding as of May 30, 1999. We have
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reserved from authorized capital 2,220,000 shares of
common stock for issuance upon exercise of the Warrants.
Warrants.................. Each Warrant entitles the holder to purchase one share of
common stock at any time up until [the date three years
from the date hereof], provided this Prospectus is still
current or has been updated. Exercise prices are $6.00
per share for Series A Warrants and $7.00 per share for
Series B Warrants, subject to adjustment in certain
events. Whether a current prospectus is in effect or not,
we can call and redeem either or both series of the
Warrants for $.01 per Warrant on 30 days notice at any
time after the date of this Prospectus. See "Description
of Securities - Series A and B Warrants."
Risk Factors.............. An investment in our Company is highly speculative.
Investors will suffer substantial dilution in the book
value per share of the common stock compared to the
purchase price. If we do not receive substantial funds
from exercise of the Warrants, which is not assured, we
may require additional funding for which we have no
commitments. You should not invest if you cannot afford to
risk loss of your entire investment. See "Risk Factors."
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RISK FACTORS
These securities involve a high degree of risk. You should carefully
consider the following risk factors and all other information in this Prospectus
before investing in our Company.
RISKS RELATED TO OUR FINANCIAL POSITION
Net Operating Loss/Accumulated Deficit. During 1998, we incurred a net
operating loss of $3,189,592 and had an accumulated deficit of $5,959,153 as of
December 31, 1998. You have no assurance that our business will be profitable in
the future. See footnote 1 to the 1998 audited Financial Statements.
Dependence on Availability of Credit. We depend on availability of
accounts receivable financing to obtain capital necessary to finance purchase of
products we sell. To fill sales orders, we secure lines of credit collateralized
by accounts receivable. This financing must be available on reasonable terms in
amounts sufficient to maintain or increase sales volume. We are not assured that
financing will be available to us in the future. If it is not, our financial
position and operating results will be adversely affected. See "Results of
Operations."
RISKS RELATED TO THE NATURE OF OUR BUSINESS
Year 2000 Compliance. Computer systems, software packages, and
microprocessor dependent equipment may cease to function or generate erroneous
data when the year 2000 arrives. The problem affects systems or products that
are programmed to accept a two-digit code in date code fields. To correctly
identify the year 2000, a four-digit date code field will be required to be what
is commonly termed "Year 2000 compliant." We may have exposure and risk if the
systems on which we depend upon to conduct our day-to-day operations are not
Year 2000 compliant. The potential areas of exposure include electronic data
exchange systems operated by third parties with whom we transact business,
certain products purchased from third parties for resale, and computers,
software, telephone systems and other equipment we use internally. Because of
Year 2000 risks, we have assessed our principal computer systems. We believe
such systems for Wareforce Incorporated (Wareforce) and CY are Year 2000
compliant. We do not however believe that the principal computer systems of
Kennsco are Year 2000 compliant. We are working to address this situation and
believe it can be remedied by January 1, 2000 by replacing many of the desktop
computers used by Kennsco as well as by switching their Help Desk dispatching
system to the Year 2000 compliant dispatch system currently used by Wareforce
and CY. We estimate the cost of taking these actions at between $50,000 and
$100,000. However, we do not have a contingency plan in the event that any
non-compliant critical systems are not remedied by January 1,
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2000. We also have not formulated a timetable to create such contingency plan.
In addition, we have not undertaken any systematic review of the Year 2000
compliance of either our customers or suppliers. However, based on public
disclosures by our principal customers and principal suppliers, our management
is of the opinion that these customers and suppliers will not be subject to
business interruptions due to Year 2000 compliance issues which would in turn
have a material prospect on our business operations. Given the nature and scope
of our customer and supplier base and the unknowns associated with Year 2000
issues, no assurances can be given that our business will not be impacted in
some way, material or otherwise, by Year 2000 issues. Additionally, as we resell
computer products produced and published by others over which we have no
control, we are not able to adequately determine if the products we resell are
Year 2000 compliant. We are therefore unable to adequately evaluate what, if
any, liability we might have due to our reselling products that may not be Year
2000 compliant. Any of these Year 2000 issues could have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Growth of the Internet, Internet Infrastructure
Development and Internet Commerce. We believe our success will depend in large
part on our ability to compete on the Internet. The Internet is being
increasingly used for retrieving, sharing and transferring information among
manufacturers, distributors, resellers, retailers and end users, including
corporate buyers and consumers of computers and computer products. We have only
just begun to develop our capabilities to sell on the Internet by developing
e-commerce systems and solutions. Critical issues remain unresolved concerning
commercial use of the Internet. These include security, reliability, cost, easy
access, quality of service and necessary increases in bandwidth availability.
These issues are likely to affect the development of new and existing markets
for our products. Demand for, and market acceptance of, commerce on the Internet
are subject to a high level of uncertainty.
Dependence on Suppliers. A key element of our past success and future
business strategy involves retaining relationships and alliances with the
world's largest manufacturers, aggregators and distributors of computer
products. These alliances enable us to offer our customers a wide selection of
products without us having to maintain large inventories. Almost all of our
supply arrangements can be terminated with 30 days' notice or less. In many
cases we must meet minimum purchase requirements. Certain products we sell are
subject to manufacturer allocations. These allocations limit the amount of
products available to us. We cannot assure you that our suppliers will continue
to sell to us on favorable terms or at all. See "Business -- Suppliers."
Risk of Declines in Inventory Value. To the extent we maintain
inventories, we are subject to risks that the value of our inventory will be
adversely affected by price reductions or technological changes affecting the
usefulness or desirability of the products comprising our inventory. Some
suppliers and distributors of microcomputer products protect companies from loss
in value of inventory due to
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technological change or the supplier's price reductions, subject to certain
conditions, but they do not protect us in all cases from declines in inventory
value.
Low Margin Business. Pricing in our industry is extremely competitive.
We also have low gross margins because we rely on the inventory of our principal
suppliers. See "Dependence on Suppliers". These factors make it unlikely that we
will be able to substantially increase profit margins in our core business of
reselling information technology products. Also, in order to attract larger
customers, we have to offer volume discounts and limit marks-ups to these
customers. At times we also sell certain products at or below cost to these
customers. We attempt to make up any losses from these sales through rebates and
incentives provided to us by product suppliers for these sales. We also try to
improve our gross margins by offering customers value-added technical services.
These services typically provide higher profit margins than we get from the sale
of products. We also try to increase sales of products while trying to reduce
operating costs as a percentage of sales so we can improve our net profit
margins. We cannot guarantee that any of these strategies will be successful.
See "Results of Operations" and "Business -- Strategy."
Substantial Reliance on Key Customers. Our customer base is highly
concentrated. In 1998, the top ten customers accounted for a substantial
majority of net sales. Based upon history and relationships with current
customers, we believe this will continue. None of our contracts or purchase
orders guarantees any minimum purchases nor requires that purchases be made
exclusively from us. We cannot assure you that our largest customers will
continue to place orders with us, or guarantee that orders by them will continue
at their previous levels. Our financial position and operating result will be
seriously affected if our largest customers substantially reduce their orders
with us. See "Results of Operations" and "Business -- Customers."
Risk of Product Returns. Products may be returned because they are
defective, they do not perform like the customer expected, the distributor made
a shipping error or because of other causes outside of our control. Some of our
suppliers have specific return policies that allow us to return certain goods
for credit. Others do not allow us to return products. We bear the cost of the
return if the supplier does not accept it. Any significant increase in the rate
of returns or unwillingness by our suppliers to accept returns could adversely
affect our financial position and operating results. In 1998 our returns as a
percentage of our revenue was 5%. We believe that this percent is in line with
industry averages. See "Results of Operations."
Risks Associated with E-Commerce. Sales in our industry are increasingly
being done on the Internet. We are attempting to keep pace by developing
internal e-commerce capabilities to sell to our corporate, government and
education customers. We are also attempting to sell to retail customers via the
Internet by investing in companies such as uMember.com. We cannot assure you
that we will be able to
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introduce new e-commerce solutions on a timely and cost-effective basis that
keep pace with technological developments and emerging industry standards and
address increasingly sophisticated customer requirements. We cannot assure you
that, despite testing by our customers, and us, computer glitches and bugs will
not be found after we introduce products. If we do find bugs, it might result in
the loss of or delay in market acceptance of our solutions. If we introduce new
e-commerce systems and enhancements that have reliability, quality or
compatibility problems, we could experience reduced sales, service costs, and
delays in collecting accounts receivable. We also cannot assure you that we will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these e-commerce systems.
Internet Commerce Security Risks; Risk of Credit Card Fraud. A
significant barrier to electronic commerce and communications is the secure
transmission of confidential information over public networks. We cannot assure
you that our security measures will prevent security breaches. We also cannot
assure you that our failure to prevent security breaches will not have a
material adverse effect on our business, results of operations and financial
condition. See "Business -- Technology" and "Business -- Systems Operations."
Dependence on Management and Other Professionals. We believe that our
past success was, and our future is, dependent on the services and efforts of
our existing senior management and key personnel. The loss of any of our senior
management could have a material adverse effect on our business, results of
operations and financial condition. We have long-term employment agreement with
most of our key personnel, see "Management". We carry $2,000,000 "key person"
life insurance on Mr. Rechtman, which is pledged to our banks. In order to meet
expected growth we believe that our future success depends upon our ability to
identify, attract, hire, train, motivate and retain other highly-skilled
managerial, marketing, sales, computer, and information technology
professionals, as well as customer service personnel. Competition for such
personnel is intense. We cannot assure you that we will be successful in
attracting, assimilating or retaining the necessary personnel. Our failure to do
so could have a material adverse effect on our business, results of operations
and financial condition. See "Business -- Employees" and "Business --
Management."
Risk of System Failure; Single Site. Our success is largely dependent
upon our computer and communications hardware located at a leased facility in
California. Our systems are vulnerable to telecommunication failure, computer
viruses and similar disruptive problems as well as damage from natural causes.
We have redundant systems but not multiple locations. We expect to add a fully
redundant site outside of California within the next 12 months. A substantial
interruption in these systems would have a material adverse effect on our
business, results of operations and financial condition. See "Business
- --Technology," and "Business -- Facilities."
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Control by Mr. Rechtman. Mr. Rechtman currently owns 55.0% of our
outstanding shares of common stock. Accordingly, he may continue to be able to
elect a portion of our directors and possibly determine the outcome of corporate
actions requiring stockholder approval, regardless of how our other stockholders
may vote. Such ownership of common stock may have the effect of delaying,
deferring or preventing a change in our control. It may also adversely affect
the voting and other rights of other holders of common stock. See "Management",
"Principal Stockholders" and "Description of Capital Stock".
Dividend Policy. It is our policy to retain our earnings, if any, for
use in our business. We do not expect to pay any cash dividends in the
foreseeable future. In addition, our ability to pay dividends is restricted by
the terms of our Credit Line with Congress Financial Corp. (Western). See
"Results of Operations -- Liquidity and Capital Resources" and "Dividend
Policy."
RISKS RELATED TO THE OFFERING
No Assurance of Warrant Exercise and No Escrow of Funds. We cannot
assure you that any proceeds will be received from exercise of Warrants in this
offering. Proceeds may not be sufficient to defray offering expenses. No minimum
number of Warrants must be exercised and there is no escrow of funds. Any
proceeds received will immediately be retained by us to be used in our business.
In the event that any proceeds from this offering and our existing capital are
not sufficient to enable us to develop and expand our business and generate a
profit, we may need to seek additional financing from commercial lenders or
other sources. This increases the risk to persons who do exercise their
Warrants, because no assurance exists that additional Warrants will be exercised
or that the Company will receive any further funding.
Risks of Warrant Exercise. Exercising Warrant holders are not assured
they will be able to sell their common stock in the future at a price that
equals or exceeds their exercise price. In addition, there is no assurance that
the market price of the common stock will ever equal or exceed the exercise
price of the Warrants.
Outstanding Warrants, Options and Other Rights. In addition to the
1,110,000 Series A and 1,110,000 Series B Warrants, options are outstanding to
purchase up to 1,000,000 shares of common stock under our Stock Option Plan. The
holders of these options, warrants or rights have an opportunity during the term
of such rights to profit from a rise in the market price of our common stock.
This may dilute the interests of all other stockholders. The holders are likely
to exercise them only if the then-prevailing market price exceeds their exercise
price. If this occurs, it would likely be at a time when we would otherwise be
able to obtain funds from the sale of our securities on terms more favorable
than those provided by the options and warrants. Accordingly, we may find it
more difficult to raise
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additional capital while the options and warrants are outstanding.
Current Prospectus and Registration Required for Exercise. You will be
able to exercise your Warrants only if the Prospectus is still current and the
exercise is qualified or exempt under the laws of the state in which you reside.
We intend to update this prospectus as necessary, but may not be able to do so
when you wish to exercise. Whether a current Prospectus is in effect or not, we
can redeem each Series of the Warrants for nominal consideration at any time
after the date of this Prospectus. If redeemed when no current prospectus is in
effect, you will have no opportunity to exercise your Warrants, but will have to
accept the nominal redemption price. The value of your Warrants may be greatly
diminished if the ability to exercise them is not maintained.
Dilution. Warrant holders who exercise their Warrants to purchase the
underlying shares of common stock will suffer substantial dilution in the
purchase price compared to the net tangible book value per share immediately
after the purchase. The exact amount of dilution will vary depending upon the
Series of Warrants being exercised and the total number of Warrants exercised,
and will be greater for the Series B Warrants. Also, the fewer Warrants
exercised, the greater dilution will be with respect to the Warrants that are
exercised. See "Dilution".
Limited Liability of Management. Our Amended Articles of Incorporation
and Bylaws limit the liability of Officers and Directors and require
indemnification to the full extent permitted by law. Under Nevada law, officers
and directors have no personal liability to a company or stockholders for
monetary damages for breach of fiduciary duties as directors, except for breach
of their duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, unlawful payment of
dividends or unlawful stock purchases or redemptions, or any transaction from
which a director derives an improper personal benefit. This substantially limits
shareholders' ability to hold officers and directors liable for breaches of
fiduciary duty, and may require us to indemnify them. See "Certain Transactions
- -- Conflicts of Interest".
Potential Issuance of Additional Common and Preferred Stock. Our
Corporation is authorized to issue up to 50,000,000 shares of common stock. To
the extent of such authorization, our board of directors may, without seeking
shareholder approval, issue additional shares of common stock for such
consideration as they consider sufficient. The issuance of additional common
stock in the future will reduce the proportionate ownership and voting power of
the common stock. We are also authorized to issue up to 5,000,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by the board of directors. To the extent of such authorization, such
designations may be made without shareholder approval. The designation and
issuance of series of preferred stock creates additional securities which have
dividend and liquidation preferences over the common stock. See "Description of
Securities".
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Anti-Takeover Provisions. The Amended Certificate of Incorporation
contains provisions that could be an impediment to a non-negotiated change in
control of the Company, namely an ability, without stockholder approval, to
issue up to 5,000,000 shares of preferred stock with rights and preferences
determined by the board of directors. These provisions could impede a
non-negotiated change in control and thereby prevent stockholders from obtaining
a premium for their stock. See "Description of Securities".
Arbitrary Determination of Offering Price. We arbitrarily determined the
exercise and redemption prices of the Warrants, which bear no relationship to
assets, shareholders equity or any other objective criteria of value. The
exercise prices were set at levels substantially in excess of prices recently
paid for securities of the same class. In no event should the exercise prices be
regarded as an indicator of any future market price of our securities.
No Assurance of a Liquid Public Market for Securities. Although our
common stock is quoted on the Electronic Bulletin Board maintained by the NASD,
there has been no long-term established public trading market for our common
stock. As a result, an investment in our common stock may be totally illiquid
and investors may not be able to liquidate their investment readily or at all
when they need or desire to sell.
Shares Eligible for Future Sale. Of the 10,831,948 shares of our common
stock outstanding prior to the exercise of any Warrants, 1,110,000 shares are
currently freely tradeable, 971,448 being sold by the selling shareholders under
this registration will be freely tradeable and approximately 8,080,500 will be
eligible as of July 13, 1999 for public resale under Rule 144 promulgated
pursuant to the Securities Act of 1933, as amended (the "Securities Act"). Sales
of substantial amounts of this common stock in the public market could adversely
affect the market price of the common stock. Furthermore, all the remaining
shares of common stock presently outstanding are restricted or affiliate
securities that are not presently, but may in the future be sold, pursuant to
Rule 144, into any public market that may exist for the common stock. Future
sales by current shareholders could depress market prices of the common stock in
any such market. See "Shares Eligible for Future Sale".
Applicability of Low Priced Stock Risk Disclosure Requirements. Our
common stock is considered a low priced security under rules promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under
these rules, broker-dealers participating in transactions in low priced
securities must first deliver a risk disclosure document which describes the
risks associated with such stocks, the broker-dealer's duties, the customer's
rights and remedies, and certain market and other information, and make a
suitability determination approving the customer for low priced stock
transactions based on the customer's financial situation, investment experience
and objectives. Broker-
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<PAGE> 14
dealers must also disclose these restrictions in writing and provide monthly
account statements to the customer, and obtain specific written consent of the
customer. With these restrictions, the likely effect of designation as a low
priced stock is to decrease the willingness of broker-dealers to make a market
for the stock, to decrease the liquidity of the stock and increase the
transaction cost of sales and purchases of such stocks compared to other
securities.
DILUTION
Dilution is the difference between the Warrant exercise prices of $6.00
per share for Series A Warrants, or $7.00 per share for Series B Warrants, and
the net tangible book value per share of the common stock immediately after its
purchase. Net tangible book value per share is calculated by subtracting total
liabilities from total assets less any intangible assets, and then dividing by
the number of shares then outstanding. Based on the consolidated financial
statements of the Company at March 31, 1999, net tangible book value of the
Company, was $816,000 or approximately $0.08 per common share. Prior to the
exercise of any Warrants, the Company has 10,831,948 shares of common stock
outstanding.
If all Series A Warrants are exercised (which is not assured), upon
their exercise, but prior to exercise of any Series B Warrants or other
outstanding options or stock rights, we would have 11,941,948 shares of common
stock outstanding. Our estimated pro forma net tangible book value (which gives
effect to receipt of the estimated net proceeds from such exercise and issuance
of the underlying shares of common stock, but does not take into consideration
any other changes in our net tangible book value subsequent to March 31, 1999),
would then be $7,476,000 or approximately $0.63 per share. This would result in
dilution to persons exercising Series A Warrants of $5.37 per share, or 89.5% of
the exercise price of $6.00 per share. Net tangible book value per share would
increase to the benefit of present stockholders from $0.08 prior to the offering
to $0.63 after the offering, or an increase of $0.55 per share attributable to
the exercise of the Series A Warrants. If, in addition, all Series B Warrants
are exercised, we would have 13,051,948 shares of common stock outstanding
(assuming no other changes). Our pro forma net tangible book value would then be
$15,246,000 or approximately $1.17 per share. This would result in dilution to
persons exercising Series B Warrants of $5.83 per share, or 83.3% from the
exercise price of $7.00 per share. Net tangible book value per share would
increase from $0.08 prior to the exercise of Series B Warrants to $1.17
afterwards, or an increase of $1.09 per share attributable to the exercise of
the Series B Warrants.
The following table sets forth the estimated net tangible book value
("NTBV") per share after exercise of each Series of the Warrants and the
dilution to persons purchasing the underlying shares of common stock.
13
<PAGE> 15
<TABLE>
<CAPTION>
Exercise of all Warrants of: Series A only Series B also
---------------------------- ------------- -------------
<S> <C> <C>
Warrant exercise price/share $6.00 $7.00
NTBV/share prior to exercise 0.08 0.08
Increase attributable to Warrant exercise 0.55 1.09
Pro forma NTBV/share after exercise 0.63 1.17
Dilution $5.37 $5.83
</TABLE>
If less than all the Warrants of either Series are exercised, dilution
to the exercising Warrant holders of each Series will be greater than the amount
shown. The fewer Warrants exercised, the greater dilution will be.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data) For the fiscal years ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $ 27,402 $ 52,254 $ 88,510 $ 79,622 $ 88,894
Gross profit 3,285 5,654 7,475 7,157 8,757
Income (loss) from operations 437 980 (139) 580 (2,568)
Net Income (loss) 234 391 (444) 62 (3,190)
Net Income (Loss) Per Common Share $ 0.03 $ 0.06 $ (0.07) $ 0.01 $ (0.38)
Shares used to compute basic
and diluted net income (loss) per share 6,772 6,772 6,772 6,772 8,491
BALANCE SHEET DATA:
Cash and cash equivalents $ 608 $ 1,678 $ 2,037 $ 383 $ 818
Working capital 236 981 (81) (1,148) (3,702)
Total assets 5,681 17,638 25,709 17,293 31,104
Total Liabilities 5,039 16,641 25,127 16,653 27,510
Total stockholder's equity $ 642 $ 997 $ 582 $ 640 $ 3,594
</TABLE>
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to us from sale of the shares of common stock
underlying the Warrants at the exercise prices of $6.00 per Share for Series A
Warrants and $7.00 per Share for Series B Warrants will vary depending upon the
total number of Warrants exercised. If all Warrants were to be exercised (of
which there is no assurance, nor any assurance that any Warrants will be
exercised), we would receive gross proceeds of $6,660,000 from Series A Warrants
and $7,770,000 from Series B Warrants, or aggregate gross proceeds of as much as
$14,430,000. Regardless of the number of Warrants exercised, we expect to incur
offering expenses estimated at $125,000 for legal, accounting, printing and
other costs in connection with the offering. Inasmuch as there is no assurance
all Warrants will be exercised nor any requirement that any minimum amount of
the Warrants be exercised, there are no escrow provisions and any proceeds that
are received will be immediately available to the Company to provide additional
working capital to be used for general corporate purposes. Proceeds have not
been specifically allocated, and the exact uses of the proceeds will depend on
the amounts received and the timing of receipt.
MARKET INFORMATION & DIVIDEND POLICY
MARKET INFORMATION
Our common stock has traded in the over-the-counter market on a limited
and sporadic basis, and is quoted on the National Association of Securities
Dealers, Inc. Electronic Bulletin Board under the symbol WFRC. The following
table sets forth the high and low bid price quotations for each calendar quarter
since we began trading in July 1998. We forward split our common stock on a 1.85
for 1 basis in July 1998. Quotations for periods prior to such split have been
restated to reflect post split amounts throughout.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
September 30, 1998 $5 5/16 $3
December 31, 1998 $5 $2 5/8
March 31, 1999 $9 1/2 $6 1/4
June 30, 1999 $7 7/8 $3
</TABLE>
These prices represent interdealer quotations, without retail markup,
markdown or commissions, and may not represent actual transactions. As of May
27, 1999, there were approximately 58 record holders of our common stock.
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<PAGE> 17
DIVIDEND POLICY
We have not previously paid any cash dividends on common stock and do
not anticipate or contemplate paying dividends on common stock in the
foreseeable future. It is our present intention to utilize all available funds
for the development of our business. The only restrictions that limit the
ability to pay dividends on common equity or that are likely to do so in the
future, are those restrictions imposed by law and those contained in our loan
agreements with Congress Financial Corp. (Western). See "Management's Discussion
and Analysis - Liquidity and Capital Resources". Under Nevada corporate law, no
dividends or other distributions may be made which would render the Company
insolvent or reduce assets to less than the sum of its liabilities plus the
amount needed to satisfy outstanding liquidation preferences.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes included in this Prospectus.
The financial statements referred to reflect the financial condition and
operating results of Wareforce.com, Inc. (formerly known as Jolley Vending)
since its acquisition of Wareforce Incorporated in July, 1998, through the year
ended December 31, 1998, and of Wareforce Incorporated for periods prior to the
acquisition. This discussion should not be construed to imply that the results
discussed will necessarily continue into the future or that any conclusion
reached will indicate our actual operating results in the future. This
discussion represents only the best present assessment of our management. See
"The Company - Background".
GENERAL
Wareforce Incorporated was formed in 1985 and historically has sold
computer products that held in inventory by distributors, aggregators and
manufacturers of computers and computer products. We generally do not keep
significant amounts of inventory. Our industry faces considerable pricing
pressures. Given these pressures, we plan to continue to focus our sales efforts
on Fortune 1000 companies and other large organizations. We believe these
organizations offer growth opportunities for us to both vertically and
horizontally sell and market computer products and services. During 1998, we
began to implement both our electronic commerce and technical services
acquisition strategies.
During 1998 we launched our electronic commerce web site. This site
enables customers' fast, efficient and cost-effective electronic procurement of
technology products and services while
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<PAGE> 18
streamlining our internal operations and cost structure. In early 1999, we
increased our web presence and electronic offerings by acquiring 70% of
uMember.com.
As part of our technical services acquisition strategy, in September
1998, we completed the acquisition of CY. The acquisition of this technical
services/computer products firm doubled the size of our core business. In March
1999, we completed the purchase of Kennsco, which is primarily a technical
services firm. Kennsco generated $16.7 million in revenues in its 1998 fiscal
year from operations in the Midwest and Florida. (As our Kennsco acquisition
closed in the last week of March 1999, its results of operations will not be
included in our results of operations until the second quarter of 1999.)
The expansion of our product and services offerings represents new
expanded undertakings for us. This expansion used a significant amount of
resources in the past year and required a great deal of our management time. We
expect future expansion to also utilize a significant amount of our financial
and management resources. These undertakings cannot be supported with internally
generated financing and will require additional outside funding. Because of
this, we cannot assure you that we will be able to continue future funding of
these ventures.
In fiscal 1998, sales to the County of Los Angeles accounted for
approximately 15.3% of our total sales and sales to the State of Florida
accounted for approximately 11.5% in 1998. Based on history, we expect to
continue to make a significant portion of our sales to one or more large
customers. Our management believes that our horizontal and vertical strategy of
expanding service offerings may yield higher margins from our large customers
than product sales alone yield. However, our sales to high volume customers have
historically been primarily product sales. Therefore, any significant increase
in product sales to high volume customers may increase our overall net sales
and/or our profitability but may also reduce our overall gross profit margins.
Typically, we do not place an order with a supplier until we have
received an order from a customer. Inventory is then drop-shipped by the
supplier to either the customer or our distribution center located in Manhattan
Beach, California. The supplier typically ships products within one to two days.
Consequently, almost all of our revenues in a quarter result from orders
received in that quarter. Although we do not maintain significant inventory, we
record as inventory merchandise being configured as well as merchandise
purchased from suppliers but not yet shipped to customers. As a result, we
generally reflect ten to twelve days' cost of sales as inventory.
We finance the purchase of computer products to fill sales orders
through a line of credit which is collateralized by accounts receivable and
inventory. Because the amount of credit available to the Company is dependent
upon its accounts receivable and inventory balances, any delay in collection or
deterioration of the quality of accounts receivable could adversely affect our
ability to obtain
17
<PAGE> 19
necessary credit, as could economic trends in the computer industry, interest
rate fluctuations and the lending policies of the Company's lenders, resulting
in a material adverse effect on the Company's financial position and results of
operations.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table shows our operating results as a percentage
of net sales:
<TABLE>
<CAPTION>
Three Month's Ended
Year Ended December 31, March 31,
--------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Consolidated
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 88.0 89.2 91.6 91.0 90.1 90.5 89.6
Gross Profit 12.0 10.8 8.4 9.0 9.9 9.5 10.4
Selling, General &
Administrative Expenses 10.4 8.9 8.6 8.3 12.7 12.8 11.9
Income (Loss) from Operations 1.6 1.9 (0.2) 0.7 (2.9) (3.3) (1.4)
Interest Expense 0.3 0.7 0.6 0.6 0.6 0.6 0.5
Other (Income) Expense (0.1) (0.1) (0.1) 0.0 0.9 0.0 0.1
Income Before Taxes 1.4 1.2 (0.7) 0.1 (4.4) (3.9) (2.0)
Provision for Income Taxes (0.5) (0.5) 0.2 (0.0) 0.8 1.6 0.0
Net Income (Loss) 0.9% 0.7% (0.5)% 0.1% (3.6)% (2.3)% (2.0)%
</TABLE>
INTERIM PERIOD
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Revenue. Our revenues increased 83.3% from $15.4 million for the three
months ended March 31, 1998 to $28.2 million in the three months ended March 31,
1999. Of the $15.4 million increase, $14.5 million is attributable to the
acquisition of CY in September 1998.
Gross Profit. Total gross profit was 10.4% of revenues or $2.9 million
for the three months of 1999, compared to $1.5 million or 9.5% of revenues for
the same period in 1998. In dollar terms, total gross profit increased largely
due to the recognition of additional revenues and gross profit in connection
with our acquisition of CY in September 1998. Gross profit as percent of net
revenues increased to 10.4% from 9.5% due in part to timing differences related
to vendor rebates. In addition, the increasing percentage is due to our
increased focus on technical services. These services generally command higher
gross profit margins than product sales.
Operating Expenses. Sales, marketing, and general and administrative
(SG&A) expenditures were $3.3 million in the first three months of 1999, or
11.9% of net sales. This compares to SG&A of $2.0 million or 12.8% in the first
three months of 1998. Of the $1.3 million increase quarter-over-quarter, $1.2
million is attributable to the acquisition and integration of CY.
Since we acquired CY, our SG&A in absolute terms has increased
significantly due to our
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<PAGE> 21
expanded business. However, as a percentage of revenue, our SG&A has decreased
due to economies of scale and the successful integration of the back-offices of
CY and Wareforce Incorporated. As we expand operations via strategic
acquisitions in the U.S. and abroad, we anticipate SG&A as a percentage of
revenue to decline when compared to 1998. However, as we mentioned above,
continued expansion will require additional funding from outside sources. We
cannot guarantee that this funding will be available to us.
Interest Expense. Interest Expense increased $48,000, or 51%, for the
three months ended March 31, 1999 from $94,000 to $142,000. Although sales
increased 83.3%, interest expense increased at a considerably smaller rate.
Through the refinancing of our credit line with a more favorable interest rate
in August 1998, a reduction in the prime rate and better cash flow management,
we were able to minimize the rate of increase in interest expense when compared
to the rate of increase in our sales. The interest rate on our line of credit is
tied to the prime rate and can increase or decrease. An increase could have a
material affect on our profitability. We currently do no hedge against interest
rate increases. However, should we see unanticipated interest rate increases in
the future, we may put into place a hedging strategy. We have historically not
had, and currently do not have, significant amounts of long-term debt and
therefore have not, and do not have, plans to hedge against market risks of our
long-term debt.
FISCAL YEARS
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997.
Revenue. Our revenues increased 11.7% from $79.6 million for the twelve
months ended December 31, 1997 to $88.9 million in the twelve months ended
December 31, 1998. This increase was largely attributable to the acquisition of
CY. However, as we acquired CY at the end of August 1998, our fiscal 1998
results only include the results of CY from September 1 - December 31, 1998. CY
generated approximately $20.1 million in sales during this four-month period.
Gross Profit. Total gross profit was 9.9% of revenues, or $8.8 million,
for 1998, compared to $7.2 million, or 9.0%, of revenues in 1997. This increase
is largely due to the recognition of additional revenues and gross profit in
connection with our acquisition of CY. The gross profit as percent of net
revenues increased to 9.9% from 9.0%. This is due in part to the increasing
percentage of our net sales from higher margin technical services. These
services often command gross profit margins of 25% to 40%, depending on the type
of services performed. Gross profit also increased due to twelve months of
contribution from our Education Advantage Division. This Division acts as a
sales agent for Apple Computer and is paid a commission based on Apple's sales
in the Division's five-state territory. This sales agent program began in May
1997. The Division's contract with Apple runs through December 31
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<PAGE> 22
of each year and is renewable at Apple's discretion.
Operating Expenses. SG&A increased to $11.3 million, or 12.7% of sales
in 1998 from $6.6 million, or 8.3% of sales in 1997, for an increase of $4.7
million. The majority of this increase, $2.7 million or 57%, is due to the
acquisition and integration of CY. Another $1.0 million of the increase is due
to our opening two new sales offices on the East Coast, see Facilities, and the
hiring of sales representatives for sales to state and local governments. The
majority of the remaining $1.0 million increase is due to us building up our
e-commerce and technical services infrastructure to prepare for the expansion of
our business through acquisitions and internal growth.
Other expenses increased to $842,000 in 1998 from $7,000 in 1997
primarily due to one-time expenses associated with the raising of $6.0 million
in financing for 1998.
Net interest expense increased to $551,000 in 1998 from $491,000 in
1997, a $60,000, or 12%, increase. This increase was in keeping with a 12%
increase in sales. The majority of interest expense was due to borrowing against
our credit line used to purchase inventory.
FISCAL YEARS
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996.
Revenue. Wareforce Incorporated revenues decreased $8.9 million or 10.1%
from $88.5 million for the twelve months ended December 31, 1996 to $ 79.6
million in the twelve months ended December 31, 1997. This decrease is due to
the fact that while Los Angeles Micromart, Inc. d/b/a Personal Support Computers
(PSC) contributed $10.1 million to Wareforce Incorporated sales in 1996, it had
no sales from PSC in 1997. PSC, an Apple Computer retail dealership, was
purchased by Wareforce Incorporated in August 1995 and was sold by Wareforce
Incorporated in November 1996. Without the operations of PSC, sales for
Wareforce Incorporated grew from $78.4 million for the twelve months ended
December 31, 1996 to $79.6 million for the twelve months ended December 31,
1997, an increase of 1.5%. This increase was primarily attributable to increased
sales to its existing customers, including higher levels of sales attributable
to software licenses.
Gross Profit. Wareforce Incorporated's gross profit from sales decreased
4.3% from $7.5 million for the twelve months ended December 31, 1996 to $7.2
million in the twelve months ended December 31, 1997. However, its gross profit
from PSC sales contributed $1.7 million for the twelve months ended December 31,
1996 at a gross profit percentage of 16.6%, prior to the reserves described
below. Although the gross profit percentage was higher at PSC than those from
Wareforce Incorporated's traditional corporate sales, PSC had higher SG&A
expenses than Wareforce Incorporated's core corporate sales business. Therefore,
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<PAGE> 23
it contributed a smaller percentage of operating profit than did corporate
sales. Without PSC, Wareforce Incorporated's gross profit increased for the
twelve months ended December 31, 1997 by 22.0% to $7.2 million for the period.
This increase came about as it took advantage of opportunities to increase sales
and increase margins through the sale of a broader range of products and
value-added services such as asset management, help desk services and LAN/WAN
design.
As part of the accounting for the PSC asset sale its discontinuation of
business, Wareforce Incorporated set up a reserve of $0.3 million. This was
comprised primarily of discounts given on the sale of PSC's inventory, plus
other costs associated with the asset sale and business discontinuation. This
reserve reduced Wareforce Incorporated's overall gross profit margin to 8.4% for
the period ended December 31, 1996.
Operating Expenses. Wareforce Incorporated's SG&A attributable to sales
decreased 4.3% from $6.9 million in the twelve months ended December 31, 1996 to
$6.6 million in the twelve months ended December 31, 1997. As a percentage of
sales, SG&A was 8.6% in 1996 and 8.3% in 1997. SG&A for PSC was $1.9 million for
the twelve months ended December 31, 1996. As discussed above, the operations of
PSC were discontinued in November 1996. Without PSC, SG&A increased from $5.0
million, or 6.4% of revenue for the twelve months ended December 31, 1996 to
$6.6 million, or 8.3% of revenue for the period ended December 31, 1997. In
1997, Wareforce Incorporated significantly increased expenditures for new sales
and new technical service personnel and added a significant number of personnel
to support its sales agent contract with Apple.
Interest expense decreased from $580,000 for the twelve months ended
December 31, 1996 to $509,000 for the twelve months ended December 31, 1997. The
lower interest expense in 1997 is due primarily to decreased borrowings as
Wareforce Incorporated paid off a term loan it used to purchase PSC.
LIQUIDITY AND CAPITAL RESOURCES
From inception through 1997, operations have been financed primarily
through credit from vendors and manufacturers as well as from traditional
revolving credit lines that are maintained with various financing companies.
Beginning in 1998, we began obtaining outside financing through the private
placements of convertible, subordinated debt and equity. In March 1998, we
issued $6 million of 12% convertible, subordinated debentures. By June 1998 the
debenture holders had converted their entire debentures into $6 million of
equity. In early 1999, we raised an additional $2.4 million as part of a $4
million private equity offering. In consultation with the placement agent, we
have agreed to postpone raising the remaining $1.6 million of this equity
placement until more favorable market conditions exist for its placement.
Currently, we have a $30.0 million line of credit that was obtained in late
August 1998. This line replaced a $15 million line we had with another lender.
22
<PAGE> 24
For the year ended December 31, 1998, we had a working capital deficit
of $3.7 million. Our management believes those funds on hand, funds available
through our credit line and funds totaling $2.2 million from our recent private
placement will be sufficient to fund our needs through at least March 31, 2000.
We cannot assure you that we will obtain sufficient funds to execute our
business plan or generate positive operating results. We anticipate that we will
have negative cash flows for the foreseeable future as we aggressively seek
additional mergers with, and acquisitions of, electronic commerce and technical
services firms. We cannot assure you that we will not require additional funds
over the next twelve months.
The net cash flows we needed for operating activities totaled $0.4
million for the three-month period ended March 31, 1999. This resulted
primarily from a net loss of $0.6 million for the period and a $0.2 million
change in working capital. The working capital change was due to an increase in
accounts payable and accrued expenses offset by a decrease in accounts
receivable. The cash we needed for operations for the year ended December 31,
1998 was $1.7 million. This was primarily due a net loss of $3.2 million, which
was offset by a decrease in other receivables and inventory and an increase in
accounts payable.
Net cash flows used in investing activities for the three-month period
ended March 31, 1999 was $1.1 million. Investing activity for this period
included $750,000 used for the purchase of the assets of Kennsco and $360,000
for the purchases of computer licenses and computer equipment for our internal
use. A portion of this went for licenses to upgrade our internal systems to ones
that are Year 2000 compliant. We also used some proceeds for the initial costs
involved with our uMember.com acquisition. Net cash flows used in investing
activities for the twelve-month period ended December 31, 1998 totaled $3.6
million. Investing activity for this period included $3.0 million for the
purchase of CY and $640,000 for the purchase of equipment, primarily computer
equipment for internal use. See "The Company - Kennsco Acquisition" and "The
Company - uMember.com Acquisition".
Net cash flows provided by financing activities for the three-month
period ended March 31, 1999 was $1.4 million. The primary source of this
financing activity was our $2.2 million equity placement offset by $0.8 million
to reduce the our line of credit. Net cash flows provided by financing
activities for the twelve-month period ended December 31, 1998 was $5.6 million.
The primary source of this financing activity was the conversion into equity of
our $6.0 million debenture issue. During 1998 we also lent $3 million of the
proceeds from the equity conversion to Mr. Rechtman for him to acquire the
shares of Wareforce then-held by Ms. Gabriel. See note 11 to the 1998 Financial
Statements, "The Company - Background" and "Related Transactions".
The actual level of borrowing capacity under our line of credit is based
on the quantity and
23
<PAGE> 25
quality of our inventory and accounts receivable. Advances under the terms of
credit line agreement are limited to the sum of 85% of eligible accounts
receivable plus 75% of eligible inventory. Interest is payable at the finance
company's prime rate (7.75% as of March 31, 1999) and may be raised to the prime
rate plus two percent under certain conditions. It is also subject to certain
covenants. Pursuant to the line of credit, we are required to maintain a
financial covenant related to our loans to our officers. This covenant was
amended in March 1999 with an effective date of December 31, 1998. As of March
31, 1999, we were in compliance with the amended covenant. The credit facility
is secured by substantially all of our assets and is personally guaranteed by a
majority stockholder of the Company in the amount of $1.5 million. Total
outstanding borrowings under the revolving line of credit were $6.6 million as
of March 31, 1999.
The line of credit includes inventory financing through a third party.
Advances under this flooring plan are based upon qualified inventory purchases
and bear no interest for 30 days. Interest is charged at a rate of 1.5% per
month for payments we make beyond the initial 30-day period. Typically, we
settle our inventory flooring plan payments within the 30-day period.
In March 1998, Wareforce Incorporated issued in aggregate $6.0 million
of 12% subordinated, convertible debentures, maturing one year from the date of
issuance with an option to renew for an additional year. Wareforce Incorporated
paid approximately $900,000 to a third party in connection with raising these
funds. During June 1998, the $6.0 million was converted into equity in exchange
for 2.0 million shares of Wareforce Incorporated common stock. The proceeds of
the debentures were used for the acquisition of CY, a loan to Mr. Rechtman to
acquire the shares of Wareforce then-held by Ms. Gabriel, and general working
capital purposes. See note 11 to the 1998 Financial Statements, "The Company -
Background", "The Company - CY Acquisition" and "Related Transactions".
In February 1999, we issued 600,000 restricted shares of our common
stock in a private placement for $2.4 million. (These funds were part of a $4
million private placement. In consultation with the placement agent, our
management decided to postpone the placement of the additional $1.6 million of
this placement until more favorable market consist for its placement.) We paid
approximately $250,000 to a third party in connection with raising these funds.
The proceeds from this placement were used by us primarily to complete our asset
purchase of Kennsco, funding start-up costs for uMember.com and general working
capital purposes. See "The Company - Kennsco Acquisition".
Many factors relating to obtaining financing are beyond our control. Any
decrease or material limitation on the amount of borrowings available to us
under our line of credit or other financing arrangement, such as floor plan
financing provided by manufacturers and vendors, will adversely affect our
ability to fill sales orders and/or increase our sales. It will also adversely
affect our financial position and operating results. We cannot guarantee that
our creditors will continue to extend credit to us in the amounts they currently
do.
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<PAGE> 26
We anticipate that we will need additional equity investments in the
future to continue our acquisition strategy as well as to fund general working
capital. There can be no assurance that such investments will be obtained. If
they are not, we will be materially, negatively affected.
THE COMPANY
OUR HISTORY AND DEVELOPMENT
Wareforce.com, Inc., a Nevada corporation, is currently engaged in the
business of providing information technology services. We were originally
incorporated under the laws of the State of Nevada on June 27, 1995, under the
name of Jolley Vending, Inc., to engage in the vending machine business. Jolley
completed a public offering in late 1996 early 1997.
In July 1998, we discontinued operations with respect to the vending
machine business and then entered into an Agreement and Plan of Reorganization
with Wareforce Incorporated pursuant to which the Company forward-split its
common stock on a 1.85 for 1 basis, and then issued 9,025,000 post-split shares
of its authorized but previously unissued common stock to acquire all the issued
and outstanding stock of Wareforce in a stock for stock exchange. As part of the
acquisition, we changed our name to Wareforce One, Inc. (which was subsequently
changed to Wareforce.com, Inc. in January 1999) and declared a distribution of
Series A and B Warrants, to be made as soon as practicable after the effective
date of the registration statement of which this Prospectus is part, to the
common stockholders of the Company, of record as of July 13, 1998, immediately
prior to the acquisition. If all such Warrants get exercised, of which there is
no assurance, we would raise an additional $14,430,000 of capital.
OUR BACKGROUND AND BUSINESS
Wareforce Incorporated was originally incorporated in 1985 as a company
to sell technology products, based in El Segundo, California, a suburb of Los
Angeles. Mr. Rechtman and his then-wife Anita Gabriel assumed control of
Wareforce Incorporated in 1990, with Mr. Rechtman serving as President and Ms.
Gabriel as CEO. At that time, Wareforce Incorporated management set a goal of
becoming a complete information technology (IT) solution provider by adding
valuable certifications from leading hardware and peripherals manufacturers.
Management also sought to develop a comprehensive IT services and support
division. Revenues have grown at a compound annualized rate of 60%. Net revenues
increased from $2 million in 1990 to $88.9 million in 1998 through both internal
growth and, more recently, through acquisitions. From its founding in 1985 until
its acquisition by Jolley in August 1998, Wareforce Incorporated was a privately
held corporation and operated under the name
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of Wareforce Incorporated. Ms. Gabriel resigned all her positions with Wareforce
Incorporated in February 1998 upon her sale of her shares in Wareforce
Incorporated to Mr. Rechtman. See "Management" and "Related Transactions".
On January 12, 1999, our board of directors approved the changing of our
name from Wareforce One, Inc., to Wareforce.com, Inc. The move reflected our
strategy to enhance our electronic commerce offerings by selling IT products via
our web site as well as through traditional channels such as direct sales and
over the telephone. We believe that our integrated electronic commerce offerings
are fast and efficient and may reduce our customers' procurement costs. Our
current Internet-based virtual computer products' warehouse represents 140,000
different products from over 900 industry-leading vendors. We expect to attract
new customers to our electronic commerce procurement site as well as lower the
costs of servicing existing clients by automating much of the purchase, status
and invoicing processes.
As a result of our September 1998 acquisition of CY and our March 1999
purchase of the assets of Kennsco, we currently have a sales presence in 31 U.S.
cities and employ approximately 280 people. Wareforce.com would have had pro
forma consolidated revenues of approximately $150 million in fiscal 1998 had the
CY and Kennsco acquisitions been made on January 1, 1998.
GROWTH STRATEGY
We intend to pursue additional acquisitions of IT services businesses
and electronic commerce companies. We expect this to broaden our service
offerings; add technical and sales personnel; increase our presence in existing
markets; expand our reach into new geographic markets in the U.S. and Europe;
improve our operating efficiencies through economies of scale; and cement
strategic vendor and customer relationships. We cannot however, guarantee that
we can find suitable acquisition candidates or that, if we do, we can acquire
them on favorable terms.
CY ACQUISITION
As part of management's strategy to aggressively grow technical services
and increase its local market share in Southern California, the Company
completed the strategic acquisition of CY in September of 1998. CY is a
technical service and computer sales firm based in Los Angeles that generated
revenues of approximately $64.5 million for the twelve months ending December
31, 1998. This marks a 14.5% growth rate from 1997 when their sales volume
reached $56.3 million. CY brings the Company a large, complimentary customer
base, an enhanced presence in the government and corporate market segments,
expanded technical service offerings, and experienced sales, technical and
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professional staff. CY customers include: Los Angeles County, Universal Studios
and Arco. CY was operationally integrated into Wareforce.com in January 1999.
The integration resulted in the elimination of approximately 40 redundant
staffing positions. In a move to simplify its operational structure and take
advantage of a single brand name, we plan to formally dissolve CY into Wareforce
in the third or fourth quarter of 1999.
uMEMBER.COM ACQUISITION
In early 1999, we acquired 70% of the common stock of uMember.com, a
membership-based electronic shopping and auction Internet destination web site.
The terms of our acquisition required us to issue 30,000 restricted shares of
our common stock to the four founders of uMember.com as well require us to fund
$1.0 million of uMember.com's initial operations and development costs. We are
currently attempting to raise this $1.0 million. We cannot assure you that we
will be able to do. If we cannot, the operations of umember.com will be
materially, adversely affected. Umember.com expects to complete development of
its site in the fourth quarter of 1999. We believe that the concept of
uMember.com is unique to the on-line sales and auction sites currently operating
on the Internet today as it plans to draw its customers from the employees of
Wareforce.com's existing corporate, government and education customers rather
than competing for customers through traditional mass advertising.Wareforce.com
will continue to service its clients at the corporate level, while the
uMember.com Internet destination is intended to tap into sales to the employees
of Wareforce.com's existing customer base, an as-yet untapped source of revenue.
We believe that many of our customers, some of whom employ 10,000 or more
employees, would take advantage of the ability to offer uMember.com membership
as a cost-free benefit to their employees. All of our existing accounts,
including such large accounts as Northrop Grumman Corp., NASA, TRW Inc., the
University of California school system, The Walt Disney Co., Universal Studios,
Inc., the National Association of Counties, the governments of the State of
Florida and the County of Los Angeles are potential participants in this unique
marketing strategy. Membership will also be offered to groups and associations
(such as the National Credit Union Association) that are registered directly by
uMember.com's sales force. By leveraging Wareforce.com's existing customer base
alone, an estimated 3-5 million employees may be eligible to join the
uMember.com Internet sales and auction network.
uMember.com expects its members to benefit from volume discounts
negotiated with manufacturers and service providers. It expects to offer
consumer products and services for sale and auction ranging from computers,
consumer electronics and jewelry to travel and personal financial services.
uMember.com expects prices to be competitive with those of uBid.com, Onsale.com
and other online suppliers. We expect revenues from the uMember.com venture to
be generated through advertising, marketing development funds provided by
product vendors, transaction fees and online sales. In March 1999, Wareforce.com
entered into a Letter of Intent to acquire, subject to certain
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conditions, on behalf of itself and uMember.com, the technology and methodology
employed by Bid On Line Sourcing Ltd. ("BOL"), an Israeli-based company. The
terms of this Letter of Intent call for Wareforce.com to purchase 19.9% of BOL
for BOL's Reverse Approach Real-Time ("RAR") search engine technology. The
Letter of Intent called for due diligence to be complete within 60 days from the
date of its initiation. As our due diligence is not yet complete, we anticipate
extending this 60-day period. However, there is no guarantee that such an
extension will be granted. If it does not, we cannot guarantee that the BOL
technology will be available to uMember.com and us. If it is not, we do not
anticipate a material effect on the business of uMember.com or us.
uMember.com plans to make an initial public offering in late 1999 or
early 2000. Our board has also discussed the possibility of distributing all or
a portion of the shares we hold in uMember.com to our shareholders in a tax-free
distribution at some point either immediately before or after such an initial
public offering. However, uMember.com has not yet entered into any negotiations
with any underwriters for such a public offering and there is no guarantee that
one will occur, or should one occur, that it will be successful. Also, our board
has not yet made a final determination of such as to such a share distribution
nor has our independent auditors advised us on the tax and accounting
consequences of such a distribution, should one occur.
KENNSCO ACQUISITION
In March 1999, we completed the asset purchase and assumption of
liabilities of Kennsco, a $16 million technical services company. The purchase
consisted of a combination of $750,000 in cash, a $250,000 note payable in
common stock and the assumption of approximately $3,659,000 in liabilities.
Kennsco, based in Minneapolis, Minnesota, held technical service contracts in
Florida, Minnesota, Illinois and seven other Midwestern states and employed
approximately 90 professionals company-wide. Virtually all Kennsco contracts
have been assigned to, or assumed by, the Company. We also hired virtually all
of Kennsco's employees. The acquisition greatly expands our sales and service
offerings in Florida, where we hold an exclusive Microsoft Select product
contract for government and higher education users. It also strengthens our
Midwestern presence as a technical service provider and enhances our ability to
provide nationwide technical services and support to our customers' field
offices throughout the U.S. The transaction also gives us ownership of Kennsco's
Leasing Division, which expands our ability to lease computer equipment directly
to end-users. Kennsco currently operates as a division of Wareforce under the
name Kennsco Technical Services. In an effort to simplify its operations and
take advantage of a single brand name, the Company plans to discontinue the use
of the Kennsco trade name in late 1999.
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OTHER
We have verbally agreed to a joint venture agreement as part of two-step
process to acquire privately held CampaNova GmbH of Frankfurt, Germany.
CampaNova provides business-to-business and business-to-consumer E-commerce
solutions to the German market. We expect the purchase of CampaNova to take
place in late 1999. We cannot guarantee however that this acquisition will occur
or that the joint venture or acquisition will be successful or, if it is not,
that it will not materially impact our financial condition. We also, from time
to time, are in discussions with various other entities concerning joint
ventures and acquisitions. We cannot guarantee that any of these will come to
fruition or that if they do, that they will be successful.
CUSTOMERS
In fiscal year 1998, we had a customer base of over 1,500 active
customers. Many clients have been active customers for three or more years. In
addition, many of these customers have numerous departments, divisions and end
users. They are usually authorized to make independent purchase decisions and to
establish discrete, billable accounts. For example, Wareforce.com serves over 50
different operating departments within Los Angeles County alone. A sample list
of customers include: SBC Communications Inc. (Pacific Bell), Universal Studios,
Inc., LA Cellular, Arco, The Boeing Company, the State of California, the State
of Florida, Los Angeles County and the University of California University
school system. In certain instances, Wareforce.com has exclusive or limited
competition sales contracts with customers that generally cover the procurement
of products and services over a one-to-three year period and may contain one or
more one-year renewals. These contracts are subject to the customers' rights to
terminate the contract upon notice. Payment terms with substantially all of our
customers are net 30 days. Although customer arrangements vary, we generally
give customers return (for credit or, in limited cases, refunds) and exchange
privileges. These are usually limited to 20 calendar days for stock hardware and
software products and defective or damaged products.
Only one customer, Los Angeles County, represented greater than 10% of
our net revenues in the first quarter of 1999. Sales to Los Angeles Country
represented 18.5% of our total revenues during the quarter. Only two customers
represented greater than 10% of net revenues during 1998. The State of Florida
and Los Angeles County represented approximately 15.3% and 11.5% respectively of
consolidated net revenues during 1998. No other customers comprised greater than
10% of net revenues during 1998.
SALES AND MARKETING
We generally sell and market to four types of customers: Technical
Services; Corporate (mid-size, large and Fortune 1,000); Government (State &
County); and Education (K-12 and Higher Education). The Company rarely sells to
individual consumers. The Company's sales team consists of
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inside and outside sales representatives and customer support personnel, all of
whom generate business via direct sales calls, telephone, fax, email and via the
Company's electronic commerce web site. Sales personnel have access to real-time
pricing and availability from the two industry-leading distributors of computer
products, Ingram Micro and Tech Data via electronic links. Management believes
that it will generate additional sales while lowering operating costs through
sales via electronic commerce on its web site. Although we are highly reliant on
various automated systems, we attempt to maintain a high level of personal
interaction with customers to ensure the highest level of customer service
possible.
SUPPLIERS
We rely on manufacturers and third-party vendors, including distributors
and aggregators of computer hardware, software and peripherals to develop,
manufacture and supply all of the computer components we sell and service. We
procure computer equipment through relationships and alliances with the nation's
largest distributors of computer products, Ingram Micro Inc. Merisel Inc., and
Tech Data Corporation and with the nation's largest aggregators of computer
products, Ingram Alliance, a division of Ingram Micro, Inacom Corporation and
Pinnacor, Inc., a wholly-owned subsidiary of MicroAge, Inc. These alliances
enable us to provide customers with a wide selection of products without
subjecting us to many of the risks and costs of maintaining high levels of
inventory. As part of our integrated electronic commerce solution, we download
daily product pricing, availability and shipping data directly from Ingram
Micro/Ingram Alliance and Tech Data's online inventory databases. Updates are
provided virtually real time. Management believes that this tight integration
with vendors allows the Company to provide the quickest, most accurate
procurement services possible.
Purchases from aggregators and distributors Ingram Alliance, Ingram
Micro, and Tech Data accounted for 19%, 16% and 11% respectively of our
aggregate purchases for the quarter ended March 31, 1999. Certain suppliers
provide the Company with trade credit as well as substantial incentives in the
form of discounts, rebates and cooperative advertising. Substantially all of our
contracts with our suppliers are terminable upon 30 days' notice or less and
several contain minimum volume requirements as a condition to providing
discounts to us.
In addition to our relationships and alliances with aggregators and
distributors, we maintain standard authorization dealership agreements directly
with many leading manufacturers of computer hardware and software. Under the
terms of these agreements, we are authorized to resell to end-users and provide,
in certain cases, warranty service on the products of such manufacturers. Our
status as an authorized dealer is essential to the operation of our business. In
general, the agreements do not require minimum purchases and include termination
provisions ranging from immediate termination to termination upon 90 days prior
written notice. We generally do not purchase products directly from these
manufacturers because we believe that our distributors and aggregators provide
us with several
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advantages, including competitive pricing, limited inventory risk, ready product
availability, product quality assurance and access to the various vendors which
may be required on a particular project. There was no single hardware
manufacturer from whom we purchased directly more than 10% of our total
purchases in the first quarter of 1999. However, we had two hardware
manufacturers, Gateway 2000 and Dell Computer Corporation, which accounted for
approximately 3% and 2% of our purchases for the quarter ended March 31, 1999,
and for which their products may only be purchased directly from them.
Additionally Wareforce purchases Microsoft product licenses directly from
Microsoft. These purchases accounted for 20% of total purchases for the quarter
ended March 31, 1999.
DISTRIBUTION
Our main distribution site is located in Manhattan Beach, California.
See "The Company - Facilities". We also have a small amount of inventory on hand
in its regional offices to serve the unique needs of the local customer base.
However, greater than 95% of our inventory is maintained at our Manhattan Beach
distribution center.
We have invested in considerable sums to automate and streamline our
ordering and distribution process. When an order is entered into the system, a
credit check or credit card verification is performed, and if approved, is
electronically transmitted to the purchasing department to process. If the
requested item is on hand in inventory, the order is electronically transmitted
to the warehouse area and a packing slip is printed for order fulfillment. If
the product is not in stock, a purchase order is submitted with a vendor /
manufacturer and is either drop shipped (supplier ships directly to the
customer) or is received by our distribution facility for subsequent delivery to
the customer via UPS, FedEx or one of the our own delivery vehicles.
In general, we do not order any product unless it has received a
confirmed sales order from a customer. We currently conduct the majority of
business via direct shipment from distributor to customer. This is commonly
referred to as drop shipping. Upon request, orders may be delivered directly by
our own delivery vehicles for distances typically less than 50 miles. However,
certain customers and types of transactions require, from time to time, us to
purchase a limited amount of inventory with intention of reselling such
merchandise within 30-60 days. Currently, most of our inventory purchases are in
the areas of Microsoft software and CD-ROM drives, the latter of which AOD, a
division of CY specializing in storage devices, sells as a specialized
distributor. This typically requires a greater reliance on a purchased inventory
model. However, in the second quarter of 1999 we decided to discontinue the
operations of AOD during the third quarter of 1999, as they are not in keeping
with our core business model. Management estimates that this will result in a
loss of approximately $5 million in revenues on an annualized basis. However, we
do not expect to record any charges for this discontinuation.
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However, further development of our web sales strategy may require an
increase in the amount of purchased inventory we currently hold and would carry
with it the risks associated with holding inventory for sale.
COMPETITION
We operate in a segment of the information technology industry that is
highly competitive. We compete with a large number and variety of resellers of
computer hardware and software and technical service provides. Our competition
includes computer retailers, computer superstores, consumer electronics and
office supply superstores, mass merchandisers, corporate resellers, value-added
resellers, specialty retailers, distributors, franchisers, mail order and
web-based retailers and online auction companies.
Specifically, in the technical services segment, we compete against two
basic types of companies: those that specialize in providing consulting and
technical services such as GE Information Services, a part of the General
Electric Company, Electronic Data Systems Corporation, Computer Science
Corporation, BancTec, Inc., and DecisionOne Corporation and those that provide
hardware and/or software procurement in addition to technical services and
support. Companies in the latter category include CompuCom Systems, Inc., Entex
Information Services, Inc., Inacom, Microage, and En Pointe Technologies Inc.
In the computer hardware segment, we compete not only with the large
computer resellers and technical services firms mentioned above but also with
companies that primarily specialize in the resale of computer hardware products
or have significant computer sales. Competitors in this segment include: CDW
Computer Centers, Inc., Micro Warehouse Inc., CompUSA Inc. and Office Depot,
Inc. In addition, we compete with manufacturers such as Compaq Computer, who
sell directly to end-users as well as to wholesale distributors and resellers.
We also compete with direct marketing and build-to-order computer suppliers such
Dell and Gateway 2000, Inc., both of whom sell directly to end-users, and
increasingly, directly to businesses.
Most recently, we have faced competition in the hardware segment from
online web merchants such as Buycomp.com as well as from combination
distributor-resellers of computer equipment such as TechBuyer.com and
pcOrder.com. We also face competition from online auction sites such as
Onsale.com, eBay.com and Yahoo! Auctions that sell new, refurbished and closeout
computer products, often at or below wholesale cost, in efforts to build market
share.
In the software and software licensing segment, we compete with many of
the hardware resellers
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mentioned above as well as organizations that specialize in only software sales
such as Softmart Management Services, Inc., Software Spectrum, Inc.,
Softwarehouse, ASAP Software Express, Inc., and Egghead.com, Inc.. Many of these
vendors operate mail order, telemarketing and online web sites as part of their
sales and marketing strategy.
Due to the increasing commoditization of computer products, many of our
competitors compete principally on the basis of price, and may, from time to
time, sell products at or below wholesale cost in an effort to increase volume
and market share. The proliferation of manufacturers, suppliers and resellers
and highly competitive pricing has caused the prices of component parts such as
microprocessors, hard drives, and RAM to fall, thus driving retail prices lower
as well. The trend of declining prices is expected to continue in the future.
Falling prices and increasing competition have driven, and are expected to
continue to drive, average gross profit margins lower, making it more difficult
to generate the same revenue and gross profit dollars for a given level of unit
sales volume.
In addition, our industry is characterized by abrupt changes in
technology, associated inventory and product obsolescence, rapid changes in
consumer preferences, short product life cycles and evolving industry standards.
We will need to continue to provide competitive prices, superior product
selection and quick delivery response time in order to remain competitive. While
we believe that we compete successfully with respect to most, if not all of
these factors, there can be no assurance that we will continue to do so in the
future. If we fail to compete favorably with respect to any of these factors,
our business, financial position, results of operations and cash flows would be
materially and adversely affected.
In response to the severe margin pressure in the computer hardware and
software segments, we and some of our competitors have aggressively focused on
expanding technical services offerings which offers value-added products and
services, higher gross margins, greater differentiation from competitors and
increased customer loyalty.
EMPLOYEES
As of May 30, 1999, we employed approximately 290 individuals, including
approximately 84 sales, marketing and related support personnel, 137 technical
service and support personnel, 31 purchasing and warehousing personnel and 38
employees in information systems (IS), administration and finance. We believe
that our ability to recruit and retain highly skilled sales, technical and
management personnel will be critical to our ability to execute our business
model and growth strategy. None of our employees are represented by a labor
union or are subject to a collective bargaining agreement. We believe that our
relations with our employees are good.
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FACILITIES
Our executive offices and principal administrative, marketing and sales
operations are located in approximately 7,100 square feet of space in El
Segundo, California. This is approximately 15 miles from downtown Los Angeles.
The lease on this space expires in April 2003. In addition, we lease
approximately 23,089 square feet of space in Manhattan Beach, California
(directly across the street from our headquarters) to house our warehousing,
distribution, data processing and finance operations. This lease expires on
January 31, 2005. See "Certain Transactions". Wareforce recently terminated a
lease in Shelton, Connecticut that housed its Connecticut sales office. This
lease originally expired in July 2003. Wareforce has agreed to pay $3,500 per
month through December 1999 to the Connecticut landlord for canceling the lease
early. Wareforce also leases space on a month-to-month basis in an executive
suite building in Blue Bell, Pennsylvania to house its Pennsylvania sales
office.
In our acquisition of CY, we acquired an approximate 5,000 square foot
sales office in Commerce, California under a lease expiring in July 1999; an
approximate 2,309 square foot sales office in Irvine, California under a lease
expiring June 30, 1999; and an approximate 2,828 square foot sales office in
Encino, California under a lease expiring December 31, 2000. In May 1999 CY
moved out of its Commerce sales office into a smaller facility. It remains
obligated on the original Commerce sales office lease through the end of its
July 1999 term. The lease for the smaller facility also in Commerce, California
expires in April 2003. CY received a three-month rent abatement on the new,
smaller facility to partially offset the remaining lease obligation on the
original Commerce sales facility. In addition, Wareforce has entered into a
lease on behalf of CY for approximately 2,074 sq. ft. of office space to replace
the expiring Irvine lease. This new Irvine lease expires on June 30, 2001.
In our asset acquisition of Kennsco, we acquired leases for various
small (generally under 1,000 sq. ft.) office locations in the Midwest and
Florida. For the most part, these are leased on a short-term basis. We also
acquired a three-year lease on Kennsco's principal office and warehouse building
located in Plymouth, Minnesota, a suburb of Minneapolis, Minnesota. This
location is owned by Kenneth Searl, our current Vice President and Kennsco's
former President. Our annual lease obligation for this approximately 24,000 sq.
ft. facility is $189,571. See "Certain Transactions".
We believe these facilities are adequate for current needs and that
suitable additional or substitute space is available if needed.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation. We are not
aware of any pending or threatened litigation other than litigation that may be
instituted by the Company against a customer
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arising from an unpaid account receivable of approximately $290,000. We are from
time to time involved in routine litigation incidental to our business.
AVAILABLE INFORMATION
We have filed with the United States Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1, under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement. For further information regarding both us and the
Securities offered hereby, reference is made to the Registration Statement,
including all exhibits and schedules thereto, which may be inspected without
charge at the public reference facilities of the Commission's Washington, D.C.
office, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies may be obtained
from the Washington, D.C. office upon request and payment of the prescribed fee.
As of the date of this Prospectus, we became subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission. Reports and other
information filed by us with the Commission pursuant to the informational
requirements of the Exchange Act will be available for inspection and copying at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: New York Regional Office, 75 Park Place, New York,
New York 10007; Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material may be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains an Internet Web site that
contains reports, proxy and information statements and other information
regarding issuers that file such reports electronically with the Commission.
Such site is accessible by the public through any Internet access service
provider and is located at http://www.sec.gov.
Copies of our Annual, Quarterly and other Reports which will be filed by
us with the Commission commencing with the Quarterly Report for the first
quarter ended after the date of this Prospectus (due 45 days after the end of
such quarter) will also be available upon request, without charge, by writing
Wareforce.com, Inc., 2361 Rosecrans Avenue, Suite 155, El Segundo, California
90245.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our directors and executive officers,
their ages, and all offices and positions with us. Directors are elected for a
period of one year and thereafter serve until the next annual meeting at which
their successors are duly elected by the stockholders. Officers and other
employees serve at the will of the board of directors.
<TABLE>
<CAPTION>
Name* Age Position
----- --- --------
<S> <C> <C>
Orie Rechtman(1) 47 Chairman, President & Chief Executive Officer
Don Hughes(2) 55 Director, Chief Financial Officer & Chief Operating Officer
Dan J. Ricketts, Esq.(3) 36 Director, Secretary-Treasurer, Vice President of
Administration and General Counsel
Raymond Wicki 55 Director
Harold Greenberg Director
Darrell Tate(4) 32 Vice President, Strategic Business Development
Richard Fu(5) 37 Vice President, Sales
Kenneth Searl(6) 53 Vice President, Technical Services
Marcia Mazria(7) 55 Vice President, Marketing and Communications
Leon Hasson(8) 44 President, uMember.com
</TABLE>
(1) Mr. Rechtman also serves as a director and Chairman, President and Chief
Executive Officer of both CY and Wareforce and as a director and
Chairman and CEO of uMember.com.
(2) Mr. Hughes also serves as a director and Chief Financial Officer, Chief
Operating Officer, Vice President and Treasurer of CY, as a director and
Chief Financial Officer, Chief Operating Officer and Vice President of
Wareforce and as a director and Vice President of uMember.com.
(3) Mr. Ricketts also serves as a director and Secretary, Vice President and
General Counsel of CY, as a director and Secretary-Treasurer, Vice
President and General Counsel of Wareforce and as a director and Acting
Vice President, General Counsel and Assistant Secretary of uMember.com.
(4) Mr. Tate is employed as Vice President, Strategic Business Development
for Wareforce and as a director and Acting Vice President of Sales for
uMember.com and also does work for all our subsidiaries.
(5) Mr. Fu is employed as Vice President, Sales for us and Vice President
and General Manager for CY but does work for all our subsidiaries.
(6) Kenneth Searl is one of our Vice Presidents and is also Vice President
of Wareforce's Kennsco Technical Services Division.
(7) Ms. Mazria is Vice President, Marketing and Communications for Wareforce
but does work for all our subsidiaries.
(8) Mr. Hasson is also a director of uMember.com. He is also on the board of
directors of Continental Computer Exchange, the company that purchased
the assets of PSC from Wareforce. See "Related Transactions".
All of our directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified. Our
board of directors elects our officers. This takes place at
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the Board's first meeting after each annual meeting of our shareholders. The
officers hold office until their death, resignation or removal from office. We
have both a Compensation Committee and an Audit Committee. Messrs. Wicki and
Greenberg are the members of these committees. Prior to their elections to our
board, our full board served the functions of these committees. No other
committees of the Board have been established to date.
These individuals serve as our executive management and/or members of
our board. A brief description of their background and business experience is as
follows:
ORIE RECHTMAN has served as a director and the Chairman, President and
CEO of Wareforce.com since July 1998. He has served as a director and Chairman
and CEO of uMember.com since February 1999. He has served as a director,
Chairman, President and CEO of CY since September 1998. He has been President
and a director of Wareforce since joining Wareforce in September 1989. In
February 1998, Mr. Rechtman was appointed to the additional offices of Chairman
and CEO of Wareforce. Mr. Rechtman's experience in the computer field goes back
to the inception of this industry in 1981. At that time, he was involved in
establishing the first distribution channel for computer software to educational
institutions in the U.S. and Israel. As the president of School Computing
Distributors, he merged that business with us in 1990 after completing the
buyout. Prior to arriving in the United States, Mr. Rechtman received a degree
equivalent to a B.S. in Electrical Engineering from the Israeli Air Force in
1972.
LEON HASSON has served as a director and President of uMember.com since
its founding in January 1999. For the two years prior to founding uMember.com,
Mr. Hasson was the CEO of Continental Computer Exchange, a multi-million dollar
computer reseller to corporate customers in the Los Angeles area. Mr. Hasson
remains on the board of Continental. He also serves as a member of the board of
BNL Technologies, Inc., d/b/a Fantom Drives. For the seven years prior to his
service with Continental, Mr. Hasson served a marketing manager for the mail
order department of Data Micro Computers, Inc.
DON HUGHES has served as a director, CFO and COO of Wareforce.com since
July 1998. He has served as a director and Vice President of uMember.com since
February 1999. He has been a director, CFO, COO, Vice President and Treasurer of
CY since September 1998. And he has been Wareforce's Vice President-Finance and
CFO since joining Wareforce in July 1996. On March 6, 1998, he was elected to
the additional position of COO of Wareforce. Since February 26, 1998, he has
also served on Wareforce's board of directors. Prior to joining Wareforce, Mr.
Hughes served as Vice President and CFO of Transoft Technology Incorporated from
October 1995 to July 1996. From 1993 to October 1995, Mr. Hughes was the CFO of
Clean-Up Technology, Inc., a contractor specializing in the environmental
remediation business, which recently ceased operations. From 1992 to 1993, Mr.
Hughes
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<PAGE> 39
was an independent business consultant, and from 1989 to 1992, Mr. Hughes was
the Vice President of Finance and CFO of Los Angeles Cellular Telephone Company,
a cellular telephone service provider in Los Angeles. Mr. Hughes earned his
B.S.E.E. from Virginia Polytechnic Institute in 1966 and his MBA from the
University of Southern California in 1972.
DAN J. RICKETTS has served as a director and Secretary-Treasurer, Vice
President of Administration and General Counsel of Wareforce.com since July
1998; as a director of uMember.com and its Acting Vice President and General
Counsel and Assistant Secretary since February 1999; CY's Secretary, Vice
President and General Counsel since September 1998; and has served as Secretary,
Vice President and General Counsel of Wareforce since March 6, 1998. From June
1996 through February 1998 Mr. Ricketts served as Wareforce's Senior Legal
Counsel. From May 1995 when he joined Wareforce to June 1996, Mr. Ricketts
served as Wareforce's Director of Legal and Business Affairs. From May 1997 to
July 1998, Mr. Ricketts also served as the Director of the Wareforce's Education
Advantage Division and from October 1996 to May 1997 served as Wareforce's
acting Director of Human Resources. Mr. Ricketts has served on Wareforce's board
of directors since March 6, 1998; CY's board of directors since September 1998
and Wareforce One's board of directors since July 1998. Prior to joining we Mr.
Ricketts was a Senior Contracts Specialist with Southern California Edison from
February 1994 to April 1995. From August 1992 to February 1994 Mr. Ricketts was
Legal Counsel to Ingram Micro Inc. Mr. Ricketts graduated with a Bachelor of
Science in Finance (with honors) from the University of Tennessee in 1985 and
with a law degree from the University of Tennessee College of Law in 1992. Mr.
Ricketts is currently licensed to practice law in the State of California.
RAYMOND WICKI has served as a director since June 1999. From 1990 to
present, Dr. Wicki has been and currently is the CEO of Bank von Graffenried, a
family-owned bank in Bern, Switzerland. From 1983 to 1990, Dr. Wicki focused on
private and industrial portfolio management, including building and managing the
institutional asset management business of a large Swiss bank. In the late
1970's, Dr. Wicki, with two partners, established one of the first venture
capital funds that invested in the U.S. and in Germany and Switzerland. For the
eight years prior, Dr. Wicki was with the industrial organization of the Aga
Khan, serving as its Head of Finance. Dr. Wicki started his professional career
in the investment department of Hoffmann-La Roche, a Swiss pharmaceutical group.
Dr. Wicki received a business administration degree and a Ph.D. in finance and
taxation from the University of Bern, Switzerland. He also holds an MBA from
Kent State University in Ohio.
HAROLD GREENBERG has served as a director since June 1999. Mr. Greenberg
is currently presently President of Earl Greenberg Productions, Inc. and
Co-Chairman of Transactional Marketing Consultants. Mr. Greenberg served as
President and CEO of Transactional Media, Inc. until 1995. Mr. Greenberg has
also served as President of HSN Entertainment, an arm of the Home Shopping
Network and Quantum Marketing, a pioneer in the Infomercial format. Mr.
Greenberg has also been an
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<PAGE> 40
independent producer, serving as Executive Producer for such shows as The Regis
Philbin Show. From 1981-1984, Mr. Greenberg served as Vice President, Compliance
and Practices for NBC-TV and Vice President-In-Charge of Daytime Programming. He
graduated from the University of Pennsylvania School of Law and practiced
corporate and antitrust law from the late 1960's to 1978. Mr. Greenberg is a
member of the board of the Electronic Retailing Association.
DARRELL TATE joined Wareforce in December 1994 as Director of Sales and
became its Vice President, Worldwide Sales and Marketing in July 1996. Mr. Tate
served on the Wareforce board of directors from November 1995 through August
1996, at which time he was removed from the board as part of the ongoing divorce
proceeding involving Mr. Rechtman and Ms. Gabriel. Mr. Tate rejoined the board
on March 6, 1998 and subsequently resigned his position from the board on May
19, 1998 in order to take a leave of absence from Wareforce. Mr. Tate returned
to Wareforce in late November 1998 as was appointed its Vice President of
Strategic Business Development. He has served as a director of uMember.com and
its Acting Vice President of Sales since February 1999. Mr. Tate has over ten
years of experience in the PC industry. From June 1991 to December 1994, Mr.
Tate was a Reseller Account Manager with Microsoft Corporation where he had
responsibility for managing some of Microsoft's largest multi-location resellers
across the country. From May 1990 to June 1991, Mr. Tate served as Product
Manager with O'Neil Product Development. From January 1987 to March 1990, Mr.
Tate was Marketing Manager for Instant Replay Corporation. Mr. Tate received a
B.A. in Organizational Communications from the University of Utah in 1989.
RICHARD FU has over 15 years of industry experience in corporate
Information Services management, computer reseller and system integrator
environment and has served as the Vice President of Sales of Wareforce
Incorporated since September 1998 and as Vice President/ General manger for
Impres since 1995. Mr. Fu also served as the Director of the Advanced Technical
Services division of Microage of Commerce, CA (a former d/b/a of CY ) from 1995
to 1998. Prior to joining CY, Mr. Fu served as Financial Systems Manger for
GlenFed Services Corporation from 1992 to 1995. Mr. Fu also has served in
various Information Services management roles and consulted for construction and
real estate development companies. Mr. Fu has a B.S. degree in Computer Science
from UCLA.
MARCIA MAZRIA has served as Vice President of Marketing and
Communications since joining Wareforce.com in July 1998. From 1991 to July 1998,
she was President of Mazria Leeds, Inc., Marketing Consultants, providing
independent marketing consulting services to a variety of companies. From 1975
to 1990, Ms. Mazria was President/CEO of Mediaworks, Inc., a full service
regional marketing and advertising firm serving clients primarily in the high
tech, government, energy, hospitality and construction industries. Ms. Mazria
holds a BA/Design (with Honors) from Pratt Institute, New York, and a
MA/Communications from the University of New Mexico.
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<PAGE> 41
KENNETH SEARL has served as a Vice President of Wareforce.com since May
1999 and has been a Wareforce Vice President of Technical Services responsible
for its Kennsco Technical Services Division since May 1999. For the
approximately 25 years prior to our acquisition of the assets of Kennsco, Mr.
Searl served as Kennsco's Chairman, CEO and President and was involved in a wide
variety of management, sales and leasing activities for Kennsco. Mr. Searl has
participated in the American Management Association's President's Leadership
Program and received a Bachelor of Science degree in Economics from the
University of Wisconsin.
There are currently no arrangements or understandings regarding the
length of time each director of the Company is to serve in such capacity.
We may adopt provisions in its by-laws and/or articles of incorporation
to divide our board of directors into more than one class and to elect each
class for a certain term. These provisions may have the effect of discouraging
takeover attempts or delaying or preventing a change of control of our Company.
EXECUTIVE COMPENSATION
The following table summarizes executive compensation paid or accrued
during the past three fiscal years for the Company's Chief Executive Officer
during that period and the most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000 during those years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name Other
And Annual Restricted LPIT All Other
Principal Compen- Stock Underlying Payouts Compen-
Position Year Salary($) Bonus($) sation($) Award(s)($) Options/SARs(#) ($) sation($)
- -------- ---- --------- -------- --------- ----------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Orie Rechtman
CEO 1998 239,220(3) 90,780
1997 148,440
1996 214,349
Don Hughes
CFO 1998 141,250(4) 10,000 49,750
1997 135,346
1996 56,866
Dan Ricketts
VP & General
Counsel 1998 79,999(5) 38,967(9) 49,750
1997 88,788
1996 61,330
Darrell Tate
VP, Business
Development(1) 1998 45,833(6) 10,000 500(10) 24,875
1997 130,657
1996 107,924
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
Name Other
And Annual Restricted LPIT All Other
Principal Compen- Stock Underlying Payouts Compen-
Position Year Salary($) Bonus($) sation($) Award(s)($) Options/SARs(#) ($) sation($)
- -------- ---- --------- -------- --------- ----------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Fu
VP, Sales(2) 1998 169,953(7) 10,000 1,750(11) 33,359 146
1997 --
1996 --
Marcia Mazria
VP, Marketing 1998 $ 40,000(8)
</TABLE>
(1) Mr. Tate was on unpaid sabbatical from May 19, 1998 to November 30,
1998.
(2) Amounts for Mr. Fu include compensation from C.Y. during January -
August 1998 as well as compensation from us from September - December
1998.
(3) On June 1,1998, Wareforce Incorporated entered into an employment
contract with Mr. Rechtman which, among other things, increased his base
salary from approximately $150,000 per year to $330,000 per year and
granted him a bonus of up to $170,000 per year based on it meeting at
least 90% of its annual projections. Mr. Rechtman receives no salary for
his work with uMember.com but has been awarded by the uMember.com board
250,000 fully-vested options to purchase the shares of uMember.com for
his service to uMember.com to date.
(4) On June 1, 1998, Wareforce Incorporated entered into a new employment
contract with Mr. Hughes that, among other things, increased his base
salary from $120,000 per year to $150,000 per year. Mr. Hughes receives
no salary for his work with uMember.com but has been awarded by the
uMember.com board 25,000 fully vested options to purchase the shares of
uMember.com for his service to date.
(5) On June 1, 1998, Wareforce Incorporated entered into an employment
contract with Mr. Ricketts. Among other things, this contract increased
his base salary from $50,000 per year to $100,000 per year (amended on
July 14, 1998 to $110,000 per year). It also granted him a one-time
bonus of $10,000 for the successful completion of our Reverse Merger and
a bonus of $50,000 per year based on his meeting at least 90% of the
annual goals set for him by the board. Mr. Ricketts receives no salary
for his work with uMember.com but has been awarded by the uMember.com
board 25,000 fully vested options to purchase the shares of uMember.com
for his service to date.
(6) On June 1, 1998, Wareforce Incorporated entered into an employment
contract with Mr. Tate. Among other things, this contract increased his
base salary from $60,000 per year to $110,000 per year and granted him a
bonus of $50,000 per year based on his meeting at least 90% of the
annual goals set for him by the board. Mr. Tate receives no salary for
his work with uMember.com but has been awarded by the uMember.com board
25,000 fully vested options to purchase the shares of uMember.com for
his service to date.
(7) On August 28, 1998, as part of our purchase of CY, we entered into an
employment contract with Mr. Fu. Among other things, this contract
granted him a base salary of $110,000 per year, a one-time signing bonus
of $10,000, a bonus of $50,000 per year based on his meeting at least
90% of certain goals related to the gross revenues of Impres' and, if
Impres' revenues exceed 125% of their annual goal, an additional bonus
equal to 0.01% of the revenues of Impres that exceed Impres' annual
revenue goal., and 33,359 non-cash incentive stock options granted at a
fair market value of $5.00 per share.
(8) Ms. Mazria served as an independent consultant to Wareforce in 1996 and
again from February 1998 to June 1998. We paid $17,590 for her
independent consulting services in 1998. On July 1, 1998, Wareforce
Incorporated entered into an employment contract with Ms. Mazria. Among
other things, this contract provides for a base salary of $80,000 per
year, a $5,000 quarterly bonus and a bonus plan to be established based
on Co-op and Market Development Funds obtained under her supervision.
(9) Includes $2,000 auto allowance.
(10) Includes $500 auto allowance.
(11) Includes $1,750 auto allowance.
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<PAGE> 43
COMPANY COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors currently does not have a Compensation Committee.
The CEO generally makes recommendations concerning salaries and incentive
compensation for our executive officers, directors and managers to our board of
directors. For information concerning transactions with the our directors and
entities affiliated with certain directors, see "Certain Relationships and
Related Transactions."
OPTION/SAR GRANTS
We have not granted any stock appreciation rights to any officer,
director or employee.
Previously, the Wareforce board of directors granted options to purchase
121,000 shares under Wareforce's 1996 Stock Option/Stock Issuance Plan to
various officers and employees of Wareforce. This was done as part of
Wareforce's efforts to undergo an Initial Public Offering. Each option was
immediately exercisable for all of the option shares. However, any shares
purchased under the option were subject to repurchase by Wareforce at the option
exercise price paid per share. Wareforce could do this if the optionee left
Wareforce before vesting in the shares. The weighted average exercise price per
share for the options outstanding under the 1996 Plan was $2.78. Each Twenty
five percent of each option would have vested upon the optionee's completion of
one year of service with Wareforce. This was measured from the grant date. The
remaining option shares would have vested in 36 equal, successive monthly
installments over the optionee's continued period of service thereafter. In
addition, the options would have vested in full upon the acquisition of
Wareforce by merger or asset sale. This vesting would not have occurred if the
options had been assumed by, and the repurchase rights are assigned to, the
acquiring company. Any assumed options would have subsequently vested in full in
the event the optionee's service was terminated by the acquiring company. This
would have happened whether the termination was involuntarily or through a
resignation for good reason, within eighteen months following the acquisition.
The options had a maximum term of ten years measured from the grant date,
subject to earlier termination upon the optionee's termination of service with
the company. However, on September 18, 1997, the Wareforce board of directors
rescinded all grants under the IPO Grant prior to notification to the optionees
of their option grants. The IPO Grant was rescinded, as a material condition of
the grants - the completion of an IPO - never transpired. Wareforce is unable to
assess, what, if any, liability may incur from this grant rescission. See "1998
Stock Option/Stock Issuance Plan."
On April 1, 1998, the Company granted to Messrs. Hughes and Ricketts
fully vested options for 41,116 shares at a fair market exercise price of $1.21
per share. (Post-split these amounts were 101,248 options at an exercise price
of $0.49 per share.) Mr. Tate was granted 20,558 fully vested options at a fair
market exercise price of $1.21 per share. (Post-split these amounts were 50,624
options at an exercise price of $0.49 per share.) Mr. Tate was granted an
additional 20,558 options at a fair market exercise
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<PAGE> 44
price of $1.21 per share which would automatically vest if he returned from a
planned sabbatical by May 18, 1999. (Post-split these amounts were 50,624
options at an exercise price of $0.49 per share.) As part of the reverse merger
with Jolley Vending, Messrs. Hughes, Ricketts and Tate were required to exercise
all their then-vested options. See "Certain Transactions". Mr. Tate subsequently
returned from his sabbatical in November 1998 and became entitled to his
additional 50,624 (post-split) options. The Company did not issue these to him
until June 2, 1999. As of the date of this Prospectus he has not exercised these
options. See "Management" and "Principal Shareholders".
1998 STOCK OPTION/STOCK ISSUANCE PLAN
The Wareforce 1996 Plan was subsumed by the 1998 Wareforce One, Inc.
Stock Option/Stock Issuance Plan (the "1998 Plan") which was adopted by the
board of directors and approved by the stockholders on July 2, 1998. One million
shares of common stock have been authorized for issuance under the 1998 Plan. On
the first trading day of each calendar year, beginning with 1997, this share
reserve automatically increases by the number of shares equal to 1% of the
number of shares of common stock outstanding on the last day of the preceding
calendar year. In no event may any one participant in the 1996 Plan receive
option grants or direct stock issuances for more than 100,000 shares in the
aggregate in any calendar year.
The 1998 Plan is divided into three separate components:
(i) the Discretionary Option Grant Program under which eligible individuals
may, at the discretion of the 1996 Plan administrator, be granted
options to purchase shares of common stock at an exercise price not less
than 85% of their fair market value on the grant date;
(ii) the Stock Issuance Program under which such persons may, in the 1996
Plan administrator's discretion, be issued shares of common stock
directly, through the purchase of such shares at a price not less than
85% of their fair market value at the time of issuance, or as a bonus
for past services rendered to we or as an incentive tied to the
performance of future services; and
(iii) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price
equal to 100% of their fair market value on the grant date.
The Compensation Committee of the Board will administer the
Discretionary Option Grant Program and the Stock Issuance Program. The Vice
President-Administration as 1998 Plan administrator will have complete
discretion to determine which eligible individuals are to receive option grants
or stock issuances, the time or times when such option grants or stock issuances
are to be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a
non-statutory stock option under the Federal tax laws, the vesting schedule (if
any) to
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<PAGE> 45
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding.
Upon an acquisition of us by merger, asset sale or hostile takeover of
our company, each outstanding option and unbelted stock issuance will be subject
to accelerated vesting under certain circumstances.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from us
equal to the excess of (i) the fair market value of the vested shares of common
stock subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of common stock.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program. The plan
administrator can do this in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date. The plan
administrator may also provide financial assistance to participants in the
Discretionary Option Grant and Stock Issuance Programs by allowing them to
acquire shares of common stock in exchange for promissory notes or installment
payments.
Under the Automatic Option Grant Program, at any time an individual
first becomes a non-employee Board member, may, at any time thereafter, receive
a 10,000 share option grant on the date such individual joins the Board,
provided such individual has not been in the prior employ of us. In addition, at
each annual meeting of our stockholders, each individual who has served as a
non-employee Board member for at least six months and who will continue to serve
as a non-employee Board member will receive an additional option grant to
purchase 10,000 shares of common stock. This non-employee Board member will
receive this option whether or not such individual has been in our prior employ.
Each option granted under the Automatic Option Grant Program will have a
maximum term of 10 years, subject to earlier termination following the
optionee's cessation of service on the board of directors. Each such option will
be immediately exercisable; however, any shares purchased upon exercise of the
option will be subject to repurchase should the optionee's service as a
non-employee Board member cease prior to vesting of the shares. The initial
10,000-share grant will vest in four equal and successive annual installments
over the optionee's period of Board service. Each additional 10,000-share grant
will vest upon the optionee's completion of one year of Board service measured
from the grant date. However, each outstanding option will immediately vest
upon:
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<PAGE> 46
(i) certain changes in the ownership or control of us; or
(ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the 1998 Plan at any time. The 1998 Plan
will terminate on July 13, 2008, unless sooner terminated by the Board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
As set forth in the following paragraphs, all of our executive officers
have employment contracts with us. In connection with an acquisition of us by
merger or asset sale, each outstanding option held by the Chief Executive
Officer and the other executive officers under the 1998 Plan will automatically
vest in full. The only exception to this is if such options are to be assumed
by, and the repurchase rights are assigned to, our successor corporation. Any
assumed options will subsequently vest in full in the event an executive
officer's service is terminated by the acquiring company, whether involuntarily
or through a resignation for good reason, within eighteen months following the
acquisition. The plan administrator has authority to provide for the accelerated
vesting of the shares of common stock subject to outstanding options held by the
Chief Executive Officer and our other executive officers granted under the 1998
Plan. The plan administrator may do this if their employment is to be terminated
(whether involuntarily or through a resignation for good reason) following a
hostile take-over of us and the takeover is effected through a successful tender
offer for more than 50% of our outstanding common stock; or a change in the
majority of the Board as a result of one or more contested elections for board
membership.
In June 1998, Wareforce Incorporated entered into an employment
agreement with Don Hughes that provides for an initial employment term of three
years. It also provides for an initial annual base salary of $135,000 (increased
by amendment on August 1, 1998 to $150,000). It provides for a one-time bonus of
$10,000 for the successful completion of our Reverse Merger and an annual bonus
of $50,000 if he meets at least 90% of the annual goals set for him by the
board. Under the terms of the agreement, Mr. Hughes is entitled to participate
in any employee benefit programs established for our executive employees.
Wareforce Incorporated may terminate the agreement for cause at any time upon
seven days written notice. Mr. Hughes however has 90 days to cure the cause of
the termination. Wareforce Incorporated may terminate the agreement without
cause upon 30 days written notice. If it terminates without cause, it would owe
Mr. Hughes all salary, benefits and bonuses owed to him through the date of
termination. It would also owe him a cash severance payment equal to 18 months
base salary. This June 1998 employment agreement superceded one Mr. Hughes had
entered into with Wareforce Incorporated in July 1996.
In June 1998, Wareforce Incorporated entered into an employment
agreement with Orie
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<PAGE> 47
Rechtman that provides for an initial employment term of three years, an initial
annual base salary of $330,000 and an annual bonus of $170,000 if it meet at
least 90% of its annual projections. Under the terms of the agreement, Mr.
Rechtman is entitled to participate in any employee benefit programs established
for our executive employees. This includes a monthly auto allowance of $2,000
per month. Wareforce Incorporated may terminate the agreement for cause at any
time upon seven days written notice. Mr. Rechtman however has 90 days to cure
the cause of the termination. Wareforce Incorporated may terminate the agreement
without cause upon 30 days written notice. If it terminates without cause, it
would owe Mr. Rechtman all salary, benefits and bonuses owed to him through the
date of termination. It would also owe him a cash severance payment equal to
five years base salary plus bonuses calculated at their maximum rate.
In June 1998, Wareforce Incorporated entered into an employment
agreement with Dan Ricketts that provides for an initial employment term of
three years. It also provides for an initial annual base salary of $100,000
(increased by amendment on July 14, 1998 to $110,000). It provides for a
one-time bonus of $10,000 for the successful completion of our Reverse Merger
and an annual bonus of $50,000 if he meets at least 90% of the annual goals set
for him by the board. Under the terms of the agreement, Mr. Ricketts is entitled
to participate in any employee benefit programs established for our executive
employees. This includes a monthly auto allowance of $500 per month. Wareforce
Incorporated may terminate the agreement for cause at any time upon seven days
written notice. Mr. Ricketts however has 90 days to cure the cause of the
termination. Wareforce Incorporated may terminate the agreement without cause
upon 30 days written notice. If it terminates without cause, we would owe Mr.
Ricketts all salary, benefits and bonuses owed to him through the date of
termination. It would also owe him a cash severance payment equal to 18 months
base salary.
In June 1998, Wareforce Incorporated entered into an employment
agreement with Darrell Tate that provides for an initial employment term of
three years. It also provides for an initial annual base salary of $110,000. It
provides for an annual bonus of $50,000 if he meets at least 90% of the annual
goals set for him by the board. Under the terms of the agreement, Mr. Tate is
entitled to participate in any employee benefit programs established for our
executive employees. This includes a monthly auto allowance of $500 per month.
Wareforce Incorporated may terminate the agreement for cause at any time upon
seven days written notice. Mr. Tate however has 90 days to cure the cause of the
termination. Wareforce Incorporated may terminate the agreement without cause
upon 30 days written notice. If it terminates without cause, it would owe Mr.
Tate all salary, benefits and bonuses owed to him through the date of
termination. It would also owe him a cash severance payment equal to 18 months
base salary.
In July 1998, Wareforce Incorporated entered into an employment
agreement with Marcia Mazria that provides for an initial employment term of
three years. It also provides for an initial annual base salary of $80,000. It
provides for an quarterly bonus of $5,000, plus it provides for the
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<PAGE> 48
establishment within 90 days of the date of signing the agreement of a bonus
plan based on the amount of Co-op and Market Development Funds collected under
her supervision. She also received options for 5,000 shares of our stock. These
options were fully vested and may exercised on a non-cash basis. Under the terms
of the agreement, Ms. Mazria is entitled to participate in any employee benefit
programs established for our executive employees. Wareforce Incorporated may
terminate the agreement for cause at any time upon seven days written notice.
Ms. Mazria however has 90 days to cure the cause of the termination. Wareforce
Incorporated may terminate the agreement without cause upon 30 days written
notice. If it terminates without cause, it would owe Ms. Mazria all salary,
benefits and bonuses owed to him through the date of termination. It would also
owe her a cash severance payment equal to 9 months base salary.
In August 1998, Wareforce Incorporated entered into an employment
agreement with Richard Fu that provides for an initial employment term of three
years. It also provides for an initial annual base salary of $110,000. It
provides for a one-time signing bonus of $10,000 and an annual bonus of $50,000
if CY meets at certain revenue targets set by its Board. Additionally, if CY
meets at least 125% of its revenue goals, he will receive an additional bonus of
.01% of any revenue amounts that exceed the revenue goal. Mr. Fu was also
granted 33,359 non-cash incentive stock options, exercisable at $5.00 per share,
upon his signing the employment agreement. Under the terms of the agreement, Mr.
Fu is entitled to participate in any employee benefit programs established for
our executive employees. This includes a monthly auto allowance of $500 per
month. We may terminate the agreement for cause at any time upon seven days
written notice. Mr. Fu however has ninety days to cure the cause of the
termination. We may terminate the agreement without cause upon 30 days written
notice. If we terminate without cause, we would owe Mr. Fu all salary, benefits
and bonuses owed to him through the date of termination. We would also owe him a
cash severance payment equal to 18 months base salary.
In May 1999, Wareforce Incorporated and we entered into an employment
agreement with Kenneth Searl that provides for an initial employment term of
three years. It also provides for an initial annual base salary of $225,000. It
provides for an annual bonus if he meets at least 90% of the annual goals set
for him by our board. Additionally, if the Kennsco Technical Services Division
generates Earnings Before Interest, Taxes, Depreciation and Amortization in the
12 month period commencing March 1, 1999 of at least $630,000, we will pay him a
bonus of $210,000, payable in 12 installments. For the next three years we are
also obligated to pay him each quarter 50% of the gross margin (less costs) for
lease transactions recorded by the Division. Under the terms of the agreement,
Mr. Searl is entitled to participate in any employee benefit programs
established for our executive employees. We may terminate the agreement for
cause at any time upon seven days written notice. Mr. Searl however has 90 days
to cure the cause of the termination. We may terminate the agreement without
cause upon 30 days written notice. If we terminate without cause, we would owe
Mr. Searl all salary, benefits and bonuses owed to him through the date of
termination. We would also owe him a cash severance payment equal to 12 months
base salary.
47
<PAGE> 49
In our Letter of Agreement with uMember.com in which we purchased 70% of
the outstanding shares of uMember.com, we agreed that Mr. Hasson would be paid
$75,000 annually for his service as President of uMember.com.
Both Wareforce and CY have employment agreements with certain other
non-executive officers and employees whose terms and conditions are similar to
others in the industry.
DIRECTOR REMUNERATION
The directors do not receive compensation for services on the board of
directors or any committee thereof but are reimbursed for their out-of-pocket
expenses in serving on the board of directors. Non-employee Board members will
be eligible to receive periodic option grants pursuant to the Automatic Option
Grant Program in effect under the 1998 Plan. See "1998 Stock Option/Stock
Issuance Plan."
CONFLICTS OF INTEREST
Other than as described herein the Company is not expected to have
significant further dealings with affiliates. However, if there are such
dealings the parties will attempt to deal on terms competitive in the market and
on the same terms that either party would deal with a third person. Presently
none of the officers and directors has any transactions which they contemplate
entering into with the Company, aside from the matters described herein.
Management will attempt to resolve any conflicts of interest that may
arise in favor of the Company. Failure to do so could result in fiduciary
liability to management.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
The General Corporation Law of Nevada permits provisions in the
articles, by-laws or resolutions approved by shareholders which limit liability
of directors for breach of fiduciary duty to certain specified circumstances,
namely, breaches of their duties of loyalty, acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, acts
involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. The Company's by-laws indemnify its Officers and Directors to
the full extent permitted by Nevada law. The by-laws with these exceptions
eliminate any personal liability of a Director to the Company or its
shareholders for monetary damages for the breach
48
<PAGE> 50
of a Director's fiduciary duty and therefore a Director cannot be held liable
for damages to the Company or its shareholders for gross negligence or lack of
due care in carrying out his fiduciary duties as a Director. The Company's
Articles provide for indemnification to the full extent permitted under law
which includes all liability, damages and costs or expenses arising from or in
connection with service for, employment by, or other affiliation with the
Company to the maximum extent and under all circumstances permitted by law.
Nevada law permits indemnification if a director or officer acts in good faith
in a manner reasonably believed to be in, or not opposed to, the best interest's
of the corporation. A director or officer must be indemnified as to any matter
in which he successfully defends himself. Indemnification is prohibited as to
any matter in which the director or officer is adjudged liable to the
corporation. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
49
<PAGE> 51
CERTAIN TRANSACTIONS
Wareforce Incorporated has various notes due from Mr. Rechtman, our CEO
and majority shareholder totaling approximately $3.3 million. These notes
include $2.0 million advanced to this shareholder to purchase 3.4 million shares
of common stock of Wareforce Incorporated from its former majority shareholder
that is also Mr. Rechtman's former wife, in February 1998. The notes are due in
varying amounts from December 2000 through December 2008 and bear interest at
rates from 5.83% to 6.48%. These shares are pledged as collateral for the
Company's line of credit. In addition, the Company has made advances to this
Shareholder. Total advances without a promissory note are $0.8 million as of
December 31, 1998. The shareholder plans to repay these advances beginning in
fiscal year 2000 through 2008. See footnote 11 to the 1998 Financial Statements.
Pursuant to a commercial lease dated June 1, 1995, Mr. Rechtman and Ms.
Gabriel, each of whom was then a director and officer of Wareforce, leased to
Wareforce Incorporated certain premises owned by them located in El Segundo,
California to house our distribution operations. Under the lease, which had a
term of five years, Wareforce had annual rental obligations to Mr. Rechtman and
Ms. Gabriel totaling approximately $122,400. As part of Mr. Rechtman and Ms.
Gabriel's June 1997 property settlement resulting from their divorce, Mr.
Rechtman was awarded sole possession of this property and all rents derived
therefrom. Prior to Mr. Rechtman and Ms. Gabriel purchasing the distribution
facility and leasing it to us, a third party was the owner of the facility and
leased it to us at a monthly rent of approximately $10,500. In August 1998 Mr.
Rechtman sold this facility and our lease and rental obligations were terminated
at that time and we acquired alternate space from an independent third party.
See "Facilities".
On May 16, 1997, an order was entered in the Superior Court for the
State of California, County of Los Angeles (the "Court"), dissolving the
marriage of Mr. Rechtman and Ms. Gabriel. On July 30, 1997, a Stipulation for
Partial Division of Community Property and Order Thereon was filed with the
Court. On February 26, 1998, the Court entered a Further Judgment on Reserved
Issues (the Further Judgement") which determined additional property rights
between Mr. Rechtman and Ms. Gabriel. Pursuant to the Further Judgment, Mr.
Rechtman acquired all of Ms. Gabriel's stock in Wareforce Incorporated for
$2,000,000. As a result of this acquisition, Mr. Rechtman held 2,750,000 shares
(pre-2.4625:1 exchange), constituting 100% of Wareforce Incorporated's
outstanding common stock. At the time of the acquisition, Ms. Gabriel resigned
as an officer and director of Wareforce. Wareforce loaned the funds used by Mr.
Rechtman to purchase Ms. Gabriel's shares to him. This loan was pursuant to a
promissory note dated February 26, 1998, due February 25, 2008. It bears
interest at the rate of 7.5% per annum, with interest only be payable quarterly
beginning April 1, 1998 until maturity. Wareforce obtained the funds loaned to
Mr. Rechtman by borrowing from our line of credit with Finova. See
50
<PAGE> 52
footnote 11 to the 1998 Financial Statements, "Risk Factors" and "Dependence on
Availability of Credit".
In addition, pursuant to the Further Judgment, Mr. Rechtman agreed to:
(1) indemnify Ms. Gabriel against any obligations, debts, liabilities,
claims, charges, taxes, penalties and fines arising out of or in any way
connected with Wareforce Incorporated;
(2) assume all obligations and liabilities (known or unknown, asserted or
unasserted, matured or unmatured, absolute or contingent) owing by Ms.
Gabriel to Wareforce Incorporated and to cause Wareforce Incorporated to
fully release Ms. Gabriel from all such obligations, including Ms.
Gabriel's officer loan account of approximately $536,000, which includes
charges for bonuses and perquisites paid to Ms. Gabriel in 1996, 1997
and 1998;
(3) cause Wareforce Incorporated to pay any business-related outstanding
debts incurred by Ms. Gabriel on her corporate credit card up to $10,000
which are not already reflected in Ms. Gabriel's officer loan account;
and
(4) cause Wareforce Incorporated to pay all of Ms. Gabriel's unpaid
attorneys' fees incurred in connection with the divorce through
February, 1998, estimated to be $25,000.
In June 1998, Wareforce Incorporated entered into an employment
agreement with Orie Rechtman, the Chairman, CEO and President of Wareforce.com,
Wareforce, CY and the Chairman and CEO of uMember.com. See "Management -
Employment Contracts and Termination of Employment and Change of Control
Arrangements."
In June 1998, Wareforce Incorporated entered into an employment
agreement with Dan Ricketts, Wareforce and CY's Vice-President of
Administration, General Counsel and Secretary, our Secretary-Treasurer and the
Acting General Counsel and Assistant Secretary of uMember.com. See "Management -
Employment Contracts and Termination of Employment and Change of Control
Arrangements."
In June 1998, Wareforce Incorporated entered into an employment
agreement with Darrell Tate, our Vice President-Strategic Business Development
and uMember.com's Acting Vice President of Sales and Marketing. See "Management
- -- Employment Contracts and Termination of Employment and Change of Control
Arrangements."
In July 1998, Wareforce Incorporated entered into an employment
agreement with Marcia Mazria, our Vice President-Marketing and Communications.
See "Management -- Employment Contracts and Termination of Employment and Change
of Control Arrangements."
In August 1998, we entered into an employment agreement with Richard Fu,
our Vice President-
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<PAGE> 53
Sales. See "Management -- Employment Contracts and Termination of Employment and
Change of Control Arrangements."
In December 1998, we lent Mr. Hughes and Mr. Ricketts $18,450 each, and
Mr. Tate $9,245, to pay taxes resulting from the forced conversion of their
stock options due to our reverse merger with Jolley Vending.
In March 1999, we entered into a lease for a new sales office for CY in
Commerce, California. Mr. Fu's wife, Nora Shen, acted as our Real Estate Broker
in this transaction. The company she works for, Takenaka & Company will receive
total commissions of $9,246 for negotiating this lease. Ms. Shen does not own
any share or interest in Takenaka & Company. See "Facilities".
In May 1999, Warefore.com and Wareforce Incorporated jointly entered
into an employment agreement with Kenneth Searl, our Vice President and
Wareforce Incorporated's Vice President of Technical Services. See "Management
- -- Employment Contracts and Termination of Employment and Change of Control
Arrangements."
In May 1999, under the terms of its Asset Purchase Agreement with
Kennsco as part of the purchase price of the transaction, the Company issued
51,948 shares of its common stock in the name of Kennsco, Inc. Kenneth Searl
beneficially owns these shares. Wareforce Incorporated also agreed to lease
Kennsco's principal office and warehouse building in Plymouth, Minnesota from
Mr. Searl for a three-year period at $189,571 per year. We have agreed to
guarantee these lease payments. See "The Company - Facilities", "Management" and
"Principal Shareholders".
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock by each director of the Company, each
beneficial owner of more than five percent (5%) of said securities, and all our
directors and executive officers as a group:
<TABLE>
<CAPTION>
TITLE OF AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS CLASS BENEFICIAL OWNERSHIP OF CLASS
- ---------------- ------- -------------------- --------
<S> <C> <C> <C>
Orie Rechtman Common 5,966,883 shares 55.0%
Von Graffenried AG Privat Bank Common 1,250,001 shares 11.5%
Bank Julius Baer & Co. Ltd. Common 939,997 shares 8.7%
Don Hughes Common 101,248 shares 0.9%
Dan Ricketts Common 66,248 shares 0.6%
All officers and directors as a Common 6,170,703 shares 57.0%
group (5 persons)
</TABLE>
52
<PAGE> 54
The foregoing amounts include all shares these persons are deemed to
beneficially own regardless of the form of ownership. See "Management -
Option/SAR Grants" and "Certain Transactions".
DESCRIPTION OF SECURITIES
The following statements do not purport to be complete and are qualified
in their entirety by reference to the detailed provisions of our Amended
Articles of Incorporation and Bylaws, copies of which will be furnished to an
investor upon written request therefor. See "Additional Information."
COMMON STOCK
We are presently authorized to issue 50,000,000 shares of $.001 par
value common stock. As of May 27, 1999, there were 10,831,948 shares of common
stock outstanding. We have reserved from its authorized but unissued shares a
sufficient number of shares of common stock for issuance of the shares offered
hereby. The shares of common stock issuable on completion of the offering will
be, when issued in accordance with the terms of the offering, fully paid and
non-assessable.
The holders of common stock, including the shares offered hereby, are
entitled to equal dividends and distributions, per share, with respect to the
common stock when, as and if declared by the board of directors from funds
legally available therefor. No holder of any shares of common stock has a
pre-emptive right to subscribe for any securities of the Company nor are any
common shares subject to redemption or convertible into other securities of the
Company. Upon our liquidation, dissolution or winding up, and after payment of
creditors and preferred stockholders, if any, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of common
stock. All shares of common stock now outstanding are fully paid, validly issued
and non-assessable. Each share of common stock is entitled to one vote with
respect to the election of any director or any other matter upon which
shareholders are required or permitted to vote. Holders of our common stock do
not have cumulative voting rights, so that the holders of more than 50% of the
combined shares voting for the election of directors may elect all of the
directors, if they choose to do so and, in that event, the holders of the
remaining shares will not be able to elect any members to the board of
directors.
PREFERRED STOCK
We are also presently authorized to issue 5,000,000 shares of $.001 par
value Preferred Stock. Under our Articles of Incorporation, as amended, the
board of directors has the power, without further action by the holders of the
common stock, to designate the relative rights and
53
<PAGE> 55
preferences of the preferred stock, and issue the preferred stock in such one
or more series as designated by the board of directors. The designation of
rights and preferences could include preferences as to liquidation, redemption
and conversion rights, voting rights, dividends or other preferences, any of
which may be dilutive of the interest of the holders of the common stock or the
Preferred Stock of any other series. The issuance of Preferred Stock may have
the effect of delaying or preventing a change in control of us without further
shareholder action and may adversely effect the rights and powers, including
voting rights, of the holders of common stock. In certain circumstances, the
issuance of preferred stock could depress the market price of the common stock.
The board of directors effects a designation of each series of Preferred Stock
by filing with the Nevada Secretary of State a Certificate of Designation
defining the rights and preferences of each such series. Documents so filed are
matters of public record and may be examined in accordance with procedures of
the Nevada Secretary of State, or copies thereof may be obtained from us.
SERIES A AND SERIES B WARRANTS
We have declared a distribution of 1,110,000 Series A and 1,110,000
Series B common stock purchase warrants (the "Warrants") to shareholders of
record as of July 13, 1998. The Warrants are exercisable at $6.00 and $7.00 per
share, respectively, prior to [the date three years from the date hereof],
subject to effectiveness of registration of the Warrants and underlying shares.
(a) We may redeem all or a portion of the Warrants, in each case
at $.01 per warrant upon 30 days' prior written notice to the warrant
holders. The warrants may be redeemed at any time after the date of this
Prospectus, whether or not a current registration statement is in effect
with respect thereto. Any warrant holder who does not exercise his
Warrants prior to the Redemption Date, as set forth on the Company's
Notice of Redemption, will forfeit his right to purchase the shares of
common stock underlying such Warrants, and after such Redemption Date
any outstanding Warrants referred to in such Notice will become void and
be canceled. If we do not redeem such Warrants, such warrants will
expire at the conclusion of the exercise period unless extended by us.
(b) We may at any time, and from time to time, extend the
exercise period of the Warrants provided that written notice of such
extension is given to the warrant holders prior to the expiration date
thereof. Also, we may, at any time, reduce the exercise price thereof by
written notification to the holders thereof. We do not presently
contemplate any extensions of the exercise period or reduction in the
exercise price of the Warrants.
(c) The Warrants contain anti-dilution provisions with respect
to the occurrence of
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<PAGE> 56
certain events, such as stock splits or stock dividends. The anti-
dilution provisions do not apply in the event of a merger or
acquisition, such as the Acquisition. In the event of our liquidation,
dissolution or winding-up, warrant holders will not be entitled to
participate in our assets. Warrant holders have no voting, preemptive,
liquidation or other rights of a stockholder of us, and no dividends may
be declared on the Warrants.
(d) The Warrants may be exercised by surrendering to us, a
Warrant certificate evidencing the Warrants to be exercised, with the
exercise form included therein duly completed and executed, and paying
to us the exercise price per share in cash or check payable to us. Stock
certificates will be issued as soon thereafter as practicable.
(e) The Warrants will not be exercisable unless the Warrants and
the shares of common stock underlying the Warrants are registered. We
have filed with the Commission a registration statement with respect to
the issuance of such shares underlying the Warrants as soon as
practicable following the Acquisition. The effective date of such
registration will be the "Commencement Date" for determining the
exercise period of such Warrants. We will also seek to register or
qualify the common stock issuable upon the exercise of the Warrants
under the Blue Sky laws of states in which holders of the Warrants may
reside.
(f) The Warrants will be nontransferable by their terms and
cannot be transferred without our consent and will be "restricted
securities" pursuant to the definition of that term used in Rule 144.
The Warrants will be stamped with a restrictive legend.
TRANSFER AGENT
Our transfer agent is Interwest Stock Transfer Co., 1981 East 4800
South, Suite 100, Salt Lake City, Utah 84117.
ANNUAL REPORTS
We intend to furnish annual reports to shareholders which will
contain financial statements examined by independent certified public
accountants and such other interim reports as we may determine.
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<PAGE> 57
DIVIDEND POLICY
We have not paid any dividends on common stock to date and do not
anticipate paying dividends on common stock in the foreseeable future. We intend
for the foreseeable future to follow a policy of retaining all of its earnings,
if any, to finance the development and expansion of our business.
PLAN OF DISTRIBUTION
This Prospectus and the registration statement of which it is part relate to the
offer and sale of 2,220,000 shares of our common stock underlying Warrants as
well as the shares of the selling shareholders described in this Prospectus. The
securities registered hereby include 1,110,000 shares of common stock issuable
upon the exercise of the Series A Warrants at an exercise price of $6.00 per
share, and 1,110,000 shares of common stock issuable upon the exercise of the
Series B Warrants, at an exercise price of $7.00 per share. The Warrants are
being distributed as a dividend with respect to the common stock of the Company
to shareholders of record as of July 13, 1998. By their terms, the Warrants are
nontransferable prior to exercise and cannot be transferred without the consent
of the Company. The Warrants are now exercisable until [the date three years
from the date hereof]. The selling stockholders may offer and sell the common
stock at their discretion. They are registering 926,448 shares of their common
stock. They can sell these shares in the over-the-counter market or otherwise.
They may sell at market prices at the time of sale, at prices related to the
market price or at negotiated prices. We will receive no proceeds from the sale
of common stock by the selling stockholders. Each of the selling stockholders
may transfer, pledge, donate or assign their selling stockholders' shares to
lenders, family members and others. If this happens, each of these persons will
then be a "Selling Stockholder" for purposes of this Prospectus. The number of
selling stockholders' shares beneficially owned by those selling stockholders
who transfer, pledge, donate or assign selling stockholders' shares will
decrease when they take these actions. The plan of distribution for selling
stockholders' shares will otherwise remain unchanged, except that the
transferees, pledgees, donees or other successors will be selling stockholders.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of our common stock may not bid for, or purchase,
shares of our common stock during a period which commences one business day, or
5 business days if our public float is less than $25 million or our average
daily trading volume is less than $100,000, prior to that person's participation
in the distribution, subject to exceptions for certain passive market making
activities. In addition and without limiting the foregoing, each selling
stockholder will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including, without limitation, Regulation M
which provisions may limit the timing of purchases and sales of shares of our
common stock by the selling stockholder.
We are bearing all costs relating to the registration of the shares of
common stock, other than fees and expenses, if any, of counsel or other advisors
to the selling stockholders. Any commissions,
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<PAGE> 58
discounts or other fees payable to broker-dealers in connection with any sale of
the shares of common stock will be borne by the selling stockholder selling
shares of common stock.
There is no assurance that all or any of the shares will be sold, or any
requirement, or escrow provisions to assure that, any minimum amount of Warrants
will be exercised. All funds received upon the exercise of any Warrants will be
immediately available to the Company for its use.
THE SELLING STOCKHOLDERS
In addition to the Warrants and the shares underlying the Warrants described in
this Prospectus, it also covers restricted shares that have been acquired the
Selling Stockholders, named below or that we may name supplementally, as of June
11, 1999. The following table sets forth the name of each Selling Stockholder,
the nature of his or her position, office, or other material relationship with
us, the number of shares of common stock beneficially owned by each Selling
Stockholder prior to the offering, and the number of shares and (if one percent
or more) the percentage of the class to be beneficially owned by a Selling
Stockholder after the offering.
<TABLE>
<CAPTION>
Shares Owned Shares Shares Owned
Prior to Offered Outstanding After Offering
Name Offering(1) Herein Shares(2) Percentage
- ---- ------------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Von Graffenried Privat Bank 1,250,001 187,500 1,062,501 9.8%
Bank Julius Baer & Co. Ltd. 939,997 141,000 798,997 7.4%
UBS AG 500,000 75,000 425,000 3.9%
Herbert Towning 300,000 300,000 0 0.0%
Swiss Bank Corporation 133,332 20,000 113,332 1.0%
Heinrich Auwarter 126,667 19,000 107,667 1.0%
Kennsco, Inc.(3) 51,948 51,948 0 0.0%
Steve Keller 45,000 45,000 0 0.0%
Continental Computer Exchange 40,000 40,000 0 0.0%
Leon Hasson, President, Dir. Of uMember.com 22,500 15,000 7,500 **
Dan Fanym 20,000 20,000 0 0.0%
Shahriar Kashfi 20,000 20,000 0 0.0%
Farideh Beral 17,500 10,000 7,500 **
Behzad Eshghieh 17,500 10,000 7,500 **
Nasser Ahdout 9,500 2,000 7,500 **
Jahanguir Esfandi 5,000 5,000 0 0.0%
Joseph Yafeh 5,000 5,000 0 0.0%
Shahab Morim 3,000 3,000 0 0.0%
Brown Brothers Harriman & Co. 2,000 2,000 0 0.0%
</TABLE>
- -----------------
** less than 1%
(1) For purposes of this table, each person listed above is deemed to own
shares of common stock if he has the right to acquire the common stock
within 60 days of June 11, 1999. For purposes of computing the
percentage of outstanding shares of common stock held by each selling
security holder, any security which they have the right to acquire
within such date is deemed to be outstanding. Except as indicated in the
footnotes to this table and pursuant to applicable community property
laws, we believe, based on information supplied by selling security
holder, that they have sole voting and investment power with respect to
all the shares of common stock which they own.
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<PAGE> 59
(2) Based on a total of 10,831,948 shares of common stock outstanding.
(3) Beneficially-owned by Kenneth Searl, Vice President of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 10,831,948 shares of the Company's common stock outstanding prior
to the exercise of any Warrants, 1,110,000 shares are currently freely
tradeable, 971,448 being sold by the selling shareholders under this
registration will be freely tradeable and approximately 8,080,500 will be
eligible as of July 13, 1999 for public resale under Rule 144 promulgated
pursuant to the Securities Act of 1933, as amended (the "Securities Act"). In
addition, the 2,220,000 shares of common stock underlying the Warrants will also
be freely tradeable into the public market immediately upon issuance. Sales of
substantial amounts of this common stock in the public market could adversely
affect the market price of the common stock. Furthermore, all of the remaining
shares of common stock presently outstanding are restricted and/or affiliate
securities which are not presently, but may in the future be sold, pursuant to
Rule 144, into any public market that may exist for the common stock. Future
sales by current shareholders could depress the market prices of the common
stock in any such market.
In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including affiliates of the Company, can
sell within any three-month period, an amount of restricted securities that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or (if the stock becomes quoted on NASDAQ or a stock exchange), the
reported average weekly trading volume during the four calendar weeks preceding
the sale; provided, that at least one year have elapsed since the restricted
securities being sold were acquired from the Company or any affiliate of the
Company, and provided further that certain other conditions are also satisfied.
If at least two years have elapsed since the restricted securities were acquired
from the Company or an affiliate of the Company, a person who has not been an
affiliate of the Company for at least three months can sell restricted shares
under Rule 144 without regard to any limitations on the amount.
WARRANT EXERCISE PROCEDURE
The Warrants may be exercised in whole or in part by presentation of the
Warrant Certificate, with the Purchase Form on the reverse side thereof filled
out and signed at the bottom thereof, together with payment of the Exercise
Price and any applicable taxes at the principal office of Interwest Stock
Transfer Co., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
Payment of the Exercise Price shall be made in lawful money of the United States
of America in cash or by cashier's or certified check payable to the order of
"Wareforce.com, Inc., Warrant Exercise Account."
All holders of warrants will be given an independent right to exercise
their purchase rights. If, as and when properly completed and duly executed
notices of exercise are received by the Transfer Agent
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<PAGE> 60
and/or Warrant Agent, together with the Certificates being surrendered and full
payment of the Exercise Price in cleared funds, the checks or other funds will
be delivered to the Company and the Transfer Agent and/or Warrant Agent will
promptly issue certificates for the underlying common stock. It is presently
estimated that certificates for the shares of common stock will be available for
delivery in Salt Lake City, Utah at the close of business on the tenth business
day after the receipt of all required documents and funds.
LEGAL MATTERS
To the knowledge of management, there is no material litigation pending
or threatened against us. The validity of the issuance of the shares offered
hereby will be passed upon for us by Thomas G. Kimble & Associates, Salt Lake
City, Utah.
EXPERTS
The audited consolidated financial statements and schedules included in
this Prospectus and elsewhere in the registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP, Ernst & Young LLP, and Boyum and Barenscheer PLLP, independent public
accountants, and are included herein in reliance upon the authority of said
firms as experts in giving said reports.
CHANGE IN INDEPENDENT ACCOUNTANTS
In June 1998, we engaged Arthur Andersen LLP as our independent
accountants, to replace Ernst & Young LLP. The decision was made by our Board of
Directors, upon the recommendation of management, and was not due to any
disagreement with Ernst & Young LLP. During the fiscal year ended December 1996
we had no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Ernst &
Young LLP would have caused them to make reference thereto in their report on
our financial statements. The reports of Ernst & Young LLP on our financial
statements for fiscal 1996 (the last fiscal year audited by Ernst & Young LLP)
did not contain any adverse opinion, disclaimer or opinion or modification as to
uncertainty, audit scope or accounting principles.
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<PAGE> 61
- ----------------------------------- -----------------------------------
NO DEALER, SALESMAN OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY WAREFORCE.COM, INC.
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE
HEREBY. IF GIVEN OR MADE, SUCH 3,191,448 SHARES
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN ----------------
OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE
SECURITIES COVERED HEREBY IN ANY
JURISDICTION OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH COMMON STOCK
OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, IN ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE PROSPECTUS
COMPANY SINCE THE DATE HEREOF.
----------------
UNTIL [90 DAYS AFTER THE DATE OF __________, 1999
THIS PROSPECTUS], ALL DEALERS
EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- ----------------------------------- -----------------------------------
60
<PAGE> 62
WAREFORCE.COM INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Wareforce Incorporated and Subsidiary - Consolidated Financial Statements
AS OF DECEMBER 31, 1996, 1997 AND 1998 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED) AND 1999 (UNAUDITED)
<TABLE>
<S> <C>
Report of Independent Public Accountants.........................................................F-2 & F-3
Consolidated Balance Sheets......................................................................F-4 & F-5
Consolidated Statements of Operations............................................................F-6
Consolidated Statements of Stockholders' Equity..................................................F-7
Consolidated Statements of Cash Flows............................................................F-8 & F-9
Notes to Consolidated Financial Statements.......................................................F-10-F-20
</TABLE>
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Wareforce.com, Inc.:
We have audited the accompanying consolidated balance sheets of WAREFORCE.COM,
INC. (a Nevada corporation) AND SUBSIDIARIES as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wareforce.com, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 26, 1999
F-2
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Wareforce Incorporated and Subsidiary
We have audited the accompanying consolidated balance sheets of Wareforce
Incorporated and Subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 Wareforce Incorporated and
Subsidiary at December 31, 1996, and the results of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
July 22, 1997
F-3
<PAGE> 65
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
Unaudited
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 383,188 $ 817,721 $ 789,412
Marketable securities 89,784 41,890 40,680
Trade receivables, net of
allowance of $259,900, $450,600, and $540,300
at December 31, 1997, 1998 and March 31, 1999,
respectively 10,814,132 19,753,622 18,201,831
Net investment in sales-type leases -- -- 1,269,797
Other receivables 1,156,948 280,827 431,418
Inventories 2,500,378 1,813,543 2,042,911
Prepaid expenses 115,379 225,952 293,166
Income taxes receivable 158,652 237,000 231,920
Deferred tax assets 275,900 631,000 631,000
----------- ----------- -----------
Total current assets 15,494,361 23,801,555 23,932,135
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net 792,707 1,127,495 1,833,546
----------- ----------- -----------
NOTES RECEIVABLE AND ADVANCES TO STOCKHOLDERS 991,872 3,375,600 3,383,436
----------- ----------- -----------
OTHER ASSETS 13,710 97,723 83,369
----------- ----------- -----------
GOODWILL, net of amortization of $0 at December 31, 1997,
$136,039 at December 31, 1998 and $236,480 at
March 31, 1999 -- 2,701,731 4,397,226
----------- ----------- -----------
Total assets $17,292,650 $31,104,104 $33,629,712
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets
F-4
<PAGE> 66
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
Unaudited
<S> <C> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 5,907,845 $ 10,923,414 $ 11,002,495
Accounts payable 10,143,259 14,340,586 13,701,213
Accrued expenses 138,208 901,887 951,821
Sales taxes payable 442,143 670,408 526,811
Current portion of long-term debt 10,450 6,637 1,217,598
Customer deposits -- 660,559 171,706
Note Payable -- -- 250,000
------------ ------------ ------------
Total current liabilities 16,641,905 27,503,491 27,821,644
------------ ------------ ------------
Long-term debt, less current portion 11,137 6,173 594,462
------------ ------------ ------------
Total liabilities 16,653,042 27,509,664 28,416,106
------------ ------------ ------------
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized no shares issued or outstanding -- -- --
Common stock, $.001 par value,
50,000,000, authorized 6,771,883, 10,135,000 and
10,750,000 shares issued and outstanding as of
December 31, 1997, 1998 and March 31, 1999, respectively 1,000 10,135 10,750
Additional paid in Capital -- 9,544,241 11,761,126
Stock subscriptions 20,000
Unrealized loss on marketable securities, -- -- --
net of deferred tax benefit of $13,910 and
$13,935 in December 31, 1997 and 1998,
and $13,935 as of March 31, 1999, respectively (20,831) (20,783) (20,783)
Retained earnings (accumulated deficit) 659,439 (5,959,153) (6,537,487)
------------ ------------ ------------
Total stockholders' equity 639,608 3,594,440 5,213,606
------------ ------------ ------------
Total liabilities and stockholders' equity $ 17,292,650 $ 31,104,104 $ 33,629,712
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-5
<PAGE> 67
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Month's Ended
Year Ended December 31, March 31
------------------------------------------------ ------------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
Unaudited
<S> <C> <C> <C> <C> <C>
Net Sales $ 88,509,770 $ 79,621,712 $ 88,894,828 $ 15,396,108 $ 28,213,967
Cost of Goods Sold 81,034,366 72,464,751 80,137,798 13,931,757 25,265,968
------------------------------------------------ ------------------------------
Gross Profit 7,475,404 7,156,961 8,757,030 1,464,351 2,947,999
Selling, General & Administrative
Expenses 6,915,447 6,576,535 11,324,823 1,974,759 3,346,144
Non-recurring Expenses 699,212 -- -- -- --
------------------------------------------------ ------------------------------
(Loss) Income from Operations (139,255) 580,426 (2,567,793) (510,408) (398,145)
Interest Expense 543,538 490,706 551,136 93,923 142,284
Other Expense(Income) (62,668) 6,600 841,932 (1,506) 37,905
------------------------------------------------ ------------------------------
(Loss) Income Before Taxes (620,125) 83,120 (3,960,861) (602,825) (578,334)
Benefit (Provision) for Income Taxes 176,002 (21,440) 771,269 241,130 --
------------------------------------------------ ------------------------------
Net (Loss) Income $ (444,123) $ 61,680 $ (3,189,592) $ (361,695) $ (578,334)
================================================ ==============================
Basic and Diluted (Loss) Earnings per
Share $ (0.07) $ 0.01 $ (0.38) $ (0.05) $ (0.05)
============ ============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 6,771,883 6,771,883 8,490,621 6,771,883 10,550,00
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 68
WAREFORCE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive
Shares Amount Paid-in Capital Gain(Loss)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE 12/31/95 6,771,883 $ 1,000 $ -- $ (45,492)
Unrealized gain on marketable
securities (net of deferred tax -- -- -- --
benefit of $52,621) -- -- -- 28,696
Net loss
-------------------------------------------------------------------------------
BALANCE 12/31/96 6,771,883 1,000 -- (16,796)
Net income -- -- -- --
Unrealized loss on marketable
securities (net of deferred tax
benefit of $2,706) -- -- -- (4,035)
Comprehensive loss
-------------------------------------------------------------------------------
BALANCE 12/31/97 6,771,883 1,000 -- (20,831)
To reflect reverse merger into par
value stock -- 6,882 (6,882) --
Jolley Vending, Inc. shares out-
standing prior to reverse merger 1,110,000 -- -- --
Stock issued for compensation
at $.49 per share 253,120 253 124,123 --
Stock issued for conversion of
debt at $3.00 per share 1,999,997 2,000 5,998,000
Proceeds from sale of 5,000
shares of common stock
subscriptions from exercise of
stock options -- -- -- --
Comprehensive loss
Net loss -- -- -- --
Unrealized gain on marketable
securities (net of deferred tax
benefit of $32) -- -- -- 48
Comprehensive loss
Repricing of Series A and B Warrants -- -- 3,429,000 --
-------------------------------------------------------------------------------
BALANCE 12/31/98 10,135,000 10,135 9,544,241 (20,783)
Stock sold in private placement at
$4.00 per share (unaudited) 600,000 600 2,149,400 --
Conversion of stock subscription to
common stock (unaudited) 5,000 5 19,995 --
Stock issued for exercise of stock --
options (unaudited) 10,000 10 47,490 --
Net Loss (unaudited)
Comprehensive Loss (unaudited) -- -- -- --
-------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 10,750,000 $ 10,750 $ 11,761,126 $ (20,783)
===============================================================================
(UNAUDITED)
<CAPTION>
Retained
Earnings Total Common
Stock (Accumulated Stockholders' Comprehensive
Subscriptions Deficit) Equity Income (loss)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE 12/31/95 $ -- $ 1,041,882 $ 997,390 $ --
Unrealized gain on marketable
securities (net of deferred tax -- -- -- --
benefit of $52,621) -- -- 28,696 --
Net loss (444,123) (444,123)
------------------------------------------------------------------------------
BALANCE 12/31/96 -- 597,759 581,963 --
Net income -- 61,680 61,680 61,680
Unrealized loss on marketable
securities (net of deferred tax
benefit of $2,706) -- -- (4,035) (4,035)
------------
Comprehensive loss 57,645
------------------------------------------------------------------============
BALANCE 12/31/97 -- 659,439 639,608
To reflect reverse merger into par
value stock -- -- -- --
Jolley Vending, Inc. shares out-
standing prior to reverse merger -- -- -- --
Stock issued for compensation
at $.49 per share -- -- 124,376 --
Stock issued for conversion of
debt at $3.00 per share 6,000,000
Proceeds from sale of 5,000
shares of common stock
subscriptions form exercise of
stock options 20,000 -- 20,000 --
Comprehensive loss
Net loss -- (3,189,592) (3,189,592) (3,189,592)
Unrealized gain on marketable
securities (net of deferred tax
benefit of $32) -- -- 48 48
------------
Comprehensive loss (3,189,544)
============
Repricing of Series A and B Warrants -- (3,429,000) --
--------------------------------------------------------
BALANCE 12/31/98 20,000 (5,959,153) 3,594,440 --
Stock sold in private placement at
$4.00 per share (unaudited) -- -- 2,150,000 --
Conversion of stock subscription to
common stock (unaudited) (20,000) -- -- --
Stock issued for exercise of stock
options (unaudited) -- -- 47,500 --
Net Loss (unaudited) (578,334) (578,334) (578,334)
------------
Comprehensive Loss (unaudited) -- -- -- $ (578,334)
------------------------------------------------------------------============
BALANCE AT MARCH 31, 1999 $ -- $ (6,537,487) $ 5,213,606
========================================================
(UNAUDITED)
</TABLE>
F-7
<PAGE> 69
WAREFORCE.COM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three month's ended
Year ended December 31, March 31,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (444,123) $ 61,680 $ (3,189,592) $ (361,695) $ (578,334)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by
operating activities:
Depreciation and amortization 224,435 242,494 500,772 69,497 199,156
Realized loss on investments -- 46,466 30,629 -- --
Provision for bad debts 93,933 79,726 110,601 24,999 24,999
Deferred taxes (324,930) 153,042 (355,100) 3,594 --
Reserve for loss on
remaining subsidiary assets (335,000)
Stock issued for compensation -- -- 124,376 -- --
Changes in operating assets and liabilities:
Accounts receivable (7,245,811) 8,862,004 (239,389) 2,721,107 2,796,447
Other receivables (402,356) (558,787) 1,018,800 590,390 (150,591)
Inventories 467,421 (636,343) 2,067,651 1,742,679 261,843
Prepaid expenses (8,658) (46,107) (104,573) 2,121 2,982
Income tax receivable -- (174,791) (163,348) (229,478) --
Other assets 88,506 17,385 (55,370) (8,422) 14,354
Accounts payable 1,041,020 3,986,084 (2,349,972) 1,277,515 (1,484,261)
Accrued expenses 699,150 (1,065,479) 875,160 (30,545) (1,159,714)
Income taxes payable (112,623) -- -- -- --
-------------------------------------------- ----------------------------
Net cash (used in) provided by operating activities (6,259,036) 10,967,374 (1,729,355) 5,801,762 (73,119)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (320,867) (381,708) (643,497) (97,084) (360,669)
Sale of property and equipment 22,920 -- -- -- --
Sale of subsidiary assets 300,000 -- -- -- --
Proceeds from sale of marketable securities 111,242 623,590 17,315 (1,712,054) 1,210
Cash used in acquisition -- -- (3,000,000) -- (750,000)
-------------------------------------------- ----------------------------
Net cash provided by (used by) investing activities 113,295 241,882 (3,626,182) (1,809,138) (1,109,459)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change on line of credit borrowings 7,070,061 (10,618,461) 2,047,489 (3,699,710) (798,500)
Long term debt (repayments) borrowings (210,892) (760,428) (8,777) 1,697,867 (317,299)
Notes receivable and advances to shareholders (272,055) (719,817) (2,383,728) (2,131,641) (7,836)
Proceeds from issuance of common stock -- -- 20,000 -- 2,197,500
Proceeds from convertible debt -- -- 6,000,000 -- --
-------------------------------------------- ----------------------------
Net cash provided by (used in) financing activities 6,587,114 (12,098,706) 5,674,984 (4,133,484) 1,073,865
-------------------------------------------- ----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 441,373 (889,450) 319,447 (140,860) (108,713)
CASH ACQUIRED IN ACQUISITIONS -- -- 115,086 -- 80,404
CASH AND CASH EQUIVALENTS, beginning of year 831,265 1,272,638 383,188 383,188 817,721
-------------------------------------------- ----------------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,272,638 $ 383,188 $ 817,721 $ 242,328 $ 789,412
============================================ ============================
</TABLE>
F-8
<PAGE> 70
WAREFORCE.COM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three month's ended
Year ended December 31, March 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
Unaudited
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $319,000 $ 230,000 $ -- $ -- $ --
========================================== ===========================
Interest $570,000 $ 451,000 $ 692,066 $ 103,562 $ 144,708
========================================== ===========================
NON-CASH FINANCING ACTIVITIES
Conversion of debt into common stock $ -- $ -- $6,000,000 $ -- $ --
========================================== ===========================
Note payable issued in connection
with acquisition $ -- $ -- $ -- $ -- $ 250,000
========================================== ===========================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE> 71
WAREFORCE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Line of Business/Significant Risks
Wareforce Incorporated (Wareforce) was incorporated in California in April 1985.
In July 1998, Wareforce Incorporated entered into a transaction which was
accounted for as a reverse merger with Jolley Vending, Inc., a Nevada
corporation incorporated in June 1995. At the time of the transaction Jolley
Vending, Inc. was inactive. The transaction is accounted for as a reverse merger
acquisition, which results in a recapitalization of Wareforce in as much as it
is deemed to be the acquiring entity for accounting purposes. In June 1998,
Jolley Vending, Inc. changed its name to Wareforce One, Inc. and in January
1999, changed its name to Wareforce.com, Inc. (the Company). The Company is a
reseller of computer software, hardware, accessories, and peripherals and
provides related technical services.
During 1998, the Company concentrated on expanding its sales and developing its
administrative and sales infrastructure. As a result, at December 31, 1998, the
Company had a working capital deficit of $3,701,936 and a net loss of $3,189,592
for the year ended December 31, 1998. To continue to progress on its business
plan, the Company plans to raise additional working capital through private
offerings of equity. Management believes that funds on hand, available on line
of credit and raised in private placements subsequent to year-end, will be
sufficient to fund its needs through at least December 31, 1999. There can be no
assurance that the Company will obtain sufficient funds to execute its business
plan or generate positive operating results. Subsequent to year-end, the Company
has raised $2,160,000 in private placements (see Note 14).
On August 31, 1998, the Company acquired 100 percent of the outstanding common
stock of C.Y. Investment, Inc. (CYI) for $3,000,000 cash. CYI is a reseller of
computers, accessories and services to businesses, the general public and
municipalities. The acquisition has been accounted for as a purchase and the
results of CYI have been included in the accompanying consolidated financial
statements since the date of the acquisition. The excess of the purchase price
over fair value of net assets acquired (goodwill) was $2,837,770 and is being
amortized on a straight-line basis over seven years.
F-10
<PAGE> 72
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash $ 115,086
Accounts receivable 8,810,702
Inventories 1,380,816
Other receivables 148,679
Property and equipment 56,024
Goodwill 2,837,770
Other assets 28,643
Accounts payable (6,547,299)
Line of credit (2,968,080)
Accrued expenses (862,341)
-----------
$ 3,000,000
===========
</TABLE>
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of CYI has occurred as of the beginning of fiscal
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Net sales $ 135,968,015 $ 133,376,335
Net loss $ (126,381) $ (3,392,143)
Net loss per basic
common share $ (0.02) $ (0.40)
</TABLE>
On August 24, 1995, the Company acquired all of the outstanding common stock of
Los Angeles Micromart, Inc. (dba Personal Support Computers) (PSC) for $220,000
cash. The acquisition was accounted for as a purchase. The purchase price
approximated the fair value of the net assets acquired, thus no goodwill was
recorded.
On November 25, 1996, as part of a plan to consolidate operations, the Company
sold certain assets and liabilities of PSC for approximately $300,000. The net
book value of the assets sold approximated the sales price. The remaining net
assets which are not expected to be recoverable amount to $335,000, and a
reserve has been recorded against the related assets and as an element of cost
of sales in 1996.
The Company also incurred in 1996 other expenditures which are nonrecurring in
nature and include $499,212 relating to a proposed offering, $200,000 for the
negotiated settlement of a lawsuit, and $335,000 to record a reserve for certain
assets of PSC.
The unaudited pro forma income from operations for the year ended December 31,
1996, excluding the nonrecurring expenses and the retail operations of Personal
Support Computers is as follows:
<TABLE>
<CAPTION>
Nonrecurring Retail Pro
Descriptions As Reported Expenses Operations Forma
- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 88,509,770 $ -- $ 9,685,412 $ 78,824,358
Cost of sales 81,034,366 335,000 7,998,975 72,700,391
------------ ------------ ------------ ------------
Gross profit 7,475,404 (335,000) 1,686,437 6,123,967
Selling, general and
administrative 6,915,447 -- 1,924,259 4,991,188
Nonrecurring expenses 699,212 699,212 -- --
------------ ------------ ------------ ------------
Income from operations $ (139,255) $ (1,034,212) $ (237,822) $ 1,132,779
============ ============ ============ ============
</TABLE>
F-11
<PAGE> 73
2. Summary of Significant Accounting Policies
a. Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
b. Cash and Cash Equivalents
Cash and cash equivalents includes cash and money market accounts which
funds may be deposited or withdrawn at any time without prior notice or
penalty. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. The
carrying value of cash equivalents approximates fair value.
c. Marketable Securities
The Company accounts for its marketable securities under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under this
statement, the Company's marketable securities, which consist
principally of publicly traded equity securities, are classified as
available-for-sale. They are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary, as well as interest and dividends,
are included in income in the accompanying consolidated statement of
operations.
d. Concentration of Credit Risk
Accounts receivable represent unsecured balances due from its customers
with the Company at risk to the extent such amounts become
uncollectible. The Company performs credit evaluations of each of its
customers and maintains allowances for potential credit losses. Such
losses have generally been within management's expectations.
Revenues from the three largest customers, the four largest customers,
and the largest customer were approximately 54 percent, 63 percent and
23 percent of net sales for the years ended December 31, 1996, 1997,
and 1998, respectively. Amounts due from one customer accounted for 25
percent, 18 percent, and 11 percent of accounts receivable at December
31, 1996, 1997, and 1998 respectively.
During fiscal 1998, the Company lost certain significant customers.
These customers represented 31 percent and 8 percent of total revenues
in 1997 and 1998, respectively. Management has plans that they believe
will replace the lost revenue with new customers.
e. Inventories
Inventories consist primarily of purchased computer software, hardware,
peripherals and accessories and are stated at the lower of cost or
market; cost is determined using the first-in, first-out method of
accounting.
f. Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over five years. Leasehold improvements are
amortized over the period of the lease or the estimated useful life,
whichever is shorter. Expenditures for repairs and maintenance are
charged to expense as incurred, while improvements and betterments
which prolong the useful life of the asset are capitalized and
depreciated over their estimated useful lives.
F-12
<PAGE> 74
g. Goodwill
Goodwill represents purchase price in excess of the value of the net
assets of companies acquired. In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of", the Company periodically assesses the
recoverability of the cost of its goodwill based on a review of the
projected undiscounted cash flows of the related company.
h. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". Under SFAS 109, deferred income tax
assets or liabilities are computed based on the temporary difference
between the financial statement and income tax basis of assets and
liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred
income tax expenses and credits are based on the changes in the
deferred income tax assets and liabilities from period to period.
i. Reverse Merger and Recapitalization
In connection with the reverse merger (see Note 1), the 2,750,000
common stock outstanding of Wareforce Incorporated was exchanged at a
rate of one share of Wareforce Incorporated for 2.4625 shares of Jolley
Vending, Inc. The financial statements and earnings per share data have
been retroactively restated to reflect the post merger share amounts.
j. Use of Estimates
In the normal course of preparing financial statements in conformity
with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
k. Major Suppliers
The Company purchased approximately 92 percent and 80 percent of
software, hardware, accessories and peripherals from four suppliers in
1997 and 1998 respectively. Although purchases are concentrated with a
few key suppliers, management believes that other suppliers could
provide similar services at comparable prices. A change in certain
suppliers, however, could cause a possible loss of sales, which could
adversely affect operating results.
l. Revenue Recognition
The Company records revenues upon shipment of merchandise. Revenues
from software site licenses are recorded when the initial copy of the
software is shipped to the customer or when the customer makes
additional copies of the licensed software. The Company records the
corresponding payable to the software manufacturer for site licenses
when such revenues are recorded.
m. Loss per Share
Basic loss per share in the accompanying financial statements is
calculated in accordance with SFAS No. 128. SFAS No. 128 requires basic
earnings per share be calculated based on weighted average shares
outstanding for the period without giving effect to outstanding common
stock equivalents, while diluted earnings per share considers the
effect of common stock equivalents on weighted average shares
outstanding.
Common share equivalents were not considered as they would be
anti-dilutive and had no impact on the loss per share for the fiscal
years presented. However, the impact under the treasury stock method of
dilutive stock
F-13
<PAGE> 75
options and warrants would have been 40,849 common shares for the year
ended December 31, 1998. There were no dilutive stock options for the
years ended December 31, 1996 or 1997.
n. New Authoritative Pronouncements
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments on Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting
and display of comprehensive income. SFAS No. 131 requires disclosure
for each segment that is similar to those required under current
standards. SFAS 130 and SFAS 131 were adopted for the year ending
December 31, 1998 and did not have a material impact on the Company's
financial statements.
o. Advertising Costs
The Company expenses advertising costs as incurred.
Certain marketing and promotional expenditures are reimbursable by
suppliers under cooperative marketing and promotional fund agreements.
Amounts qualifying for reimbursement are recorded as a receivable from
suppliers and as a corresponding reduction in marketing expense in the
period the expenditure occurs.
3. Marketable Securities
The following is a summary of available-for-sale securities held by the Company:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1996 $ 791,790 $ 92,671 $(120,586) $ 763,875
December 31, 1997 $ 124,525 $ 16,135 $ (50,876) $ 89,784
December 31, 1998 $ 76,608 -- $ (34,718) $ 41,890
</TABLE>
The net realized gain (loss) on sales of available-for-sale securities totaled
$58,000, $46,466, and $30,629 in 1996, 1997, and 1998 respectively.
4. Property and Equipment
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
December 31, March 31, 1999
------------------------------ -----------
1997 1998 Unaudited
----------- ----------- -----------
<S> <C> <C> <C>
Automobiles $ 70,354 $ 83,478 $ 88,086
Equipment 963,048 1,364,023 1,817,722
Furniture and fixtures 207,596 291,713 497,828
Leasehold improvements 205,556 406,861 547,205
----------- ----------- -----------
1,446,554 2,146,075 2,950,891
Less: accumulated depreciation
and amortization (653,847) (1,018,580) (1,117,295)
----------- ----------- -----------
$ 792,707 $ 1,127,495 $ 1,833,546
=========== =========== ===========
</TABLE>
5. Line of Credit
During 1998, the Company entered into a new agreement with Congress Financial
Corporation (Congress) to provide for a $30,000,000 credit facility, of which
$18,000,000 has been allocated to Wareforce and $12,000,000 has been
F-14
<PAGE> 76
allocated to CYI. $15,000,000 of the $30,000,000 is a revolving credit line and
the other $15,000,000 is to be used for inventory flooring plan. Advances under
the terms of the revolving credit line are limited to the sum of 85 percent of
eligible accounts receivable plus 75 percent of eligible inventory. Interest is
payable at Congress's prime rate (7.75 percent at December 31, 1998) and may be
raised to prime rate plus two percent under certain conditions and is subject to
certain covenants as defined in the agreement. The covenants were also amended
in March of 1999 effective December 31, 1998. As of December 31, 1998, the
Company is in compliance with the amended covenants. Advances under the
inventory flooring plan are based upon qualified inventory purchases and bear no
interest for 30 days, interest is charged at a rate of 1.5 percent per month for
payments made by the Company beyond the initial 30 day period. Typically, the
Company settles its advances under the inventory flooring plan within the 30 day
period. The facility is secured by substantially all of the Company's assets and
guaranteed by a majority stockholder in the amount of $1,500,000. Outstanding
borrowings under the revolving line of credit were $7,877,928 and $7,041,840 at
December 31, 1998 and March 31, 1999 respectively. Outstanding borrowings under
the inventory flooring plan were $3,045,486 and $4,523,630 as of December 31,
1998 and March 31, 1999 respectively. Unused credit, subject to the terms of the
related agreement was $4,365,329 at December 31, 1998 and $2,213,946 at March
31, 1999.
At December 31, 1997, the Company had a $15,000,000 credit facility with a
financial institution. The $15,000,000 revolving credit facility was comprised
of a $9,000,000 revolving credit line, a $5,000,000 inventory flooring plan and
a $1,000,000 term loan. Outstanding borrowings under the revolving line of
credit were $3,745,887. Outstanding borrowings under the floor plan line of
credit were $2,161,958 and no amounts were outstanding under the $1,000,000 term
loan as of December 31, 1997. The credit facility expired in August 1998 and was
refinanced with the Congress agreement, described above.
6. Long-Term Debt
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Note payable to bank, secured by vehicle, principal and interest payments of
$312 per month through April 1999, interest at 7.5 percent per annum $ 4,538 $ 1,022
Note payable to bank, secured by $27,000 certificate of deposits, principal
payments of $530 per month through December 2000 interest at 7.5 percent per
annum $17,049 $11,788
------- -------
$21,587 $12,810
======= =======
</TABLE>
F-15
<PAGE> 77
Maturities of long-term debt for the year ended December 31, are as follows:
<TABLE>
<S> <C>
1999 $ 3,874
2000 $ 6,173
$12,810
=======
</TABLE>
7. Convertible Debt
In March and April 1998, the Company issued in aggregate $6,000,000 of 12
percent convertible debentures, maturing one year from the date of issuance with
an option to renew for an additional year. The Company paid a commission plus
expenses of $810,310 to a third party in connection with raising these funds.
Interest is payable monthly. During June 1998, the $6,000,000 was converted into
1,999,997 shares of the Company's common stock.
8. Common Stock
The Company's Board of Directors (the Board) and stockholders approved a common
stock split of 2,750 to 1 on outstanding shares as of October 31, 1996. The
Company restated its Articles of Incorporation and Bylaws to increase the
authorized shares of common stock to 15,000,000. Accordingly, all shares amounts
have been adjusted retroactively for the stock split.
During April 1998, the Company issued options to purchase 253,120 shares of
common stock to officers at approximately $0.49 per share for past services
performed. During April 1998, the officers exercised the options. The officers
were not required to pay the exercise price. Therefore, $124,376 was recorded as
compensation expense in the accompanying consolidated financial statements.
In June 1998, prior to the reverse merger, 1,110,000 shares were outstanding of
Jolley Vending, Inc. The former stockholders of Jolley Vending, Inc. were issued
1,110,000 Series A warrants and 1,110,000 Series B warrants to purchase common
stock at $13.00 per share and $15.00 respectively. The warrants were exercisable
upon filing a registration statement with the Securities and Exchange
Commission. This registration statement has not been filed. In December 1998,
the Series A warrants and Series B warrants were re-priced at $6.00 per share
and $7.00 per share, respectively. The difference between the fair value of the
warrants as of the date of the re-pricing and the initial issuance is $3,429,000
and is recorded in stockholders' equity in the accompanying consolidated
financial statements. The warrants were valued using the Black-Scholes option
pricing model using the following weighted average assumptions: 0 dividend
yield, expected volatility of 86 percent, weighted average risk-free interest
rate of 5.0 percent and expected life of three years.
During December 1998, an employee exercised options to purchase 5,000 shares of
common stock at $4.00. As of December 31, 1998, the shares were not issued and
are included in stock subscriptions. These shares were issued in January 1999.
9. Stock Option Plan
During 1998 the Board approved the Wareforce.com, Inc. 1998 Stock Option/Stock
Issuance Plan (the 1998 Plan) as a successor to the 1996 Plan. No options were
outstanding under the 1996 plan. The Plan has three separate equity programs:
the discretionary option grant program, the stock issuance program and the
automatic option grant program. As part of the 1998 Plan, the number of common
stock available for issuance is 1,000,000 shares subject to increases per year
of one percent of the common stock outstanding on December 31 of the preceding
year. Incentive stock options will be granted at a price that is not less than
100 percent of fair value of the stock at the date of grant, and non-qualified
stock options will be granted at a price that is not less than 85 percent of
fair value of the stock at the date of grant. Options vest as determined by the
plan administrator and are generally exercisable over a period not to exceed
F-16
<PAGE> 78
ten years. As of December 31, 1998, the Company had granted an aggregate of
417,859 options under the 1998 Plan at exercise prices ranging from $2.75 to
$5.13 per share which vest over four years from the date of grant.
The number of options and weighted-average exercise prices of options for each
of the following groups of options, for the periods indicated, are as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Options Exercise Prices
------- -------
<S> <C> <C>
Options outstanding at December 31, 1997 -- $ --
Granted 670,979 $ 2.49
Exercised 258,120 $ 0.56
Cancelled 8,750 $ 3.34
Options outstanding at December 31, 1998 404,109 $ 3.73
Exercisable at December 31, 1998 55,859 $ 5.00
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Number of Options Remaining Number of Shares
Exercise Price Outstanding Contractual Life Exercisable
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$ 3.03 255,000 9.6 years --
$ 4.94 149,109 9.7 years 55,859
</TABLE>
The Company accounts for grants under the 1998 Plan under APB No. 25 and,
accordingly, no compensation costs have been recognized in the accompanying
consolidated statements of operations. If compensation costs for the 1998 Plan
had been determined under SFAS No. 123, pro forma net loss would have been as
follows:
<TABLE>
<S> <C>
Net loss as reported $ (3,189,592)
Net loss pro forma $ (3,400,192)
Basic and diluted loss per share
as reported $ (0.38)
Basic and diluted loss per share
pro forma $ (0.40)
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Weighted-Average
Assumptions for Option
Grant
----------------------
<S> <C>
Dividend Yield None
Expected Volatility 86 percent
Weighted Average Risk-Free Interest Rate 5.22 percent
Expected Lives 5 years
Weighted-Average Fair Value of Options Granted $ 2.64
</TABLE>
F-17
<PAGE> 79
10. Income Taxes
The (benefit) provision for income taxes is as follows as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal $ 106,283 $ 14,700 $ --
State 42,555 6,800 2,400
Deferred:
Federal (243,051) (60) (590,669)
State (81,789) -- (183,000)
--------- --------- ---------
$(176,002) $ 21,440 $(771,269)
========= ========= =========
</TABLE>
The deferred income tax assets consist of the tax effect of temporary
differences related to the following components as of December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventory reserves $ 281,500 $ 138,000
Allowance for bad debts 87,800 180,200
Other accruals 14,900 115,300
Net operating loss
carryforward -- 1,426,000
----------- -----------
384,200 1,859,500
Valuation allowance (108,300) (1,228,500)
----------- -----------
Total deferred tax assets $ 275,900 $ 631,000
=========== ===========
</TABLE>
As of December 31, 1998, the Company had a Federal net operating loss
carryforward of approximately $3,974,000, which will expire in fiscal years
ending 2018. A reconciliation of the provision for income taxes to the amount
computed at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax benefit
(provision) at the
statutory rate $ 210,842 34% $ (25,630) (31)% $ 1,351,000 34%
State taxes, net of federal
income tax effect $ 37,828 6% (7,730) (9)% 175,000 4%
Provision for net operating
loss carryforward -- -- -- -- (1,120,200) (28)%
Tax refund claims and other
items, net (72,668) (12)% 11,920 14% 365,469 9%
-------------------- --------------------- -------------------
$ 176,002 28% $ (21,440) (26)% $ 771,269 19%
==================== ===================== ===================
</TABLE>
F-18
<PAGE> 80
The Company establishes valuation allowances in accordance with SFAS 109. The
Company continually reviews the adequacy of the valuation allowance and is
recognizing these benefits only as reassessment indicates it is more likely than
not that the benefits will be realized.
11. Related Party Transaction
The Company has various notes due from a majority Shareholder totaling
$2,457,700. These notes include $2,000,000 advanced to this Shareholder to
purchase 3,358,938 shares of common stock from the former majority Shareholder
in February 1998. The notes are due in varying amounts from December 2000 to
December 2008 and bear interest at rates from 5.83 percent to 6.48 percent and
are pledged as collateral for the line of credit. Included in notes receivable
and advances to stockholder is approximately $128,000 of accrued interest as of
December 31, 1998. In addition, the Company has made advances to this
Shareholder. Total advances without a promissory note are $789,900 as of
December 31, 1998. The Shareholder plans to repay these advances beginning in
fiscal year 2000 through 2008.
A stockholder of the Company owns the Company's distribution facility, to which
the Company made rental payments of $10,200 per month to the stockholder for a
total of $122, 400 for each of 1996 and 1997, and $81,600 in 1998. In September
1998 the Company moved to a new distribution facility.
12. Employee Profit Sharing Plan
Effective January 1, 1993, the Company adopted a noncontributory Employee Profit
Sharing Plan (the Plan). The Plan covers all employees who are 21 years of age
or older and have one or more years of service as of June 1, 1993. Company
contributions to the Plan are voluntary and at the discretion of the Board of
Directors.
In 1996, the Company amended the Plan to include the Company's 401(k) Profit
Sharing Plan (the 401(k) Plan) which was formed on January 1, 1996. Under the
401(k) Plan, eligible employees can defer up to 10% of their salary, subject to
certain limitations, and the Company, at its discretion, may make a matching
contribution equal to a percentage of the deferred salary elected by employees.
Contributions made by the Company to both plans totaled $6,135 in 1998. There
were no contributions made by the Company to either plan in 1997 or 1996.
13. Commitments
a. Operating Leases
The Company leases facilities under non-cancelable operating leases
expiring through January 2005. The lease agreements provide for
periodic cost of living adjustments based upon changes in the Consumer
Price Index. Rent expense recorded by the Company totaled approximately
$285,000, $366,000, and $551,000 during 1996, 1997, and 1998
respectively.
Minimum lease payments for the years ending December 31, are as
follows:
<TABLE>
<S> <C>
1999 $ 621,878
2000 496,969
2001 442,303
2002 442,303
2003 337,034
Thereafter 318,078
----------
$2,658,565
==========
</TABLE>
b. Employment Contracts
The Company has employment agreements with five of its executive
officers, which expire through August 2001. These agreements provide
for minimum salary levels, as well as for incentive bonuses that are
payable
F-19
<PAGE> 81
if specified management goals are attained. The aggregate commitment
for future salaries at December 31, 1998, excluding bonuses, was
approximately $1,976,000.
14. Subsequent Events
a. Common Stock
In January 1999, the Company sold in aggregate 600,000 shares of common
stock in a private placement at an issue price of $4.00 per share for
net proceeds of $2,150,000.
b. Acquisitions
In March 1999, the Company purchased certain assets and liabilities of
Kennsco, Inc. for $1,000,000. The purchase price was paid $750,000 cash
and $250,000 by means of a promissory note due in September 1999,
payable in shares of the Company's common stock as defined in the
agreement. The Company is a Minneapolis, Minnesota-based technical
services company.
In February 1999, the Company entered into a letter of intent to
purchase 70 percent of the outstanding stock of uMember.com a private
online auction company, a start up organization incorporated on January
28, 1999. In connection with the proposed purchase, the Company is
required to fund $1,000,000 of uMember.com's operations and also issue
30,000 restricted shares of the Company's common stock to the owners of
uMember.com. The restricted shares were issued April 27, 1999. As of
May 31,1999 $150,000 has been advanced to uMember to fund operations.
F-20
<PAGE> 82
15. INFORMATION RELATED TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. These unaudited financial statements should be read in
conjunction with the audited financial statements and related noted thereto,
appearing elsewhere herein. The results for the interim periods presented are
not necessarily indicative of results to be expected for a full year.
Acquisition
The following unaudited proforma consolidated results of operations have been
prepared as if the acquisition of Kennsco had occurred as of the beginning of
fiscal 1998 and 1999, the 1999 data is for three months ended:
<TABLE>
<CAPTION>
Consolidated Consolidated
Proforma Profoma
12/31/98 3/31/99
--------------------------------
<S> <C> <C>
SALES $ 108,134,580 $ 32,394,901
COST OF SALES 93,614,635 28,103,129
--------------------------------
GROSS PROFIT 14,519,945 4,291,772
SELLING, GENERAL AND ADMINISTRATIVE 16,785,940 4,441,129
--------------------------------
LOSS FROM OPERATIONS (2,265,995) (149,357)
INTEREST EXPENSE, NET 868,033 208,845
OTHER INCOME (EXPENSE) (1,067,564) (44,314)
--------------------------------
LOSS BEFORE INCOME TAXES (4,201,592) (402,516)
BENEFIT FOR INCOME TAXES (771,269) --
NET LOSS $ (3,430,323) $ (402,516)
================================
</TABLE>
Additional Sub Events Footnotes
Sales Type Leases
The present value of the minimum lease payments receivable and guaranteed
residual value are recorded as equipment sales-leasing at the inception of the
lease with a corresponding net investment in sales-type leases. The cost of
equipment less the present value of the estimated unguaranteed residual value is
recorded as cost of equipment sales-leasing.
F-21
<PAGE> 83
Notes Payable
The current portion and non current portion of long term debt consist of the
following notes :
Sales type leases with several leasing companies with varying monthly payments
through June, 2002 with varying interest rates from 8 to 9.56 percent per annum.
A note to Ken Searl payable in 13 quarterly installments of principal and
interest, at Congress Financial Corporation's prime rate of interest charged to
Wareforce.
Note payable to Fidelity Bank for inventory that is due March 31, 2000 and is
payable in 12 monthly installments of $39,455.28, which includes principal and
interest at the current rate of 10.25 percent per year.
<TABLE>
<CAPTION>
CURRENT NON CURRENT
---------- ----------
<S> <C> <C>
Leases $ 707,459 $ 403,330
Searl 53,502 187,258
Fidelity 450,000 --
---------- ----------
$1,210,961 $ 590,588
========== ==========
</TABLE>
Line of Credit
The agreement previously mentioned in footnote 5 with Congress Financial
Corporation was amended in March 1999 to include Kennsco and provides a
$2,000,000 revolving sub-facility under the same terms as the original loan
agreement. At March 31, 1999, $877,600 was outstanding by Kennsco.
Warrants
In June 1999 Wareforce.com engaged the services of an investment relations firm.
Part of their compensation is 50,000 stock purchase warrants. These warrants are
convertible into 50,000 shares, exercisable at $7.00/per share. The warrants
vest immediately and expire 1.5 years from the date of issue.
<PAGE> 84
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
C.Y. INVESTMENT INC. (DBA MICROAGE/IMPRES TECHNOLOGY):
We have audited the accompanying balance sheets of C.Y. INVESTMENT INC. (DBA
MICROAGE/IMPRESS TECHNOLOGY) (a California corporation) as of December 31, 1997
and 1996 and the related statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to expressed
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 C.Y. INVESTMENT INC. as of
December 31, 1997 and 1996, and the results of its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
October 22, 1998
<PAGE> 86
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 380,095 $ 96,879
Accounts receivable, net of
allowance of $174,000 and $55,000
in 1997 and 1996, respectively 11,080,181 4,591,164
Other receivables 404,928 79,217
Inventories 1,260,653 749,463
Prepaid expenses 11,401 34,800
Income taxes receivable -- 27,000
----------- -----------
Total current assets 13,137,258 5,578,523
----------- -----------
PROPERTY AND EQUIPMENT, net 76,081 80,822
----------- -----------
OTHER ASSETS 111,896 104,512
----------- -----------
$13,325,235 $ 5,763,857
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 87
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Lines of credit $ 8,962,692 $ 3,168,460
Accounts payable 2,697,966 1,375,902
Accrued liabilities 1,029,560 510,517
Income taxes payable 114,000 --
------------ ------------
Total current liabilities 12,804,218 5,054,879
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value:
Authorized - 1,000,000 shares
Issued and outstanding - 410,000 shares 410,000 410,000
Additional paid in capital 212,751 212,751
(Accumulated deficit) retained earnings (101,734) 86,227
------------ ------------
Total stockholders' equity 521,017 708,978
------------ ------------
$ 13,325,235 $ 5,763,857
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 88
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 56,346,303 $ 37,335,006
COST OF SALES 50,457,421 34,032,282
------------ ------------
Gross profit 5,888,882 3,302,724
SELLING, GENERAL AND ADMINISTRATIVE 5,541,887 3,223,361
------------ ------------
Income from operations 346,995 79,363
OTHER INCOME (EXPENSE):
Other income 9,948 7,093
Interest expense (363,904) (122,184)
------------ ------------
(353,956) (115,091)
------------ ------------
Net loss before provision
for income taxes (6,961) (35,728)
PROVISION FOR INCOME TAXES (181,000) (4,000)
------------ ------------
NET LOSS $ (187,961) $ (39,728)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 89
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(Accumulated
Additional Deficit)
Common Stock Paid in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 410,000 $ 410,000 $ 212,751 $ 125,955 $ 748,706
Net loss -- -- -- (39,728) (39,728)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 410,000 410,000 212,751 86,227 708,978
Net loss -- -- -- (187,961) (187,961)
--------- --------- --------- --------- ---------
Balance, December 31, 1997 410,000 $ 410,000 $ 212,751 $(101,734) $ 521,017
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 90
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (187,961) $ (39,728)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Compensation expense for options issued 25,800 22,200
Depreciation and amortization 55,789 38,158
Provision for doubtful accounts 219,000 55,000
Deferred income tax asset -- 31,000
Change in operating assets and liabilities:
Accounts receivable (6,708,017) (1,983,924)
Inventories (511,190) (223,653)
Prepaid expenses and other receivables (302,312) (59,830)
Other assets (2,032) (5,802)
Income taxes receivable 27,000 (27,000)
Accounts payable 1,322,064 808,734
Accrued liabilities 493,243 124,142
Income taxes payable 114,000 --
----------- -----------
Net cash used in
operating activities (5,454,616) (1,260,703)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (43,903) (9,867)
Increase in cash surrender value (12,497) (10,371)
----------- -----------
Net cash used in
investing activities (56,400) (20,238)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES--
Net borrowings lines of credit 5,794,232 1,213,945
----------- -----------
INCREASE/(DECREASE) IN CASH 283,216 (66,996)
CASH, beginning of year 96,879 163,875
----------- -----------
CASH, end of year $ 380,095 $ 96,879
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 21,000 $ 9,000
=========== ===========
Interest $ 322,000 $ 127,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 91
C.Y. INVESTMENT INC.
(DBA MICROAGE/IMPRES TECHNOLOGY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Line of Business and Summary of Significant Accounting Policies
a. Line of Business
C.Y. INVESTMENT INC. (the Company) was incorporated in California in
June 1988. The Company is a franchised computer store, which sells
computers, accessories and services to businesses, the general public
and municipalities. The Company has three locations in Southern
California.
On July 1, 1987, the Company entered into a ten-year franchise agreement
with Microage Computer Store, Inc., an Arizona Corporation. The
agreement was revised in January 1, 1990 and the period of the agreement
remained at ten years starting on the date of this revised agreement.
Under the Agreement, the Company has the non-exclusive franchise to
operate a Microage Computer Store. The agreements restrict the transfer
of the Company's stock and contain non-compete covenants. Subsequent to
year-end this agreement was terminated upon the sale of the Company to
Wareforce One, Inc. (Note 8).
b. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingencies at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Sales and Concentration of Credit Risk
The Company sells computer software, hardware, peripherals and
accessories to governmental and private customers. The Company performs
periodic credit evaluations of its customers. The Company maintains
reserves for potential credit losses and to date such losses have been
within management's expectations. As of December 31, 1997 one customer's
balance was approximately 20 percent of total accounts receivable. As of
December 31, 1996 two customer's balances combined were approximately 32
percent of total accounts receivable.
d. Revenue Recognition
Product revenue is recorded at the time of shipment, net of estimated
allowances for bad debts, warranty and product returns. Revenues from
software site licenses are recorded when the initial
<PAGE> 92
-2-
copy of the software is shipped to the customer or when the customer
issues a purchase order to make additional copies of licensed software.
The Company records the corresponding payable to the software vendor for
site licenses when such revenues are recorded.
e. Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
f. Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the
lesser of the life of the asset or the remaining life of the lease.
The Company capitalizes expenditures which materially increase asset
lives and charges ordinary repairs and maintenance to operations as
incurred. When assets are sold or otherwise disposed of, the cost and
related reserves are removed from the accounts and any resulting gain or
loss is included in operations.
g. Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
totaled approximately $198,000 and $43,000 in 1997 and 1996,
respectively. Certain marketing and promotional expenditures are
reimbursable by suppliers under cooperative marketing and promotional
fund agreements. Amounts qualifying for reimbursement are recorded as a
receivable from suppliers and as a corresponding reduction in marketing
expense in the period the expenditure occurs.
h. Income Taxes
Income taxes are accounted for using the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets
and liabilities are recognized for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases
of assets and liabilities.
<PAGE> 93
-3-
2. Property and Equipment
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Equipment $197,768 $172,975
Office furniture and fixtures 139,854 130,525
Leasehold improvements 109,346 99,565
-------- --------
446,968 403,065
Less -- Accumulated depreciation
and amortization 370,887 322,243
-------- --------
$ 76,081 $ 80,822
======== ========
</TABLE>
3. Lines of Credit
The Company has a $250,000 line of credit with a vendor. The vendor advances on
the credit line for purchases of inventory. Advances under the line of credit
are based upon qualified inventory and bear no interest for the first 30 days,
an interest rate of prime (8.5 percent as of December 31, 1997) plus 6.5 percent
is charged on amounts outstanding longer than 30 days. The credit line is
secured by all inventories and is guaranteed by certain shareholders. This
agreement shall be in force until one of the parties gives notice to the other
that it is terminated. As of December 31, 1997 and 1996, outstanding balances
under this line were $13,674 and $24,671, respectively.
The Company has a $750,000 line of credit, subject to agreed upon temporary
uplifts, with a finance company for the purchase of inventory. The repayment
terms are net 30. The line of credit bears interest of 18 percent on amounts
outstanding longer than 60 days. The credit line is secured by substantially all
eligible inventories and is guaranteed by certain shareholders. As of December
31, 1997 and 1996, outstanding balances under this line were $378,762 and
$189,997, respectively.
As of December 31, 1997, the Company has a $6,750,000 accounts receivable line
of credit with a finance company. The availability of this line of credit was
reduced to $4,500,000 in February 1998. The advances are subject to a borrowing
base computation on eligible accounts receivable. The line is secured by
substantially all of the assets of the Company and is guaranteed by certain
shareholders. Interest is payable monthly on the outstanding principal at prime
plus 0.5 percent. This temporary overline expired in February 2, 1998. As of
December 31, 1997, the Company had exceeded its accounts receivable facility by
$122,948. As of December 31, 1997, outstanding balances under this line were
$6,872,948 and $1,364,011, respectively.
The Company has a $3,250,000 line of credit with a finance company for the
purchase of inventory. The line is secured by substantially all of the assets of
the Company and is guaranteed by certain shareholders. Advances under the line
of credit bear no interest for 40 days,
<PAGE> 94
-4-
thereafter, interest is at prime plus 0.5 percent. As of September 30, 1997, the
Company was approved a temporary increase to $4,875,000. This temporary increase
expired on January 31, 1998. As of December 31, 1997 and 1996 outstanding
balances under this line were $1,447,308 and $1,589,781, respectively.
The Company has a $250,000 revolving line of credit. The line is secured by
substantially all the assets of the Company and is guaranteed by a shareholder.
The line expires March 23, 1999 renewable annually. Interest on advances is
charged at the Bank's Prime rate plus 2 percent. At December 31, 1997 and 1996,
outstanding balances under the line of credit were $250,000 and $0,
respectively.
Subsequent to year-end, all of the above lines of credit were refinanced with a
financing company (Note 8).
4. Income Taxes
Under SFAS No. 109, deferred tax assets or liabilities are computed based on the
temporary differences between financial statement and income tax basis of assets
and liabilities using the enacted marginal income tax rate in effect for the
year in which the differences are expected to reverse.
Valuation allowances have been established to reduce deferred tax assets to the
amount anticipated to be realized. Income tax expense is the tax payable for the
period and the change in deferred tax assets and liabilities during the period.
The components of the net deferred income tax asset are as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Allowance for doubtful accounts $ 75,000 $ 24,000
Inventory reserves 131,000 72,000
Accrued expenses 44,000 59,000
--------- ---------
Net short-term deferred tax asset 250,000 155,000
Depreciation and amortization 26,000 24,000
--------- ---------
Long-term deferred tax asset 26,000 24,000
Valuation allowance (276,000) (179,000)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
</TABLE>
<PAGE> 95
-5-
The provision for income taxes is comprised of the following components as of
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $123,000 $ 3,000
State 35,000 1,000
-------- --------
158,000 4,000
-------- --------
Deferred:
Federal 17,000 --
State 6,000 --
-------- --------
23,000 --
-------- --------
Provision for income taxes $181,000 $ 4,000
======== ========
</TABLE>
5. Commitments and Contingencies
a. Deferred Compensation Plan
The Company entered into a deferred compensation plan in 1989 for the
benefit of an employee. The benefit payable under the plan consists of
monthly payment of $3,000 commencing on a date determined by the Company
but within six months from such retirement date, November 1, 1999 and
continuing for 36 months. If the employee dies before retirement age
while in the employment of the Company, the benefits payable to the
beneficiary will be $100,000. As of December 31, 1997 and 1996, the
Company has accrued $47,327 and $36,352, respectively, under this
agreement.
The Company is funding the deferred compensation plan with a life
insurance policy on the employee with a face value of $130,000. The cash
value of the policy was $64,184 and $51,687 as of December 31, 1997 and
1996, respectively, and is included in other assets in the accompanying
balance sheets.
<PAGE> 96
-6-
b. Leases
The Company leases facilities under non-cancelable operating leases
expiring through December 2000. Total minimum operating lease
commitments are as follows:
<TABLE>
<CAPTION>
Year Ending Offices and
December 31, Warehouses
------------ ----------
<S> <C>
1998 $274,839
1999 188,003
2000 63,683
--------
$526,525
========
</TABLE>
Rental expense was $293,746 and $218,442 for the years ended December
31, 1997 and 1996, respectively.
The Company also subleased part of the warehouse facilities to Battery
Technology Inc. under an operating lease that will expire in December of
2000. Total rental income was $93,443 and $81,400 for the year ended
December 31, 1997 and 1996, respectively.
6. Related Party Transactions
A majority stockholder of the Company also has an interest in Battery Technology
Inc. (BTI), a California corporation. Total sales to and purchases from BTI were
$22,071 and $152,174, respectively, for the year ended December 31, 1997. Total
sales to BTI was approximately $42,000 for the year ended December 31, 1996.
There was $438 outstanding balance due from BTI and approximately $2,395 due to
BTI as of December 31, 1997. There was a $22,803 outstanding balance due from
BTI as of December 31, 1996. The Company also subleases office space to BTI (see
Note 5).
A majority stockholder of the Company has a minority interest in Protect
Investment Inc., d.b.a.: Microage Industry, a California corporation. Total
sales to and purchase from Protec Investment Inc. were $459,146 and $53,571
respectively, for the year ended December 31, 1997. As of December 31, 1997
$23,753 was due from and $2,439 was due to Protec Investment Inc. There was no
sales, purchases or amounts due to or from Protec Investment Inc. for the year
ended December 31, 1996.
7. Employment Agreement
The Company has an employment agreement with a stockholder. Under the agreement
the employee received an option to purchase shares of the Company up to 20
percent for $100 for each one percent of the common stock. The options vest over
the term of the agreement. If ownership in the Company is transferred or sold,
the entire 20 percent option becomes vested. The Company recognized $25,800 and
$22,200 of expense in 1997 and 1996, respectively, and included in accrued
liabilities is
<PAGE> 97
-7-
$140,600 and $114,800 related to this agreement for 1997 and 1996, respectively.
8. Subsequent Events
a. Lines of Credit
On August 27, 1998, the Company entered into a new agreement with a
finance company to provide for a $12,000,000 credit facility of which
$7,000,000 can be used for inventory flooring, which replaces the
previous credit facilities (Note 3). Advances under the terms of the
agreement are limited to the sum of 85 percent of eligible accounts
receivable plus 75 percent of eligible inventory. Interest is payable at
the finance company's prime rate and may be raised to prime rate plus
two percent under certain conditions and is subject to certain covenants
as defined in the agreement. The facility is secured by substantially
all of the Company's assets and guaranteed by a stockholder.
b. Sale of Company
On August 31, 1998, 100 percent of the outstanding stock of the Company
was purchased by Wareforce One, Inc. for $3,000,000.
<PAGE> 98
KENNSCO, INC.
AND SUBSIDIARY
PLYMOUTH, MINNESOTA
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1998
<PAGE> 99
C O N T E N T S
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2-3
Consolidated statements of operations and retained
earnings (deficit) 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-14
</TABLE>
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Kennsco, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheets of Kennsco, Inc.
and subsidiary as of June 30, 1998 and 1997, and the related consolidated
statements of operations and retained earnings (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Kennsco, Inc. and subsidiary as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, on March 22, 1999, the
Company sold its assets to a third party.
Minneapolis, Minnesota
January 20, 1999, (except for Note 10,
to which the date is March 22, 1999)
-1-
<PAGE> 101
KENNSCO, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
JUNE 30, 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH $ -- $ 138,366
RECEIVABLES
Accounts receivable, trade, less allowance for doubtful accounts of
$30,000 at June 30, 1998 and 1997 1,336,403 1,601,808
Accounts receivable, other 165,251 85,887
---------- ----------
TOTAL RECEIVABLES 1,501,654 1,687,695
NET INVESTMENT IN SALES-TYPE LEASES 1,313,081 1,559,976
INVENTORY 870,417 1,326,638
DEPOSITS AND PREPAID EXPENSES 170,179 147,076
COMPUTER EQUIPMENT UNDER OPERATING LEASES,
at cost -- 20,160
Less accumulated depreciation -- 18,660
---------- ----------
NET COMPUTER EQUIPMENT UNDER OPERATING LEASES -- 1,500
EQUIPMENT, at cost
Transportation equipment 72,135 73,624
Maintenance equipment 680,450 695,338
Office equipment 1,232,503 1,192,165
Leasehold improvements 283,597 255,037
---------- ----------
2,268,685 2,216,164
Less accumulated depreciation 1,549,488 1,291,390
---------- ----------
NET EQUIPMENT 719,197 924,774
INTANGIBLES (net of accumulated amortization)
Covenants not to compete -- 57,030
Goodwill 299,902 325,536
---------- ----------
TOTAL INTANGIBLES 299,902 382,566
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,874,430 $6,168,591
=======================================================================================================
</TABLE>
The Consolidated Notes to Financial Statements are an integral
part of these statements.
-2-
<PAGE> 102
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
LIABILITIES
Demand note payable, bank $ 1,707,009 $ 2,100,000
Demand note payable, stockholder 290,762 --
Checks written in excess of account balance 321,053 --
Installment notes payable to banks and others 159,626 351,767
Discounted lease rentals 1,189,460 1,490,944
Accounts payable, trade 1,104,481 1,062,976
Customer deposits and advances 238,138 160,931
Accrued expenses 196,686 184,023
Income taxes payable 21,004 20,878
----------- -----------
TOTAL LIABILITIES 5,228,219 5,371,519
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, $1.00 par value; 25,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Additional paid-in capital 9,586 9,586
Retained earnings (deficit) (364,375) 786,486
----------- -----------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT) (353,789) 797,072
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $ 4,874,430 $ 6,168,591
=====================================================================================================
</TABLE>
-3-
<PAGE> 103
KENNSCO, INC.
AND SUBSIDIARY
Consolidated Statements Of Operations And Retained Earnings (Deficit)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Equipment sales and maintenance income $ 16,729,744 $ 20,372,736
Equipment sales-leases 1,139,154 1,336,551
Operating lease income 145,560 195,195
Financing lease income 140,575 141,530
Interest and miscellaneous income 1,975 10,873
------------ ------------
TOTAL REVENUES 18,157,008 22,056,885
------------ ------------
COSTS AND EXPENSES
Cost of equipment sales and maintenance 11,813,675 14,283,655
Cost of equipment sales-leases 932,961 1,246,865
Inventory obsolescence 455,000 462,500
Depreciation of leased equipment -- 89,663
Selling, general and administrative expenses 5,670,847 6,252,593
Interest expense 432,261 395,795
------------ ------------
TOTAL COSTS AND EXPENSES 19,304,744 22,731,071
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,147,736) (674,186)
Income taxes 3,125 4,986
------------ ------------
NET INCOME (LOSS) (1,150,861) (679,172)
Retained earnings, beginning of year 786,486 1,465,658
- -------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF YEAR $ (364,375) $ 786,486
=====================================================================================
</TABLE>
The Consolidated Notes to Financial Statements are an integral
part of these statements.
-4-
<PAGE> 104
KENNSCO, INC.
AND SUBSIDIARY
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,150,861) $ (679,172)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Net profit on sales type leases added (206,192) (89,685)
Depreciation and amortization 352,108 534,076
Loss on sale of assets 2,784 105,900
Leased equipment transferred to inventory, at net book value 467,661 117,817
Principal portion of sales type lease payments received 867,425 1,106,149
(Increase) decrease in receivables 186,041 59,369
(Increase) decrease in inventory 456,221 433,428
(Increase) decrease in other assets (23,103) 4,291
Checks written in excess of account balance 321,053 --
Increase (decrease) in accounts payable
and accrued expenses 54,168 (201,385)
Increase (decrease) in customer deposits and advances 77,207 (85,273)
Increase (decrease) in income taxes payable 126 8,361
Increase (decrease) in deferred income taxes -- (10,014)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,404,638 1,303,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchased for leasing (881,999) (931,669)
Capital expenditures (76,856) (376,754)
Proceeds on sale of assets 11,705 122,380
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (947,150) (1,186,043)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The Consolidated Notes to Financial Statements are an integral
part of these statements.
-5-
<PAGE> 105
KENNSCO, INC.
AND SUBSIDIARY
Consolidated Statements Of Cash Flows (Continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under demand notes payable $ (102,229) $ (141,083)
Payments on installment notes payable (192,141) (287,975)
Proceeds from installment notes payable -- 394,065
Proceeds from discounted lease rentals 676,145 1,446,385
Payments on discounted lease rentals (977,629) (1,553,890)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (595,854) (142,498)
----------- -----------
INCREASE (DECREASE) IN CASH (138,366) (24,679)
Cash, beginning of year 138,366 163,045
----------- -----------
CASH, end of year $ -- $ 138,366
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 433,180 $ 395,765
=========== ===========
Income taxes $ 2,999 $ 6,721
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The Consolidated Notes to Financial Statements are an integral
part of these statements.
-6-
<PAGE> 106
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company is engaged in selling and leasing new and used computer
equipment. Additional revenues are derived from the maintenance and
installation of computer equipment and the management of computer
networks.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All material intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE AND EXPENSE RECOGNITION:
Income from the sale of equipment and the related cost of equipment are
recorded at the time of customer acceptance of the equipment.
Maintenance and installation income is recorded at the time services
are performed or, if under contract, in the period earned. The related
costs are recorded as incurred.
As required by Statement of Financial Accounting Standards No. 13, the
Company's leasing activities as lessor are accounted for as either
sales-type or operating leases. Accordingly, leases that transfer
substantially all of the benefits and risks of ownership have been
accounted for as sales-type leases. All other leases have been
accounted for as operating leases.
The accounting methods and the related financial reporting effects are
described below:
1. Sales-type leases: The present value of the minimum lease
payments receivable and guaranteed residual value are recorded
as equipment sales-leasing at the inception of the lease with
a corresponding net investment in sales-type leases. The cost
of the equipment less the present value of the estimated
unguaranteed residual value is recorded as cost of equipment
sales-leasing.
-7-
<PAGE> 107
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. (CONTINUED)
2. Operating leases: Revenue consists of monthly rentals and is
recorded as operating lease income. The cost of the equipment
is recorded as equipment under operating leases and is
depreciated over the estimated useful lives of the equipment
using the straight-line method.
RESIDUAL VALUES:
Residual values, representing the estimated value of the equipment at
the termination of a lease, are recorded in the financial statements at
the inception of each sales-type lease. Residual values are thereafter
regularly reviewed by management, and adjustments are made where it is
considered there has been a permanent reduction in value. No upward
revision of residual values is made subsequent to the inception of the
lease.
Residual values relating to equipment which is subject to a sales-type
lease are recorded at their net present value and are incremented to
their future value on a yield basis over the lease term.
The residual values for operating leases are included in the equipment
under operating leases net book value and are subject to the same
yearly review as the residual values established for sales-type leases.
DISCOUNTED LEASE RENTALS:
Proceeds from financing equipment on a non-recourse basis is recorded
on the balance sheet as discounted lease rentals. In the event of
default by the lessee, the lender has first lien against the underlying
leased equipment with no further recourse against the Company.
INVENTORY:
Inventories consist of new and used computer equipment and maintenance
parts and equipment.
Inventories are valued at the lower of cost or market with cost
determined on the specific identification method for computer equipment
and on the first-in, first-out method for maintenance parts and other
inventories. Market for maintenance inventory is determined from
published industry references where available. The remainder of the
maintenance inventory is reduced below cost by a market valuation
reserve based on management's estimate of the realizable value and
usefulness of the inventory in fulfilling its maintenance contracts.
-8-
<PAGE> 108
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. (CONTINUED)
DEPRECIATION:
Depreciation is computed using principally the straight-line method
over the estimated useful lives of the assets. The lives assigned are
as follows:
<TABLE>
<S> <C>
Equipment on lease 2 - 3 years
Transportation equipment 2 - 5 years
Maintenance equipment 3 - 7 years
Office equipment 5 - 7 years
Leasehold improvements 2 - 20 years
</TABLE>
AMORTIZATION:
Amortization of intangible assets is computed using the straight-line
method over the following periods:
<TABLE>
<S> <C>
Covenants not to compete 5 years
Goodwill 15 - 40 years
</TABLE>
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
NOTE 2. NET INVESTMENT IN SALES-TYPE LEASES
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Total minimum lease payments to
be received $ 1,362,890 $ 1,631,498
Estimated unguaranteed residual
values of leased equipment 85,528 92,853
Less unearned income (135,337) (164,375)
- -------------------------------------------------------------------------------
NET INVESTMENT IN SALES-TYPE LEASES $ 1,313,081 $ 1,559,976
===============================================================================
</TABLE>
-9-
<PAGE> 109
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 2. (CONTINUED)
The following is a schedule by year of minimum lease payments receivable on
non-cancelable sales-type leases:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 780,369
2000 494,748
2001 87,773
- --------------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS RECEIVABLE $1,362,890
================================================================================
</TABLE>
NOTE 3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $ 381,970 $ 444,895
Maintenance parts and equipment 937,287 1,318,391
Other 25,860 25,852
----------- -----------
1,345,117 1,789,138
Less market valuation reserve for
maintenance parts and equipment (474,700) (462,500)
- -------------------------------------------------------------------------------
TOTAL INVENTORY $ 870,417 $ 1,326,638
===============================================================================
</TABLE>
NOTE 4. DEMAND NOTES PAYABLE
The Company has a $2,300,000 revolving line of credit, of which $1,707,009 and
$2,100,000 was outstanding at June 30, 1998 and 1997, respectively. The line
carries an average interest rate of 4.00% over the prime rate (prime rate at
June 30, 1998 was 8.50%). The line of credit is secured by the Company's
accounts receivable, inventory, equipment, general intangibles and the personal
guarantee of the stockholder. The Company is required to make monthly principal
payments of $40,000 and interest. The credit line expires February 28, 1999.
The Company has a demand note payable to the stockholder of which $290,762 was
outstanding at June 30, 1998. This note payable is subordinate to the revolving
line of credit described above and requires monthly interest only payments of
2.00% over the prime rate. The note is secured by the Company's accounts
receivable, inventory, equipment and general intangibles. Interest expense
related to this note amounted to $4,375 for 1998.
-10-
<PAGE> 110
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 5. INSTALLMENT NOTES PAYABLE TO BANKS AND OTHERS
Installment notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to Century Bank National Association, prime rate plus 2.00% payable
in monthly installments of $5,825 through March 1999 and $5,804 on April 1,
1999, secured by accounts receivable, inventory, equipment and general
intangibles $ 55,378 $116,128
Note payable to Guardian Capital, Inc., 9.50% payable in monthly installments of
$11,507 through March 1999, secured by furniture, fixtures and equipment 99,482 221,340
Note payable to Sencore, 9.90% payable in monthly installments of $884 through
November 1998, secured by equipment 4,766 14,299
- --------------------------------------------------------------------------------------------------------------
TOTAL INSTALLMENT NOTES PAYABLE $159,626 $351,767
==============================================================================================================
</TABLE>
Maturities of long-term notes payable are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
- -----------------------------------------------------------------------
<S> <C>
1999 $159,626
- -----------------------------------------------------------------------
TOTAL $159,626
=======================================================================
</TABLE>
-11-
<PAGE> 111
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 6. DISCOUNTED LEASE RENTALS
The Company utilizes its lease rentals receivable and underlying equipment in
leasing transactions as collateral to borrow from financial institutions at
fixed rates on a non-recourse basis. In return for this secured interest, the
Company receives a discounted cash payment. In the event of a default by a
lessee, the financial institution has a first lien on the underlying leased
equipment, with no further recourse against the Company. Proceeds from
discounting are recorded on the balance sheet as discounted lease rentals. As
lessees make payments, financing lease income and interest expense are recorded.
Discounted lease rentals at 8.50% to 10.00% are reduced by the interest method
and are due in varying installments through June 2001. Discounted lease rentals
are secured by assignment of lease contracts.
Scheduled maturities of discounted lease rentals are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
- -----------------------------------------------------------------------
<S> <C>
1999 $ 685,049
2000 428,785
2001 75,626
- -----------------------------------------------------------------------
TOTAL DISCOUNTED LEASE RENTALS $1,189,460
=======================================================================
</TABLE>
NOTE 7. INCOME TAX MATTERS
Income taxes included on the consolidated statements of income consist of the
following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current tax expense (benefit):
Federal $ -- $ --
State 3,125 15,000
Deferred tax expense (benefit):
Federal -- (8,397)
State -- (1,617)
- -------------------------------------------------------------------------------
TOTAL INCOME TAXES $ 3,125 $ 4,986
===============================================================================
</TABLE>
-12-
<PAGE> 112
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 7. INCOME TAX MATTERS
The net deferred tax liability included in the consolidated balance sheets
consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Basis differences $ 339,014 $ 391,778
Net operating loss carryforwards 531,257 296,755
Valuation allowance (662,517) (370,794)
--------- ---------
Deferred tax assets 207,754 317,739
--------- ---------
Deferred tax liabilities:
Basis differences (141,774) (159,827)
Difference in lease accounting for tax purposes
and financial statement purposes (65,980) (157,912)
--------- ---------
Deferred tax liabilities (207,754) (317,739)
- -----------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ -- $ --
===================================================================================
</TABLE>
For tax purposes, the Company has approximately $1,400,000 of federal and state
net operating loss carryforwards, which expire in the years 2001 through 2012.
Since it is more likely than not the net operating loss carryforwards will
expire unused, a valuation allowance of $662,517 has been recorded against the
deferred tax asset.
- --------------------------------------------------------------------------------
NOTE 8. RENTAL COMMITMENT
The Company and its subsidiary lease several office-warehousing facilities from
unrelated parties. In addition to base rent, the agreements provide for monthly
payments of pro rata shares of real estate taxes and operating expenses. Rent
expense related to these leases is to $586,827 for 1998 and $465,724 for 1997.
-13-
<PAGE> 113
KENNSCO, INC.
AND SUBSIDIARY
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 8. (CONTINUED)
The following is a schedule by year of minimum future rental commitments on
these leases as of June 30, 1998:
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
- --------------------------------------------------
<S> <C>
1999 $378,320
2000 155,479
2001 30,884
- --------------------------------------------------
TOTAL RENTAL COMMITMENTS $564,683
==================================================
</TABLE>
NOTE 9. RELATED PARTY LEASE
The Company leases an office-warehouse facility from the stockholder under a
lease that expires on November 30, 2006. In addition to monthly lease payments
of $20,500, the Company is responsible for all real estate taxes, utilities and
maintenance costs. The Company has guaranteed the debt incurred by the
stockholder to finance the cost of the facility. Rent expense, net of sublease
rental income, related to this lease amounted to $218,300 for 1998 and $208,008
for 1997.
NOTE 10. SUBSEQUENT EVENT
On March 22, 1999 the Company executed and closed on a sale agreement whereby
the Company sold all of its assets to a third party for $1,000,000. In addition,
the third party assumed all of the Company's liabilities. The Company received
$750,000 cash at closing and a note in the amount of $250,000. The note will be
converted into shares of stock issued by the acquiring company within six months
of the date of closing.
-14-
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- -----------
<S> <C>
SEC registration fee........................................ $ 4,836.03
Accounting fees and expenses*............................... $ 35,000.00
Legal fees and expenses*.................................... $ 50,000.00
Blue Sky fees and expenses.................................. $ 10,000.00
Printing and engraving expenses*............................ $ 20,000.00
Transfer Agent and Registrar fees and expenses*............. $ 2,500.00
Miscellaneous fees and expenses*............................ $ 2,663.97
-----------
Total............................................. $125,000.00
===========
</TABLE>
- -------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty to certain specified circumstances,
namely, breaches of their duties of loyalty, acts or omissions not in good faith
or which involve intentional misconduct or knowing violation of law, acts
involving unlawful payment of dividends or unlawful stock purchases or
redemptions, or any transaction from which a director derives an improper
personal benefit. The Company's by-laws indemnify its Officers and Directors to
the full extent permitted by Nevada law. The by-laws with these exceptions
eliminate any personal liability of a Director to the Company or its
shareholders for monetary damages for the breach of a Director's fiduciary duty
and therefore a Director cannot be held liable for damages to the Company or its
shareholders for gross negligence or lack of due care in carrying out his
fiduciary duties as a Director. The Company's Articles provide for
indemnification to the full extent permitted under law which includes all
liability, damages and costs or expenses arising from or in connection with
service for, employment by, or other affiliation with the Company to the maximum
extent and under all circumstances permitted by law. Nevada law permits
indemnification if a director or officer acts in good faith in a manner
reasonably believed to be in, or not opposed to, the best interest's of the
corporation. A director or officer must be indemnified as to any matter in which
he successfully defends himself. Indemnification is prohibited as to any matter
in which the director or officer is adjudged liable to the corporation. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
II-1
<PAGE> 115
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1998, the Wareforce Incorporated issued in aggregate $6.0 million
of 12% subordinated, convertible debentures, maturing one year from the date of
issuance with an option to renew for an additional year. This placement was
issued under Regulation D of the Securities Act of 1933 to a group of accredited
foreign investors. Wareforce Incorporated paid approximately $900,000 to a third
party in connection with raising these funds. During June 1998, the $6.0 million
was converted into equity in exchange for 2.0 million shares of Wareforce
Incorporated common stock. The proceeds of the debentures were used for the
acquisition of CY, a loan to Mr. Rechtman to acquire the shares of Wareforce
then-held by Ms. Gabriel, and general working capital purposes.
In February 1999, we issued 600,000 restricted shares of our common stock
in a private placement for $2.4 million. (These funds were part of a $4 million
private placement. In consultation with the placement agent, our management
decided to suspend the placement at $2.4 million until market conditions were
more favorable for continuing the placement.) This placement was issued under
Regulation D of the Securities Act of 1933 to a group of accredited foreign
investors. We paid approximately $200,000 to a third party in connection with
raising these funds. The proceeds from this placement were used by us primarily
to complete our asset purchase of Kennsco, funding start-up costs for
and general working capital purposes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization between Jolley Vending,
Inc. and Wareforce Incorporated, dated as of July , 1998
3.1 Amended and Restated Certificate of Incorporation of the
Company
3.2 Bylaws of the Company
4.1 Form of the Company's Common Stock Certificate
4.2 Warrant Agreement by and between Wareforce.com, Inc. and
Interwest Transfer Co., Inc. as Transfer Agent, dated as of
, 1999 with Form of Warrant as Exhibits A and B
5.1 Opinion of Thomas G. Kimble and Associates
10.1 Promissory Note with Orie Rechtman as Maker and Wareforce
Incorporated as Payee, dated May 23, 1997
10.2 Promissory Note with Orie Rechtman as Maker and Wareforce,
Inc, as Payee, dated February 18, 1998
10.3 Lease Agreement by and between Kenneth Searl, as Landlord,
and Wareforce Incorporated, as Tenant, dated March 22, 1999
10.4 Channel Agreement by and between Wareforce, Inc. and Microsoft
Corporation, dated as of May 19, 1998, including Large Account
Reseller Addendum
10.5 Agreement by and between Wareforce Incorporated and the Los
Angeles County, California, dated as of September 1, 1997
10.6 Amended Agreement by and between the Company and the State
of Florida, dated as of April 1, 1997
10.7 Loan and Security Agreement by and between Congress
Financial Corporation (Western) as Lender and Wareforce
Incorporated as Borrower, dated August 27, 1998
10.8 Loan and Security Agreement by and between Congress
Financial Corporation (Western) as Lender and C.Y.
Investment Inc. as Borrower, dated August 27, 1998
</TABLE>
II-2
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.9 First Amendment to Loan and Security Agreement by and
Between Congress Financial Corporation (Western) and
Wareforce Incorporated, dated March 22, 1999
10.10 Stock Purchase Agreement and Escrow Instructions between by
and between Christopher Chu and Alina Chu Family Trust,
Vivien Mak, Richard Fu and Luisa Fu and the Company, dated
August 28, 1998
10.11 Employment Agreement between Wareforce Incorporated and Orie
Rechtman
10.12 Employment Agreement and Amendment No. 1 between Wareforce
Incorporated and Don Hughes
10.13 Employment Agreement and Amendment No. 1 between Wareforce
Incorporated and Dan Ricketts
10.14 Employment Agreement between Wareforce Incorporated and
Darrell Tate
10.15 Employment Agreement between Wareforce Incorporated and Richard Fu
10.16 Employment Agreement between Wareforce Incorporated and
Marcia Mazria
10.17 Employment Agreement between the Company, Wareforce
Incorporated and Kenneth Searl
10.18 Wareforce.com, Inc. 1998 Stock Option/Stock Issuance Plan
10.19 uMember.com, Inc. 1999 Stock Option/Stock Issuance Plan
15.1* Letter of Arthur Anderson LLP Acknowledging Use of Unaudited
Interim Financial Statements
16.1* Letter of Ernst & Young LLP Regarding Change in Certifying
Accountant
21.1 Subsidiaries
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Ernst & Young LLP
23.3* Consent of Boyum & Barenscheer LLP
23.4 Consent of Thomas G. Kimble and Associates (included in
Exhibit 5.1)
</TABLE>
- -------------------------
* to be filed by amendment.
(b) Financial Statement Schedules. The financial statement schedules have been
omitted because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) Include any additional or changed material information on the
plan of distribution; and
(iii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
II-3
<PAGE> 117
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 118
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of El
Segundo, State of California, on July 6, 1999.
WAREFORCE.COM, INC.
By: /s/ ORIE RECHTMAN
-----------------------------------
Orie Rechtman, Chairman
(Chief Executive Officer)
By: /s/ DON HUGHES
-----------------------------------
Don Hughes, Chief Financial Officer
(Chief Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Thomas G. Kimble or Van L. Butler, the
undersigned's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing, requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ ORIE RECHTMAN July 6, 1999
- ---------------------------------------------------
Orie Rechtman, Director
/s/ DON HUGHES July 6, 1999
- ---------------------------------------------------
Don Hughes, Director
/s/ DAN RICKETTS July 6, 1999
- ---------------------------------------------------
Dan J. Ricketts, Esq., Director
</TABLE>
II-5
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
JOLLEY VENDING, INC.
AND
WAREFORCE INCORPORATED
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Plan of Reorganization...........................................................1
2. Exchange of Shares...............................................................1
3. Pre-Closing Events...............................................................2
4. Exchange of Securities...........................................................2
5. Post Acquisition Events..........................................................3
6. Other Matters....................................................................3
7. Delivery of Shares...............................................................4
8. Representations of Wareforce Shareholders........................................4
9. Representations of Wareforce.....................................................4
10. Representations of JVI and Edwards...............................................6
11. Closing..........................................................................8
12. Conditions Precedent to the Obligations of Wareforce.............................8
13. Conditions Precedent to the Obligations of JVI .................................10
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
14. Indemnification...................................................................10
15. Nature and Survival of Representations............................................11
16. Documents at Closing..............................................................11
17. Finder's Fees.....................................................................12
18. Miscellaneous.....................................................................13
Signature Page..............................................................................13
</TABLE>
Exhibit A - Wareforce Stockholder Schedule
Exhibit B - Amendment to Articles of Incorporation
Exhibit C - Investment Letter
Exhibit D - Description of Series A and Series B Warrants
(i)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (hereinafter the "Agreement")
is entered into effective as of this ____ day of July, 1998, by and among Jolley
Vending, Inc.., a Nevada corporation (hereinafter "JVI"); Ken Edwards, the sole
officer and director of JVI (hereinafter "Edwards"); Wareforce Incorporated, a
California corporation (hereinafter "Wareforce"), and the owners of all the
outstanding shares of common stock of Wareforce (hereinafter the "Wareforce
Stockholders").
RECITALS:
WHEREAS, the Wareforce Stockholders own all of the issued and
outstanding common stock of Wareforce which comprises 3,661,972 shares (the
"Wareforce Common Stock"). JVI desires to acquire the Wareforce Common Stock
solely in exchange for voting common stock of JVI, making Wareforce a
wholly-owned subsidiary of JVI; and
WHEREAS, the Wareforce Stockholders (as set forth on the attached
Exhibit "A") desire to acquire voting common stock of JVI in exchange
<PAGE> 3
for the Wareforce Common Stock, as more fully set forth herein.
NOW THEREFORE, for the mutual consideration set out herein and other
good and valuable consideration, the legal sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. Plan of Reorganization. It is hereby agreed that all of the Wareforce
Common Stock shall be acquired by JVI in exchange solely for JVI common voting
stock (the "JVI Shares"). It is the intention of the parties hereto that all of
the issued and outstanding shares of capital stock of Wareforce shall be
acquired by JVI in exchange solely for JVI common voting stock and that this
entire transaction qualify as a corporate reorganization under Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related or
other applicable sections thereunder.
2. Exchange of Shares. JVI and Wareforce Stockholders agree that on the
Closing Date or at the Closing as hereinafter defined, the Wareforce Common
Stock shall be delivered at Closing to JVI in exchange for the JVI Shares, after
giving effect to a 1.85 for 1 forward stock split (the "JVI Forward Stock
Split") as to all presently outstanding shares of JVI common stock, as follows:
(a) At Closing, JVI shall, subject to the conditions set forth herein,
issue an aggregate of 9,025,000 shares of JVI common stock for immediate
delivery to the Wareforce Stockholders on the basis of 2.4625 JVI Shares for
each outstanding share of Wareforce Common Stock.
(b) Each Wareforce Stockholder shall execute this Agreement or sign a
written consent to the exchange of shares.
(c) Unless otherwise agreed by JVI and Wareforce this transaction shall
close only in the event JVI is able to acquire all of the outstanding Wareforce
Common Stock.
3. Pre-Closing Events. The Closing is subject to the completion of the
following:
<PAGE> 4
(a) JVI shall have authorized 50,000,000 shares of $.001 par value
common stock and 5,000,000 shares of $.001 par value preferred stock. The
preferred stock shall be subject to issuance in such series and with such
rights, preferences and designations as determined in the sole discretion of the
board of directors.
(b) JVI shall have effectuated the JVI Forward Stock Split at or prior
to Closing, and shall have 1,110,000 shares of its common stock issued and
outstanding and no other shares of capital stock issued or outstanding.
(c) JVI shall demonstrate to the reasonable satisfaction of Wareforce
that it has no material assets and no liabilities contingent or fixed.
4. Exchange of Securities. As of the Closing Date each of the following
shall occur:
(a) Each share of Wareforce Common Stock issued and outstanding
immediately prior to the Closing Date shall be exchanged for 2.4625 JVI Shares
to be delivered at Closing. All such outstanding shares of Wareforce Common
Stock shall be deemed, after Closing, to be owned by JVI. The holders of such
certificates previously evidencing shares of Wareforce Common Stock outstanding
immediately prior to the Closing Date shall cease to have any rights with
respect to such shares of Wareforce Common Stock except as otherwise provided
herein or by law;
(b) Any shares of Wareforce Common Stock held in the treasury of
Wareforce immediately prior to the Closing Date shall automatically be canceled
and extinguished without any conversion thereof and no payment shall be made
with respect thereto;
(c) The 1,110,000 shares of JVI common stock previously issued and
outstanding prior to the Closing, after giving effect to the JVI Forward Split
will remain outstanding.
5. Other Events Occurring at Closing. At Closing, the following shall be
accomplished:
(a) JVI shall file an amendment to its Articles of Incorporation
<PAGE> 5
with the Secretary of State of the State of Nevada in substantially the form
attached hereto as Exhibit "B" effecting an amendment to its Articles of
Incorporation to reflect a name change and to accomplish the JVI Forward Stock
Split, all as set forth in the attached Exhibit "B".
(b) The resignation of the existing JVI officer and director and
appointment of new officers and directors as described in Section 12(f) hereof.
(c) JVI shall file for listing in Standard and Poor's Corporation Manual
and pay for accelerated listing service and shall thereafter keep Standard and
Poors current with respect to the business and financial affairs of the JVI on
at least an annual basis.
(d) JVI shall deliver an updated due diligence package of information
for distribution to interested parties.
6. Other Matters.
(a) Except as otherwise described herein, including the JVI Forward
Stock Split, there shall be no stock dividend, stock split, recapitalization, or
exchange of shares with respect to or rights issued in respect of, JVI's capital
stock after the date hereof and there shall be no dividends paid on JVI's
capital stock after the date hereof, in each case through and including the
Closing Date.
(b) Wareforce shall have received all requisite director and shareholder
approval of all matters set forth herein, and no shareholder of Wareforce shall
have exercised any dissenters rights under applicable corporate law.
(c) JVI shall have received all requisite shareholder approval of the
matters set forth herein.
(d) JVI shall announce the declaration of a distribution of Series A
Warrants and Series B Warrants to the shareholders of record as of a date to be
announced but which shall be as of a date prior to closing. The Series Warrants
shall be distributed on the basis of one Series A Warrant and one Series B
Warrant for each share of post-split common stock held by each shareholder of
record. There shall be
<PAGE> 6
1,110,000 Series A Warrants and 1,110,000 Series B Warrants distributed, subject
to the terms and conditions set forth in the attached Exhibit "D".
(e) All parties hereto acknowledge and recognize that as an integral
part of the consideration given herein, JVI has agreed and committed to
immediately proceed, upon Closing, to obtain all necessary audited financial
statements and to commence preparation for filing, as soon as practicable, a
registration statement with the Securities and Exchange Commission ("S.E.C."),
registering the distribution of the Series A and Series B Warrants and the
exercise of said Warrants. Therefore, JVI, with the complete cooperation of
Wareforce, hereby agrees to commence preparation of said registration statement
for filing with the S.E.C. and to attempt to file such registration statement as
soon as practicable after Closing and to prosecute the same with all diligence
to effectiveness.
(f) JVI will adopt an incentive stock option plan as recommended by
Wareforce covering at least 1,000,000 shares of JVI Common Stock and will grant
options under said plan as directed by Wareforce.
7. Delivery of Shares. On or as soon as practicable after the Closing
Date, Wareforce will use its best efforts to cause the Wareforce Stockholders to
surrender for cancellation certificates representing their shares of Wareforce
Common Stock, against delivery of certificates representing the JVI Shares for
which the shares of Wareforce Common Stock are to be exchanged at Closing.
8. Representations of Wareforce Stockholders. Wareforce Stockholders
hereby represent and warrant each only as to its own Wareforce Common Stock,
effective this date and the Closing Date as follows:
(a) Except as may be set forth in Exhibit "A", the Wareforce Common
Stock is free from claims, liens, or other encumbrances, and at the Closing Date
Wareforce Stockholders will have good title and the unqualified right to
transfer and dispose of such Wareforce Common Stock.
(b) Each Wareforce Stockholder, respectively, is the sole owner
<PAGE> 7
of the issued and outstanding Wareforce Common Stock as set forth in Exhibit
"A";
(c) No Wareforce Stockholder has the present intent to sell or dispose
of the JVI Shares and no Wareforce Stockholder is under a binding obligation,
formal commitment, or existing plan to sell or otherwise dispose of the JVI
Shares in an amount which would decrease the overall ownership of the Wareforce
Stockholders below 80% of the outstanding shares of JVI after the Closing.
9. Representations of Wareforce. Wareforce hereby represents and
warrants as follows, which warranties and representations shall also be true as
of the Closing Date:
(a) Except as noted on Exhibit "A", the Wareforce Stockholders listed on
the attached Exhibit "A" are the sole owners of record and beneficially of the
issued and outstanding common stock of Wareforce.
(b) The Wareforce Common Stock constitutes duly authorized, validly
issued shares of common stock of Wareforce, fully paid and nonassessable and are
the only capital shares of Wareforce authorized or outstanding. At Closing,
there will be no outstanding rights, options, warrants or similar agreements
which authorize the holder thereof to acquire shares of capital stock of
Wareforce except incentive stock options held by employees of Wareforce which
shall become a part of the JVI Stock Option Plan.
(c) The Wareforce unaudited financial statements as of December 31,
1996, December 31, 1997 and March 31, 1998 which have been delivered to JVI
(hereinafter referred to as the "Wareforce Financial Statements") are complete,
accurate and fairly present the financial condition of Wareforce as of the dates
thereof and the results of its operations for the periods covered. There are no
material liabilities, commitments or obligations, either fixed or contingent,
not disclosed in the Wareforce Financial Statements or in any exhibit thereto or
notes thereto other than contracts or obligations in the ordinary course of
business; and no such contracts or obligations in the ordinary course of
business constitute liens or other liabilities which materially alter the
financial condition of Wareforce as reflected in the Wareforce Financial
Statements. Wareforce has good title to all assets shown on the
<PAGE> 8
Wareforce Financial Statements subject only to dispositions and other
transactions in the ordinary course of business, the disclosures set forth
therein an liens and encumbrances of record. The Wareforce Financial Statements
have been prepared in accordance with generally accepted accounting principles
consistently applied (except as may be indicated therein or in the notes
thereto),
(d) Since the date of the Wareforce Financial Statements, there have not
been any material adverse changes in the financial position of Wareforce except
changes arising in the ordinary course of business, which changes will in no
event materially and adversely affect the financial position of Wareforce.
(e) Wareforce is not a party to any material pending litigation or, to
its best knowledge, any governmental investigation or proceeding, not reflected
in the Wareforce Financial Statements, and to its best knowledge, no material
litigation, claims, assessments or any governmental proceedings are threatened
against Wareforce.
(f) Wareforce is in good standing in its jurisdiction of incorporation,
and is in good standing and duly qualified to do business in each jurisdiction
where required to be so qualified except where the failure to so qualify would
have no material negative impact on Wareforce.
(g) Wareforce has (or, by the Closing Date, will have filed) all
material tax, governmental and/or related forms and reports (or extensions
thereof) due or required to be filed and has (or will have) paid or made
adequate provisions for all taxes or assessments which have become due as of the
Closing Date.
(h) Wareforce has not materially breached any material agreement to
which it is a party. Wareforce has previously given JVI copies or access thereto
of all material contracts, commitments and/or agreements to which Wareforce is a
party including all relationships or dealings with related parties or
affiliates.
(i) Wareforce has no subsidiary corporations except as described in
writing to JVI.
<PAGE> 9
(j) Wareforce has made all material corporate financial records, minute
books, and other corporate documents and records available for review to present
management of JVI prior to the Closing Date, during reasonable business hours
and on reasonable notice.
(k) The execution of this Agreement does not materially violate or
breach any material agreement or contract to which Wareforce is a party and has
been duly authorized by all appropriate and necessary corporate action under
California law and Wareforce, to the extent required, has obtained all necessary
approvals or consents required by any agreement to which Wareforce is a party.
(l) All information regarding Wareforce which has been delivered to JVI
for use in the disseminations of information to the shareholders of JVI is true,
complete and accurate in all material respects.
10. Representations of JVI and Edwards. JVI, and Edwards to the best of
his knowledge, hereby jointly and severally represent and warrant as follows,
each of which representations and warranties shall continue to be true as of the
Closing Date:
(a) As of the Closing Date, the JVI Shares, to be issued and delivered
to the Wareforce Stockholders hereunder will, when so issued and delivered,
constitute, duly authorized, validly and legally issued shares of JVI common
stock, fully-paid and nonassessable.
(b) JVI has the corporate power to enter into this Agreement and to
perform its respective obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the board of directors of JVI. The execution and performance
of this Agreement will not constitute a material breach of any agreement,
indenture, mortgage, license or other instrument or document to which JVI is a
party and will not violate any judgment, decree, order, writ, rule, statute, or
regulation applicable to JVI or its properties. The execution and performance of
this Agreement will not violate or conflict with any provision of the Articles
of Incorporation or by-laws of JVI.
(c) JVI has delivered to Wareforce a true and complete copy of its
audited financial statements for the years ended December 31, 1996
<PAGE> 10
and 1997, (the "JVI Financial Statements"). The JVI Financial Statements are
complete, accurate and fairly present the financial condition of JVI as of the
dates thereof and the results of its operations for the periods then ended.
There are no material liabilities or obligations either fixed or contingent not
reflected therein. The JVI Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
(except as may be indicated therein or in the notes thereto) and fairly present
the financial position of JVI as of the dates thereof and the results of its
operations and changes in financial position for the periods then ended.
(d) Since December 31, 1997, there have not been any material adverse
changes in the financial condition of JVI except with regard to disbursements to
pay reasonable and ordinary expenses in connection with maintaining its
corporate status and pursuing the matters contemplated in this Agreement. Prior
to Closing, all accounts payable and other liabilities of JVI shall be paid and
satisfied in full.
(e) JVI is not a party to or the subject of any pending litigation,
claims, or governmental investigation or proceeding not reflected in the JVI
Financial Statements or otherwise disclosed herein, and there are no lawsuits,
claims, assessments, investigations, or similar matters, to the best knowledge
of Edwards, threatened or contemplated against or affecting JVI, its management
or its properties.
(f) JVI is duly organized, validly existing and in good standing under
the laws of the State of Nevada; has the corporate power to own its property and
to carry on its business as now being conducted and is duly qualified to do
business in any jurisdiction where so required except where the failure to so
qualify would have no material negative impact on it.
(g) JVI has filed all federal, state, county and local income, excise,
property and other tax, governmental and/or related returns, forms, or reports,
which are due or required to be filed by it prior to the date hereof, except
where the failure to do so would have no material adverse impact on JVI, and has
paid or made adequate provision in the JVI Financial Statements for the payment
of all taxes, fees, or assessments which have or may become due pursuant to such
returns or
<PAGE> 11
pursuant to any assessments received. JVI is not delinquent or obligated for any
tax, penalty, interest, delinquency or charge.
(h) There are no existing options, calls, warrants, preemptive rights or
commitments of any character relating to the issued or unissued capital stock or
other securities of JVI, except as contemplated in this Agreement.
(i) The corporate financial records, minute books, and other documents
and records of JVI have been made available to Wareforce prior to the Closing.
(j) JVI has not breached, nor is there any pending, or to the knowledge
of management, any threatened claim that JVI has breached, any of the terms or
conditions of any agreements, contracts or commitments to which it is a party or
by which it or its assets are is bound. The execution and performance hereof
will not violate any provisions of applicable law or any agreement to which JVI
is subject. JVI hereby represents that it is not a party to any material
contract or commitment other than appointment documents with its transfer agent,
and that it has disclosed to Wareforce all relationships or dealings with
related parties or affiliates.
(k) JVI common stock is currently approved for quotation on the OTC
Bulletin Board and there are no stop orders in effect with respect thereto.
(l) All information regarding JVI which has been provided to Wareforce
or otherwise disclosed to the public in connection with the transactions
contemplated herein, is true, complete and accurate in all material respects.
JVI and Edwards specifically disclaim any responsibility regarding disclosures
as to Wareforce or its business.
11. Closing. The Closing of the transactions contemplated herein shall
take place on such date (the "Closing" or "Closing Date") as mutually determined
by the parties hereto when all conditions precedent have been met and all
required documents have been delivered, which Closing shall be no later than
July 15, 1998, unless extended by mutual consent of all parties hereto. The
"Closing Date" of the transactions described herein (the "Acquisition"), shall
be that date on which all
<PAGE> 12
conditions set forth herein have been met and the JVI Shares are issued in
exchange for the Wareforce Common Stock.
12. Conditions Precedent to the Obligations of Wareforce. All
obligations of Wareforce under this Agreement are subject to the fulfillment,
prior to or as of the Closing and/or the Closing Date, as indicated below, of
each of the following conditions:
(a) The representations and warranties by or on behalf of Edwards and
JVI contained in this Agreement or in any certificate or document delivered
pursuant to the provisions hereof shall be true in all material respects at and
as of the Closing and Closing Date as though such representations and warranties
were made at and as of such time.
(b) JVI shall have performed and complied with all covenants,
agreements, and conditions set forth in, and shall have executed and delivered
all documents required by this Agreement to be performed or complied with or
executed and delivered by it prior to or at the Closing.
(c) On or before the Closing, the board of directors, and shareholders
representing a majority interest the outstanding common stock of JVI, shall have
approved in accordance with applicable state corporation law the execution and
delivery of this Agreement and the consummation of the transactions contemplated
herein.
(d) On or before the Closing Date, JVI shall have delivered to Wareforce
certified copies of resolutions of the board of directors and shareholders of
JVI approving and authorizing the execution, delivery and performance of this
Agreement and authorizing all of the necessary and proper action to enable JVI
to comply with the terms of this Agreement including the election of Wareforce's
nominees to the Board of Directors of JVI and all matters outlined herein.
(e) The Acquisition shall be permitted by applicable law and JVI shall
have sufficient shares of its capital stock authorized to complete the
Acquisition.
(f) At Closing, the existing officer and director of JVI shall have
resigned in writing from all positions as director and officer of
<PAGE> 13
JVI effective upon the election and appointment of the persons designated by
Wareforce to serve as officers and directors of JVI.
(g) At the Closing, all instruments and documents delivered to Wareforce
and Wareforce Stockholders pursuant to the provisions hereof shall be reasonably
satisfactory to legal counsel for Wareforce.
(h) The shares of restricted JVI capital stock to be issued to Wareforce
Stockholders at Closing will be validly issued, nonassessable and fully-paid
under Nevada corporation law and will be issued in compliance with all federal,
state and applicable corporation and securities laws.
(i) Wareforce and Wareforce Stockholders shall have received the advice
of their tax advisor, if deemed necessary by them, as to all tax aspects of the
Acquisition.
(j) Wareforce shall have received all necessary and required approvals
and consents from required parties and its shareholders.
(k) At the Closing, JVI shall have delivered to Wareforce an opinion of
its counsel dated as of the Closing to the effect that:
(i) JVI is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation;
(ii) This Agreement has been duly authorized, executed and
delivered by JVI and is a valid and binding obligation of JVI
enforceable in accordance with its terms;
(iii) JVI through its board of directors and stockholders has
taken all corporate action necessary for performance under this
Agreement;
(iv) The documents executed and delivered by JVI to Wareforce and
Wareforce Stockholders hereunder are valid and binding in accordance
with their terms and vest in Wareforce Stockholders, as the case may be,
all right, title and interest in and to the JVI Shares to be issued
pursuant to the terms hereof,
<PAGE> 14
and the JVI Shares when issued will be duly and validly issued,
fully-paid and nonassessable;
(v) JVI has the corporate power to execute, deliver and perform
under this Agreement;
(vi) Legal counsel for JVI is not aware of any liabilities,
claims or lawsuits involving JVI;
13. Conditions Precedent to the Obligations of JVI. All obligations of
JVI under this Agreement are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:
(a) The representations and warranties by Wareforce and Wareforce
Stockholders contained in this Agreement or in any certificate or document
delivered pursuant to the provisions hereof shall be true in all material
respects at and as of the Closing as though such representations and warranties
were made at and as of such time.
(b) Wareforce shall have performed and complied with, in all material
respects, all covenants, agreements, and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing;
(c) Wareforce shall deliver on behalf of the Wareforce Stockholders a
letter commonly known as an "Investment Letter," signed by each of said
shareholders, in substantially the form attached hereto as Exhibit "C",
acknowledging that the JVI Shares are being acquired for investment purposes.
(d) Wareforce shall deliver an opinion of its legal counsel to the
effect that:
(i) Wareforce is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation
and is duly qualified to do business in any jurisdiction where so
required except where the failure to so qualify would have no material
adverse impact on Wareforce;
(ii) This Agreement has been duly authorized, executed and
<PAGE> 15
delivered by Wareforce.
(iii) The documents executed and delivered by Wareforce and
Wareforce Stockholders to JVI hereunder are valid and binding in
accordance with their terms and vest in JVI all right, title and
interest in and to the Wareforce Common Stock, which stock is duly and
validly issued, fully-paid and nonassessable.
14. Indemnification. For a period of one year from the Closing, JVI and
Edwards agree to jointly and severally indemnify and hold harmless Wareforce,
and Wareforce agrees to indemnify and hold harmless JVI and Edwards, at all
times after the date of this Agreement against and in respect of any liability,
damage or deficiency, all actions, suits, proceedings, demands, assessments,
judgments, costs and expenses including attorney's fees incident to any of the
foregoing, resulting from any material misrepresentations made by an
indemnifying party to an indemnified party, an indemnifying party's breach of
covenant or warranty or an indemnifying party's nonfulfillment of any agreement
hereunder, or from any material misrepresentation in or omission from any
certificate furnished or to be furnished hereunder.
15. Nature and Survival of Representations. All representations,
warranties and covenants made by any party in this Agreement shall survive the
Closing and the consummation of the transactions contemplated hereby for one
year from the Closing. All of the parties hereto are executing and carrying out
the provisions of this Agreement in reliance solely on the representations,
warranties and covenants and agreements contained in this Agreement and not upon
any investigation upon which it might have made or any representation, warranty,
agreement, promise or information, written or oral, made by the other party or
any other person other than as specifically set forth herein.
16. Documents at Closing. At the Closing, the following documents shall
be delivered:
(a) Wareforce will deliver, or will cause to be delivered, to JVI the
following:
(i) a certificate executed by the President and Secretary of
Wareforce to the effect that all representations and warranties
<PAGE> 16
made by Wareforce under this Agreement are true and correct as of the
Closing, the same as though originally given to JVI on said date;
(ii) a certificate from the jurisdiction of incorporation of
Wareforce dated at or about the Closing to the effect that Wareforce is
in good standing under the laws of said jurisdiction;
(iii) Investment Letters in the form attached hereto as Exhibit
"C" executed by each Wareforce Stockholder;
(iv) such other instruments, documents and certificates, if any,
as are required to be delivered pursuant to the provisions of this
Agreement;
(v) certified copies of resolutions adopted by the shareholders
and directors of Wareforce authorizing this transaction; and
(vi) all other items, the delivery of which is a condition
precedent to the obligations of JVI as set forth herein.
(vii) the legal opinion required by Section 13(d) hereof.
(b) JVI will deliver or cause to be delivered to Wareforce:
(i) stock certificates representing the JVI Shares to be issued
as a part of the stock exchange as described herein;
(ii) a certificate of the President of JVI, to the effect that
all representations and warranties of JVI made under this Agreement are
true and correct as of the Closing, the same as though originally given
to Wareforce on said date;
(iii) certified copies of resolutions adopted by JVI's board of
directors and JVI's Stockholders authorizing the Acquisition and all
related matters described herein;
(iv) certificate from the jurisdiction of incorporation of JVI
dated at or about the Closing Date that JVI is in good
<PAGE> 17
standing under the laws of said state;
(v) opinion of JVI's counsel as described in Section 12(k) above;
(vi) such other instruments and documents as are required to be
delivered pursuant to the provisions of this Agreement;
(vii) resignation of the existing officer and director of JVI;
(viii) all corporate and financial records of JVI; and
(ix) all other items, the delivery of which is a condition
precedent to the obligations of Wareforce, as set forth in Section 13
hereof.
17. Finder's Fees. JVI, represents and warrants to Wareforce, and
Wareforce represents and warrants to JVI that neither of them, or any party
acting on their behalf, has incurred any liabilities, either express or implied,
to any "broker" of "finder" or similar person in connection with this Agreement
or any of the transactions contemplated hereby. In this regard, JVI, on the one
hand, and Wareforce on the other hand, will indemnify and hold the other
harmless from any claim, loss, cost or expense whatsoever (including reasonable
fees and disbursements of counsel) from or relating to any such express or
implied liability.
18. Miscellaneous.
(a) Further Assurances. At any time, and from time to time, after the
Closing Date, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to confirm or perfect
title to any property transferred hereunder or otherwise to carry out the intent
and purposes of this Agreement.
(b) Waiver. Any failure on the part of any party hereto to comply with
any of its obligations, agreements or conditions hereunder may be waived in
writing
<PAGE> 18
by the party to whom such compliance is owed.
(c) Termination. All obligations hereunder may be terminated at the
discretion of either party's board of directors if (i) the closing conditions
specified in Sections 12 and 13 are not met by July 15, 1998, unless extended,
or (ii) any of the representations and warranties made herein have been
materially breached.
(d) Amendment. This Agreement may be amended only in writing as agreed
to by all parties hereto.
(e) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if delivered in person or sent by
prepaid first class registered or certified mail, return receipt requested.
(f) Headings. The section and subsection headings in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(h) Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Nevada.
(i) Binding Effect. This Agreement shall be binding upon the parties
hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns.
(j) Entire Agreement. This Agreement and the attached Exhibits
constitute the entire agreement of the parties covering everything agreed upon
or understood in the transaction. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof.
(k) Time. Time is of the essence.
<PAGE> 19
(l) Severability. If any part of this Agreement is deemed to be
unenforceable the balance of the Agreement shall remain in full force and
effect.
(m) Responsibility and Costs. All fees, expenses and out-of-pocket costs
and expenses, including, without limitation, fees and disbursements of counsel,
advisors and accountants, incurred by the parties hereto shall be borne solely
and entirely by the party that has incurred such costs and expenses.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
Jolley Vending, Inc..
By: /s/Ken Edwards
--------------
Ken Edwards, President and
Secretary
/s/Ken Edwards
--------------
Ken Edwards, individually
Wareforce Incorporated
By: /s/Dan Ricketts By: /s/Orie Rechtman
--------------- ----------------
Dan Ricketts, Secretary Orie Rechtman, President
SHAREHOLDERS OF Wareforce
Incorporated
(Shareholders of Wareforce
not signing below may execute
a separate consent form.)
/s/Orie Rechtman
----------------
<PAGE> 20
Orie Rechtman
/s/Don Hughes
-------------
Don Hughes
/s/Dan Ricketts
---------------
Dan Ricketts
/s/Darrell Tate
---------------
Darrell Tate
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
WAREFORCE ONE, INC.
Pursuant to the applicable provisions of the Nevada Business
Corporations Act, Wareforce One, Inc. (the "Corporation") adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The present name of the Corporation is Wareforce One, Inc.
SECOND: The following amendments to its Articles of Incorporation were
adopted by the board of directors and by majority consent of shareholders of the
Corporation in the manner prescribed by applicable law.
The Article entitled ARTICLE I - NAME, is amended to read as follows:
ARTICLE I - NAME
The name of the corporation shall be: Wareforce.com, Inc.
THIRD: The number of shares of the Corporation outstanding and entitled
to vote at the time of the adoption of said amendment was 10,150,000.
FOURTH: The number of shares voted for such amendments was 6,346,883
(62.5%) and no shares were voted against such amendment.
DATED this 12th day of January 1999.
WAREFORCE ONE, INC.
By: /s/Orie Rechtman
-------------------------------
Orie Rechtman, President
By: /s/Dan Ricketts
<PAGE> 2
-------------------------------
Dan Ricketts, Secretary
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
JOLLEY VENDING, INC.
Pursuant to the applicable provisions of the Nevada Business
Corporations Act, Jolley Vending, Inc. (the "Corporation") adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The present name of the Corporation is Jolley Vending, Inc.
SECOND:The following amendments to its Articles of Incorporation were
adopted by the board of directors and by majority consent of shareholders of the
Corporation in the manner prescribed by applicable law.
The Article entitled ARTICLE I - NAME, is amended to read as follows:
ARTICLE I - NAME
The name of the corporation shall be: Wareforce One, Inc.
THIRD: The Corporation has effectuated, effective with the commencement
of business on Tuesday, July 14, 1998, a 1.85 for 1 forward stock split as to
its shares of common stock outstanding as of the opening of business on July 13,
1998, which increases the outstanding shares as of that date from 600,000 shares
to 1,110,000 shares. The forward split shall not change the number of shares of
Common Stock: authorized for issuance by the Corporation.
FOURTH:The number of shares of the Corporation outstanding and entitled
to vote at the time of the adoption of said amendment was 600,000.
FIFTH: The number of shares voted for such amendments was 480,160 (80%)
and no shares were voted against such amendment.
DATED this 10th of July, 1998.
JOLLEY VENDING, INC.
<PAGE> 3
By: /s/Ken Edwards
---------------------------------
Ken Edwards, President/Secretary
Articles Of Incorporation
Of
JOLLEY VENDING, INC.
WE, THE UNDERSIGNED natural persons of the age of eighteen (18) years
or more, acting as incorporators of a corporation under the Nevada Business
Corporation Act, adopt the following Articles of Incorporation.
Article I
NAME
The Name of the corporation is Jolley Vending, Inc.
Article II
DURATION
The duration of the corporation is perpetual.
Article Ill
PURPOSES
The purpose or purposes for which this corporation is engaged are:
(a) To be an operating vending machine company (candy, pastry, gum,
etc.). Also, to acquire, develop, explore, and otherwise deal in and with all
kinds of real and personal property and all related activities, and for any and
all other lawful purposes.
(b) To acquire by purchase, exchange, gift, bequest, subscription, or
otherwise; and to hold, own, mortgage, pledge, hypothecate, sell, assign,
transfer, exchange, or otherwise dispose of or deal in or with its own corporate
securities or stock or other securities including, without limitations, any
shares of stock, bonds, debentures, notes mortgages, or other obligations, and
any certificates, receipts or other instruments representing rights or interests
therein on any property or assets created or issued by any person, firm,
associate, or corporation, or instrumentalities thereof; to make payment
therefor in any lawful manner or to issue in exchange therefor in any lawful
manner or to issue in exchange therefor its unreserved earned surplus for the
purchase of its own shares, and to
<PAGE> 4
exercise as owner or holder of any securities, any and all rights, powers, and
privileges in respect thereof.
(c) To do each and everything necessary, suitable, or proper for the
accomplishment of any of the purposes or the attainment of any one or more of
the subjects herein enumerated, or which may, at any time, appear conducive to
or expedient for the protection or benefit of this corporation, and to do said
acts as fully and to the same extent as natural persons might, or could do in
any part of the world as principals, agents, partners, trustees, or otherwise,
either alone or in conjunction with any other person, association, or
corporation.
(d) The foregoing clauses shall be construed both as purposes and powers
and shall not be held to limit or restrict in any manner the general powers of
the corporation, and the enjoyment and exercise thereof, as conferred by the
laws of the State of Nevada; and it is the intention that the purposes and
powers specified in each of the paragraphs of this Article Ill shall be regarded
as independent purposes and powers.
Articles IV
STOCK
(a) Common Stock. The aggregate number of shares of Common Stock which
the Corporation shall have authority to issue is 50,000,000 shares at a par
value of $.001 per share. All stock when issued shall be fully paid and
non-assessable, shall be of the same class and have the same rights and
preferences.
No holder of shares of Common Stock of the Corporation shall be
entitled, as such, to any pre-emptive or preferential rights to subscribe to any
unissued stock or any other securities which the Corporation may now or
thereafter be authorized to issue.
Each share of Common Stock shall be entitled to one vote at a
stockholders meetings, either in person or by proxy. Cumulative voting in
elections of Directors and all other matters brought before stockholders
meeting, whether they be annual or special, shall not be permitted.
(b) Preferred Stock. The aggregate number of share of Preferred Stock
which the Corporation shall have authority to issue is 5,000,000 shares, par
value $.001, which may be issued in series, with such designations, preferences,
stated values,
<PAGE> 5
rights, qualifications or limitations as determined solely by the Board of
Directors of the Corporation.
Article V
AMENDMENT
These Articles of Incorporation may be amended by the affirmative Vote
of "a majority" of the shares entitled to vote on each such amendment.
Article VI
SHAREHOLDERS RIGHTS
The authorized and treasury stock of this corporation may be issued at
such time, upon such terms and conditions and for such consideration as the
Board of Directors shall determine. Shareholders shall not have pre-emptive
rights to acquire unissued shares of the stock of this corporation.
Article VII
INITIAL OFFICE AND AGENT
The registered office of the Corporation in the State of Nevada is 3230
E. Flamingo Road, Suite 156, Las Vegas, NV 89121. The registered agent in charge
thereof at such address is Gateway Enterprises, Inc.
Article VIII
DIRECTORS
The directors are hereby given the authority to do any act on behalf of
the corporation by law and in each instance where the Business corporation act
provides that the directors may act in certain instances where the Articles of
Incorporation authorize such action by the directors, the directors are hereby
given authority to act in such instances without specifically numerating such
potential action or instance herein.
The directors are specifically given the authority to mortgage or
pledge any or all assets of the business with stockholders' approval.
The number of directors constituting the initial Board of Directors of
this corporation is two (2). The names and addresses of persons who are to serve
as Directors until the first annual meeting of stockholders or until their
successors are elected and qualify are:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
RONALD L. JOLLEY 368 SOUTH 600 WEST
OREM, UTAH 84058
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
NANCY JOLLEY 368 SOUTH 600 WEST
OREM, UTAH 84058
</TABLE>
Articles IX
INCORPORATORS
The name and address of each incorporator is:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
RONALD L. JOLLEY 368 SOUTH 600 WEST
OREM, UTAH 84058
</TABLE>
Article X
COMMON DIRECTORS - TRANSACTIONS BETWEEN CORPORATIONS
No contract or other transaction between, this corporation and any on or
more of its directors or any other corporation, firm, association, or entity in
which one or more of its directors or officers are financially interested, shall
be either void or voidable because of such relationship or interest, or because
such director or directors are present at the meeting of the Board of Directors,
or a committee thereof, which authorizes, approves, or ratifies such contract or
transaction, or because his or their votes are counted for such purpose if: (a)
the fact of such relationship or interest is disclosed or known to the Board of
Directors or committee which authorizes, approves, or ratifies the contract or
transaction by vote or consent sufficient for the purpose without counting the
votes or consents of such interested director; or (b) the fact of such
relationship or interest is disclosed or known to the stockholders entitled to
vote and they authorize, approve, or ratify such contract or transaction by vote
or written consent, or (c) the contract or transaction is fair and reasonable to
the corporation.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or committee there
of which authorizes, approves or ratifies such contract or transaction.
Article XI
LIABILITY OF DIRECTORS AND OFFICERS
No director or officer shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by such
person as a director or officer. Notwithstanding the foregoing sentence, a
director or officer shall be liable to the extent provided by applicable law,
(i) for
<PAGE> 7
acts or omissions which involve intentional misconduct, fraud or a knowing
violation of law or (ii) for the payment of dividends in violation of NRS
78.300.
The provisions hereof shall not apply to or have any effect on the
liability or alleged liability of any officer or director of the Corporation for
or with respect to any acts or omissions of such person occurring prior to such
amendment.
Under penalties of perjury, I declare that these Articles of
Incorporation have been examined by me and are, to the best of my knowledge and
belief, true, correct and complete.
Dated this 26th day of June, 1995
/s/Ronald L. Jolley
-----------------------------------
Ronald L. Jolley
<PAGE> 1
Exhibit 3.2
BY-LAWS
of
JOLLEY VENDING, INC.
A NEVADA CORPORATION
ARTICLE I
OFFICES
Section I. The principal office of the Corporation shall be at 368 South 600
West, Orem, Utah 84058. The Corporation may have such other offices, either
within or without the State of Utah as the Board of Directors may designate or
as the business of the Corporation may require from time to time.
The registered office of the Corporation required by the Nevada Business
Corporation Act to be maintained in the State of Nevada may be, but need not be,
identical with the principal offices in the State of Nevada, and the address of
the registered office may be changed, from time to time, by the Board of
Directors.
ARTICLE II
STOCKHOLDERS
Section I. ANNUAL MEETING. The annual meeting of stockholders shall be
held at the principal office of the Corporation, at 368 South 600 West, Orem,
Utah 84058, or at such other places on the second Friday of April, or at such
other times as the Board of Directors may, from time to time, determine. If the
day so designated falls upon a legal holiday then the meeting shall be held upon
the first business day thereafter. The Secretary shall serve personally or by
mail a written notice thereof, not less than ten (10) nor more than fifty (50)
days previous to such meeting, addressed to each stockholder at his address as
it appears on the stock book; but at any meeting at which all stockholders shall
be present, or of which all stockholders not present have waived notice in
writing, the giving of notice as above required may be dispensed with.
Section 2. SPECIAL MEETINGS. Special meetings of stockholders other than
those regulated by statute, may be called at any time by a majority of the
Directors. Notice of such meeting stating the place, day and hour and the
purpose for which it is called shall be served personally or by mail,
<PAGE> 2
not less than ten (10) days before the date set for such meeting. If mailed, it
shall be directed to a stockholder at his address as it appears on the stock
book; but at any meeting at which all stockholders shall be present, or of which
stockholders not present have waived notice in writing, the giving of notice as
above described may be dispensed with. The Board of Directors shall also, in
like manner, call a special meeting of stockholders whenever so requested in
writing by stockholders representing not less than ten percent (10%) of the
capital stock of the Corporation entitled to vote at the meeting. The President
may in his discretion call a special meeting of stockholders upon ten (10) days
notice. No business other than that specified in the call for the meeting shall
be transacted at any special meeting of the stockholders, except upon the
unanimous consent of all the stockholders entitled to notice thereof.
Section 3. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purpose of determining stockholders entitled to receive notice of or to vote at
any meeting of stockholders or any adjournment thereof, or stockholders entitled
to receive payment of any dividend; or in order to make a determination of
stockholders for any other proper purpose. the Board of Directors of the
Corporation may provide that the stock transfer books shall be closed for a
stated period not to exceed, in any case, fifty (50) days. If the stock transfer
books shall be closed for the purpose of determining stockholders entitled to
notice of or to vote at a meeting of stockholders. such books shall be closed
for a least ten (10) days immediately preceding such meeting. In lieu of closing
the stock transfer books, the Board of Directors may fix in advance a date as
the record date for any such determination of stockholders, such date in any
case to be not more than fifty (50) days, and in case of a meeting of
stockholders, not less than ten (10) days prior to the date on which the
particular action, requiring such determination of stockholders, is to be taken.
If the stock transfer books are not closed, and no record date is fixed for the
determination of stockholders entitled to receive notice of or to vote at a
meeting of stockholders, or stockholders entitled to receive payment of a
dividend, the date on which notice of the meeting
<PAGE> 3
is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination as to stockholders. When a determination of stockholders
entitled to vote at any meeting of stockholders has been made as provided in
this section, such determination shall apply to any adjournment thereof.
Section 4. VOTING. At all meetings of the stockholders of record having
the right to vote, subject to the provisions of Section 3, each stockholder of
the Corporation is entitled to one (1) vote for each share of stock having
voting power standing in the name of such stockholder on the books of the
Corporation. Votes may be cast in person or by written authorized proxy.
Section 5. PROXY. Each proxy must be executed in writing by the
stockholder of the Corporation or his duly authorized attorney. No proxy shall
be valid after the expiration of eleven (11) months from the date of its
execution unless it shall have specified therein its duration.
Every proxy shall be revocable at the discretion of the person executing
it or of his personal representatives or assigns.
Section 6. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by such officer, agent or proxy as the
by-laws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may
be noted by him either in person or by proxy without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name if authority so to do be
contained in an appropriate Order of the Court by which such
<PAGE> 4
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledge, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section 7. ELECTION OF DIRECTORS. At each election for Directors every
stockholder entitled to vote at such election shall have the right to vote, in
person or by proxy, the number of snares owned by him for as many persons as
there are Directors to be elected and for whose election he has a right to vote
There shall be no cumulative voting.
Section 8. QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of the stockholders,
If a quorum shall not be present or represented, the stockholders
entitled to vote thereat, present in person or by proxy, shall have the power to
adjourn the meeting, from time to time, until a quorum shall be present or
represented. At such rescheduled meeting at which a quorum shall be present or
represented any business or any specified item of business may be transacted
which might have been transacted at the meeting as originally notified,
The number of votes or consents of the holders of stock having voting
power which shall be necessary for the transaction of any business or any
specified item of business at any meeting of stockholders, or the giving of any
consent, shall be a majority of the outstanding shares of the Corporation
entitled to vote.
Section 9. INFORMAL ACTION BY STOCKHOLDERS. Any action required to be
taken at a meeting of the stockholders, or any other action which may be taken
at a meeting of the stockholders, may be taken without a meeting if a consent in
writing setting forth the action so taken shall be signed by all of the
stockholders entitled to vote with respect to the
<PAGE> 5
subject matter thereof.
ARTICLE III
DIRECTORS
Section 1. NUMBER. The affairs and business of this Corporation shall be
managed by a Board of Directors. The present Board of Directors shall consist of
two (2) members. Thereafter the number of Directors may be increased to not more
than nine (9) by resolution of the Board of Directors. Directors need not be
residents of the State of Nevada and need not be stockholders of the
Corporation.
Section 2. ELECTION. The Directors shall be elected at each annual
meeting of the stockholders, but if any such annual meeting is not held, or the
Directors are not elected thereat, the Directors may be elected at any special
meeting of the stockholders held for that purpose.
Section 3. TERM OF OFFICE. The term of office of each of the Directors
shall be one (1) year, which shall continue until his successor has been elected
and qualified.
Section 4. DUTIES. The Board of Directors shall have the control and
general management of the affairs and business of the Corporation. Such
Directors shall in all cases act as a Board, regularly convened, and may adopt
such rules and regulations for the conduct of meetings and the management of the
Corporation, as may be deemed proper, so long as it is not inconsistent with
these By-Laws and the laws of the State of Nevada.
Section 5. DIRECTORS' MEETINGS. Regular meetings of the Board of
Directors shall be held immediately following the annual meeting of the
stockholders, and at such other time and places as the Board of Directors may
determine. Special meetings of the Board of Directors may be called by the
President or the Secretary upon the written request of two (2) Directors.
Section 6. NOTICE OF MEETINGS. Notice of meetings other than the regular
annual meeting shall be given by service upon each Director in person, or by
mailing to him at his last known address, at least three (3) days before the
date therein designated for such meeting. of a written notice thereof specifying
the time and place of such meeting, and the business to be brought before the
meeting, and no business other than
<PAGE> 6
that specified in such notice shall be transacted at any special meeting. At any
Directors' meeting at which a quorum of the Board of Directors shall be present
(although held without notice), any and all business may be transacted which
might have been transacted if the meeting had been duly called if a quorum of
the Directors waive or are willing to waive the notice requirements of such
meeting.
Any Directors may waive notice of any meeting under the provisions of
Article XII. The attendance of a Director at a meeting shall constitute a waiver
of notice of such meeting except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully convened or called.
Section 7. VOTING. At all meetings of the Board of Directors, each
Director is to have one (1) vote. The act of a majority of the Directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors.
Section 8. VACANCIES. Vacancies in the Board occurring between annual
meetings shall be filled for the unexpired portion of the term by a majority of
the remaining Directors.
Section 9. REMOVAL OF DIRECTORS. Any one or more of the Directors may be
removed, with or without cause, at any time, by a vote of the stockholders
holding a majority of the stock, at any special meeting called for that purpose.
Section 10. QUORUM. The number of Directors who shall be present at any
meeting of the Board of Directors in order to constitute a quorum for the
transaction of any business or any specified item of business shall be a
majority.
The number of votes of Directors that shall be necessary for the
transaction of any business of any specified item of business at any meeting of
the Board of Directors shall be a majority.
If a quorum shall not be present at any meeting of the Board of
Directors, those present may adjourn the meeting, from time to time, until a
quorum shall be present.
Section 11. COMPENSATION. By resolution of the Board of Directors, the
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors or each may be paid a stated salary as Director. No such
<PAGE> 7
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefore.
Section 12. PRESUMPTION OF ASSENT. A Director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent is entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the Secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered or certified mail to the Secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
Director who voted in favor of such action.
ARTICLE IV
OFFICERS
Section I. NUMBER. The officers of the Corporation shall be: President,
Vice-President, Secretary, and Treasurer, and such assistant Secretaries as the
President shall determine.
Any officer may hold more than one (1) office.
Section 2. ELECTION. All officers of the Corporation shall be elected
annually by the Board of Directors at its meeting held immediately following the
meeting of stockholders, and shall hold office for the term of one (1) year or
until their successors are duly elected. Officers need not be members of the
Board of Directors.
The Board may appoint such other officers, agents and employees as it
shall deem necessary who shall have such authority and shall perform such duties
as, from time to time, shall be prescribed by the Board.
Section 3. DUTIES OF OFFICERS. The duties and powers of the officers of
the Corporation shall be as follows:
PRESIDENT
The President shall preside at all meetings of the stockholders. He
shall present at each annual meeting of the stockholders and Directors a report
of the condition of the business of the Corporation. He shall cause to be called
regular and special meetings of these stockholders and Directors in accordance
with these By-Laws. He shall appoint
<PAGE> 8
and remove, employ and discharge and fix the compensation of all agents,
employees, and clerks of the Corporation other than the duly appointed officers,
subject to the approval of the Board of Directors. He shall sign and make all
contracts and agreements in the name of the Corporation, subject to the approval
of the Board of Directors. He shall see that the books, reports, statements and
certificates required by the statutes are properly kept, made and filed
according to law. He shall sign all certificates of stock, notes, drafts, or
bills of exchange, warrants or other orders for the payment of money duly drawn
by the Treasurer; and he shall enforce these ByLaws and perform all the duties
incident to the position and office, and which are required by law.
VICE-PRESIDENT
During the absence or inability of the President to render and perform
his duties or exercise his powers, as set forth in these By-Laws or in the
statutes under which the Corporation is organized, the same shall be performed
and exercised by the Vice-President; and when so acting, he shall have all the
powers and be subject to all the responsibilities hereby given to or imposed
upon such President.
SECRETARY
The Secretary shall keep the minutes of the meetings of the Board of
Directors and of the stockholders in appropriate books. He shall give and serve
all notices of the Corporation. He shall be custodian of the records and of the
corporate seal and affix the latter when required. He shall keep the stock and
transfer books in the manner prescribed by law, so as to show at all times the
amount of capital stock issued and outstanding; the manner and the time
compensation for the same was paid; the names of the owners thereof,
alphabetically arranged; the number of shares owned by each; the time at which
each person became such owner; and the amount paid thereon; and keep such stock
and transfer books open daily during the business hours of the office of the
Corporation, subject to the inspection of any stockholder of the Corporation and
permit such stockholder to make extracts from said books to the extent
prescribed by law He shall sign all certificates of stock. He shall present to
the Board or Directors at their meetings all communications addressed to him
officially by the
<PAGE> 9
President or any officer or stockholder of the Corporation: and he shall attend
to all correspondence and perform all the duties incident to the office of
Secretary.
TREASURER
The Treasurer shall have the care and custody of and be responsible for
all the funds and securities of the Corporation, and deposit all such funds in
the name of the Corporation in such bank or banks, trust company or trust
companies or safe deposit vaults as the Board of Directors may designate. He
shall exhibit at all reasonable times his books and accounts to any Director or
stockholder of the Corporation upon application at the office of the Corporation
during business hours. He shall render a statement of the conditions of the
finances of the Corporation at each regular meeting of the Board of Directors,
and at such other times as shall be required of him, and a full financial report
at the annual meeting of the stockholders. He shall keep. at the office of the
Corporation, correct books of account of all its business and transactions and
such other books of account as the Board of Directors may require. He shall do
and perform all duties appertaining to the office of Treasurer. The Treasurer
shall, if required by the Board of Directors, give to the Corporation such
security for the faithful discharge of his duties as the Board may direct.
Section 4. BOND. The Treasurer shall, if required by the Board of
Directors, give to the Corporation such security for the faithful discharge of
his duties as the Board may direct.
Section 5. VACANCIES, HOW FILLED. All vacancies in any office shall be
filled by the Board of Directors without undue delay, either at its regular
meeting or at a meeting specifically called for that purpose. In the case of the
absence of any officer of the Corporation or for any reason that the Board of
Directors may deem sufficient, the Board may, except as specifically otherwise
provided in these By-Laws, delegate the power or duties of such officers to any
other officer or Director for the time being; provided, a majority of the entire
Board concur therein.
Section 6. COMPENSATION OF OFFICERS. The officers shall receive such
salary or compensation as may be determined
<PAGE> 10
by the Board of Directors.
Section 7. REMOVAL OF OFFICERS. The Board of Directors may remove any
officer, by a majority vote, at any time with or without cause.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. DESCRIPTION OF STOCK CERTIFICATES. The certificates of stock
shall be numbered and registered in the order in which they are issued. They
shall be bound in a book and shall be issued in consecutive order therefrom, and
in the margin thereof shall be entered the name of the person owning the shares
therein represented, with the number of shares and the date thereof. Such
certificates shall exhibit the holder's name and number of shares. They shall be
signed by the President or Vice President, and countersigned by the Secretary or
Treasurer and sealed with the Seal of the Corporation.
Section 2. TRANSFER OF STOCK. The stock of the Corporation shall be
assignable and transferable on the books of the Corporation only by the person
in whose name it appears on said books, his legal representatives or by his duly
authorized agent. In case of transfer by attorney, the power of attorney, duly
executed and acknowledged. shall be deposited with the Secretary. In all cases
of transfer the former certificate must be surrendered up and cancelled before a
new certificate may be issued. No transfer shall be made upon the books of the
Corporation within ten (10) days next preceding the annual meeting of the
stockholders.
Section 3. LOST CERTIFICATES. If a stockholder shall claim to have lost
or destroyed a certificate or certificates of stock issued by the Corporation,
the Board of Directors may, at its discretion, direct a new certificate or
certificates to be issued, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed, and upon the
deposit of a bond or other indemnity in such form and with such sureties if any
that the Board may require.
ARTICLE VI
SEAL
Section 1. SEAL. The seal of the Corporation shall be as follows:
<PAGE> 11
NO SEAL IN USE AT THIS TIME
ARTICLE VII
DIVIDENDS
Section 1. WHEN DECLARED. The Board of Directors shall by vote declare
dividends from the surplus profits of the Corporation whenever, in their
opinion, the condition of the Corporation's affairs will render it expedient for
such dividends to be declared.
Section 2. RESERVE. The Board of Directors may set aside, out of the net
profits of the Corporation available for dividends, such sum or sums (before
payment of any dividends) as the Board, in their absolute discretion, think
proper as a reserve fund, to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and they may abolish or modify any such reserve in the manner in
which it was created.
ARTICLE VIII
INDEMNIFICATION
Section 1. Any person made a party to or involved in any civil, criminal
or administrative action, suit or proceeding by reason of the fact that he or
his testator or intestate is or was a Director, officer, or employee of the
Corporation, or of any corporation which he, the testator, or intestate served
as such at the request of the Corporation, shall be indemnified by the
Corporation against expenses reasonably incurred by him or imposed on him in
connection with or resulting from the defense of such action. suit, or
proceeding and in connection with or resulting from any appeal thereon, except
with respect to matters as to which it is adjudged in such action, suit or
proceeding that such officer, Director, or employee was liable to the
Corporation, or to such other corporation, for negligence or misconduct in the
performance of his duty. As used herein the term "expense" shall include all
obligations incurred by such person for the payment of money, including without
limitation attorney's fees, judgments, awards, fines, penalties, and amounts
paid in satisfaction of judgment or in settlement of any such action, suit, or
proceedings, except amounts paid to the Corporation or
<PAGE> 12
such other corporation by him.
A judgment of conviction whether based on plea of guilty or nolo
contendere or its equivalent, or after trial, shall not of itself be deemed an
adjudication that such Director, officer or employee is liable to the
Corporation, or such other corporation, for negligence or misconduct in the
performance of his duties. Determination of the rights of such indemnification
and the amount thereof may be made at the option of the person to be indemnified
pursuant to procedure set forth, from time to time, in the By-Laws, or by any of
the following procedures: (a) order of the Court or administrative body or
agency having jurisdiction of the action, suit, or proceeding; (b) resolution
adopted by a majority of the quorum of the Board of Directors of the Corporation
without counting in such majority any Directors who have incurred expenses in
connection with such action. suit or proceeding; (c) if there is no quorum of
Directors who have not incurred expense in connection with such action, suit, or
proceeding, then by resolution adopted by a majority of the committee of
stockholders and Directors who have not incurred such expenses appointed by the
Board of Directors; (d) resolution adopted by a majority of the quorum of the
Directors entitled to vote at any meeting; or (e) Order of any Court having
jurisdiction over the Corporation. Any such determination that a payment by way
of indemnity should be made will be binding upon the Corporation. Such right of
indemnification shall not be exclusive of any other right which such Directors,
officers, and employees of the Corporation and the other persons above mentioned
may have or hereafter acquire, and without limiting the generality of such
statement, they shall be entitled to their respective rights of indemnification
under any By-Law, Agreement, vote of stockholders, provision of law, or
otherwise in addition to their rights under this Article. The provision of this
Article shall apply to any member of any committee appointed by the Board of
Directors as fully as though each person and been a Director, officer or
employee of the Corporation.
ARTICLE IX
AMENDMENTS
<PAGE> 13
Section 1. HOW AMENDED. These By-Laws may be altered, amended, repealed
or added to by the vote of the Board of Directors of the Corporation at any
regular meeting of said Board, or at a special meeting of Directors called for
that purpose provided a quorum of the Directors as provided by law and by the
Articles of Incorporation, are present at such regular meeting or special
meeting. These By-Laws and any amendments thereto and new By-Laws added by the
Directors may be amended, altered or replaced by the stockholders at any annual
or special meeting of the stockholders.
ARTICLE X
FISCAL YEAR
Section 1. FISCAL YEAR. The fiscal year shall end on the 31st day of
December.
ARTICLE XI
WAIVER OF NOTICE
Section 1. Whenever any notice is required to be given to any
shareholders or directors of the Corporation under the provisions of these
By-Laws, under the Articles of Incorporation or under the provisions of the
Nevada Business Corporation Act, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice.
ADOPTED this 29th day of June 1995.
JOLLEY VENDING, INC.
A Nevada Corporation,
/s/Ronald L. Jolley
-----------------------------------
RONALD L. JOLLEY
President
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
l. That I am the duly elected and acting Secretary\Treasurer of JOLLEY
VENDING, INC., A NEVADA CORPORATION; and
2. That the foregoing By-Laws, comprising Nine (9) pages, constitute the
By-Laws of said Corporation as duly adopted at a meeting of the Board of
Directors thereof duly held on the 29th day of June, 1995.
<PAGE> 14
/s/Nancy Jolley
----------------------------
Secretary\Treasurer
(SEAL)
<PAGE> 1
Exhibit 4.1
[Stock Certificate Border Graphics]
Not Valid Unless Countersigned by Transfer Agent
Incorporated Under the Laws of the State of Nevada
CUSIP NO. 934213 10 9
Number Shares
[No. of Cert] [No. of Shares]
WAREFORCE ONE, INC.
Authorized Common Stock: 50,000,000 Shares
Par Value: $.001
THIS CERTIFIES THAT [Name of Shareholder]
IS THE RECORD HOLDER OF [Number of Shares]
Shares of WAREFORCE ONE, INC. Common Stock
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated: [date of Certificate]
[Graphic of Corporate Seal]
/s/Dan Ricketts /s/Orie Rechtman
- --------------- ----------------
Secretary President
[Border Graphics]
Interwest Transfer Co. Inc. P.O. Box 17136/Salt Lake City, Utah 84117
Countersigned & Registered
-----------------------
<PAGE> 1
Exhibit 4.2
WARRANT AGREEMENT
-------------------
WAREFORCE.COM, INC.
AND
INTERWEST TRANSFER CO., INC.
Warrant Agent
----------------------------
THIS WARRANT AGREEMENT (the "Agreement") is dated effective as of______,
1999, between Wareforce.com, Inc., a Nevada Corporation (the "Company"), and
Interwest Transfer Co., Inc., Salt Lake City, Utah (the "Warrant Agent").
WHEREAS, the Company proposes to distribute as a dividend with respect
to its Common Stock, and issue to the shareholders of record as of July 13,1998
(the record date), 1,110,000 Series A and 1,110,000 Series B Common Stock
Purchase Warrants (the "Warrants");
WHEREAS, in conjunction with the potential exercise of the Warrants, the
Company anticipates the issuance of up to 2,220,000 shares of its Common Stock
(the "Warrant Shares");
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer and exchange of Warrant Certificates and
exercise of the Warrants.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter set forth, it is agreed that:
<PAGE> 2
1. Warrants/Warrant Certificates. Each Warrant will, in the future
during the period specified in the Warrant Certificate, upon fulfillment of the
conditions and subject to the terms set forth therein, entitle the holder (the
"Registered Holder" or, in the aggregate, the "Registered Holders") in whose
name the Warrant Certificate shall be registered on the books maintained by the
Warrant Agent to purchase one share of Common Stock on exercise thereof, subject
to modification and adjustment as provided in Section 8. Warrant Certificates
representing the right to purchase Warrant Shares shall be executed by the
Company's President and attested to by the Company's Secretary or Assistant
Secretary, or shall bear facsimile signatures of such officers, and shall be
delivered to the Warrant Agent upon execution of this Agreement for distribution
to the Company's shareholders pursuant to written instructions from the Company
to the Warrant Agent.
Subject to the provisions of Sections 3, 5, 6 and 8, the Warrant Agent
shall deliver Warrant Certificates in required whole number denominations to
Registered Holders in connection with any transfer or exchange permitted under
this Agreement. Except as provided in Section 6 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder, (ii)
Warrant Certificates issued on or after the initial issuance date, upon the
exercise of any Warrants, to evidence the unexercised Warrants held by the
exercising Registered holder, and (iii) Warrant Certificates issued after the
initial issuance date, upon any transfer or exchange of Warrant Certificates or
replacements of lost or mutilated Warrant Certificates.
2. Form and Execution of Warrant Certificates. The Warrant Certificates
shall be substantially in the form attached hereto as Exhibits A and B. The
Warrant Certificates shall be dated as of the date of their issuance, whether on
initial issuance, transfer or exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates.
Each Warrant Certificate shall be numbered serially with the designation
"Series A or Series B", respectively, appearing on each Warrant Certificate.
The Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so
<PAGE> 3
countersigned. In the event any officer of the Company who executed the Warrant
Certificates shall cease to be an officer of the Company before the date of
issuance of the Warrant Certificates or before countersignature and delivery by
the Warrant Agent, such warrant Certificates may be countersigned, issued and
delivered by the Warrant Agent with the same force and effect as though the
person who signed such Warrant Certificates had not ceased to be an officer of
the Company.
3. Exercise. Subject to the provisions of Sections 4, 7 and 8, the
Warrants, when evidenced by a Warrant Certificate, may be exercised at a price
(the "Exercise Price") of $6.00 per share as to the Series A Warrants and $7.00
per share as to the Series B Warrants, in whole or in part, commencing on the
date of issuance (the "Initial Exercise Date") and terminating on __________,
2002, unless extended by the Company's Board of Directors (the "Exercise
Period"), at any time during such period that the Company's Registration
Statement with respect to the Warrant Shares is effective and current. The
Company shall promptly notify the Warrant Agent of the effectiveness of such
Registration Statement, any suspension of effectiveness and of any such
extension of the Exercise Periods. A Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date (the "Exercise
Date") of the surrender for exercise of the Warrant Certificate. The exercise
form shall be executed by the Registered Holder thereof or his attorney duly
authorized in writing and will be delivered together with payment to the Warrant
Agent at 1981 East 4800 South, Salt Lake City, Utah 84117, (the "Corporate
Office") or such other place as designated by the Company, in cash or by
official bank or certified check, of an amount equal to the aggregate Exercise
Price, in lawful money of the United States of America.
Unless Warrant Shares may not be issued as provided herein, the person
entitled to receive the number of Warrant Shares deliverable on such exercise
shall be treated for all purposes as the holder of such Warrant Shares as of the
close of business on the Exercise date. In addition, the Warrant Agent shall
also, at such time, verify that all of the conditions precedent to the issuance
of Warrant Shares set forth in Section 4 have been satisfied as of the Exercise
Date. If any one of the conditions precedent set forth in Section 4 are not
satisfied as of the Exercise Date, the Warrant Agent shall request written
instructions from
<PAGE> 4
the Company as to whether to return the Warrant and pertinent Exercise Price to
the exercising Registered Holder or to hold the same until all such conditions
have been satisfied. The Company shall not be obligated to issue any fractional
share interests in Warrant Shares issuable or deliverable on the exercise of any
Warrant or scrip or cash therefor and such fractional shares shall be of no
value whatsoever. If more than one Warrant shall be exercised at one time by the
same Registered Holder, the number of full Shares which shall be issuable on
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable on such exercise.
Within thirty days after the Exercise Date and in any event prior to the
pertinent Expiration Date, the Warrant Agent shall cause to be issued and
delivered to the person or persons entitled to receive the same, a certificate
or certificates for the number of Warrant Shares deliverable on such exercise.
No adjustment shall be made in respect of cash dividends on Warrant Shares
delivered on exercise of any Warrant. The Warrant Agent shall promptly notify
the Company in writing of any exercise and of the number of Warrant Shares
delivered and shall cause payment of an amount in cash equal to the pertinent
Exercise Price to be promptly made to the order of the Company.
Upon the exercise of any Warrant, the Warrant Agent shall promptly
deposit the payment into a segregated account established by mutual agreement of
the Company and the Warrant Agent at a federally insured commercial bank. All
funds deposited in the escrow account will be disbursed on a weekly basis to the
Company once they have been determined by the Warrant Agent to be collected
funds. Once the funds are determined to be collected the Warrant Agent shall
cause the share certificate(s) representing the exercised Warrants to be issued.
Expenses incurred by the Warrant Agent while acting in the capacity as
Warrant Agent will be paid by the Company. These expenses, including delivery of
exercised share certificates to the shareholder, will be deducted from the
exercise fee submitted prior to distribution of funds to the Company.
A detailed accounting statement relating to the number of shares
exercised and the net amount of exercised funds remitted will be given
<PAGE> 5
to the Company with the payment of each exercise amount. This will serve as an
interim accounting for the Company's use during the exercise periods. A complete
accounting will be made by the Warrant Agent to the Company concerning all
persons exercising Warrants, the number of shares issued and the amounts paid at
the completion of the Exercise Period.
The Company may deem and treat the Registered Holder of the Warrants at
any time as the absolute owner thereof for all purposes, and the Company shall
not be affected by any notice to the contrary. The Warrants shall not entitle
the holder thereof to any of the rights of shareholders or to any dividend
declared on the Common Stock unless the holder shall have exercised the Warrants
and purchased the shares of Common Stock prior to the record date fixed by the
Board of Directors of the Company for the determination of holders of Common
Stock entitled to such dividend or other right.
4. Reservation of Shares and Payment of Taxes. The Company covenants
that it will at all times reserve and have available from its authorized Common
Stock such number of shares as shall then be issuable on the exercise of all
outstanding Warrants. The Company covenants that all Warrant Shares which shall
be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
The Company and the Warrant Agent acknowledge that the Company will be
required, pursuant to the Securities Act of 1933, as amended (the "Act"), to
deliver to each Registered Holder, upon the exercise of Warrants and delivery of
Warrant Shares, a prospectus covering the issuance of the Warrant Shares which
meets the requirements of the Act, which prospectus must be a part of an
effective registration statement under the Act at the time that the Warrant is
exercised. No Warrants may be exercised nor may Warrant shares be issued by the
Company's transfer agent or delivered by the Warrant Agent unless, on the
Exercise Date: (i) the Company has an effective registration statement covering
the issuance of the Warrant Shares under the Act; (ii) the Warrant Agent has
copies of the prospectus which is a part of such effective registration
statement and which the Warrant Agent hereby agrees to deliver with the Warrant
Shares; and (iii) the Warrant Shares may legally be issued and
<PAGE> 6
delivered to the exercising Registered Holder under the securities laws of the
state in which such Registered Holder resides.
The Company agrees to use its best efforts to maintain, to the extent
required by the Act, an effective registration statement under the Act covering
the issuance of the Warrant Shares during the period the Warrants are
exercisable, but there may be times when no such registration statement will be
currently effective. The exercise of Warrants may be temporarily suspended
without liability to the Company during times when no such registration
statement is currently effective, or during times when, in the reasonable
opinion of the Board of Directors of the Company, such suspension is necessary
to preclude violation of any requirements of applicable law of regulatory bodies
having jurisdiction over the Company. If any Warrant would expire during such a
suspension, then if exercise of such Warrant is duly tendered before its
expiration, such Warrant shall be exercisable and exercised (unless the
attempted exercise is withdrawn) as of the first day after the end of such
suspension. The Company further agrees, from time to time, to furnish the
Warrant Agent with copies of the Company's prospectus to be delivered to
exercising Registered Holders, as set forth above.
If any shares of Common Stock to be reserved for the purpose of exercise
of Warrants hereunder require any other registration with or approval of any
government authority under any federal or state law before such shares may be
validly issued or delivered, then the Company covenants that it will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be. No Warrant Shares shall be issued unless and until
any such registration requirements have been satisfied.
The Registered Holder shall pay all documentary, stamp or similar taxes
and other government charges that may be imposed with respect to the issuance of
the Warrants, or the issuance, transfer or delivery of any Warrant Shares on
exercise of the Warrants. In the event the Warrant Shares are to be delivered in
a name other than the name of the Registered Holder of the Warrant Certificate,
no such delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of any such taxes or charges incident thereto.
<PAGE> 7
In the event the Warrant Agent ceases to also serve as the stock
transfer agent for the Company, the Warrant Agent is irrevocably authorized to
requisition the Company's new transfer agent from time to time for Certificates
of Warrant Shares required upon exercise of the Warrants, and the Company will
authorize such transfer agent to comply with all such requisitions. The Company
will file with the Warrant Agent a statement setting forth the name and address
of its new transfer agent, for shares of Common Stock or other capital stock
issuable upon exercise of the Warrants and of each successor transfer agent.
5. Registration of Transfer. The Warrant Certificates may be transferred
in whole or in part if permitted by the Company. In any permitted transfer, the
Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent
at its Corporate Office. The Company shall execute and the Warrant Agent shall
countersign, issue and deliver in exchange therefor the Warrant Certificate or
Certificates which the holder making the transfer shall be entitled to receive.
The Warrant Agent shall keep transfer books at its Corporate Office
which shall register Warrant Certificates and the transfer thereof. On due
presentment for registration of transfer of any Warrant Certificate at such
office, the Company shall execute and the Warrant Agent shall issue and deliver
to the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants. All Warrant Certificates
presented for registration of transfer or exercise shall be duly endorsed or be
accompanied by a written instrument or instruments or transfer in form
satisfactory to the Company and the Warrant Agent. At the time of exercise, the
transfer fee shall be paid by the Company. The Company may require payment of a
sum sufficient to cover any tax or other government charge that may be imposed
in connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise, or
for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of the agency created by this Agreement. Prior to due presentment
for registration of transfer thereof, the Company and the Warrant Agent may
treat the Registered Holder of any Warrant Certificate as the absolute owner
thereof
<PAGE> 8
(notwithstanding any notations of ownership or writing thereon made by anyone
other than the Company or the Warrant Agent), and the parties hereto shall not
be affected by any notice to the contrary.
6. Loss or Mutilation. On receipt by the Company and the Warrant Agent
of evidence satisfactory as to the ownership of and the loss, theft, destruction
or mutilation of any Warrant Certificate, the Company shall execute, and the
Warrant Agent shall countersign and deliver in lieu thereof, a new Warrant
Certificate representing an equal aggregate number of Warrants. In the case of
loss, theft or destruction of any Warrant Certificate, the individual requesting
issuance of a new Warrant Certificate shall be required to indemnify the Company
and Warrant Agent in an amount satisfactory to each of them. In the event a
Warrant Certificate is mutilated, such certificate shall be surrendered and
canceled by the Warrant Agent prior to delivery of a new Warrant Certificate.
Applicants for a new Warrant Certificate shall also comply with such other
regulations and pay such other reasonable charges as the Company may prescribe.
7. Call Option. At any time, whether or not the Company's Registration
Statement with respect to the Warrant Shares is then current and effective, the
Company shall have the right and option with respect to each series of the
Warrants, upon thirty (30) days written notice to each Warrantholder (or such
longer period as is required under any applicable law), to call, redeem and
acquire all of the Warrants of either or both series which remain outstanding
and unexercised at the date specified for such redemption in such notice (the
"Redemption Date"), which Redemption Date shall be 30 days after the date of
such notice, for an amount equal to $.01 per Warrant; provided, however, that if
the Company's Registration Statement is then current and effective, the
Warrantholders shall have the right during the 30-day period immediately
following the date of such notice to exercise the Warrants in accordance with
the provisions of Section 3 hereof. In the event any Warrants are exercised
during such 30-day period, this call option shall be deemed not to have been
exercised by the Company as to the Warrants so exercised by the holders thereof.
Said notice of redemption shall require each Warrantholder to surrender to the
Company, on the Redemption Date, at the Corporate Office of the Warrant Agent
(or its successor), his certificate or certificates representing the Warrants to
be redeemed.
<PAGE> 9
Notwithstanding the fact that any Warrants called for redemption have not been
surrendered for redemption and cancellation on the Redemption Date, after the
Redemption Date, such Warrants shall be deemed to be expired and all rights of
the holders of such unsurrendered Warrants shall cease and terminate, other than
the right to receive the redemption price of $.01 per Warrant for such Warrants,
without interest provided, however, that such right to receive the redemption
price of $.01 per Warrant for such Warrants shall itself expire on the
Expiration Date of the Warrants. The Company shall notify the Warrant Agent
verbally, with confirmation in writing, of the call of the Warrants and of the
Redemption Date and the Company shall instruct the Warrant Agent accordingly as
to the procedures to be followed by the Warrant Agent in connection with the
redemption of the Warrants.
8. Adjustment of Exercise Price and Shares. After each adjustment of the
Exercise Price pursuant to this Section 8, the number of shares of Common Stock
purchasable on the exercise of each Warrant shall be the number derived by
dividing such adjusted pertinent Exercise Price into the original pertinent
Exercise Price. The pertinent Exercise Price shall be subject to adjustment as
follows:
(a) In the event, prior to the expiration of the Warrants by exercise or
by their terms, the Company shall issue any shares of its Common Stock as a
share dividend or shall subdivide the number of outstanding shares of Common
Stock into a greater number of shares, then, in either of such events, the
Exercise Price per share of Common Stock purchasable pursuant to the Warrants in
effect at the time of such action shall be reduced proportionately and the
number of shares purchasable pursuant to the Warrants shall be increased
proportionately. Conversely, in the event the Company shall reduce the number of
shares of its outstanding Common Stock by combining such shares into a smaller
number of shares, then, in such event, the Exercise Price per share purchasable
pursuant to the Warrants in effect at the time of such action shall be increased
proportionately and the number of shares of Common Stock at that time
purchasable pursuant to the Warrants shall be decreased proportionately. Any
dividend paid or distributed on the Common Stock in shares of any other class of
the Company or securities convertible into shares of Common Stock shall be
treated as a dividend paid in Common
<PAGE> 10
Stock to the extent that shares of Common Stock are issuable on the conversion
thereof.
(b) In the event the Company, at any time while the Warrants shall
remain unexpired and unexercised, shall sell all or substantially all of its
property, or dissolves, liquidates or winds up its affairs, prompt,
proportionate, equitable, lawful and adequate provision shall be made as part of
the terms of any such sale, dissolution, liquidation or winding up such that the
holder of a Warrant may thereafter receive, on exercise thereof, in lieu of each
share of Common Stock of the Company which he would have been entitled to
receive, the same kind and amount of any share, securities, or assets as may be
issuable, distributable or payable on any such sale, dissolution, liquidation or
winding up with respect to each share of Common Stock of the Company; provided,
however, that in the event of any such sale, dissolution, liquidation or winding
up, the right to exercise this Warrant shall terminate on a date fixed by the
Company, such date to be not earlier than 4:00 p.m., Eastern Time, on the 10th
day next succeeding the date on which notice of such termination of the right to
exercise the Warrants has been given by mail to the holders thereof at such
addresses as may appear on the books of the company.
(c) In the event, prior to the expiration of the Warrants by exercise or
by their terms, the Company shall determine to take a record of the holders of
its Common Stock for the purpose of determining shareholders entitled to receive
any share dividend or other right which will cause any change or adjustment in
the number, amount, price or nature of the shares of Common Stock or other
securities or assets deliverable on exercise of the Warrants pursuant to the
foregoing provisions, the Company shall give to the Registered Holders of the
Warrants at the addresses as may appear on the books of the Company at least 10
days prior written notice to the effect that it intends to take such a record.
Such notice shall specify the date as of which such record is to be taken; the
purpose for which such record is to be taken; and the number, amount, price and
nature of the Common Shares or other shares, securities or assets which will be
deliverable on exercise of the Warrants after the action for which such record
will be taken has been completed. Without limiting the obligation of the Company
to provide notice to the Registered Holders of the Warrant Certificates of any
<PAGE> 11
corporate action hereunder, the failure of the Company to give notice shall not
invalidate such corporate action of the Company.
(d) No adjustment of the Exercise Price shall be made as a result of or
in connection with (i) the issuance of Common Stock of the Company pursuant to
options, warrants and share purchase agreements outstanding or in effect on the
date hereof, (ii) the establishment of additional option plans of the Company,
the modification, renewal or extension of any plan now in effect or hereafter
created, or the issuance of Common Stock, on exercise of any options pursuant to
such plans, in connection with compensation arrangements for officers, employees
or agents of the Company or any subsidiary, and the like or (iii) the issuance
of Common Stock in connection with an acquisition or merger of any type
(therefore, the antidilution provisions of this Section 8 will not apply in the
event a merger or acquisition is undertaken by the Company).
(e) This Agreement shall be incorporated by reference on the Warrant
Certificates.
Upon any adjustment of the exercise Price required to be made pursuant
to this Section 8, the Company within 30 days thereafter shall (A) cause to be
filed with the Warrant Agent a certificate setting forth the pertinent Exercise
Price after such adjustment and setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based, and (B) cause to
be mailed to each of the Registered Holders of the Warrant Certificates written
notice of such adjustment.
9. Reduction in Exercise Price at Company's Option. In addition to any
adjustments made to the Exercise Price pursuant to Section 8, the Company's
Board of Directors may, at its sole discretion, reduce the Exercise Price of
either or both series of the Warrants in effect at any time either for the life
of the Warrants or any shorter period of time determined by the Company's Board
of Directors. The Company shall promptly notify the Warrant Agent and the
Registered Holders of any such reductions in the Exercise Price.
10. Duties. Compensation and Termination of Warrant Agent. The Warrant
Agent shall act hereunder as agent and in a ministerial capacity
<PAGE> 12
for the Company, and its duties shall be determined solely by the provisions
hereof. The Warrant Agent shall not, by issuing and delivering Warrant
Certificates or by any other act hereunder, be deemed to make any representation
as to the validity, value or authorization of the Warrant Certificates or the
Warrants represented thereby or of the Common Stock or other property delivered
on exercise of any Warrant. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of the Warrant Certificates to make or
cause to be made any adjustment of the Exercise Price or to determine whether
any fact exists which may require any such adjustments.
The Warrant Agent shall not (i) be liable for any recital or statement
of fact contained herein or for any action taken or omitted by it in reliance on
any Warrant Certificate or other document or instrument believed by it in good
faith to be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement
except for its own negligence or willful misconduct, or (iii) be liable for any
act or omission in connection with this Agreement except for its own negligence
or willful misconduct.
The Company agrees to indemnify the Warrant Agent against any and all
losses, expenses and liabilities which the Warrant Agent may incur in connection
with the delivery of copies of the Company's prospectus to exercising Registered
Holders upon the exercise of any Warrants as set forth in Section 4.
The Warrant Agent may at any time consult with counsel satisfactory to
it (which may be counsel for the Company) and shall incur no liability or
responsibility for any action taken or omitted by it in good faith in accordance
with the opinion or advice of such counsel. Any notice, statement, instruction,
request, direction, order or demand of the Company shall be sufficiently
evidenced by an instrument signed by its President and attested by its Secretary
or Assistant Secretary. The Warrant Agent shall not be liable for any action
taken or omitted by it in accordance with such notice, statement, instruction,
request, order or demand.
<PAGE> 13
The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse the Warrant Agent for its reasonable
expenses. The Company further agrees to indemnify the Warrant Agent against any
and all losses, expenses and liabilities, including judgments, costs and counsel
fees, for any action taken or omitted by the Warrant Agent in the execution of
its duties and powers hereunder, excepting losses, expenses and liabilities
arising as a result of the Warrant Agent's negligence or willful misconduct.
The Warrant Agent may resign its duties or the Company may terminate the
Warrant Agent and the Warrant Agent shall be discharged from all further duties
and liabilities hereunder (except liabilities arising as a result of the Warrant
Agent's own negligence or willful misconduct), on 30 days' prior written notice
to the other party. At least 15 days prior to the date such resignation is to
become effective, the Warrant Agent shall cause a copy of such notice of
resignation to be mailed to the Registered Holder of each Warrant Certificate.
On such resignation or termination the Company shall appoint a new warrant
agent. If the Company shall fail to make such appointment within a period of 30
days after it has been notified in writing of the resignation by the Warrant
Agent, then the registered holder of any Warrant Certificate may apply to any
court of competent jurisdiction for the appointment of a new warrant agent.
After acceptance in writing of an appointment of a new warrant agent is
received by the Company, such new warrant agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act or
deed; provided, however, if it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed. The
Company shall file a notice of appointment of a new warrant agent with the
resigning Warrant Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged, or any corporation resulting from any consolidation
to which the Warrant Agent or any new warrant agent shall
<PAGE> 14
be a party, or any corporation succeeding to the corporate trust business of the
Warrant Agent shall be a successor Warrant Agent under this Agreement, provided
that such corporation is eligible for appointment as a successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
Warrant Agent shall promptly cause notice of its succession as Warrant Agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate. No further action shall be required for establishment and
authorization of such successor warrant agent.
The Warrant Agent, its officers or directors and its subsidiaries or
affiliates may buy, hold or sell Warrants or other securities of the Company and
otherwise deal with the Company in the same manner and to the same extent and
with like effect as though it were not Warrant Agent. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
11. Modification of Agreement. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or mistake or error herein contained; or
(ii) that they may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Warrant Certificates; provided, however,
this Agreement shall not otherwise be modified, supplemented or altered in any
other respect except with the consent in writing of the registered holders of
Warrant Certificates representing not less than 51% of each class of Warrants
outstanding. Additionally, except as provided in Section 8, no change in the
number or nature of the Warrant Shares purchasable on exercise of a Warrant,
increase the purchase price therefor, or the acceleration of the Expiration Date
of a Warrant shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are specifically prescribed or allowed by this Agreement.
12. Notices. All notices, demands, elections, opinions or requests
(however characterized or described) required or authorized hereunder shall be
deemed given sufficiently if in writing and sent by registered or certified
mail, return receipt requested and postage prepaid, or by
<PAGE> 15
tested telex, telegram or cable to the last known address of the Company, the
Warrant Agent and if to the Registered Holder of a Purchase Warrant Certificate,
at the address of such holder as set forth on the books maintained by the
Warrant Agent.
13. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the holders from time to time of Purchase Warrant Certificates.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim or to impose on any other person any
duty, liability or obligation.
14. Further Instruments. The parties shall execute and deliver any and
all such other instruments and shall take any and all other actions as may be
reasonably necessary to carry out the intention of this Agreement.
15. Severability. If any provision of this Agreement shall be held,
declared or pronounced void, voidable, invalid, unenforceable, or inoperative
for any reason by any court of competent jurisdiction, government authority or
otherwise, such holding, declaration or pronouncement shall not affect adversely
any other provision of this Agreement, which shall otherwise remain in full
force and effect and be enforced in accordance with its terms, and the effect of
such holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
16. Waiver. All the rights and remedies of either party under this
Agreement are cumulative and not exclusive of any other rights and remedies as
provided by law. No delay or failure on the part of either party in the exercise
of any right or remedy arising from a breach of this Agreement shall operate as
a waiver of any subsequent right or remedy arising from a subsequent breach of
this Agreement. The consent of any party where required hereunder to act or
occurrence shall not be deemed to be a consent to any other action or
occurrence.
17. General Provisions. This Agreement shall be construed and enforced
in accordance with, and governed by, the laws of the State of Nevada. Except as
otherwise expressly stated herein, time is of the
<PAGE> 16
essence in performing hereunder. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, and this Agreement may not
be modified or amended or any term or provisions hereof waived or discharged
except in writing signed by the party against whom such amendment, modification,
waiver or discharge is sought to be enforced. The headings of this Agreement are
for convenience in reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WAREFORCE.COM, INC.
By
--------------------
Authorized Officer
THE WARRANT AGENT:
INTERWEST TRANSFER CO., INC.
By
--------------------
Authorized Officer
Exhibit A to Warrant Agency Agreement
dated __________________, 1999
NUMBER
------
W-A___________ __________SERIES A WARRANTS
VOID AFTER 5:00 P.M., CALIFORNIA TIME,
ON __________, 2002
<PAGE> 17
CERTIFICATE FOR SERIES A WARRANTS
FOR THE PURCHASE OF COMMON STOCK, $.001 PAR VALUE, OF
WAREFORCE.COM, INC.
Incorporated Under The Laws Of The State of Nevada
CUSIP N(0).______________________
THIS WARRANT CERTIFICATE CERTIFIES THAT, for value received,
___________________________________________________ or its registered assigns
("Holder"), is the registered holder of the number of warrants (Warrants) set
forth above, issued by Wareforce.com, Inc., a Nevada corporation ("Company").
This Warrant Certificate is issued under and subject to all of the
terms, provisions and conditions of the Warrant Agency Agreement, dated as of ,
1999 the ("Warrant Agreement"), between the Company and Interwest Transfer
Company, Inc. (the "Warrant Agent"), to all of which terms, provisions and
conditions the holder of this Warrant consents by acceptance hereof. The Warrant
Agreement is incorporated herein by reference and made a part hereof, and
reference is made to the Warrant Agreement for a full description of the rights,
limitations of rights, obligations, duties and immunities of the Warrant Agent,
the Company and the Holders of the Warrant Certificates. Copies of the Warrant
Agreement are available for inspection at the offices of the Warrant Agent at
1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, or may be obtained
upon written request addressed to the Company at 2361 Rosecrans Avenue, Suite
155, El Segundo, California 90245.
Each Warrant entitles the Holder thereof to purchase from the Company,
subject to the terms and conditions set forth hereinafter and in the Warrant
Agreement, one (1) fully paid and nonassessable share of common stock, $.001 par
value, of the Company ("Common Stock") upon presentation and surrender of this
Warrant Certificate with the exercise form hereon duly completed and executed,
at any time prior to 5:00 p.m., California time, on __________, 2002 ("Exercise
Period"), at the stock transfer office of the Warrant Agent or of any successor
warrant agent
<PAGE> 18
or, if there be no successor warrant agent, at the corporate offices of the
Company, and upon payment of $6.00 per share of Common Stock ("Purchase Price")
and any applicable taxes paid either in cash, or by certified or official bank
check, payable in lawful money of the United States of America to the order of
the Company. The Holder may exercise all or any whole number of Warrants
evidenced hereby. The Purchase Price and the number of shares of Common Stock
issuable upon exercise of a Warrant are subject to adjustment in certain events
specified in the Warrant Agreement.
The purchase rights represented by this Warrant Certificate shall not be
exercisable with respect to a fraction of a share of Common Stock. As to any
fractions of a share which would otherwise be purchasable on the exercise of a
Warrant, the Company shall pay the cash value thereof determined as provided in
the Warrant Agreement. In case of the purchase of less than all the shares
purchasable under this Warrant Certificate, the Company shall cancel this
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of shares purchasable
hereunder.
This Warrant Certificate shall not entitle the holder hereof to any
voting rights or other rights as a shareholder of the Company, or to any other
rights whatsoever except the rights herein expressed and such as are set forth,
and no dividends shall be payable or shall accrue in respect of the Warrants
represented by this Warrant Certificate except to the extent that such Warrants
shall be exercised.
Upon 30 days' prior written notice, the Company may at any time redeem
all or any portion of the outstanding Warrants for $0.01 per Warrant.
The Warrants are exercisable immediately, provided that a current
prospectus relating to the shares of Common Stock issuable upon exercise hereof
is in effect and that such shares are qualified for sale or deemed to be exempt
from qualification, under applicable state securities laws. All Warrants not
theretofore exercised or redeemed shall expire at 5:00 p.m., California time on
__________, 2002, and any Warrant not exercised by such time shall become void
unless extended by the Company.
<PAGE> 19
This Warrant Certificate, with or without other Certificates, upon
presentation and surrender to the Warrant Agent, any successor warrant agent or,
in the absence of any successor warrant agent, at the corporate offices of the
Company, may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered, subject to such terms and conditions
set forth in the Warrant Agreement. If the Warrants evidenced by this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof another Warrant Certificate or Certificates
evidencing the number of Warrants not so exercised.
The Company shall not be required to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax which may be payable in
respect thereof by the Holder pursuant to the Warrant Agreement shall have been
paid.
This Warrant Certificate shall not be valid or obligatory for any
purpose until countersigned by the Warrant Agent.
Except as otherwise above provided, this Warrant Certificate and all
rights hereunder are transferable by the registered holder hereof in person or
by its duly authorized attorney on the books of the Warrant Agent upon surrender
of this Warrant Certificate, properly endorsed, to the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its President and has caused a facsimile of its corporate seal to
be imprinted hereon.
- ---------------- WAREFORCE.COM, INC.
Date of Issuance
By:
------------------------
Orie Rechtman, President
<PAGE> 20
COUNTERSIGNED:
(Corporate Seal)
Interwest Transfer Company, Inc.
As Warrant Agent
by:
--------------------
Authorized Signature
Exhibit B to Warrant Agency Agreement
dated _______________, 1999
NUMBER
------
W-B _____________ __________SERIES B WARRANTS
VOID AFTER 5:00 P.M., CALIFORNIA TIME,
ON __________, 2002
CERTIFICATE FOR SERIES B WARRANTS
FOR THE PURCHASE OF COMMON STOCK, $.001 PAR VALUE, OF
WAREFORCE.COM, INC.
Incorporated Under The Laws Of The State of Nevada
CUSIP N(0)._____________
THIS WARRANT CERTIFICATE CERTIFIES THAT, for value received,
_____________________________________________________or its registered assigns
("Holder"), is the registered holder of the number of warrants (Warrants) set
forth above, issued by Wareforce.com, Inc., a Nevada corporation ("Company").
<PAGE> 21
This Warrant Certificate is issued under and subject to all of the
terms, provisions and conditions of the Warrant Agency Agreement, dated as of
_________________________, 1999 the ("Warrant Agreement"), between the Company
and Interwest Transfer Company, Inc. (the "Warrant Agent"), to all of which
terms, provisions and conditions the holder of this Warrant consents by
acceptance hereof. The Warrant Agreement is incorporated herein by reference and
made a part hereof, and reference is made to the Warrant Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Warrant Agent, the Company and the Holders of the Warrant
Certificates. Copies of the Warrant Agreement are available for inspection at
the offices of the Warrant Agent at 1981 East 4800 South, Suite 100, Salt Lake
City, Utah 84117, or may be obtained upon written request addressed to the
Company at 2361 Rosecrans Avenue, Suite 155, El Segundo, California 90245.
Each Warrant entitles the Holder thereof to purchase from the Company,
subject to the terms and conditions set forth hereinafter and in the Warrant
Agreement, one (1) fully paid and nonassessable share of common stock, $.001 par
value, of the Company ("Common Stock") upon presentation and surrender of this
Warrant Certificate with the exercise form hereon duly completed and executed,
at any time prior to 5:00 p.m., California time, on __________, 2002 ("Exercise
Period"), at the stock transfer office of the Warrant Agent or of any successor
warrant agent or, if there be no successor warrant agent, at the corporate
offices of the Company, and upon payment of $7.00 per share of Common Stock
("Purchase Price") and any applicable taxes paid either in cash, or by certified
or official bank check, payable in lawful money of the United States of America
to the order of the Company. The Holder may exercise all or any whole number of
Warrants evidenced hereby. The Purchase Price and the number of shares of Common
Stock issuable upon exercise of a Warrant are subject to adjustment in certain
events specified in the Warrant Agreement.
The purchase rights represented by this Warrant Certificate shall not be
exercisable with respect to a fraction of a share of Common Stock. As to any
fractions of a share which would otherwise be purchasable on the exercise of a
Warrant, the Company shall pay the cash value thereof determined as provided in
the Warrant Agreement. In case of the purchase
<PAGE> 22
of less than all the shares purchasable under this Warrant Certificate, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of shares purchasable hereunder.
This Warrant Certificate shall not entitle the holder hereof to any
voting rights or other rights as a shareholder of the Company, or to any other
rights whatsoever except the rights herein expressed and such as are set forth,
and no dividends shall be payable or shall accrue in respect of the Warrants
represented by this Warrant Certificate except to the extent that such Warrants
shall be exercised.
Upon 30 days' prior written notice, the Company may at any time redeem
all or any portion of the outstanding Warrants for $0.01 per Warrant.
The Warrants are exercisable immediately, provided that a current
prospectus relating to the shares of Common Stock issuable upon exercise hereof
is in effect and that such shares are qualified for sale or deemed to be exempt
from qualification, under applicable state securities laws. All Warrants not
theretofore exercised or redeemed shall expire at 5:00 p.m., California time on
__________, 2002, and any Warrant not exercised by such time shall become void
unless extended by the Company.
This Warrant Certificate, with or without other Certificates, upon
presentation and surrender to the Warrant Agent, any successor warrant agent or,
in the absence of any successor warrant agent, at the corporate offices of the
Company, may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered, subject to such terms and conditions
set forth in the Warrant Agreement. If the Warrants evidenced by this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof another Warrant Certificate or Certificates
evidencing the number of Warrants not so exercised.
The Company shall not be required to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax
<PAGE> 23
which may be payable in respect thereof by the Holder pursuant to the Warrant
Agreement shall have been paid.
This Warrant Certificate shall not be valid or obligatory for any
purpose until countersigned by the Warrant Agent.
Except as otherwise above provided, this Warrant Certificate and all
rights hereunder are transferable by the registered holder hereof in person or
by its duly authorized attorney on the books of the Warrant Agent upon surrender
of this Warrant Certificate, properly endorsed, to the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its President and has caused a facsimile of its corporate seal to
be imprinted hereon.
- ---------------- WAREFORCE.COM, INC.
Date of Issuance
By:
------------------------
Orie Rechtman, President
COUNTERSIGNED:
(Corporate Seal) Interwest Transfer Company, Inc.
As Warrant Agent
By:
--------------------
Authorized Signature
<PAGE> 1
Exhibit 5.1
June 29, 1999
Board of Directors
Wareforce.com, Inc.
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Re: Opinion and Consent of Counsel with respect to Registration Statement on
Form S-1
TO WHOM IT MAY CONCERN:
You have requested the opinion and consent of this law firm, as
counsel, with respect to the proposed issuance and public distribution of
certain securities of the Company pursuant to the filing of a registration
statement on Form S-1 with the Securities and Exchange Commission.
The proposed offering and public distribution relates to:
- 1,110,000 Series A Warrants being distributed as a dividend with
respect to the Common Stock of the Company to shareholders of
record as of July 13, 1998.
- 1,110,000 shares of Common Stock, $.001 par value to be offered
and sold to the holders of Series A Warrants at a price of $6.00
per share,
- 1,110,000 Series B Warrants being distributed as a dividend with
respect to the Common Stock of the Company to shareholders of
record as of July 13, 1998.
- 1,110,000 shares of Common Stock, $.001 par value to be offered
and sold to the holders of Series B Warrants at a price of $7.00
per share.
- 971,448 shares of Common Stock, $.001 par value to be offered and
sold by various selling security holders.
It is our opinion that the shares of Common Stock will, when issued in
accordance with the terms and conditions set forth in the registration
statement, be duly authorized, validly issued, fully paid and nonassessable
shares of common stock of the Company in accordance
<PAGE> 2
with the corporation laws of the State of Nevada.
We hereby consent to be named as counsel for the Company in the
registration statement and prospectus included therein.
Sincerely yours,
THOMAS G. KIMBLE & ASSOCIATES
Van L. Butler
<PAGE> 1
Exhibit 10.1
$ 90,243.74
PROMISSORY NOTE
Los Angeles,
California
May 23, 1997
For the value received, Orie Rechtman ("maker") promises to pay
Wareforce Incorporated (the "Payee"), whose address is 2361 Rosecrans Ave., El
Segundo, CA 90245 (or at such other address as may subsequently be designated by
the Payee by written notice to the undersigned) the principal sum of $90,243.74
(ninety thousand two hundred forty three dollars and seventy-four cents)
together with the interest thereon from the date of December 31, 1996, on the
amount of the principal, at the rate of five and eight-three hundredths percent
(5.83%), compounded semi-annually, on this Promissory Note. The principal and
the interest shall be due at the maturity of this Promissory Note, on December
31, 2001. Unless the Maker and the holder agree to other terms of payment in
writing, such amounts shall be due and payable upon December 31, 2001.
Notwithstanding anything to the contrary contained herein, this
Promissory Note, Maker's obligations hereunder and maker's underlying
obligations shall be deemed for all purposes to be automatically and immediately
discharged, canceled, and terminated if, when and to the extend that (i) all or
any portion of the obligations or underlying obligations of Anita Gabriel under
that certain $ amount promissory note, of even date herewith and due on December
31, 2001, made by Anita Gabriel with Payee as payee, shall be directly or
indirectly discharged, forgiven, canceled, waived, suspended, modified or
amended in any manner favorable to Anita Gabriel, or otherwise terminated, other
than by reason of the payment of such promissory note by Anita Gabriel to the
payee thereof in lawful money of the United States of America, or (ii) such
promissory note made by Anita Gabriel is sold assigned, given, pledged,
hypothecated or otherwise transferred (or any interest therein is transferred)
by Wareforce
<PAGE> 2
Incorporated directly or indirectly, voluntarily, involuntarily or by operation
of law, either at a discount to its principal amount or for any consideration
other than lawful money of the United States of America.
The value received by Maker was a loan to Maker by Payee on December 31,
1996 and was so recorded in the books of Payee. Maker desires to formalize
Maker's obligation under such loan by making this Promissory Note.
Maker waives demand for payment, notice of nonpayment, notice of
dishonor, protest, and notice of protest. If Maker fails to make timely the
payments required by this Promissory Note, Maker shall pay costs of collection
and reasonable attorney's fees. These costs shall be added to the balance of
principal and interest then due.
This promissory Note shall be governed by and construed in accordance
with the laws of the State of California. All amounts payable under this
Promissory Note are to be paid in lawful money of the United States of America.
/s/Orie Rechtman
--------------------------
Orie Rechtman
<PAGE> 1
Exhibit 10.2
$2,000,000.00 February 18, 1998
FOR VALUE RECEIVED, the undersigned promises to pay to the order of Wareforce,
Inc., a California corporation ("Wareforce"), at 2361 Rosecrans Avenue, El
Segundo, California 90245, or at such other address as the holder of this Note
shall from time to lime designate, the principal sum of Two Million Dollars
($2,000,000.00), together with interest thereon until paid in full at the rate
of Seven and One Half Percent (7.5%) per annum. Principal shall be paid in full
on or before the tenth anniversary of the date of this Note. Accrued interest
shall be paid on or before the first day of each calendar quarter commencing
April 1, 1998, and on the date principal is due and payable. Each payment shall
be credited first to interest, if any then due, and the remainder to principal.
Principal and interest shall be payable in lawful money of the United States of
America. The undersigned shall have the right to prepay all or any portion of
the principal sum hereof at any time without penalty.
Upon the occurrence of any Event of Default, as defined below, the
entire balance of principal together with all accrued interest thereon shall, at
the option of Wareforce, without demand or notice, immediately become due and
payable. For purposes of this Note, an "Event of Default" shall be the failure
of the undersigned to make any payment of principal or interest or other sums
payable under this Note which failure remains uncured for a period of fifteen
(15) days following the date of the undersigned's receipt of a notice of default
from Wareforce.
The undersigned agrees to pay all costs and expenses (including
reasonable attorneys fees) incurred by the holder of this Note in connection
with or related to this Note or the enforcement thereof, whether or not suit be
brought. The undersigned hereby waives presentment, demand for payment, notice
of dishonor, notice of nonpayment, protest, notice of protest, and any and all
other notices and demands in connection with the delivery, acceptance,
performance, default, or enforcement of this Note. To the fullest extent
permitted by law, the
<PAGE> 2
undersigned waives the statute of limitations in any action brought by the
holder in connection with this Note.
Unless applicable law requires a different method of giving notice, any
and all notices, demands or other communications required or desired to be given
hereunder by any party shall be in writing. A notice shall be validly given or
made if served either personally or if postage prepaid, or if transmitted by
telegraph, telecopy or other electronic written transmission device or if sent
by overnight courier service, and if addressed to the applicable party at such
persons principal business address or primary residence or at such other
addresses as the addressee may from time to time designate to the other by
notice given in the manner aforesaid.
This Note may not be transferred, pledged or assigned, directly or
indirectly, by Wareforce without the prior written consent of the undersigned.
This Note shall be governed and construed in accordance with the laws of the
State of California.
/s/Orie Rechtman
-------------------------
ORIE RECHTMAN
<PAGE> 1
Exhibit 10.3
LEASE AGREEMENT
Office
This LEASE AGREEMENT dated this 22nd day of March, 1999 by and between KENNETH
H. SEARL, JR. (hereinafter referred to as "Landlord"), and WAREFORCE
INCORPORATED a California corporation (hereinafter referred to as "Tenant").
WITNESSETH
1. Leased Premises. In consideration of the rents, terms, provisions,
and covenants of this Lease Agreement, Landlord does hereby lease and let unto
Tenant and Tenant does hereby hire, lease and take from Landlord, the premises
as shown and marked on Exhibit A attached consisting of approximately 26,146
square feet (hereinafter called the "Leased Premises"), of that certain property
located at 14700 28th Avenue North in the City of Plymouth, County of Hennepin,
State of Minnesota 55447 as set forth and legally described on Exhibit B
attached hereto and made a part hereto (hereinafter called the "Building").
2. Term. To have and to hold said Leased Premises for a term of
thirty-six (36) months, commencing on the 22nd day of March 1999 ("Commencement
Date"), through the 21st day of March 2002 (hereinafter called the "Term") upon
the rentals and subject to the conditions set forth in this Lease Agreement.
3. Use of Leased Premises.
3.1 Generally. Tenant shall use the Leased Premises solely as an office
and warehouse facility. Tenant shall not use or permit upon the Leased Premises
anything that might be dangerous to life or limb. Tenant shall not, in any
manner, deface or injure any part of the Leased Premises or commit waste
thereon. Tenant shall not do anything or permit anything to be done upon the
Leased Premises which in any way would tend to create a public or private
nuisance or would tend to disturb occupants of neighboring property or would
tend to injure the reputation of the Leased Premises. Tenant shall not use or
occupy the Leased Premises or
-1-
<PAGE> 2
permit the Leased Premises to be used or occupied in a manner which would
violate any certificate of occupancy affecting the Leased Premises, or would
cause structural injury to the Improvements, or would cause the value or
usefulness of any part of the Leased Premises to diminish in any material
respect.
3.2 Compliance With Law. Tenant shall, at its sole cost and expense,
comply with (a) all laws, regulations and ordinances of any applicable
governmental authority ("Laws") affecting the Leased Premises and the occupancy,
operation or use of the Leased Premises, including those pertaining to the
Americans With Disabilities Act (the ADA), (b) all rules, orders and regulations
of the state fire marshal or fire insurance rating bureau or other similar
organization for the prevention of fire or the correction of hazardous
conditions, and (c) the requirements of all policies of public liability, fire
and other insurance at any time in force with respect to the Leased Premises.
3.3 Tenant's Business. Tenant shall observe and comply with all
conditions and requirements necessary to conduct Tenant's business operations
upon the Leased Premises, including any and all rights, licenses, permits
(including but not limited to zoning variances, special exemptions and
nonconforming uses), privileges, franchises and concessions which may be
applicable to the Leased Premises. Tenant shall, at its sole cost and expense,
procure any and all necessary permits, certificates, licenses or other
authorizations required for its use of the Leased Premises. If the owner of the
Leased Premises is required by law to join in any such application, Landlord
shall allow any applications for such permits, certificates or other
authorizations to be made in Landlord's name and shall execute any documents
required in connection with such applications promptly on request and shall
otherwise cooperate fully with Tenant in connection with such applications,
provided Tenant is otherwise in compliance with the terms and conditions hereof
and provided Landlord is not required to incur cost or expense in doing so.
4. Base Rent. Tenant agrees to pay to Landlord as base rental in lawful
money of the United States of America (hereinafter called "Base Rental") for the
Leased Premises, without notice set-off or demand, the annual sum of One Hundred
Eighty Nine Thousand Five Hundred Seventy-one
-2-
<PAGE> 3
Dollars ($189,571) payable in monthly installments of Fifteen Thousand Seven
Hundred Ninety -Seven and 58\100 Dollars ($15,797.58) commencing on the date
hereof, said monthly installments to be due and payable on the first day of each
and every month thereafter during the Term of this Lease Agreement, or any
extension or renewal thereof in advance at the office of Landlord as set forth
in this Lease Agreement or at such other place as Landlord may designate in
writing. In the event the Commencement Date falls on a date other than the first
of a month, the rental for that month shall be prorated and adjusted
accordingly.
5. Operating Costs and Expenses. Tenant shall, for the entire Term, pay
to Landlord as an item of additional rent, without any setoff or deduction
therefrom, its Proportionate Share of the annual aggregate operating costs and
expenses ("Operating Expenses") which Landlord may incur in owning, maintaining
and operating the Building during each calendar year of the Term. Tenants
"Proportionate Share" is 69.25% which is defined as Tenant's percentage of
Operating Expenses incurred by Landlord with respect to the Building (being the
decimal equivalent of a fraction, the numerator of which is the number of square
feet of the Leased Premises and the denominator of which is the number of square
feet within the entire Building). "Operating Expenses" are defined to include
all expenses and costs (but not specific costs which are separately billed to
and paid by individual tenants) of every kind and nature which the Landlord
shall pay or become obligated to pay because of or in connection with the
ownership and operation of the Building and supporting facilities of the
Building, including but not limited to all real estate taxes and annual
installments of special or other assessments payable with respect to the
Building, and all other taxes, service payments in lieu of taxes, excises,
levies, fees, or charges, general and special, ordinary and extraordinary, of
any kind, which are assessed, levied, charged, confirmed or imposed by any
public authority upon the Building, its operations or the rent provided for in
this Lease; costs of any contest of such taxes, including attorney's fees,
management fees, insurance premiums, utility costs, janitorial costs, Building
security costs, costs of wages, maintenance costs (relating to the Building and
adjacent land including sidewalks, skyways, landscaping and parking or service
areas, common areas, service contracts, equipment and supplies) and all other
costs of any nature whatsoever which for federal tax purposes may be expensed
rather than capitalized, but exclusive only of
-3-
<PAGE> 4
leasing commissions, depreciation, costs of tenant improvements and payments of
principal and interest on any mortgages, deeds of trusts, or other security
devices covering the Building.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Term, Landlord shall furnish to Tenant as estimate of
Operating Expenses for the ensuing calendar year and Tenant's Proportionate
Share thereof. Tenant shall pay, as additional rent hereunder, together with
each installment of Base Rental, one-twelfth (1/12th) of its estimated annual
Proportionate Share of Operating Expenses. As soon as reasonably practicable
after the end of each calendar year during the Term, Landlord shall furnish to
Tenant a statement of the actual Operating Expenses for the previous calendar
year, including Tenant's Proportionate Share of Operating Expenses, and within
thirty (30) days thereafter Tenant shall pay to Landlord, or Landlord shall
credit to the next rent payments due Landlord from Tenant or at the end of the
Term by a refund, as the case may be, any difference between the actual
Operating Expenses and the estimated Operating Expenses paid by Tenant. Tenant's
Proportionate Share of Operating Expenses for the years in which this Lease
commences and terminates shall be prorated by multiplying the actual Operating
Expenses by a fraction the numerator of which is the number of days of that year
of the Term and the denominator of which is 365. Notwithstanding any other
provision herein to the contrary, it is agreed that in the event that the
Building is not fully occupied at any time during the Term, an adjustment shall
be made in computing the Operating Expenses for such year so that the Operating
Expenses shall be computed for such year as though the Building had been fully
occupied during such year.
6. Security Deposit. None.
7. Obligations of Landlord. So long as Tenant shall perform each and
every obligation to be performed by Tenant hereunder, Landlord agrees that
Tenant shall quietly Leased Premises in accord with the provisions hereof and
that Landlord shall:
(a) Keep the foundations, the exterior walls and the roof of the
Building in good repair, ordinary wear and tear excepted;
provided, however, if the need for such repairs is directly or
-4-
<PAGE> 5
indirectly attributable to or results from any activity being
conducted by Tenant within the Leased Premises, Tenant agrees
to reimburse Landlord for all costs and expenses incurred by
Landlord with respect to such repairs. Landlord shall commence
any repairs it is required to do hereunder as soon as
reasonably practicable after receiving written notice from
Tenant of the necessity for such repairs, but in no event
shall Landlord be required to make any other repairs.
(b) Maintain all common areas within the Building or land adjacent
thereto, including, but not limited to, the exterior
improvements to the property adjacent to the Building such as
shrubbery, landscaping, fencing and exterior lighting; and
(3) Maintain all electrical, plumbing or other systems which
service not only the Tenant, but all tenants in the building.
To the extent that any of the foregoing constitute "Operating Expenses"
as defined in Paragraph 5 of this Lease , the same shall be allocated to the
Tenant as set forth in said paragraph. It is understood that Landlord does not
warrant that any of the services and utilities referred to above will be free
from interruption from causes beyond the reasonable control of Landlord. Such
interruption of service or utilities shall never be deemed an eviction or
disturbance of Tenant's use and possession of the Leased Premises or any part
thereof or render Landlord liable to Tenant for damages by abatement of rent or
otherwise or relieve Tenant from performance of Tenant's obligations under this
Lease.
8. Maintenance and Repair.
8.1 Acceptance by Tenant. Tenant's taking possession of the Leased
Premises constitutes acknowledgment that Tenant has received the Leased Premises
in good order and condition. Landlord makes no warranty or representation
regarding the physical condition of any part of the Leased Premises or to the
suitability or fitness of the Leased Premises or any part thereof for any
particular purpose.
8.2 Tenant's Maintenance Obligations. During the Term hereof
-5-
<PAGE> 6
Tenant shall, at its expense, take good care of the Leased Premises (including
all of Landlord's fixtures and appurtenances therein or thereon) and shall
complete and perform all routine maintenance and repairs to the Leased Premises
as soon as same are necessary, including, but not limited to all HVAC repairs to
the Leased Premises. Tenant shall obtain at its expense a HVAC maintenance
contract to provide routine service to the HVAC system in the Leased Premises.
Tenant shall not be required to make capital improvements/repairs to the Leased
Premises. Tenant's obligations to maintain, repair and replace the Leased
Premises shall exclude all (i) building systems located within the Building that
service the entire Building (ii) broken or damaged glass, provided that if such
damage was caused by the negligence of the Tenant or its customers or employees
any costs of repair shall be charged to Tenant; (iii) damage by vandals (iv) the
common area walls, ceilings, floors and floor coverings (including carpets and
tiles of the common area of the Building); (v) the exterior improvements to the
Land such as shrubbery, landscaping, fencing and exterior lighting; (vi) snow
plowing and ice removal; (vii) the common areas located within the Building,
including the common entrances, corridors, doors and windows, stairways and
lavatory facilities; and (vii) all necessary repairs and replacements to the
roof, exterior and bearing walls of the Building and support beams, foundation
columns and lateral support thereto. All repairs made by the Tenant shall be
equal in quality and workmanship to the original work. Any of the foregoing
expenses incurred by Landlord in performing its duties which shall constitute
"Operating Expenses" as defined in Paragraph 5 shall be allocated to the Tenant
as provided therein.
8.3 Failure to Maintain. If Tenant fails to comply with the provisions
of this Section 8, Landlord may give Tenant written notice of such failure to
comply, specifying the maintenance or repairs to be made by Tenant. If the
maintenance or repairs are not completed by Tenant within twenty (20) days after
said notice, Landlord may have the work done at Tenant's expense, and the cost
of the same shall become Additional Rent payable by Tenant to Landlord upon
written demand from Landlord. Notwithstanding the foregoing, if the maintenance
or repair is not susceptible of cure within twenty (20) days or if any cause
beyond Tenants reasonable control (except for payments to be made by Tenant)
delays Tenants completion of the maintenance or repair, said twenty (20) day
period shall be extended by the length of the delay so long as Tenant
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has commenced the cure within said twenty (20) day period and diligently
prosecutes the same thereafter. if the required maintenance and repairs are of
an emergency nature or threaten the security or safety of the Building or
persons, Landlord may act on Tenant's behalf without notice to Tenant.
9. Covenants of Tenant. Tenant agrees, during the Lease Term or any
extension or renewal thereof that it shall:
(a) Observe and comply with all governmental ordinances, laws and
regulations and all such rules and regulations as from time to
time may be put in effect by Landlord, or Landlord's
designated managing agent, for the general safety, comfort,
and convenience of Landlord, occupants and tenants of the
Building, including, without limitation, Building signage and
graphics standards, use of designated common areas and other
Building areas, security measures, and similar matters.
(b) Give Landlord and Landlord's managing agent access to the
Leased Premises, at any time during emergencies and at all
reasonable times, without charge or diminution of rent, to
enable Landlord to examine or exhibit the same and to make
such inspections, repairs, additions and alterations as
Landlord deems necessary or may be required to make hereunder.
(c) Keep the Leased Premises in good order and condition; Tenant
shall be responsible for payment of all costs incurred by
Landlord in replacing all broken glass with glass of the same
quality, save only glass broken by fire and extended coverage
risks; and Tenant shall commit no waste on the Leased
Premises.
(d) Pay for all replacement electric lamps and ballasts in the
Leased Premises.
(e) Upon the termination of this Lease in any manner whatsoever,
remove Tenant's goods and effects and those of any other
person claiming under Tenant, and quit and deliver up the
Leased Premises to Landlord peaceably and quietly in as good
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<PAGE> 8
order and condition as the same are in at the commencement of
the term or thereafter were put in by Landlord or Tenant,
reasonable use and wear expected. Goods and effects not
removed by Tenant at the termination of this Lease, however
terminated, shall be considered abandoned, and Landlord may
dispose of the same as it deems expedient at Tenant's expense.
Tenant shall be responsible for payment of all costs incurred
by Landlord for any restoration of the Leased Premises needed
by virtue of the removal of Tenant's goods and effects whether
removed by Tenant or Landlord.
(f) Not assign this Lease or sublet all or any part of the Leased
Premises voluntarily, involuntarily or by operation of law, or
through change in the ownership of Tenant if Tenant is a
corporation or a partnership, without first obtaining
Landlord's written consent thereto.
(g) Not place signs on or about the Leased Premises or the
Building without first obtaining Landlord's written consent
thereto.
(h) Not overload, damage or deface the Leased Premises or the
Building or do any act which may make void or voidable any
insurance on the Leased Premises or the Building, or which may
render an increased or extra premium payable for insurance.
(i) Not install asbestos or any asbestos containing material
within the Leased Premises or the Building and not make any
alterations or additions to the Leased Premises without the
prior written consent of the Landlord and until payment and
completion bonds therefore have been approved by Landlord; and
all alterations, additions or improvements (including
carpeting or other floor covering) which may be made by either
of the parties hereto upon the Leased Premises, except
moveable office furniture and equipment, shall at Landlord's
election, be the property of Landlord and shall remain upon
and be surrendered with the Leased Premises, as a part
thereof, at the termination of this Lease.
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<PAGE> 9
(j) Keep the Leased Premises and the Building free from any
mechanics', materialmens', contractors' or other liens arising
from, or any Claims for damages growing out of, any work
performed, materials furnished or obligations incurred by or
on behalf of Tenant. Tenant shall indemnify and hold harmless
Landlord from and against any such lien, or claim or action
thereon, and reimburse Landlord promptly upon demand therefore
by Landlord for costs of suit and reasonable attorneys' fees
incurred by Landlord in connection with any such lien, claim
or action.
(k) Maintain at its expense at all times during the Term (i) a
policy or policies of public liability insurance with respect
to the Leased Premises and the business of Tenant, with limits
of not less than $1,000,000 combined single limit; and (ii) a
policy or policies of all risk insurance insuring Tenant's
leasehold improvements, trade fixtures and other personal
property for the full insurable value thereof. All such
insurance policies shall provide for at least thirty (30) days
prior written notice to Landlord before cancellation or
amendment, name Landlord as an additional insured thereon,
filed with Landlord prior to Tenant's occupancy of the Leased
Premises and at all times thereafter during the Term.
10. Hazardous Substances. Tenant and Landlord agree to the definition
of Hazardous Substance as follows: the term "Hazardous Substance", as used in
this paragraph, shall mean those substances and waste which are defined as
hazardous in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq., including, but not
limited to, those substances listed in the United States Department of
Transportation Hazardous Materials Table (49 CFR 172.101) and shall include,
without limitation, flammables, explosives, radioactive materials, asbestos,
polychlorinated biphenyls (PCBs), chemicals known to cause cancer or
reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic
substances or related materials, petroleum and petroleum products, and
substances including, without limitation, Freon or other chlorofluorocarbons
declared to be hazardous or toxic or regulated or banned under any law or
regulation now or hereafter enacted or promulgated by any government authority
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<PAGE> 10
(hereinafter, collectively, "Hazardous Substances").
Tenant shall not cause or permit to occur: (a) any violation of any
federal, state, or local law, ordinance, or regulation now or hereafter enacted,
related to environmental conditions on, under, or about the Leased Premises, or
arising from Tenant's use or occupancy of the Leased Premises, including, but
not limited to, soil and ground water conditions; or (b) the use, generation,
release, manufacture, refining, production, processing, storage or disposal of
any Hazardous Substance on, under or about the Leased Premises, or the
transportation to or from the Leased Premises of any Hazardous Substance.
Tenant agrees to Environmental Cleanup as follows: (a) Tenant shall, at
Tenant's own expense, comply with all laws regulating the use, generation,
storage, transportation, or disposal of Hazardous Substances ("Laws"); (b)
Tenant shall, at Tenant's own expense, make all submissions to, provide all
information required by, and comply with all requirements of all governmental
authorities (the "Authorities") under the Laws; (c) should any Authority or any
third party demand that a cleanup plan be prepared and that a cleanup be
undertaken because of any deposit, spill, discharge, or other release of
Hazardous Substances that occurs during the term of this Lease, at or from the
Leased Premises, or which arises at anytime from Tenant's use or occupancy of
the Leased Premises, then Tenant shall, at Tenants own expense, prepare and
submit the required plans and all related bonds and other financial assurances;
and Tenant shall carry out all such cleanup plans; (d) Tenant shall promptly
provide all information regarding the use, generation, storage of
transportation, or disposal of Hazardous Substances that is requested by
Landlord. If Tenant fails to fulfill any duty imposed under this Paragraph
within a reasonable time, Landlord may do so; and in such case, Tenant shall
cooperate with Landlord in order to prepare all documents Landlord deems
necessary or appropriate to determine the applicability of the Laws to the
Leased Premises and Tenant's use thereof, and for compliance therewith, and
Tenant shall execute all documents promptly upon Landlord's request. No such
action by Landlord and no attempt made by Landlord to mitigate damages under any
Law shall constitute a waiver of any of Tenant's obligations under this
Paragraph; (e) Tenant will, at and to the extent of any written request of
Landlord remove from the Leased Premises at the end of Term, at Tenant's expense
and in accordance with
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<PAGE> 11
any applicable laws or regulations, equipment (including refrigeration equipment
and enhancements to the Building's standard HVAC systems) that contains, uses or
generates Freon or any other chlorofluorocarbons, whether or not such removal is
then required by applicable laws or regulations; (f) Tenant's obligations and
liabilities under this Paragraph shall survive the expiration of this Lease.
Tenant agrees to Tenant's Indemnity as follows: (a) Tenant shall indemnify,
defend, and hold harmless Landlord, the manager of the property, and their
respective officers, directors, beneficiaries, shareholders, partners, agents,
and employees from all fines, suits, procedures, claims, and actions of every
kind, and all costs associated therewith (including attorneys' and consultants'
fees) arising out of or in any way connected with any deposit, spill, discharge,
or other release of Hazardous Substances that occurs during the term of this
Lease, at or from the Leased Premises, or which arises at any time from Tenant's
use or occupancy of the Leased Premises, or from Tenant's failure to provide all
information, make all submissions, and take all steps required by all
Authorities under the Laws and all other environmental laws; (b) Tenant's
obligations and liabilities under this Paragraph shall survive the expiration of
this Lease.
Tenant's obligations under this Paragraph to do or not to do a
specified act shall extend to and include Tenant's obligation for all conduct of
Tenant's employees, agents and invitees.
11. Alterations and Additions.
11.1 Tenant's Alterations. Tenant may, at any time and from time to
time during the term of this Lease and at its sole cost and expense, make
additions to or alterations, substitutions, removals or replacements of the
Improvements ("Alterations") provided, however, that (a) the total market value
of the Leased Premises shall not be lessened by reason of any such Alterations,
(b) any Alterations shall be done in a good and workmanlike manner, (c) all such
Alterations shall be expeditiously completed and in compliance with all
applicable Laws, (d) the nature, scope and effect of the Alterations shall be
subject to Landlord's prior written consent, which consent shall not be
unreasonably withheld, but which consent may be conditioned upon Tenant removing
all or part of the proposed Alterations at its expense at the expiration or
termination of
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<PAGE> 12
this Lease and restoring the Leased Premises to the condition existing prior to
the Alterations, (e) the plans and specifications for all Alterations shall be
submitted to Landlord for Landlord's review and approval, which approval shall
not be unreasonably withheld, (f) all Alterations shall be completed by
contractors and subcontractors reasonably acceptable to Landlord and further, as
a condition of the approval of Alterations, Landlord may specify which
contractors and subcontractors must be used with respect to the Alterations, (g)
Tenant shall comply with all reasonable insurance requirements of Landlord,
together with any other reasonable requirements of the holder of any mortgage
covering the Leased Premises; and (h) Tenant shall promptly pay all costs and
expenses and discharge any and all liens arising with respect to the
construction of the Alterations. Title to all Alterations made by Tenant, except
trade fixtures, shall become the property of Landlord at the termination of this
Lease. Upon the request of Landlord, Tenant shall deposit with Landlord a surety
bond or other security satisfactory to Landlord to assure the completion of any
such Alterations. Tenant shall procure and pay for all required permits,
certificates and licenses in connection with Alterations.
11.2 Landlord Alterations. Landlord shall have no obligation relating
to alterations or the improvements to the Leased Premises. Notwithstanding the
foregoing, however, Landlord shall at all times have the right to further
improve the Land, in its absolute discretion including, without limitation, the
right to erect onto the Land parking structure(s) or facilities or additional
building(s) provided that no such improvements to the Land shall unreasonably
interfere with access to and/or use of the Leased Premises.
12. Loss by Casualty. In the event of any damage or destruction to the
Leased Premises by fire or other cause during the term hereof, the following
provisions shall apply;
(a) If the Building is damaged by fire or any other cause to such
extent that the cost of restoration, as reasonably estimated
by Landlord, will equal or exceed thirty percent (30%) of said
replacement value of the Building (exclusive of foundations)
just prior to the occurrence of the damage, or if in the
opinion of the Landlord such damages cannot be restored or
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<PAGE> 13
repaired within one hundred twenty (120) days from the date of
such casualty, then Landlord may, no later than the sixtieth
(60th) day following the damage, give Tenant written notice of
Landlord's election to terminate this Lease.
(b) If the cost of restoration as estimated by Landlord will equal
or exceed fifty percent (50%) of said replacement value of the
Building and if the Leased Premises are not suitable as a
result of said damage for the purposes for which they are
demised hereunder, in the reasonable opinion of Tenant, then
Tenant may, no later than the sixtieth (60th) day following
the damage, give Landlord a written notice of election to
terminate this Lease.
(c) If the cost of restoration as estimated by Landlord shall
amount to less than thirty percent (30%) of said replacement
value of the Building, or if, despite the cost, Landlord does
not elect to terminate this Lease, Landlord shall restore the
Building and the Leased Premises with reasonable promptness,
subject to delays beyond Landlord's control and delays in the
making of insurance adjustments by Landlord; and Tenant shalt
have no right to terminate this Lease except as herein
provided Landlord shall not be responsible for restoring or
repairing leasehold improvements installed by or paid for by
Tenant.
(d) In the event of either of the elections to terminate, this
Lease shall be deemed to terminate on the date of the receipt
of the notice of election and all rentals shall be paid up to
the date. Tenant shall have no claim against Landlord for the
value of any unexpired term of this Lease.
(e) In any case where damage to the Building shall materially
affect the Leased Premises so as to render them unsuitable in
whole or in part for the purposes for which they are demised
hereunder, then, a portion of the rent based upon the amount
of the extent to which the Leased Premises are rendered
unsuitable shall be abated until repaired or restored.
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13. Eminent Domain. In the event of any eminent domain or condemnation
proceeding or private sale in lieu thereof in respect to the Leased Premises
during the term thereof, the following provisions shall apply:
(a) If the whole of the Leased Premises shall be acquired or
condemned by eminent domain for any public or quasi-public use
or purpose, then the term of the Lease shall cease and
terminate as of the date possession shall be taken in such
proceeding and all rental shall be paid up to that date.
(b) If any part constituting less than the whole of the Leased
Premises shall be acquired or condemned as aforesaid, and in
the event that said partial taking or condemnation shall
materially affect the Leased Premises so as to render the
Leased Premises unsuitable for the business of the Tenant, in
the reasonable opinion of Landlord, then the term of this
Lease shall cease and terminate as of the date possession
shall be taken by the condemning authority and rent shall be
paid to the date of such termination.
In the event of a partial taking or condemnation of the Leased
Premises which shall not materially affect the Leased Premises
so as to render the Leased Premises unsuitable for the
business of the Tenant, in the reasonable opinion of the
Landlord, this Lease shall continue in full force and affect
but with a proportionate abatement of the Base Rental and
additional rent based on the portion, if any, of the Leased
Premises taken. Landlord reserves the right, at its option, to
restore the Building and the Leased Premises to substantially
the same condition as they were prior to such condemnation. In
such event, Landlord shall give written notice to Tenant,
within 30 days following the date possession shall be taken by
the condemning authority, of Landlord's intention to restore.
Upon Landlord's notice of election to restore, Landlord shall
commence restoration and shall restore the Building and the
Leased Premises with reasonable promptness, and Tenant shall
have no right to terminate this Lease except as herein
provided. Upon completion of such restoration, the rent shall
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<PAGE> 15
be adjusted based upon the portion, if any, of the Leased
Premises restored.
(c) All damages in the event of any condemnation shall belong to
the Landlord, however, Tenant shall have the right to claim
and recover from the condemning authority, but not from
Landlord, such compensation as may be separately awarded or
recoverable by Tenant in Tenant's own right on account of any
and all damage to Tenant's business by reason of the
condemnation and for or on account of any cost or loss to
which Tenant might be put in removing Tenant's merchandise,
furniture, fixtures, leasehold improvements and equipment.
14. Liability and Indemnity. Save for its gross negligence, Landlord
shall not be responsible or liable to Tenant for any loss or damage (i) that may
be occasioned by or through the acts or omissions of persons occupying any part
of the Building or any persons transacting any business in or about the Building
or persons present in or about the Building for any other purpose or (ii) for
any loss or damage resulting to Tenant or its property from burst, stopping or
leaking water, sewer, sprinkler or steam pipes or plumbing fixtures or from any
failure of or defect in any electric line, circuit or facility. Tenant shall
defend, indemnify and save Landlord harmless from and against all liabilities,
damages, claims, costs, charges, judgments and expenses, including, but not
limited to, reasonable attorneys' fees, which maybe imposed upon or incurred or
paid by or asserted against Landlord, the Leased Premises or any interest
therein or in the Building by reason of or in connection with any use, non-use,
possession or operation of the Leased Premises, or any part thereof, any
negligence or tortious act on the part of Tenant or any of its agents,
contractors, servants, employees, licensees or invitees, any accident, injury,
death or damage to any person or property occurring in, on or about the Leased
Premises or any part thereof, and any failure on the part of Tenant to perform
any of the terms or conditions of this Lease provided, however, that nothing
contained in this paragraph shall be deemed to require Tenant to indemnify
Landlord with respect to any gross negligence or tortious act committed by
Landlord or to any extent prohibited by law.
15. Default.
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15.1 Events of Default. Any of the following occurrences or acts
shall constitute an event of default under this Lease:
15.1.1 Lease Terms. Tenant (a) fails to make payment of any
installment of Base Rent or Additional Rent within
five (5) days after the date when due or (b) fails to
observe or perform any of Tenant's other covenants,
agreements or obligations pursuant to this Lease and
fails to cure such non-monetary default within twenty
(20) days after Landlord's written notice to Tenant
specifying such default or defaults;
15.1.2 Insolvency. Tenant files a petition in bankruptcy or
is adjudicated a bankrupt or insolvent or makes an
assignment for the benefit of its creditors or admits
in writing its inability to pay its debts generally
as they become due and such petition, adjudication,
assignment or admission is not discharged or denied
within thirty (30) days;
15.1.3 Appointment. A receiver, trustee or liquidator of all
or substantially all of the property of Tenant or of
the Leased Premises is appointed in any proceeding
brought by Tenant and such appointment is not
discharged within thirty (30) days;
15.1.4 Abandonment. The Leased Premises are abandoned or
left unoccupied for thirty (30) calendar days;
15.1.5 Other Agreements. Tenant shall default in any other
agreement relating to the sale of the assets of
Kennsco, Inc., to which agreement Tenant is a party.
15.2 Extension of Cure Period. Notwithstanding the foregoing
provisions of this Section 14, if a default not related to the
payment of amounts to Landlord is not susceptible of cure
within the specified time period due to causes beyond Tenant's
reasonable control (except for payments to be made by Tenant),
the specified period shall be extended a reasonable period of
time (not to exceed sixty (60) days), provided Tenant has
commenced the cure within said specified period and diligently
prosecutes the same thereafter.
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15.3 Termination. Upon an event of default, Landlord shall have the
right (but not the obligation) to terminate this Lease by
written notice to Tenant. Thereupon, all right, title and
interest of Tenant shall immediately expire as fully and
completely as if the date specified were the Termination Date.
In that event, Tenant shall then peaceably and quietly quit
the Leased Premises and surrender the same to Landlord, but
Tenant shall remain liable as provided in Section 14.4 of this
Lease. If such notice is given, Landlord shall have the
immediate right of reentry and possession of the Leased
Premises and the right to remove all persons and property from
the Leased Premises. Upon taking possession, Landlord may make
such alterations and repairs to the Leased Premises as
Landlord deems necessary and appropriate and Landlord may,
from time to time, relet all or any portion of the Leased
Premises for such term or terms and such rental or rentals and
upon such other terms and conditions as Landlord, it in its
sole discretion, deems advisable.
15.4 Landlord's Reentry Without Termination. Landlord may elect to
reenter and obtain possession of the Leased Premises by reason
of or following an event of default, with or without
terminating this Lease in the manner set forth in Section 14.3
above. Thereupon, Landlord shall have the right, at Landlord's
option and without notice: (a) to repair or alter the Leased
Premises in such manner as Landlord may deem necessary or
advisable so as to put the Leased Premises in good order and
to make the same rentable and O,) to relet the Leased Premises
or any part of the Leased Premises. No such reentry or taking
of possession of the Leased Premises by Landlord shall be
construed as an election on Landlord's part to terminate this
Lease unless a notice of such intention be given to Tenant or
unless the termination of this Lease is decreed by a court of
competent jurisdiction.
15.4.1 Payment of Landlord's Expenses. If Landlord does
reenter the Leased Premises, Tenant shall pay to
Landlord on demand all expenses incurred by Landlord
in (a) obtaining possession, (b) altering, repairing
and putting the Leased Premises in good order and
condition,
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<PAGE> 18
and (c) reletting the same, including (i) reasonable
fees of attorneys, architects, and other experts
and (ii) any other legitimate expenses or
commissions.
15.4.2 Continuing Payment of Rent. In the event of any
expiration or termination of Term of this Lease or
re-entry or possession of the Leased Premises by
reason of the occurrence of an Event of Default,
Tenant shall pay to Landlord all Base Rent,
Additional Rent and all other sums required to be
paid by Tenant through and including the date of such
expiration, termination, reentry or repossession; and
thereafter, until the end of what would have been the
Term of this Lease in the absence of such expiration,
termination, re-entry or re-possession (whether or
not the Leased Premises shall have been relet) and
Tenant shall be liable to Landlord for and shall pay
to Landlord, as liquidated and agreed current
damages, all Base Rent, Additional Rent and all other
sums which would be payable under this Lease by
Tenant in the absence of such expiration,
termination, re-entry or repossession less the net
proceeds, if any, of any reletting affected for the
account of Tenant after deducting therefrom the
expenses set forth in Section 14.4.1 hereof Tenant
shall pay such current damages on the days on which
Base Rent would be payable under this Lease in the
absence of such expiration, termination, re-entry or
repossession and Landlord shall be entitled to
recover the same from Tenant on each day. Landlord
shall have, from time to time, the right to begin and
maintain successive actions or other legal
proceedings against Tenant for the recovery of such
amounts and such other sums payable pursuant to this
Lease. At any time after such termination or
repossession, whether or not Landlord shall have
collected any current damages as aforesaid, Landlord
shall be entitled to recover from Tenant, and Tenant
shall pay to Landlord on demand, as and for
liquidated and final damages for Tenant's default
hereunder (in addition to Landlord's expenses set
forth in Section 14.4.1 hereof) an amount equal to
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the then present value of the excess of the Base Rent
and other sums or charges reserved under this Lease
from the date of such termination or repossession for
what would be the then unexpired Term if the same had
remained in effect, over the amount of rent Tenant
establishes that Landlord could in all likelihood
actually receive for the Leased Premises for the same
period. Said present value to be arrived at on the
basis of a discount of four percent (4%) per annum.
Tenant's liability hereunder shall survive the
termination or expiration of this Lease or any action
to secure possession of the Leased Premises. Nothing
contained in this Lease shall be deemed to require
Landlord to wait until the Termination Date to begin
such action or other legal proceedings.
16. Additional Rights of Landlord.
16.1 Enforcement Rights. No right or remedy in this Lease conferred
upon or reserved to Landlord is intended to be exclusive of any other right or
remedy, and each and every right and remedy of Landlord shall be cumulative and
in addition to any other right or remedy given Landlord pursuant to this Lease,
or now or at any time existing at law or in equity. In addition to the other
remedies provided by this Lease, Landlord shall be entitled to (a) injunctive
relief in case of the violation or attempted or threatened violation of any of
the covenants, agreements, conditions or provisions of this Lease, (b) a decree
compelling performance of any of the covenants, agreements, conditions or
provisions of this Lease, or (c) any other remedy allowed to Landlord at law or
in equity.
16.2 Non waiver. The failure of Landlord to insist at any time upon
Tenant's strict performance of any of the covenants or agreements contained in
this Lease shall not be construed as a waiver or a relinquishment of such
covenants or agreements for the future. Landlord's receipt of any Base Rent or
Additional Rent, with knowledge of a breach by Tenant of any covenant or
agreement contained in this Lease shall not be deemed a waiver of such breach.
No waiver by either party of any provision of this Lease shall be deemed to have
been made unless
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expressed in writing and signed by the party waiving the same.
17. Notices. All rent and other payments required to be made by Tenant
shall be payable to Landlord at the address set forth below, or any other
address Landlord may specify' from time to time by written notice delivered to
Tenant. All payments required to be made by Landlord to Tenant shall be payable
to Tenant at the address set forth below, or at any other address within the
United States as Tenant may specify from time to time by written notice. Any
written notice or document required or permitted to be delivered by this Lease
shall be deemed to be delivered (whether or not actually received) when
deposited in United States mail, postage paid, certified mail, return receipt
requested, addressed to the parties at their respective address set out below:
TENANT: Wareforce.com, Inc.
291 Rosecrans Avenue, Suite 155
El Sequndo, CA. 90245
Attn.: General Counsel
LANDLORD: Kenneth H. Searl, Jr.
900 East Shady Lane
Wayzata, Minnesota 55391
18. Option to Extend Term. Provided Tenant is not in default of this
Lease, Tenant is hereby granted the option to extend the term of this Lease for
one additional term of two (2) years which shall commence on the first day after
the end of the initial term of this Lease. Said option shall only be exercised
by Tenant delivering written notice thereof to Landlord not less than one
hundred eighty (180) days prior to the expiration of the initial term. The terms
and conditions during the extended term shalt be the same as the terms and
conditions during the initial term of this Lease, except that the annual Base
Rental payable during each lease year during the extended term shall be two
hundred twenty five thousand ($225,000) dollars and shall be payable in equal
monthly installments of eighteen thousand seven hundred fifty ($18,750) dollars
in advance on or before the first day of each calendar month during the extended
term.
19. Holding Over. In the event of holding over by Tenant after the
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expiration or termination of this Lease, Tenant shall be deemed to be occupying
said Leased Premises as a Tenant from month to month subject to all of the
applicable terms and provisions of this Lease, except that Tenant shall pay
Landlord as rental for the period of such hold over an amount equal to 150% of
the rent payable by Tenant for the immediately proceeding month. Tenant agrees
to vacate and deliver the Leased Premises to Landlord upon Tenant's receipt of
written notice from Landlord to vacate. The rental payable during the hold over
period shall be payable to Landlord on demand. No holding over by Tenant with or
without consent of Landlord, shalt operate to extend this Lease except as
otherwise expressly provided.
20. Subordination to Mortgage. Tenant agrees that this Lease shall be
subordinate to any first mortgage that may now or hereafter be placed upon the
Building or any part thereof, and to any and all advances to be made thereunder,
and to the interest thereon, and all renewals, replacements, and extensions
thereof, provided the mortgagee named in such mortgage shall agree to execute an
agreement, sometimes referred to as a "non-disturbance agreement", which shall
provide that, so long as Tenant shall not be in default under this Lease,
Tenant's possession of the Leased Premises and its rights under this Lease shall
not be disturbed by said mortgage, by foreclosure, or otherwise. In confirmation
of such subordination, Tenant shall execute and deliver within ten (10) days
following a request therefore, any reasonable instrument, in recordable form, as
required by Landlord's mortgagee. In the event of any mortgagee electing to have
the Lease Agreement a prior encumbrance to its mortgage, then in such event upon
such mortgagee noting Tenant to that effect, this Lease Agreement shall be
deemed prior in encumbrance to the said mortgage, whether this Lease Agreement
is dated prior to or subsequent to the date of said mortgage.
21. Estoppel Certificates. Tenant agrees, within ten (10) days
following Landlord's request, to execute either an estoppel certificate
addressed to any mortgagee of Landlord or any purchaser of Landlord's interest
or a third party agreement among Landlord, Tenant and such mortgagee(s)
certifying as to such facts (if true) and agreeing to such notice provisions and
other matters as may be reasonably required by Landlord or Landlord's mortgagee.
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<PAGE> 22
22. Successors and Assignees. This Lease shall be binding upon and
inure to the benefit of Landlord, its successors and assignees and shall be
binding upon and inure to the benefit of Tenant, its successors, and to the
extent assignments may be approved by Landlord hereunder, Tenants assigns.
23. Rights Cumulative; Governing Law. All rights and remedies of
Landlord under this Lease shall be cumulative and none shall exclude any of the
rights or remedies allowed by law; and this Lease is declared to be a Minnesota
State contract, and all of the terms hereof shall be construed according to the
laws of said state.
24. Attorney's Fees. In the event either party places the enforcement
of this Lease or any part thereof, or the collection of any rent due or to
become due hereunder, or recovery of the possession of the Leased Premises in
the hands of an attorney, or file suit upon the same, the non-prevailing (or
defaulting) party shall pay the other parties reasonable attorney's fees and
court costs as any court shall deem reasonable and equitable.
25. Access; Changes in Building Facilities; Name. All portions of the
Building except the inside surfaces of all walls and doors bounding the Leased
Premises, and any space in or adjacent to the Leased Premises used for shafts,
stacks, pipes, conduits, fan rooms, ducts electric or other utilities, sinks or
other Building facilities, and the use thereof, as well as access thereto
through the Leased Premises for the purposes of operation, maintenance,
decoration and repair, are reserved to Landlord and Landlord's managing agent.
Landlord reserves the right, at any time, without incurring any liability to
Tenant therefor, to make such changes in or to the Building and the fixtures and
equipment thereof, as well as in or to the street entrances, halls, passages,
concourse, elevators, escalators, stairways and other improvements thereof, as
it may deem necessary or desirable. Landlord may adopt any name for the Building
and Landlord reserves the right to change the name or address of the Building at
anytime.
26. Commissions. Unless otherwise agreed in writing, if Tenant has
dealt with any person or real estate broker in respect to leasing or renting
space in the Building. excepting the exclusive leasing agent for
-22-
<PAGE> 23
the Building, Tenant shall be solely responsible for the payment of any fee due
said person or firm and Tenant shall hold Landlord free and harmless from and
against any liability in respect thereto. Landlord shall be solely responsible
for the payment of any fee due the exclusive leasing agent for the Building.
27. Assignment by Tenant. Tenant shall not assign or in any manner
transfer or encumber this Lease or the Leased Premises or any interest in or of
the same, nor sublet all or any part of the Leased Premises, nor permit
occupancy by anyone with, through or under it, without the previous written
consent of Landlord which consent will not be unreasonably withheld. Consent by
Landlord to one or more assignment of this Lease or to one or more subletting of
the Leased Premises shall not operate as a waiver of Landlord's rights under
this Section 27 to any subsequent assignment or subletting. This prohibition
includes any subletting, assignment or transfer which would otherwise occur by
operation of law. Notwithstanding the foregoing, Tenant may, without Landlord's
consent, sublease the Leased Premises to any company owned and controlled by
Tenant provided any such sublease shall be subject to the terms of this Lease
and further provided that any sublease shall not relieve, limit or release
Tenant from any liability to Landlord hereunder for the full and timely
performance of this Lease. No assignment or subletting shall release Tenant or
any guarantor of this Lease of any of its obligations under this Lease or be
construed or taken as a waiver of any of Landlord's rights or remedies pursuant
to this Lease.
Landlord and Tenant agree that the absence of any one of the following
factors, or any other reasonable factor, may be reasonable grounds for denying
the Tenant's request:
(i) Financial strength of the proposed subtenant/assignee must be
at least equal to that of the existing Tenant;
(ii) Business reputation of the proposed subtenant/assignee must be
in accordance with generally acceptable commercial standards;
(iii) Use of the Leased Premises by the proposed
-23-
<PAGE> 24
subtenant/assignee must be reasonably acceptable to Lender;
(iv) Percentage rents of the proposed subtenant/assignee, or the
prospect of percentage rents, must be at least equal to that
of the existing Tenant;
(v) Managerial and operational skills of the proposed
subtenant/assignee must be the same as those of the existing
Tenant;
(vi) Use of the Leased Premises by the proposed subtenant/assignee
will not violate or create any potential violation of any
laws;
(vii) Use of the Leased Premises will not violate any other
agreements affecting the Premises, the Landlord or other
Tenants.
28. Waiver of Subrogation. Anything in this Lease to the contrary not
withstanding, Landlord and Tenant hereby waive and release each other of and
from any and all rights or recovery, claim, action or cause of action, against
each other, their agents, officers and employees for any loss or damage that may
occur to the Leased Premises, improvements to the Building of which the Leased
Premises are a part, or personal property (building contents) within the
Building, by reason of fire or the elements regardless of cause of origin,
including negligence of Landlord or Tenant and their agents, officers and
employees. Each party to this Lease agrees immediately to give each insurance
company which has issued to its policies of fire and extended coverage
insurance, written notice of the terms of the mutual waiver as contained in this
paragraph, and to have the insurance policies property endorsed, if necessary,
to prevent the invalidation of the insurance coverages by reason of the mutual
waivers contained in this paragraph.
29. General. This Lease does not create the relationship of principal
and agent or of partnership or of joint venture or of any association between
Landlord and Tenant, the sole relationship between Landlord and Tenant being
that of landlord and tenant. No waiver of any default of Tenant hereunder shall
be implied from any omission by
-24-
<PAGE> 25
Landlord to take any action on account of such default if such default persists
or is repeated, and no express waiver shall affect any default other than the
default specified in the express waiver and that only for the time and to the
extent therein stated. Each term and each provision of this Lease Agreement
performable by Tenant shall be construed to be both a covenant and a condition.
The marginal or topical headings of the several paragraphs and clauses are for
convenience only and do not define, limit or construe the contents of such
paragraphs or clauses. All preliminary negotiations are merged into and
incorporated in this Lease Agreement. This Lease Agreement can only be modified
or amended by an agreement in writing signed by the parties hereto. All
provisions hereof shall be binding upon the heirs, successors and assigns of
each party hereto.
30. Right of Landlord To Enter Premises: Right to Show. Landlord, its
employees and agents, may at all reasonable times enter the Leased Premises for
the purposes of inspection, cleaning, repairing, altering or improving the
Leased Premises or said Building, and shall have the right to place signs
advertising availability of the Leased Premises for lease at any time during the
last six months of the lease Term. During such period, Landlord shall also have
the right to display the Leased Premises to prospective purchasers or lessees
provided that Landlord shall not unreasonably interfere with the conduct of
Tenant's business.
31. Right of Tenant to Terminate Lease. Notwithstanding anything to the
contrary contained herein, Tenant may, twenty-four (24) months after the date of
execution of this Agreement, terminate this Agreement upon ninety (90) days
prior written notice, which notice may be given in anticipation of the
occurrence of the following events, without further obligation or liability to
Landlord, if:
(i) Tenant does not, as measured by Tenant's accountant using
Generally Accepted Accounting Principals, have a positive cash
flow for the cumulative twenty-four (24) month period; or
(ii) Tenant, does not, as measured by Tenant's accountant using
Generally Accepted Accounting Principals, have a positive net
profit for the cumulative twenty-four (24) month period; and
(iii) If either (i) or (i) above apply, Tenant has made a good faith
-25-
<PAGE> 26
effort to sublet the property herein.
32. Incorporation of Exhibits. The following exhibits to this Lease are
hereby incorporated by reference for all purposes as fully as if set forth at
length herein:
EXHIBIT A Floor Plan of Leased Premises
EXHIBIT B Legal Description of Building
IN WITNESS WHEREOF, the respective parties hereto have caused this
Lease to be executed as of the day and year first above written.
TENANT:
WAREFORCE INCORPORATED
By: /s/Dan Ricketts
---------------
Its: General Counsel
---------------
LANDLORD:
/s/Kenneth Searl
- ----------------
KENNETH H. SEARL, JR.
-26-
<PAGE> 1
Exhibit 10.4
Microsoft Corporation
Channel Agreement
This Microsoft Corporation Channel Agreement ("Agreement") is entered into as of
the 1st day of July, 1998 (the "Effective Date") between MICROSOFT CORPORATION
("MS"), having its principal place of business at One Microsoft Way, Redmond, WA
98052-6399 and WAREFORCE, INC. ("COMPANY"), having its principal place of
business at 2361 Rosecrans Ave #155, El Segundo, CA 90245.
1. Definitions
Except as set forth above, all capitalized terms included in this Agreement are
as defined in Schedule A, attached hereto and incorporated herein by reference.
Addendum to the Agreement
COMPANY's rights and obligations with respect to the distribution of Product
under this Agreement are subject to the terms of any Addendum which the parties
have signed. Each Addendum is incorporated into and made a part of this
Agreement. In the event of inconsistency, the terms of any applicable Addendum
shall prevail over this Agreement. The terms of this Agreement, including any
Addenda, shall prevail over any provisions in purchase orders or set-up forms
3. Term and Termination
3.1 Term
This Agreement shall take effect on the Effective Date and shall continue until
June 30, 1999.
3.2 Termination
Either MS or COMPANY may terminate this Agreement in its entirety and/or any
individual Addendum at any time, with or without
<PAGE> 2
cause, upon thirty (30) calendar days prior written notice. If this Agreement is
terminated without cause, neither party shall be responsible to the other for
any costs or damages resulting from such termination.
3.3 Rights Upon Expiration or Termination
Any amounts which have accrued prior to termination or expiration shall become
immediately due and payable. Any Product acquired by COMPANY pursuant to this
Agreement as of the termination of this Agreement may be distributed in
accordance with the terms of this Agreement until fully liquidated, or such
Product may be returned to MS within sixty (60) calendar days after the
effective termination or expiration. All orders received from COMPANY but not
shipped by MS prior to the effective date of any expiration or termination, at
MS' option, may be shipped or canceled. COMPANY shall make a final report to MS
within ninety (90) days of termination of this Agreement.
4. COMPANY Rights and Obligations
4.1 Authorized Distribution
Product acquired under this Agreement shall be distributed within the Territory
only and only in accordance with the terms of this Agreement and any applicable
Addendum. COMPANY shall not, without the prior written consent of MS distribute
Product to any Reseller or End User whom they have reason to believe may
re-distribute such Product outside of the Territory.
4.2 No Other Product Warranties by COMPANY
Neither COMPANY nor any of its employees or agents shall have any right to make
any other warranties or promises for the use of Product which are not contained
in the written warranty document accompanying the Product. COMPANY may, however,
give instructions for the use of the Product which are contained on the Product
label or container, or End User documentation provided with the manual or MS
product literature denoted by a MS part number or authorized in writing by MS.
<PAGE> 3
4.3 No Alterations of Product
COMPANY shall not alter the Product or Product packaging, and shall have no
authority to make copies of MS diskettes or documentation without the prior
written consent of MS. COMPANY shall distribute Product to its customers in
unopened packages.
4.4 Use of Trademarks
This Agreement does not constitute a trademark or service mark license. COMPANY
acknowledges and agrees that the Trademarks are the exclusive property of MS or
one of its affiliated companies and that COMPANY is not entitled either by
implication or otherwise to any title in the Trademarks. COMPANY shall not use
any Trademarks other than in accordance with this Agreement (including but not
limited to the guidelines set out in the TM Web Site) or as otherwise permitted
in writing from time to time by MS. With respect to the distribution of Product,
COMPANY shall use the appropriate trademark symbol "TM" or "(R)" in a
superscript and clearly indicate MS' ownership of the Trademark(s) whenever the
Product name is first mentioned in any advertisement, brochure, or other manner
in connection with Products.
4.5 Financial Statement
COMPANY will provide to MS credit management, quarterly Financial Statements
within forty-five (45) days after the end of each calendar quarter. COMPANY
Financial Statements will be used by MS' credit department solely for the
purpose of establishing and reviewing COMPANY's credit.
4.6 Taxes
4.6(a) COMPANY Taxes
All amounts to be paid by COMPANY to MS herein, are exclusive of any federal,
state, municipal or other governmental taxes, including income, franchise,
excise, sales, use, gross receipts, value added, goods and services, property or
similar tax, now or
<PAGE> 4
hereafter imposed on COMPANY. Such charges shall be the responsibility of
COMPANY and may not be passed on to MS, unless they are owed solely as a result
of entering into this Agreement and are required to be collected from MS under
applicable law.
4.6(b) Billing and Collection
COMPANY will bill, collect and remit sales, use, value added, and other
comparable taxes determined by COMPANY to be due with respect to the
distribution of the Product. MS is not liable for any taxes, including without
limitation, income taxes, withholding taxes, value added, franchise, gross
receipt, sales, use, property or similar taxes, duties, levies, fees, excises or
tariffs incurred in connection with or related to the distribution of the
Product. COMPANY takes full responsibility for all such taxes, including
penalties, interest and other additions thereon.
If, after a determination by foreign tax authorities, any taxes are required to
be withheld, on payments made by COMPANY to MS, COMPANY may deduct such taxes
from the amount owed MS and pay them to the appropriate taxing authority,
provided however, that COMPANY shall promptly secure and deliver to MS an
official receipt for any such taxes withheld or other documents necessary to
enable MS to claim a U.S. Foreign Tax Credit. COMPANY will make certain that any
taxes withheld are minimized to the extent possible under applicable law.
COMPANY shall indemnify, defend and hold MS harmless from any claims or
liabilities arising from or related to any failure by COMPANY to comply with
Subsection 4.6.
4.7 Anti-Piracy
COMPANY shall take all commercially reasonable steps to prevent unauthorized
distribution, duplication or pirating of the Product.
4.8 Compliance with Applicable Laws
<PAGE> 5
COMPANY shall ensure that its distribution of Product complies with any and all
applicable laws and regulations in the Territory.
5. MS Obligations
5.1 Assistance with Reporting
Upon COMPANY'S written request, MS shall use reasonable efforts to assist
COMPANY in data reporting, and will work with COMPANY's Information Management
department to facilitate the data reporting process.
5.2 No Warranties for Product Not Manufactured by MS
MS makes no warranties as to items distributed under a third party name,
copyright, trademark or tradename which may be included within the retail
package of a Product sold hereunder.
5.3 Reporting/Electronic Data Interchange
COMPANY shall provide weekly sales and inventory reporting in a timely and
accurate manner during the Term. Such sales reporting shall be submitted to MS
in accordance with the Electronic Data Interchange (EDI) Guidelines as provided
to COMPANY by MS. from time to time.
5.4 Audits
During the term of this Agreement and for a period of two (2) years following
its termination or expiration, MS or its designated representative, at its own
cost, may audit the applicable books, records and operations of COMPANY as is
reasonable to verify COMPANY's compliance with the terms of this Agreement.
COMPANY shall promptly correct any errors and omissions disclosed by such audit.
Any audit will be conducted during COMPANY's normal business hours in such a
manner as not to unreasonably interfere with COMPANY's normal business
activities. If any audit uncovers material discrepancies COMPANY shall bear the
costs for the audit. For purposes of this Section, "material
<PAGE> 6
discrepancies" shall mean a discrepancy of five hundred thousand U.S. dollars
(US$500,000) or more in any revenue or sales reporting.
6. Company and MS Obligations
6.1 Product Warranty; Limitation of Liability
(a) MS warrants its software and hardware Product to End Users as
defined in the written limited warranty document accompanying each Product. All
replacement Product is delivered subject to the terms of the MS limited Product
warranty. THE ABOVE LIMITED WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, OR STATUTORY, INCLUDING IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER OBLIGATIONS OR
LIABILITIES ON MS' PART.
(b) NEITHER MS NOR ANY THIRD PARTIES WHO HAVE BEEN INVOLVED IN THE
CREATION, PRODUCTION, OR DELIVERY TO THE COMPANY OF ANY MICROSOFT PRODUCT WHICH
IS THE SUBJECT OF THIS AGREEMENT SHALL BE LIABLE FOR ANY INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS
PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE)
ARISING OUT OF THE USE OR INABILITY TO USE ANY PRODUCT EVEN IF MS HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
(c) IN ANY CASE, THE LIABILITY OF MS (i) UNDER ANY PROVISION OF THIS
AGREEMENT; (ii) FOR ANY DAMAGES CAUSED BY A PROGRAM DEFECT OR FAILURE IN ANY
PRODUCT OR (iii) ARISING FROM A COURT OF PROPER JURISDICTION HOLDING ANY OF THE
ABOVE WARRANTIES OR DISCLAIMERS OF WARRANTIES INADEQUATE OR INVALID SHALL BE
LIMITED TO THE AMOUNT ACTUALLY PAID BY COMPANY TO MS UNDER THIS AGREEMENT. MS'
LIMITATION OF LIABILITY IS CUMULATIVE WITH ALL OF MS' EXPENDITURES BEING
AGGREGATED TO DETERMINE SATISFACTION OF THE LIMIT. THE EXISTENCE OF CLAIMS OR
SUITS AGAINST MORE THAN ONE PRODUCT DISTRIBUTED UNDER THIS AGREEMENT WILL NOT
ENLARGE OR EXTEND THE LIMIT. COMPANY RELEASES MS FROM ALL OBLIGATIONS,
LIABILITY, CLAIMS OR DEMANDS IN EXCESS OF THE LIMITATION.
6.2 Semester Programs
(a) Marketing Funds
<PAGE> 7
Each Semester, MS may allow COMPANY to participate in programs which provide the
opportunity to earn marketing funds. COMPANY's participation in such programs
shall be governed by COMPANY's then current Microsoft Rebate and Marketing Fund
Offer Letter, and Microsoft's Marketing Fund Guidelines, as such may be
promulgated and modified by MS, in its sole discretion, from time to time.
(b) Rebates
Each Semester, MS may allow COMPANY to participate in programs which provide the
opportunity to earn rebates as described in COMPANY's current Microsoft Rebate
and Marketing Fund Rebate Letter, and COMPANY s Rebate Program Guidelines, as
such may be promulgated and modified by MS, in its sole discretion, from time to
time.
7. Indemnification
7.1 By MS
(a) If a cause of action, claim, or demand is brought under United
States laws against COMPANY for an Infringement Claim, COMPANY shall promptly
notify MS in writing of the Infringement Claim, specify the nature of such claim
and the relief sought. COMPANY shall tender the defense of the Infringement
Claim to MS. Within thirty (30) calendar days of MS' receipt of such notice, MS
shall notify COMPANY in writing of MS' acceptance or rejection of the defense of
the Infringement Claim. If MS accepts the defense of the Infringement Claim,
then MS shall pay any settlement to which MS consents or shall pay the amount of
any adverse final judgment. MS' acceptance or rejection of any Infringement
Claim shall be based on MS' discretion which shall be reasonable. MS shall have
sole control over the defense and/or settlement of Infringement Claims. COMPANY
shall provide reasonable assistance in the same.
(b) In the event MS receives information concerning an intellectual
property infringement claim (including an Indemnified Claim) under United States
laws and related to the Product(s) or the Marks, MS may at its expense, without
<PAGE> 8
obligation to do so, either (i) procure for COMPANY the right to continue to
distribute the alleged infringing Product or Mark, or (ii) replace or modify the
Product or Mark to make it non-infringing, and in which case, COMPANY shall
thereupon cease distribution of the alleged infringing Product or Mark.
(c) MS shall have no liability for any intellectual property
infringement claim (including an Infringement Claim) based on COMPANY's (i)
distribution or use of any Product or Mark after MS' notice that COMPANY should
cease distribution, or use of such Product or Mark due to such a claim; or (ii)
combination of a Product with any other product, program or data; or (iii)
adaptation or modification of any Product. For all claims described in this
Section 7.1(c), COMPANY agrees to indemnify and defend MS from and against all
damages, costs and expenses, including reasonable attorneys' fees.
7.2 By Company
COMPANY shall defend MS, its subsidiaries, and affiliated companies from and
against any claims, losses, and damages relating to any default, breach or
alleged breach of COMPANY's obligations, promises, representations, warranties
or agreements hereunder. COMPANY's obligation to defend MS shall only apply
provided that COMPANY is immediately notified in writing of any such claim. MS
shall provide reasonable assistance in the defense of any claim. At MS's sole
option, and at COMPANY's cost, MS may participate in the selection of counsel,
defense and settlement of any claims covered by this Section 7.2, or may tender
sole control over the defense or settlement of the claim to COMPANY. If MS
chooses to participate in the selection of counsel, defense and settlement of
such claims, the parties shall work together in good faith to reach decisions
which are mutually acceptable to both parties. MS shall provide reasonable
assistance in the defense of any claim.
8. Insurance
8.1 COMPANY
<PAGE> 9
Throughout the Term and for thirty (30) days thereafter, COMPANY shall maintain,
at its sole expense, Commercial General Liability Insurance written on an
Occurrence Form, with policy limits of not less than three million dollars
(US$3,000,000) combined single limit each occurrence for personal injury
(including bodily injury and death) and property damage which may arise from or
in connection with the performance of COMPANY's obligations hereunder or out of
any negligent act or omission of COMPANY, its officers, directors, agents, or
employees. Upon MS' request, COMPANY shall provide proof of its compliance with
this section.
Throughout the Term and for thirty (30) days thereafter, MS shall maintain,
at its sole expense, Commercial General Liability Insurance written on an
Occurrence Form, with policy limits of not less than three million dollars
(US$3,000,000) combined single limit each occurrence for personal injury
(including bodily injury and death) and property damage which may arise
from or in connection with the performance of MS's obligations hereunder or
out of any negligent act or omission of MS, its officers, directors,
agents, or employees. Upon COMPANY's request, MS shall provide proof of its
compliance with this section. Notwithstanding the foregoing, MS shall have
the right to self-insure.
9. Export Restrictions
COMPANY agrees that COMPANY and, as applicable, its Resellers will not
export or re-export Product to any country, person, or entity subject to
U.S. export restrictions. COMPANY specifically agrees not to export or
reexport Product (i) to any country to which the U.S. embargoes or
restricts the export of goods or services, which as of March 31, 1998,
includes, but is not necessarily limited to, Cuba, Iran, Iraq, Libya, North
Korea, Sudan and Syria, or to any national of any such country who COMPANY
knows intends to transmit or transport the products back to such country;
(ii) to any person or entity that COMPANY or, as applicable, its Resellers
know will utilize Product in the design, development or production of
nuclear, chemical or biological
<PAGE> 10
weapons; or (iii) to any person or entity that has been prohibited from
participating in U.S. export transactions by any federal agency of the U.S.
government.
10. Delay in Performance
If as a result of fire, casualty, act of God, riot, war, labor dispute,
government regulation, or decree of any court or any other event beyond the
control of COMPANY or MS, either of the parties shall be unable to perform
its obligations hereunder, such inability shall not constitute a breach of
this agreement, and such obligations shall be performed as soon as the
cause of the inability ceases or is removed. Strikes or other labor
difficulties which are not capable of being terminated on terms acceptable
to the party affected shall not be considered circumstances within the
control of such party. In the event of Product shortages, MS shall have the
right to allocate available supplies of the Product in its sole discretion.
11. No Waiver
None of the provisions of this Agreement shall be deemed to have been
waived by any act or acquiescence on the part of MS, COMPANY or their
respective agents or employees, but may be waived only by an instrument in
writing signed by an authorized officer of the waiving party. No waiver of
any provision of this Agreement shall constitute a waiver of any other
provision or of the same provision on another occasion.
12. No Partnership or Agency
Nothing in this Agreement shall be deemed to create or constitute a
partnership, joint venture, franchise, agency, or contract of employment
between MS and COMPANY.
13. Attorney's Fees; Governing Law
In the event an action is commenced to enforce a party's rights under this
Agreement, the prevailing party in such
<PAGE> 11
action shall be entitled to recover its costs and attorneys' fees. This
Agreement shall be governed by and interpreted in accordance with the laws
of the State of Washington. COMPANY consents to jurisdiction and venue in
King County, Washington.
This Agreement and all attached Amendments and Addenda constitute the entire
agreement between MS and COMPANY, and supersedes and terminates any and all
prior agreements or contracts, written or oral, entered into between the parties
relating to the subject matter hereof. Any representations, promises, or
conditions in connection therewith not in writing signed by both parties shall
not be binding upon either party. This Agreement shall control any provisions in
purchase orders which are inconsistent with this Agreement.
15. U.S. Government Rights
All Products provided to the U.S. Government pursuant to solicitations issued on
or after December 1, 1995, are provided with commercial license rights only. All
Products provided to the U.S. Government pursuant to solicitations issued prior
to December 1, 1995 are provided with RESTRICTED RIGHTS as provided for in FAR,
48 C.F.R. 52.227-14 (June 1987) or FAR, 48 CFR 252.227-7013 (OCT 1988), as
applicable. COMPANY shall be responsible for ensuring that all Products are
marked with the "Restrictive Rights" legend. Manufacturer is Microsoft
Corporation, One Microsoft Way. Redmond, WA 98052-6399.
16. Confidentiality
COMPANY expressly undertakes to retain in confidence the terms and conditions of
this Agreement and any applicable Addenda and all information and know-how
transmitted to it by MS and make no use of such information and know-how except
under the terms and during the existence of this Agreement. COMPANY shall
guarantee and ensure its employees' compliance with this paragraph. COMPANY's
obligations under this paragraph shall survive any termination of this Agreement
and shall extend to the earlier of
<PAGE> 12
such time as the information is public domain or five (5) years following the
termination of this Agreement. This Section shall not prohibit the parties from
disclosing such information as is specifically required by any Federal or state
authorities. Notwithstanding the fore going, COMPANY may disclose confidential
information in accordance with any judicial or other governmental order or
request, provided that COMPANY shall immediately notify MS in writing upon its
receipt of such order or request and shall assist MS as is reasonable in seeking
any protective order or its equivalent or in limiting the scope of disclosure of
any Confidential Information.
17. No Assignment
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, provided that COMPANY may
not assign its rights or obligations under this Agreement in any way without the
prior written consent of MS. MS may assign this Agreement or any portions
thereof, to any MS related company.
18. Notices
All notices required or contemplated by this Agreement shall be in writing,
delivered by U.S. certified mail (return receipt requested), or via overnight
courier (e.g., Federal Express, or DHL), and addressed as follows:
If to MS: Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn.: Channel Policies
With cc to: Law and Corporate Affairs
If to COMPANY:
WAREFORCE, INCORPORATED
2361 ROSECRANS AVE
#155
<PAGE> 13
EL SEGUNDO CA 90245
Attn: DAN RICKETTS - GENERAL CONSUL
Such notices shall be deemed given three (3) business days after being deposited
in the United States mail or one business day after being delivered with an
overnight carrier.
19. Survival
Sections 3.3, 4.6, 5.4, 6.1, 7, 8.1, 8.2, 14, 15 and 18 shall survive any
termination of this Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement on the dates
indicated below. This Agreement is not binding until executed by MS.
MICROSOFT CORPORATION ("MS") WAREFORCE, INC. ("COMPANY")
By: /s/ Bill Henningsgaard By: /s/ Orie Rechtman
---------------------------- ---------------------------
Bill Henningsgaard ORIE RECHTMAN
---------------------------- ---------------------------
Name (please print) Name (please print)
General Manager. US Headquarter Sales CEO
- ------------------------------------- --------------------------
Title Title
5/19/98 5-18-98
- ------- -------
Date Date
Defined Terms
"Distributor" shall mean any business entity which purchases MS Product
directly from MS, and is authorized by MS to distribute said Product to
Resellers.
"Electronic Data Interchange" or "EDI" shall mean the ANSI-ASCII X. 12
standard, adopted by CompTIA, by which COMPANY shall
<PAGE> 14
submit sales reporting to MS.
"End User" shall mean the ultimate consumer of Product.
"Financial Statement" shall mean a Balance Sheet as of the last day of the
calendar quarter, and an Income Statement and Statement of Cash Flows for the
quarter and year-to-date, prepared in accordance with Generally Accepted
Accounting Principles ("GAAP"). Any deviation from GAAP in the quarterly
statements shall be clearly noted. These statements must be signed by an officer
of COMPANY as being representative of the books and accounts of COMPANY.
"Infringement Claim" shall mean any allegation against the COMPANY that the
Products or Marks infringes any copyright, patent, or trademark of a third
party, or misappropriates a third party trade secret.
"Marks" shall mean the Trademarks (defined below) or any and all copyrights
MS may own.
"Product" shall mean any MS Stock Keeping Unit ("SKU") listed on COMPANY's
then current Price List.
"Reseller" shall mean any software retailer which purchases Product from MS
or a MS authorized Distributor.
"Semester" shall mean a six month period. During the Term there shall be
two (2) Semesters, one running from July 1 through December 31, and the second
Semester running from January 1 through June 30.
"Term" shall mean the term of this Agreement which is specified in Section
3.1 of this Agreement.
"Territory" shall mean the geographic boundaries of the United States of
America, excluding all United States territories, possessions, or protectorates.
The parties agree that if this Agreement includes a Large Account Reseller
Addendum, then for that Addendum only, Territory shall mean both
<PAGE> 15
Canada and the United States, excluding all United States territories,
possessions, or protectorates.
"TM Web site" shall mean the web site located at
http://www.microsoft.com/permission.
"Trademarks" shall mean the trademark and trade name "Microsoft", and all
trademarks and tradenames derived therefrom, and the trademarks used in
association with all Products or which are set out at the TM Web site, as may be
amended from time to time by MS.
Large Account Reseller
Addendum to The Microsoft
Channel Agreement
This Addendum ("Addendum") entered into this 1st day of July, 1998 supplements
that certain Channel Agreement ("Agreement") between MICROSOFT CORPORATION
("MS") having its principal place of business at One Microsoft Way, Redmond, WA
98052 and WAREFORCE, INC. ("COMPANY") having its principal place of business at
2361 Rosecrans Ave #155, El Segundo, CA 90245. The Agreement is hereby
supplemented as follows:
1. Purpose
The purpose of this Addendum is to set forth the framework by which MS appoints
COMPANY as a non-exclusive Large Account Reseller in the Territory with the
right to acquire Microsoft Select Software Products from MS and to distribute
such Select Software Products and their associated license rights to Select
Customers which have designated COMPANY in their Enrollment Form as their Large
Account Reseller. For purposes of this Addendum only, the parties agree that
"Territory" shall mean Canada and the United States, excluding all United States
territories, possessions, or protectorates.
2. Definitions
For purposes of this Addendum, capitalized terms are as defined in Schedule A
attached hereto and incorporated herein by
<PAGE> 16
reference. Any capitalized terms not otherwise defined herein, shall have the
same meaning as set forth in the Agreement.
3. COMPANY Rights and Obligations
3.1 Distribution of Select Software Products
COMPANY may only distribute Select Software Products to Select Customers located
in the Territory, and, in accordance with Subsection 3.1(a) below, at the
direction of any Select Customer, outside of the Territory. However, should a
Select Customer desire to initiate an Enrollment Form in a country outside of
the Territory, the Select Customer is required by the terms of the Microsoft
Select Program to locate a Large Account Reseller in the desired country and
acquire Select Software Products from that Large Account Reseller.
3.1(a): If the Select Customer is a business entity established under
the laws of the United States or Canada and existing in the Territory, it may
designate the COMPANY on an Enrollment Form as its Large Account Reseller for
itself and other related companies which may exist outside of the Territory.
COMPANY shall distribute Select Software Products outside the Territory in
accordance with the terms and conditions of this Agreement and in accordance
with applicable laws.
3.1(b): If the Select Customer is a business entity established under
the laws of a foreign country and existing outside of the Territory, then it
must designate a Large Account Reseller in the same country on an Enrollment
Form. In this case, COMPANY is not authorized to distribute Select Software
Products for such Select Customer. Select Customers are entitled to distribute
the rights associated with their Select Software Products outside of the
Territory if they so elect, in accordance with the Master Agreement and all
applicable laws. However, in the event a Select Customer wants to initiate an
Enrollment Form in a country outside of the Territory, the Select Customer is
required by the terms of the Microsoft Select Program to locate a Large Account
Reseller in the desired country and acquire Select Software Products from that
Large Account Reseller.
<PAGE> 17
3.2 Documentation
COMPANY shall be authorized to purchase Documentation Components from MS
Worldwide Fulfillment for resale to MS volume license customers only. A
validation process must be implemented by COMPANY to ensure that only MS volume
license customers receive Documentation Components. This validation process must
include, at a minimum, verification of the Select or Open Licensee Authorization
number, as applicable, of the customer. The validation process must be
documented in writing, which documentation will be made available to Microsoft
upon request. Price protection is not available for Documentation Components
purchased from MS Worldwide Fulfillment.
COMPANY may request authorization to return Documentation Components purchased
from MS Worldwide Fulfillment within sixty (60) calendar days from the date of
invoice. Upon request, MS will provide COMPANY with a Return Authorization Form
which COMPANY must complete and return to MS. MS will issue a return
authorization number for Documentation Components meeting return criteria
Documentation Components must be returned within thirty (30) calendar days of
the issuance of the return authorization number. Freight costs shall be paid by
COMPANY. MS shall issue COMPANY a purchase credit in the amount of the
authorized return.
3.3 Distribution Restrictions
Nothing in this Addendum authorizes the Large Account Reseller to use Select
Software Products internally or to distribute or otherwise transfer Select
Software Products to any Large Account Reseller Affiliate without the prior
written consent of MS.
3.4 COMPANY Acceptance of Enrollment Agreements
In order to remain authorized to purchase Select Software Products and
Documentation Components from MS for resale to Select Customers, an authorized
representative of COMPANY must review and acknowledge the Select Customer's
Enrollment Agreement. COMPANY's signature on the Enrollment Agreement shall
<PAGE> 18
constitute COMPANY's agreement to pay MS as set forth in Section 3.6 below for
all copies of Select Software Products made by the Select Customer pursuant to
the Select License Agreement.
3.5 COMPANY Select Price Schedule
COMPANY's prices are set forth on the COMPANY Select Price Schedule, a sample of
which is attached hereto and incorporate herein by reference as Schedule B. MS
may modify the COMPANY Select Price Schedule at any time by providing thirty
(30) days written notice to COMPANY.
3.6 COMPANY's Reporting and/or Ordering and Payment to MS
(a) Microsoft Select 2.x Enrollment Agreement Reporting
For each executed Microsoft Select version 2.x Enrollment Agreement, the Select
Customer is obligated by the terms of the Microsoft Select Program to deliver to
MS within fifteen (15) days of the end of each calendar quarter, a written
verified report for each Select Software Product acquired from COMPANY pursuant
to the terms of this Agreement. Following receipt of a report from a given
Select Customer, MS shall invoice COMPANY and COMPANY shall be obligated to pay
MS the fees set forth on Schedule B for each unit reported by the Select
Customer. If the Select Customer delivers written verified reports at intervals
shorter than the quarterly requirement, MS shall invoice COMPANY immediately
following receipt of such report, and COMPANY shall be obligated to pay MS
pursuant to the terms of this Section 3.6. In the event COMPANY wants to receive
copies of its Select Customers' quarterly reports, COMPANY shall negotiate with
its Select Customers for the right to receive such copies.
(b) Microsoft Select Consumption Reporting
For each of its executed Microsoft Select version 3.0 and 4.0 Enrollment
Agreements, COMPANY shall deliver to MS via Electronic Data Interchange ("EDI")
no later than the fifteenth (15th) day of each calendar month, a purchase order
for each Select Software Product ordered and acquired in the previous month from
COMPANY by the Select Customer pursuant to the terms of this Addendum.
<PAGE> 19
Following receipt of such purchase order, MS shall invoice COMPANY and COMPANY
shall be obligated to pay MS according to the Schedule B prices, along with any
applicable quarterly Maintenance fees. If the Select Customer elects to pre-pay
any or all of its Maintenance commitment, COMPANY shall immediately report such
pre-payment to MS, MS shall invoice COMPANY immediately following receipt of
such report, and COMPANY shall be obligated to pay MS pursuant to the terms of
this Section 3.6.
(c) Payment Terms
All amounts are due and owing net thirty (30) days of date of invoice. All
payments not received by MS from COMPANY within the required time frame may be
assessed a finance charge of two percent (2%) of the invoice amount per month or
the legal maximum, which ever is less. COMPANY shall be obligated to pay MS any
and all amounts due regardless of whether COMPANY has received payment from the
Select Customer. COMPANY shall use its best efforts to collect any and all
amounts due from any Select Customer. Notwithstanding the foregoing, if any
Enterprise Customer defaults on its payment obligation to COMPANY for more than
ninety (90) calendar days, COMPANY will provide MS with written notice
identifying the Enterprise Customer and the amount of the delinquency. COMPANY
shall deliver such notice to MS at the address set forth in Section 17 of the
Channel Agreement. Provided that the Enterprise Customer certifies its inability
to pay the amounts due and MS determines that the applicable Enterprise
Agreement will be terminated, then COMPANY shall be released from any payment
obligation arising from the delinquent Enterprise Customer's account.
All payments shall be in the form of bank wire transfer or electronic funds
transfer through an Automated Clearinghouse ("ACH") with electronic remittance
detail attached.
Payments shall be remitted to::
Microsoft North American Collections # (omitted)
Account # (omitted)
<PAGE> 20
ABA: # (omitted)
NationsBank of Texas, N.A.
All payments must be sent to NationsBank at the address indicated above using
the 820 Remittance EDI transaction set or other form of ACH payment with
electronic remittance detail attached. Remittance detail must be received by
NationsBank by 10:00AM Central time/8:00AM Pacific time to ensure same-day
credit to COMPANY's account. COMPANY may not withhold payment or take deductions
prior to MS issuing credit for rebates, price adjustments, billing errors or any
other credit memo issued by MS.
(d) Report Revisions
COMPANY shall use its best efforts to process all adjustments of Microsoft
Select Software Products within ninety (90) days from the original invoice date.
All revised reports must provide detailed back-up as required by MS. MS reserves
the right to review the circumstance of all claims submitted more than one
hundred eighty (180) days from the original invoice date. and may determine
whether such revised report is eligible for credit.
(e) EDI Transaction Sets
COMPANY shall utilize EDI transaction sets Purchase Order Acknowledgment (855),
Advance Ship Notice (856), Price Catalog (832), Purchase Order Transmission
(850), and Re Invoices (810). MS may elect, during the term of this Addendum, to
require COMPANY to implement Backorder Reports using EDI transaction set 870
and/or other EDI transaction sets or forms of electronic commerce. Should MS
require such transaction sets, MS shall provide COMPANY with no less than one
hundred twenty (120) days prior written notice. All required EDI transaction
shall be submitted in accordance with the EDI Guidelines as provided to COMPANY
by MS
3.7 Sales Taxes
COMPANY shall either provide MS with a bona fide resale
<PAGE> 21
certificate for all Select Software Products delivered to COMPANY by MS pursuant
to the terms of this Addendum, or shall pay to MS all applicable sales, use or
other excise taxes due on such Select Software Products. COMPANY shall
indemnify, defend and hold harmless MS from any tax liabilities arising from or
related to any failure by COMPANY to comply with this Section 3.7 to the
Addendum.
3.8 Agreements Between COMPANY and Select Customers
With the exception of the terms contained in this Addendum and the terms
relating to the exercise of the intellectual property rights set forth in the
applicable Select Software Products, the applicable License Agreement for such
Select Software Products, Master Agreement and Enrollment Form, COMPANY shall
have complete discretion to establish with each Select Customer the pricing and
all other terms and conditions regarding COMPANY's provision of Select Software
Products and their associated license rights to COMPANY's Select Customers. The
negotiation of these terms between COMPANY and its Select Customers shall not be
subject to approval or review by MS in any way.
3.9 Role of the Select Program Administrator
COMPANY agrees to appoint a representative to serve as COMPANY's Select Program
Administrator. COMPANY agrees to promptly make that individual, as well as
COMPANY's other sales employees, available for training on the Microsoft Select
Program and on the licensing policies related to such products at such times and
places as MS reasonably requests. The individual appointed by COMPANY as its
Select Program Administrator shall be an individual generally knowledgeable of
MS products and of Microsoft's Select Program. The Select Program Administrator
shall be responsible for administering all of COMPANY's Select Customer billings
and transactions, contract compliance, for general administration of COMPANY's
Select Customers, disseminating all program information as necessary within
COMPANY's organization, and for working with the Microsoft Select Account
Manager (or local MS Contact) in regard to any problems relevant to a given
Select Customer. COMPANY's Select Program
<PAGE> 22
Administrator shall be:
(OMITTED)
WAREFORCE, INCORPORATED
2361 ROSECRANS #155
EL SEGUNDO, CA. 90245
COMPANY shall provide MS with at least ten (10) days advance written notice of
any change in the individual serving as its Select Program Administrator.
3.10 Enrollment of New Select Customers
COMPANY's solicitation of new Select customers shall be on such terms and
conditions as MS specifies from time to time. MS reserves the right to accept or
reject in its sole discretion any proposed customer.
3.11 COMPANY's Representations and Warranties
COMPANY hereby represents and warrants that COMPANY shall:
(a) Have email availability, Internet access, and an active VLOR
account as is necessary to perform COMPANY's obligations pursuant to this
Addendum;
(b) Use its best efforts to service and support its Select Customers
and will promptly inform the appropriate Microsoft Select contact of any
difficulties it encounters in servicing its Select Customers;
(c) Not alter in any way or form the Select Software Products or their
packaging;
(d) Deliver the Select Software Products only to the Select Customer
specified on the outside of the Select Software Product packaging and will
deliver CD-ROMs and program materials
<PAGE> 23
and information only to the Select Customer named on each such CD-ROM or
materials; and
(e) Promptly inform MS of any known or suspected violations by a
Select Customer of the terms and conditions of the Master Agreement, Enrollment
Agreement, Enrollment Form, or its Select Software Products and/or the
applicable License Agreement.
3.12 Confidentiality
CUSTOMER expressly undertakes to retain in confidence the terms and conditions
of this Addendum, and the terms and conditions of all executed Select Master
Agreements and Select Enrollment Forms which are made available to CUSTOMER.
Should CUSTOMER disclose the terms and conditions of any executed Select Master
Agreement or Select Enrollment Form, this Addendum shall immediately terminate.
CUSTOMER shall guarantee and ensure its employees' compliance with this
paragraph. CUSTOMER's obligations under this paragraph shall survive any
termination of this Agreement and shall extend to the earlier of such time as
the information is in the public domain or five (5) years following the
termination of this Agreement. This section shall not prohibit COMPANY from
disclosing such information as is specifically required by any Federal or state
authorities. Notwithstanding the foregoing, COMPANY may disclose confidential
information in accordance with any judicial or other governmental order or
request, provided that COMPANY shall immediately notify MS in writing upon its
receipt of such order or request and shall assist MS as is reasonable in seeking
any protective order or its equivalent or in limiting the scope of disclosure of
any confidential information.
3.13 COMPANY Termination of Enrollment Agreement/Form
At anytime during the Term, COMPANY shall be able to terminate its rights and
obligations related to any Enrollment Agreement/Form currently administered by
COMPANY. In order for such termination to be effective, COMPANY must notify MS
in writing of its desire to terminate its rights and obligations.
<PAGE> 24
Such notification shall include the Select Customer's name and current contact
information, Select Agreement Number, and date of execution. All notification
shall be sent via a courier service able to track package delivery. COMPANY's
rights and obligations shall terminate thirty (30) days upon receipt of the
required notice.
4. COMPANY AND MS Obligations
4.1 Delivery of Select Software Products and Select CD-ROMs.
Within fifteen (15) days of MS's approval of a given Enrollment Agreement or
Form, MS agrees to deliver to COMPANY the Select Software Products identified on
such Enrollment Each Select Software Product delivered to COMPANY will be a
custom package specific to the named Select Customer and will set forth the
Customer's Select Agreement Number and any special conditions relevant to the
named Select Customer. Select Software Products are provided in order that
COMPANY may provide the Select Software Products and their associated license
rights to the named Select Customer on such pricing and payment terms and
conditions as COMPANY and the Select Customer agree. COMPANY agrees to pay MS
for Select Software Products as set forth in Section 3.6 above. From time to
time during the term of this Addendum, MS will provide COMPANY with CD-ROMs
containing upgraded copies of the Select Software Products covered by a Select
Customer's Select Agreement COMPANY agrees to immediately deliver all CD-ROMs
and any additional MS supplied program information and materials to the named
Select Customer.
4.2 Reservation of Rights
MS expressly reserves the right at any time during the Term to terminate any
Select Customer's status as a Select Customer in the event the Select Customer
fails to comply with the terms of either the Master Agreement, the Enrollment
Form or the applicable License Agreement MS agrees to promptly notify COMPANY of
the termination of any Select Customer to whom COMPANY has distributed Select
Software Products. Following such a notice,
<PAGE> 25
COMPANY shall immediately cease the distribution of any Select Software
Products, licenses, CD-ROMs or any additional program information and materials
to the terminated Select Customer. Termination shall not, however, affect the
Select Customer's obligation to file the next due order/report and MS's right to
invoice COMPANY in regard to such order. If MS terminates a given Select
Customer, COMPANY shall not have any claim against MS or the Select Customer for
damages or lost profits resulting from such termination. COMPANY shall, however,
be entitled to invoice the Select Customer for copies of Select Software
Products reproduced by the Select Customer as set forth in the Select Customer's
final order, such invoice to be on the terms and conditions previously agreed to
between COMPANY and the Select Customer.
4.3 Obligations on Termination
In the event this Addendum is terminated for cause, MS shall be entitled to
direct all of COMPANY's Select Customers to report/order and pay to MS or to the
Select Customer's newly designated Select Large Account Reseller any and all
payments due after termination. In such an event, COMPANY shall not under any
circumstances be entitled to any portion of, or any compensation for, the Select
Customers' next orders and payments or any future orders and payments.
Termination or expiration shall not affect COMPANY's ability to perform its
obligations pursuant to this Addendum as it relates to any of COMPANY's existing
Enrollment Agreements. However, COMPANY shall have no right to enter into
additional Enrollment Agreements, or to present itself as a Large Account
Reseller.
4.4 Essential Element
Both COMPANY and MS acknowledge that this Addendum is essential to any agreement
it enters into with a Select Customer. Except as is specifically provided in
Section 4.3 related to COMPANY's right to collect any outstanding payment
following termination of this Addendum, COMPANY's rights to acquire and/or
distribute Select Software Products, Select CD-ROMs and/or any additional
program information and materials, and to collect payment from
<PAGE> 26
its Select Customers are conditional upon this Addendum being in full force and
effect. COMPANY acknowledges further that, if and when it is the subject of a
bankruptcy filing (under any Chapter of 11 United States Code Section 101 et
seq. including any future amendments), then assumption of any contract with a
Select Customer is conditional upon the assumption of this Addendum.
5. Agreement and Addendum Terms
If any terms and conditions in this Addendum conflict with the term and
conditions in the Agreement, with respect to COMPANY's authorization as a Large
Account Reseller only, the terms and conditions of this Addendum shall control.
6. Survival
Sections 3.6, 3.7, 3.12, 4.3, and 6 shall survive any termination of this
Addendum.
IN WITNESS WHEREOF, the parties have signed this Addendum on the date indicated
below. This Addendum is hereby made part of the Agreement. All terms and
conditions of the Agreement not supplemented herein shall remain in full force
and effect. This Addendum is not binding until executed by MS.
MICROSOFT CORPORATION ("MS") WAREFORCE, INC. ("COMPANY")
By: /s/ Bill Henningsgaard By: /s/ Orie Rechtman
----------------------------- -----------------------------
Bill Henningsgaard ORIE RECHTMAN
- --------------------------------- -----------------------------
Name (please print) Name (please print)
General Manager. US Headquarter Sales CEO
- ------------------------------------- -----------------------------
Title Title
5/19/98 5-18-98
- ------- -------
Date Date
<PAGE> 27
Schedule A
Definitions
"Documentation Components" shall mean the supplemental disk sets and
Product documentation available from Microsoft World Wide Fulfillment
"Enrollment Agreement" shall mean the Microsoft Select Enrollment Agreement
in the form provided by MS to be signed by each Select Customer and MS, and
approved by COMPANY.
"Enrollment Agreement Number" shall mean the number assigned by MS to a
given Enrollment Agreement.
"Enrollment Form" shall mean the Microsoft Select Enrollment Form in the
form provided by MS to be signed by each Select Customer and MS.
"Enterprise Customer" shall mean any company having a valid Enterprise
Enrollment Agreement under MS's Select volume licensing program.
"Large Account Reseller" shall mean any reseller which MS has authorized to
distribute licenses to Select Customers.
"Large Account Reseller Affiliate" shall mean any entity which owns,
controls, is owned or controlled by, or under common ownership or control with
the Large Account Reseller. For the purposes of this Addendum, an entity is
"controlled" by another if that other company or legal entity, either directly
or through its control of another company or legal entity: (i) holds the
majority of voting rights in it; (ii) is a member of it and has the right to
appoint or remove a majority of its board of directors; or (iii) is a member of
it and controls alone or under an agreement with other shareholders or members,
the majority of the voting rights in it.
"Lead Customer" shall mean the company or entity signing a Master
Agreement.
<PAGE> 28
"Lead Customer Affiliate" shall mean a company or legal entity which owns
and controls, is owned or controlled by, or is under common ownership and
control with, the Lead Customer.
"License Agreement(s)" shall mean the license agreement attached to the
Enrollment Form.
"Master Agreement" shall mean the Microsoft Select Master Agreement in the
form provided by MS to be signed by a given Select Customer or an entity acting
on behalf of the Select Customer.
"Master Agreement Number" shall mean the number assigned by MS to a given
Master Agreement.
"Select Customer" shall mean the Lead Customer, any Lead Customer Affiliate
and for identifiable division, business unit or office location of the Lead
Customer or Lead Customer Affiliate identified as the Select Customer on an
Enrollment Form or identified as an "Enrollment Customer", as that term is
defined in the Microsoft Select version 4.0 or in any Enrollment Agreement This
definition shall also include "Enrollment Customers" as such terms are defined
in the Microsoft Select version 4.0.
"Select Program Administrator" shall mean the individual appointed by
COMPANY to act as COMPANY's primary contact with respect to the Microsoft Select
Program.
"Select Software Product" shall mean the MS software as designated from
time to time by Microsoft which may be reproduced pursuant to an Enrollment
Form, excluding Documentation Components.
Schedule B
COMPANY Select Price Schedule
(OMITTED)
<PAGE> 1
Exhibit 10.5
BY AND BETWEEN
COUNTY OF LOS ANGELES
AND
WAREFORCE, INC.
FOR
PERSONAL COMPUTERS, PERIPHERALS, SOFTWARE
AND RELATED SERVICES
September 1, 1997
COUNTY OF LOS ANGELES
INTERNAL SERVICES DEPARTMENT
AGREEMENT NO. 56881
MASTER AGREEMENT BETWEEN
COUNTY OF LOS ANGELES
AND WAREFORCE, INC.
FOR PERSONAL COMPUTERS, PERIPHERALS, SOFTWARE, AND RELATED SERVICES,
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1.0 PURPOSE
1.1 Priority of Interpretation
1.2 Entire Master Agreement
2.0 DEFINITIONS
2.1 Day(s)
2.2 Eligible Vendor
2.3 Fiscal Year
2.4 Normal Working Hours
2.5 Master Agreement
2.6 Services
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
3.0 CHANGE NOTICES AND AMENDMENTS
3.1 Master Agreement Changes
4.0 WORK
4.1 Non-transferable Responsibilities
4.2 Assignment and Subcontracting
4.3 Time is of the Essence
5.0 TERM OF AGREEMENT
5.1 Term
5.2 Termination
5.3 Extension
6.0 METHOD OF PURCHASE, INVOICING AND PAYMENTS
6.1 Purchase Order(s)
6.2 Prices
6.3 Warranty and Product Compliance
6.4 Invoice and Payment Terms
6.5 Product/Equipment Pricing and Maintenance
6.6 Independent CONTRACTOR Status
7.0 INDEMNIFICATION AND INSURANCE
7.0 Indemnification
7.1 Insurance
7.3 Liability Insurance
7.4 Failure to Procure Insurance
8.0 RECORDS, DOCUMENTS AND AUDITS
8.1 Publicity
9.0 EMPLOYMENT ELIGIBILITY VERIFICATION
10.0 CAPTIONS AND PARAGRAPH HEADINGS
11.0 WAIVER
12.0 GOVERNING LAW, JURISDICTION AND VENUE
13.0 SEVERABILITY
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
14.0 PROHIBITION OF HIRING
15.0 TERMINATION FOR GRATUITIES
16.0 TERMINATION FOR IMPROPER CONSIDERATION
17.0 TERMINATION FOR INSOLVENCY
18.0 TERMINATION FOR CONVENIENCE
19.0 TERMINATION FOR FAILURE TO OPERATE IN ORDINARY COURSE
20.0 COUNTY AUDIT SETTLEMENTS
21.0 CONFLICT OF INTEREST
22.0 FORCE MAJEURE
23.0 MOST FAVORED PUBLIC ENTITY
24.0 DAMAGE TO COUNTY FACILITIES, BUILDINGS OR ENTITY
25.0 RESTRICTIONS ON LOBBYING
25.1 COUNTY Projects
26.0 NOTICES
27.0 WARRANTY
28.0 VARIATION OF TERMS
29.0 CANCELLATION OF ORDERS
30.0 NON-EXCLUSIVE AGREEMENT
31.0 COMPLIANCE WITH APPLICABLE LAW
32.0 FAIR LABOR STANDARDS
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
33.0 NONDISCRIMINATION AND AFFIRMATIVE ACTION
34.0 PARTICIPATING MUNICIPALITIES
35.0 CONSUMPTION REPORTS/ITEM NUMBERS/RESTRICTED PURCHASES
36.0 ORDERING REQUIREMENTS
37.0 SHIPPING INSTRUCTIONS
38.0 LIMITATION OF COUNTY'S OBLIGATION DUE TO NON-APPROPRIATIONS OF FUNDS
AUTHORIZATION OF MASTER AGREEMENT
</TABLE>
EXHIBITS
EXHIBIT A - VENDOR'S EEO CERTIFICATION
EXHIBIT B - VENDOR'S PROPOSAL (Not Attached)
EXHIBIT C - COUNTY'S REQUEST FOR PROPOSALS (Not Attached)
MASTER AGREEMENT BETWEEN
COUNTY OF LOS ANGELES
AND WAREFORCE INC
FOR PERSONAL COMPUTERS, PERIPHERALS, SOFTWARE, AND RELATED SERVICES.
1.0 PURPOSE
This Personal Computers, Peripherals, software, and Related Services, Master
Agreement (hereafter "Master Agreement") is made and entered into by and between
the County of Los Angeles (hereafter "COUNTY"), and WAREFORCE, INC. (hereafter
"VENDOR").
WHEREAS, COUNTY and VENDOR agree that VENDOR will offer to provide COUNTY,
COUNTY employees and others as more fully described herein Personal Computers,
Peripherals, Software and Related Services hereafter sometimes referred to as
the ("Product/equipment and Services", and/or "Services", or
<PAGE> 5
"Product/Equipment").
WHEREAS, VENDOR is in the business of selling and supplying Computer Equipment,
Software and Related Services;
WHEREAS, VENDOR is willing and able to offer, deliver, service and support The
products/equipment it offers to, COUNTY departments/divisions, COUNTY
offices/organizations, COUNTY employees, and any other entities as set forth
herein (hereafter "Customer(s)").
This document together with the exhibits identified in Paragraph 1.1 Priority of
Interpretation), defines the scope of this Agreement.
1.1 Priority of Interpretation
This document without exhibits is referred to as the "Base Agreement". The Base
Agreement. Exhibit A, is attached to and forms a part of this Master Agreement.
Exhibits B, and C, referenced below but not attached, are hereby incorporated
herein by reference. Any reference throughout the Base Agreement and each of its
exhibits to the "Master Agreement" shall, unless the context clearly denotes
otherwise, denote the Base Agreement with all exhibits hereby incorporated. In
the event of any conflict or inconsistency in the definition or interpretation
of any word, responsibility, schedule, or the contents or description of any
task, deliverable, service, or other work, or otherwise, between the Base
Agreement and the exhibits, or between exhibits, such conflict or inconsistency
shall be resolved by giving precedence first to the body of this Master
Agreement, and then to the exhibits according to the following priority:
1. EXHIBIT A - VENDOR's EEO Certification
2. EXHIBIT B - VENDOR's Proposal (not attached)
3. EXHIBIT C - COUNTY's Request for Proposals (RFP/not attached)
<PAGE> 6
1.2 Entire Master Agreement
This Master Agreement incorporates and supersedes all previous agreements,
written and oral, and all prior and contemporaneous communications between the
parties, regarding this subject. COUNTY reserves the right to initiate change to
any provision of this Master Agreement. All such changes shall be accomplished
only by mutually signed Amendments, as provided under this Paragraph 1.2 No
change hereto shall be valid unless in the form of a signed Amendment prepared
and approved pursuant to Subparagraph 3.0 (Change Notices and Amendments).
2.0 DEFINITIONS
The following terms shall have the following meaning and use herein. Capitalized
terms used in this Master Agreement, not defined in this Paragraph 2.0, shall
have the meaning ascribed to them elsewhere in this Master Agreement or in the
exhibits.
2.1 Day(s)
"Day(s)" means calendar day(s) unless otherwise specified.
2.2 Eligible Vendor
"Eligible Vendor" identifies a Vendor whose evidences of insurance, as required
by Paragraph 8.0 (Indemnification and Insurance), have all been received by
Purchasing and Central Services, as set for in Section 27.0 (Notices), and are
valid and in effect at the time of a given Purchase Order solicitation under
this Master Agreement.
2.3 Fiscal Year
"Fiscal year" means the twelve (12) month period beginning July 1st and ending
June 30th.
2.4 Normal Working Hours
"Normal Working Hours" means one of the following work schedules, according to
individual COUNTY department policy, excluding COUNTY holidays:
A. "5/40", which is normally eight (8) hours per day Monday through
Friday ("Working Days "), with starting and ending times
departmentally established;
<PAGE> 7
B. "9/80", which is a flexibility arranged nine (9) hours on each of
eight Working Days in a given two-week period, plus 8 hours arranged,
per department policy, on the ninth Working Day; or
C. "4/40", which is a flexibly arranged ten (10) hours on each of four
fixed Working Days each week, with starting and ending times
departmentally established.
2.5 Master Agreement
"Master Agreement" means COUNTY's standard agreement entitled "Personal
Computers, Peripherals, Software, And Related Services, Master Agreement," as
specified in Paragraph 1.1, copies of which are separately executed between
COUNTY and individual Qualified Vendors, and which sets forth the terms and
conditions for the provision of Computer Equipment, Software, Supplies And
Services, Master agreement to COUNTY. COUNTY shall execute Master Agreements
with as many vendors as COUNTY deems qualified and appropriate for COUNTY needs.
All Master Agreements shall be undertaken with terms of equal duration as set
forth in Paragraph 5.0 (Term of Agreement). Undertaking this Master Agreement
does not grant any right to compensation to VENDOR, or to vendors in the
aggregate.
2.6 Services
* On-Line
* Toll Free Telephone line
* Facsimile transmissions
* Up to date, easy to access, product information (Technical Specs)
* Dedicated Technical Support (Toll Free Number)
* Printed Catalogs/Pricers (If Requested)
* Prompt On-Site installation and warranty repair of equipment
* Up to date, easy to access, customer specific Electronic Catalog
* Up to date, easy to access, customer specific On-Line capabilities
* Reporting Capabilities
<PAGE> 8
* E-Mail Capabilities
* E.D.I. Capabilities
* Order Acknowledgment/Order Tracking
(Status-Back Order-Shipping Info, etc.)
Deliveries
* 3 to 5 days (maximum) for In Stock Items
* 5 to 7 days (maximum) for Configured Systems
* Direct deliveries to all facilities
* Desk Top deliveries capabilities
* Will Calls (if needed)
Customized Monthly/Quarterly/Annual Usage Reports
* By User Department or Participating Government Agency
* For all Hardware Purchases
* For all Software Purchases
* For all Services Contracted
* As requested by any User Department or Participating Government Agency
Dedicated Team to Servicing Agreement
* In House Sales (support) Team
* Outside Sales Team
* Technical Support Team (Hardware/Software)
Hardware & Software
* System Configuration
* Warranty tracking
* Asset Management Capabilities
* Copying Capabilities (Software)
* Maintenance and Upgrade Services
Training
* Certified by Software Manufacturers
(Novell - GNE - Microsoft - Lotus - Unix etc.)
* On-Site Training
* Off-Site Training
<PAGE> 9
3.0 CHANGE NOTICES AND AMENDMENTS
3.1 Master Agreement Changes
3.1.1 For any change which affects the period of performance, payments, or any
term or condition included in this Master Agreement, a negotiated Amendment to
this Master Agreement shall be prepared and executed by COUNTY's Purchasing
Agent and VENDOR's originally executing authorized Officials, or designees.
3.1.2 For any change which does not affect the, period of performance, payments,
or any rights or obligations of this Master Agreement, a Change Notice shall be
prepared and executed by COUNTY's Purchasing Agent and VENDOR.
4.0 WORK
VENDOR shall fully complete and timely deliver, pursuant to standards,
requirements, and schedules either presently incorporated in or to be developed
hereunder, all tasks, deliverables, sub-deliverables, goods, services, and other
work as set forth herein and elsewhere hereunder.
4.1 Non-transferable Responsibilities
No assumption or takeover of any of VENDOR's duties, responsibilities, or
obligations, or performance of same by any entity other than VENDOR, whether
through assignment, subcontract, delegation, merger, buyout, or any other
mechanism, with or without consideration, for any reason whatsoever, may occur
without COUNTY's express prior written approval.
If any such assumption, takeover, or unauthorized performance does occur without
such prior written approval, this Agreement will become void for failure of its
essential purpose. Such act is therefore a material breach of this Agreement,
upon which COUNTY may pursue any lawful remedy.
4.2 Assignment and Subcontracting
VENDOR shall not assign its rights, delegate its duties or subcontract any
performance of our Agreement
<PAGE> 10
without the express prior written consent of COUNTY. Any assignment,
delegation or subcontract without such express prior written consent shall
be null and void and shall constitute a material breach of this Agreement,
upon which COUNTY may immediately terminate the Agreement in accordance
with the provisions of paragraph 17.0 (TERMINATION BY DEFAULT).
4.3 Time is of the Essence
Time is of the Essence. If any anticipated or actual delays arise, VENDOR shall
immediately so notify COUNTY. Regardless of notice if deliveries are not made at
the time agreed upon, COUNTY may, at its sole discretion, terminate this
Agreement and proceed pursuant to Paragraph 17.0 (termination BY DEFAULT).
5.0 TERM OF AGREEMENT
5.1 This Agreement is awarded for a period of three (3) years, including a six
(6) month probationary period commencing upon execution by COUNTY'S Purchasing
Agent, or designee, indicated on the signature page.
The six (6) month probationary period shall include the evaluation of the
performance of services rendered within this Agreement, including on-time
delivery of products, testing, implementation, configuration, copying of
software, asset management, technical support, maintenance/upgrade services,
training and electronic ordering/reporting/invoicing/tracking capabilities.
Upon successful completion of the six (6) month probationary period, the period
of this Agreement will continue through the remainder of the three (3) year
term, unless sooner terminated, in whole or in part, as provided herein. This
Agreement may be extended up to a maximum of two (2) additional years beyond the
initial period upon executed approval by both COUNTY'S Purchasing Agent and
VENDOR'S Authorized Official.
<PAGE> 11
In the event the six (6) month probationary period is not successful, this
agreement will be terminated in its entirety. The County of Los Angeles shall be
sole judge in this decision.
5.2 Termination
This Agreement may be canceled by either party, after the initial 12 months of
the Agreement period, upon sixty (60) days written notice. The COUNTY may
continue to place orders against said Agreement until the effective date of such
cancellation.
5.3 Extension
5.3.1 The COUNTY's Purchasing Agent may exercise the option to extend the Master
Agreement period for two (2) additional twelve (12) month periods as set forth
in Paragraph 3.0 (Change Notices and Amendments), of this Master Agreement.
5.3.2 COUNTY shall notify VENDOR of any determination to extend this Agreement
no less than Thirty (30) days prior to the beginning of the relevant option
year.
6.0 METHOD OF PURCHASE, INVOICING AND PAYMENTS
6.1 Purchase Order(s)
6.1.1 COUNTY shall purchase the items listed herein by issuance of a formal
purchase order. Such purchase order shall contain the terms and conditions
applicable for that purchase. Notwithstanding anything herein to the contrary,
the purchase order, as specifically noted, shall govern and control the
applicable purchase. -Preprinted additional or different terms and conditions on
the purchase order will be of no force or effect.
6.1.2 VENDOR shall not deliver products and/or goods to COUNTY as loaner
equipment or for trial unless and until a "No Charge" purchase order and loan
agreement is received by VENDOR from COUNTY.
<PAGE> 12
6.2 Prices:
6.2.1 VENDOR agrees for the period of this Agreement that prices for products
covered herein will be based on a Cost Plus arrangement.
6.2.2 Notwithstanding anything herein to the contrary for thirty (30) days from
date of delivery to Customer, should Customer find a lower price, offered in
Southern California, for the same product, payment terms, quantity and delivery
terms and conditions set forth in the applicable purchase order and this
Agreement, VENDOR shall, upon presentation of authentic, (e.g. sales invoice,
advertisement(s) proof of such, immediately refund the difference to Customer.
This paragraph shall not apply to special and/or one-time offers, liquidation
sales and discounted product(s). Further, COUNTY contract VENDORS and
non-authorized resellers where required by the manufacturer, are excluded
6.3 Warranty and Product Compliance
6.3.1 All equipment provided to COUNTY must be new, unused, and be approved by
either U.L., L.A. City Testing Lab, Factory Mutual Corp. or ETL testing labs.
Further, equipment provided to COUNTY shall meet other such standards as the
COUNTY may require.
6.4 INVOICES AND PAYMENT TERMS
6.4.1 In no event shall the COUNTY be liable for any late fees or charges.
6.4.2 Invoices shall bear upon their face the Purchase Order number which
appears in the upper right-hand corner hereof. Invoices must state that they
cover, as the case may be, complete or partial delivery, and must show unit and
unit prices. Invoices will not be paid unless and until the requirements have
been fully met. All transportation and delivery charges must be prepaid in full
to destination.
6.4.3 Unless otherwise set forth on the applicable purchase order, payment terms
are net thirty (30) days from receipt of a
<PAGE> 13
properly prepared and submitted invoice. In no event shall COUNTY be liable for
any late charges. Invoices shall only be issued after COUNTY'S acceptance of the
goods and/or products. Discounts shall be set forth herein.
6.5 Product/Equipment Pricing and Maintenance
6.5.1 VENDOR will be solely responsible for the maintenance of the Agreement and
will document all additions, deletions, manufacturers' discontinuance of
products/equipment, and all associated variables Including pricing revisions.
Any changes, substitutions, additions, deletions and/or pricing revisions must
be reviewed and approved by the COUNTY and VENDOR in writing prior to any
inclusion to the Agreement.
6.5.2 Said notification and approval shall be binding upon the COUNTY and
VENDOR. Upon such approval the Agreement shall be deemed to be amended to
include such changes. All documentation and formal approvals and revised copies
of the effected Agreement page(s) reflecting current release revisions will be
submitted to:
County of Los Angeles Internal Services Department
Purchasing and Central Services
2500 South Garfield Avenue
Commerce, CA 90040
Attn: Personal Computer Buyer
6.6 Independent CONTRACTOR Status
6.6.1 This Master Agreement is by and between COUNTY and VENDOR and is not
intended, and shall not be construed, to create the relationship of agent,
servant, employee, partnership, joint venture, or association, as between COUNTY
and VENDOR. The employees and agents of one party are not the employees or
agents of the other party for any purpose whatsoever.
6.6.2 VENDOR understands and agrees that all persons performing work pursuant to
this Master Agreement are, for purposes of workers' compensation liability,
solely employees of VENDOR and
<PAGE> 14
not employees of COUNTY. VENDOR shall be solely liable and responsible for
furnishing any and all workers' compensation benefits to any person as a result
of any injuries arising from or connected with any work performed by or on
behalf of VENDOR hereunder.
6.6.3 The employees and agents of each party, shall, while on the premises of
the other party, comply with all rules and regulations of the premises,
including, but not limited to, security requirements.
7.0 INDEMNIFICATION AND INSURANCE
7.1 Indemnification
VENDOR agrees to indemnify, defend and hold harmless COUNTY, COUNTY Special
Districts, and Participating Government entities and their elected and appointed
officers, employees, and agents, from and against any and all liability and
expense, including defense costs and legal fees, arising from or connected with
claims and lawsuits connected with VENDOR'S operations, goods and/or commodities
or services provided hereunder as well as for damages a or worker' s
compensation benefits relating to VENDOR's and its subcontractors operations and
services, which result from bodily and/or personal injury, death, or property
damage (including physical damage to VENDOR's and its subcontractors' property,
or property in the care, custody, or control of VENDOR and/or its
subcontractors). This indemnity shall include, but not be limited to claims for
or by reason of any actual or alleged infringement of any United States patent
or copyright or any actual or alleged trade secret disclosure.
7.2 Insurance
Without limiting VENDOR's indemnification of COUNTY, and during the term of this
Agreement, VENDOR shall provide and maintain at its own expense the
below-described programs of insurance. Such programs and evidence of insurance
shall be satisfactory to COUNTY and shall be primary to and not contributing
with any other insurance maintained by COUNTY. Certificates or other
<PAGE> 15
evidence of coverage shall be delivered to:
County of Los Angeles
ISD/Purchasing & Central Services
2500 South Garfield Avenue
Commerce, California 90040
Attn: Personal Computer Buyer
Prior to commencing performance under this Agreement, shall specifically
identify this Agreement, and shall contain the express condition that COUNTY is
to be given written notice by certified mail at least thirty (30) days in
advance of any modification or termination of insurance.
7.3 Liability Insurance
7.3.1 Any and all insurance described below shall be endorsed naming the County
of Los Angeles as an additional insured, and shall include:
7.3.2 General liability insurance written on a commercial general liability form
or on a comprehensive general liability form covering the hazards of
premises/operations, products/completed operations, contractual, broad form
property damage, independent contractors, and personal and advertising injury
with a combined single limit of not less than One Million Dollars ($1,000,000)
per occurrence.
A. If written with an annual aggregate limit, the policy limit shall
be three times the above required occurrence limit.
B. If written on a claims made form, the VENDOR shall provide an
extended two (2) year reporting period commencing upon expiration or
termination of this Agreement.
7.3.3 Comprehensive auto liability insurance endorsed for all owned, non-owned
and hired vehicles with a combined single limit of not less than Three Hundred
Thousand Dollars ($300,000) per occurrence.
<PAGE> 16
7.3.4 A program of workers' compensation insurance in an amount and form to meet
all applicable requirements of the California Labor Code including employer's
liability with a limit no less than One Million Dollars ($1,000,000), covering
all persons performing work on behalf of VENDOR and all risks to such persons
under this Agreement.
7.3.5 Crime Coverage: Insurance in an amount not less than $1,000,000 covering
against loss of money, securities, or other property referred to hereunder which
may result from employee dishonesty, forgery or alteration, theft, disappearance
and destruction, computer fraud, burglary and robbery. Such insurance shall name
COUNTY as loss payee.
7.4 Failure to Procure Insurance
Failure on the part of VENDOR to obtain and maintain all required insurance
coverage is a material breach upon which COUNTY may, in its sole discretion,
immediately suspend VENDOR's performance or terminate this Agreement.
8.0 RECORDS, DOCUMENTS AND AUDITS
VENDOR shall maintain accurate and complete financial records of its activities
and operations relating to this Agreement in accordance with generally accepted
accounting principles. VENDOR shall also maintain accurate and complete
employment and other records relating to its performance of this Agreement.
VENDOR agrees that COUNTY, or its authorized representatives, shall have access
to and the right to examine, audit, excerpt, copy or transcribe any pertinent
transaction, activity, or records relating to this Agreement. All financial
records, timecards and other employment records, and proprietary data and
information, shall be kept and maintained by VENDOR and shall be made available
to COUNTY during the term of this Agreement and for a period of four years
thereafter unless COUNTY's written permission is given to dispose of any such
material prior to such time. All such material shall be maintained by VENDOR at
a location in Los Angeles County, provided that if any such material is located
outside Los Angeles County, then, at COUNTY's
<PAGE> 17
option, VENDOR shall pay COUNTY for travel, per diem, and other costs incurred
by COUNTY to examine, audit, excerpt, copy or transcribe such material at such
other location.
In the event that an audit is conducted of VENDOR specifically regarding this
Agreement by any Federal or State auditor, or by any auditor or accountant
employed by VENDOR or otherwise, then VENDOR shall file a copy of the audit
report with COUNTY's Auditor-Controller within thirty days (30) of VENDOR's
receipt thereof, unless otherwise provided by applicable Federal or State law or
under this Agreement. COUNTY shall make a reasonable effort to maintain the
confidentiality of such audit report(s).
Failure on the part of VENDOR to comply with the provisions of this Paragraph
10.0 shall constitute a material breach upon which COUNTY may terminate or
suspend this Agreement.
8.1 Publicity
VENDOR shall not disclose any details in connection with this Agreement to
any person or entity except as may be otherwise provided herein or required by
law. However, in recognizing VENDOR's need to identify its services and related
clients to sustain itself, COUNTY shall not inhibit VENDOR from publishing its
role under this Agreement, with the following conditions:
A. VENDOR shall develop all publicity material in a professional manner.
B. During the term of this Agreement, VENDOR shall neither, authorize
another to, nor publish or disseminate any commercial advertisements,
press releases, feature articles, or other materials using the name of
COUNTY without the prior written consent of COUNTY's Purchasing Agent
COUNTY shall not unreasonably withhold written consent, and approval
by COUNTY may be assumed in the event no adverse comments are received
in writing within two weeks after submittal of written request for
such consent.
<PAGE> 18
C. VENDOR may, without the prior written consent of COUNTY, indicate in
its proposals and sales materials that it has been awarded this
Agreement with the County of Los Angeles, provided that the
requirements of this Paragraph 8.0 shall apply.
9.0 EMPLOYMENT ELIGIBILITY VERIFICATION
VENDOR warrants that it fully complies with all Federal statutes and regulations
regarding the employment of aliens and others and that all its employees
performing work under this Master Agreement meet the citizenship or alien status
requirements set forth in Federal statutes and regulations. VENDOR shall
indemnify, defend, and hold harmless COUNTY, its officers, participating
government agencies and employees from and against any employer sanctions and
any other liability which may be assessed against VENDOR or COUNTY in connection
with any alleged violation of any Federal statutes or regulations pertaining to
the eligibility for employment of any persons performing work hereunder
10.0 CAPTIONS AND PARAGRAPH HEADINGS
Captions and paragraph headings used in this Master Agreement are for
convenience only and are not a part of this Master Agreement and shall not be
used in construing this Master Agreement.
11.0 WAIVER
No waiver by either party of any breach of any provision of this Master
Agreement shall constitute a waiver of any other breach or of such provision.
Failure of either party to enforce at any time, or from time to time, any
provision of this Master Agreement shall not be construed as a waiver thereof.
The rights and remedies set forth in this Paragraph 13.0 are non-exclusive and
cumulative.
12.0 GOVERNING LAW, JURISDICTION AND VENUE
This Master Agreement shall be governed by, and construed in
<PAGE> 19
accordance with, the laws of the State of California. VENDOR agrees and consents
to the exclusive jurisdiction of the courts of the State of California for all
purposes regarding this Master Agreement and further agrees and consents that
venue of any action brought hereunder shall be exclusively in the County of Los
Angeles, California.
13.0 SEVERABILITY
If any provision of this Master Agreement or the application thereof to any
person or circumstance is held invalid, the remainder of this Master Agreement
and the application of such provision to other persons or circumstances shall
not be affected, unless the essential purposes of this Master Agreement shall be
materially impaired thereby.
14.0 PROHIBITION OF HIRING
VENDOR and COUNTY agree that, during the term of this Agreement and for a period
of six months following its termination, neither party shall in any way induce
or persuade any employee of one party to become an employee or agent of the
other party. No bar exists to any hiring initiated through a public
announcement.
15.0 TERMINATION FOR GRATUITIES
COUNTY may, by written notice to VENDOR, terminate the right of VENDOR to
proceed under this Master Agreement upon one day's written notice, if it is
found that gratuities in the form of entertainment, gifts, or otherwise were
offered or given by, or any agent or representative of VENDOR, to any officer or
employee of COUNTY with a view toward securing a contract or securing favorable
treatment with respect to the awarding or amending, or the making of any
determinations with respect to the performing, of such contract. In the event of
such termination, COUNTY shall be entitled to pursue the same remedies against
VENDOR as it could pursue in the event of default by VENDOR.
<PAGE> 20
15.1 TERMINATION FOR IMPROPER CONSIDERATION
COUNTY may, by written notice to CONTRACTOR, immediately terminate the right of
CONTRACTOR to proceed under this Agreement if it is found that consideration, in
any form, was offered or given by CONTRACTOR, either directly or through an
intermediary, to any County officer, employee or agent with the intent of
securing the Agreement or securing favorable treatment with respect to the
award, amendment or extension of the Agreement or the making of any
determinations with respect to the CONTRACTOR's performance pursuant to the
Agreement. In the event of such termination, COUNTY shall be entitled to pursue
the same remedies against CONTRACTOR as it could pursue in the event of default
by the CONTRACTOR.
CONTRACTOR shall immediately report any attempt by a County officer or employee
to solicit such improper consideration. The report shall be made either to the
County manager charged with the supervision of the employee or to the County
Auditor-Controller's Employee Fraud Hotline at (213) 974-0914 or (800) 544-6861.
Among other items, such improper consideration may take the form of cash,
discounts, service, the provision of travel or entertainment, or tangible gifts.
16.0 TERMINATION FOR INSOLVENCY
COUNTY may terminate this Master Agreement forthwith in the event of the
occurrence of any of the following:
A. Insolvency of VENDOR. VENDOR shall be deemed to be insolvent if it has
ceased to pay its debts for at least sixty days in the ordinary course
of business, whether or not a petition has been filed under the
Federal Bankruptcy Code and whether or not VENDOR is insolvent within
the meaning of such laws
B. The filing of a voluntary or involuntary petition regarding VENDOR
under the Federal Bankruptcy Code.
C. The appointment of a Receiver or Trustee for VENDOR.
D. The execution by VENDOR of a general assignment for the benefit of
creditors.
<PAGE> 21
The rights and remedies of COUNTY provided in this Paragraph 19.0 shall not be
exclusive and are in addition to any other rights and remedies provided by law
or under this Master Agreement.
17.0 TERMINATION FOR DEFAULT
COUNTY may, by written notice to VENDOR, terminate the whole or any part of this
Master Agreement if, in the judgment of COUNTY's Purchasing Agent:
A. VENDOR has materially breached this Master Agreement as elsewhere
provided herein: or
B. VENDOR fails to timely provide and/or satisfactorily perform any task,
deliverable, service, or other work required under this Master
Agreement hereunder; or
C. VENDOR has assigned or delegated its duties or subcontracted any
performance of this Agreement without prior written consent by COUNTY
as elsewhere provided.
VENDOR shall not be liable for any excess costs If its failure to perform under
this Master Agreement, arises from force majeure, i.e., causes beyond the
control and without the fault or negligence of VENDOR. Such causes include, but
are not necessarily limited to: acts of God or of the public enemy, acts of
COUNTY in either its sovereign or contractual capacity, acts of Federal or State
Governments in their sovereign capacities, fires, floods, epidemics, quarantine
restrictions, strikes, freight embargoes, and unusually severe weather; but in
every case, the failure to perform must be beyond the control and without the
fault or negligence of VENDOR. If the failure to perform is caused by the
default of a subcontractor, and if such default arises out of causes beyond the
control of both VENDOR and subcontractor, and without the fault or negligence of
either, VENDOR shall not be liable for any such excess costs for failure to
perform, unless the goods or services to be furnished by the subcontractor were
obtainable from other sources in sufficient time to permit VENDOR to meet the
requirements. As used in this subparagraph the terms "subcontractor" and
"subcontractors" mean
<PAGE> 22
subcontractor(s) at any tier.
If, after COUNTY has given notice of termination under the provisions of this
Paragraph 17.0, it is determined by COUNTY that VENDOR was not in default under
these provisions, or that the default was excusable under these provisions, the
rights and obligations of the parties shall be the same as if the notice of
termination had been issued pursuant to Paragraph 18.0 (Termination for
Convenience).
The rights and remedies of COUNTY provided in this Paragraph 17.0 are
non-exclusive and cumulative.
18.0 TERMINATION FOR CONVENIENCE
This Master Agreement, may be terminated, when such action is deemed by COUNTY
to be in its best interest. Termination shall be effected by delivery to VENDOR
of a notice of termination specifying the extent to which performance of
Agreement is terminated and the date upon which such termination becomes
effective, which shall be no less than ten (10) days after the notice is sent.
After receipt of a notice of termination, VENDOR shall submit its termination
claim and invoice to COUNTY, in the form and with any certifications as may be
prescribed by COUNTY. Such claim and invoice shall be submitted promptly, but
not, later than three months from the effective date of termination. Upon
failure of VENDOR to submit its termination claim and invoice within the time
allowed, COUNTY may determine on the basis of information available to COUNTY,
the amount, if any, due to VENDOR in respect to the termination, and such
determination shall be final. When such determination is made, COUNTY shall pay
VENDOR the amount so determined.
Vendor shall honor purchase orders accepted on or before the effective date of
termination.
<PAGE> 23
19.0 TERMINATION FOR FAILURE TO OPERATE IN ORDINARY COURSE
VENDOR'S stability was and/is a primary basis for entering into and continuing
with this Agreement, therefore, COUNTY may terminate this Agreement by thirty
(30) days written notice should vendor fail to continue to do business in the
ordinary course.
20.0 COUNTY AUDIT SETTLEMENTS
If, at any time during or after the term of this Master Agreement,
representatives of COUNTY conduct an audit of VENDOR regarding the work
performed under this Master Agreement, and if such audit finds that COUNTY's
dollar liability for any such work is less than payments made by COUNTY to
VENDOR, then the difference shall be either repaid by VENDOR to COUNTY by cash
payment upon demand or, at the sole option of COUNTY, deducted from any amounts
due to VENDOR from COUNTY. If such audit finds that COUNTY's dollar liability
for such work is more than the payments made by COUNTY to VENDOR, then the
difference shall be paid to VENDOR by COUNTY by cash payment.
21.0 CONFLICT OF INTEREST
No COUNTY employee whose position with COUNTY enables such employee to influence
the award or conduct of this Master Agreement, and no spouse or economic
dependent of such employee, shall be employed in any capacity by VENDOR or have
any other direct or indirect financial interest in this Master Agreement. No
officer or employee of, nor any individual possessing any direct or indirect
financial interest in, VENDOR, may in any way participate in COUNTY's approval,
or ongoing evaluation, of such work, or in any way attempt to influence COUNTY's
approval or ongoing evaluation of such work.
VENDOR shall comply with all conflict of interest laws, ordinances and
regulations now in effect or hereafter to be enacted during the term of this
Master Agreement. VENDOR warrants that it is not now aware of any facts which
create a conflict of interest. If VENDOR hereafter becomes aware of any facts
which might reasonably be expected to create a conflict of interest, it shall
immediately make full written disclosure of such facts to
<PAGE> 24
COUNTY. Full written disclosure shall include, but is not limited to,
identification of all persons implicated and a complete description of all
relevant circumstances.
22.0 FORCE MAJEURE
Neither party will be liable for delays in performance beyond reasonable
control, including, but not limited to, fire, flood, acts of God or restriction
of civil or military authority.
23.0 MOST FAVORED PUBLIC ENTITY
VENDOR represents that the prices charged to COUNTY in this Agreement do not
exceed existing selling prices to other customers for the same or substantially
similar items or services for comparable quantities under similar terms and
conditions.
If VENDOR's prices decline, or should VENDOR, at any time during the term of
this Master Agreement, provide the same goods or services under similar quantity
and delivery conditions to the State of California or any county, municipality
or district of the State at prices below those set forth in this Master
Agreement, then such lower prices shall be immediately extended to COUNTY.
24.0 DAMAGE TO COUNTY FACILITIES, BUILDINGS OR GROUNDS
VENDOR shall repair, or cause to be repaired, at its own cost, any and all
damage to COUNTY facilities, buildings, or grounds caused by VENDOR or
employees, subcontractors or agents of VENDOR. Such repairs shall be made
immediately after VENDOR has become aware of such damage, but in no event later
than thirty days after the occurrence.
If VENDOR fails to make timely repairs, COUNTY may make any necessary repairs.
All costs incurred by COUNTY, as determined by COUNTY for such repairs shall be
repaid by VENDOR by cash payment upon demand or COUNTY may deduct such costs
from any amounts due to VENDOR from COUNTY.
<PAGE> 25
25.0 RESTRICTIONS ON LOBBYING
25.1 COUNTY Projects
VENDOR, and each COUNTY lobbyist or COUNTY lobbying firm as defined in COUNTY
Code Section 2.160.010 retained by VENDOR, shall fully comply with COUNTY's
Lobbyist Ordinance, COUNTY Code Chapter 2.160. Failure on the part of VENDOR or
any COUNTY lobbyist or COUNTY lobbying firm retained by VENDOR to fully comply
with COUNTY's Lobbyist Ordinance shall constitute a material breach of this
Agreement, upon which COUNTY may immediately terminate or suspend this
Agreement.
26.0 NOTICES
All notices or demands required or permitted to be given or made under this
Agreement shall be in writing and shall be hand-delivered with signed receipt or
mailed by first-class registered or certified mail, postage prepaid, addressed
to the parties at the following addresses:
If to COUNTY: ISD/Purchasing and Central Services
Attn: Personal Computer Buyer
2500 South Garfield Avenue
Commerce, California 90040
If to VENDOR: WAREFORCE, INC.
ATTN: DARRELL TATE
2361 ROSECRANS, STE. 155
EL SEGUNDO, CA 90245
Addressees may be changed upon ten days prior written notice.
27.0 AUTHORIZATION WARRANTY
VENDOR represents and warrants that the person executing this Agreement for
VENDOR is an authorized agent who has actual authority to bind VENDOR to each
and every term, condition and obligation of this Agreement and that all
requirements of VENDOR have been fulfilled to provide such actual authority.
<PAGE> 26
28.0 VARIATION OF TERMS
The parties hereto agree that the terms and conditions contained herein shall
prevail notwithstanding any variations on any acknowledgments, invoices or such
other documents submitted by VENDOR. Any addendum hereto shall become binding
upon the parties only after signature by authorized representatives of both
parties.
29.0 CANCELLATION OF ORDERS
COUNTY may cancel any purchase order with respect to any Supplies or equipment
ordered without incurring any cancellation charges by giving VENDOR notice of
such cancellation at least ten (10) days prior to the scheduled delivery date
specified in COUNTY's order.
30.0 NON EXCLUSIVITY
This Agreement is non-exclusive and shall not in any way preclude COUNTY from
entering into similar agreements and/or arrangements with other vendors or from
acquiring similar, equal or like goods and/or services from other entities or
sources.
COUNTY makes no representation that it or any governmental entity ill purchase
any minimum quantities or dollar amounts.
31.0 Compliance with Applicable Law
VENDOR shall comply with all applicable Federal, State and local laws, rules,
regulations, and ordinances, and all provisions required thereby to be included
in this Master Agreement are hereby incorporated herein by reference.
VENDOR warrants that the products shipped may be used in a customary manner
without violation of any law, ordinance, rule or regulation of any government or
administrative body. These laws, ordinances, rules or regulations include, but
are not limited to, CAL/OSHA and County Code Title 27 and Ordinance No. 4388
(electrical approval) and are incorporated herein by reference.
<PAGE> 27
VENDOR shall indemnify and hold harmless COUNTY from and against any and all
liability, damages, costs, and expenses, including, but not limited to, defense
costs and attorneys' fees, arising from or related to any violation on the part
of VENDOR, its employees, agents, or subcontractors of any such laws, rules,
regulations, and ordinances.
32.0 Fair Labor Standards
VENDOR shall comply with all applicable provisions of the Federal Fair Labor
Standards Act (FLSA), and shall indemnify, defend, and hold harmless COUNTY, its
officers, employees, and agents from any and all liability, including, but not
limited to, wages, overtime pay, liquidated damages, penalties, court costs, and
attorneys' fees arising under any wage and hour law, including, but not limited
to, FLSA, for work performed by VENDOR'S employees for which COUNTY may be found
jointly or solely liable.
33.0 Nondiscrimination and Affirmative Action
VENDOR certifies and agrees that all persons employed by it, its affiliates,
subsidiaries or holding companies are and will be treated equally without regard
to or because of race, color, religion, ancestry, national origin, sex, age, or
physical or mental handicap, in compliance with all applicable Federal and State
anti-discrimination laws and regulations. VENDOR shall certify to, and comply
with, the provisions of Exhibit A (VENDOR'S EEO Certification).
VENDOR shall take affirmative action to ensure that applicants are employed, and
that employees are treated during employment, without regard to race, color,
religion, ancestry, national origin, sex, age, or physical or mental handicap,
in compliance with all applicable Federal and State anti-discrimination laws and
regulations. Such action shall include, but is not limited to: employment,
upgrading, demotion, transfer, recruitment or recruitment advertising, layoff or
termination, rates of pay or other forms of compensation, and selection for
training, including apprenticeship.
<PAGE> 28
VENDOR certifies and agrees that it will deal with its subcontractors, bidders
or vendors without regard to or because of race, color, religion, ancestry,
national origin, sex, age, or physical or mental handicap.
VENDOR certifies that it is in compliance with all federal, state, and local
laws, including, but not limited to:
A. Title VI, Civil Rights Act of 1964;
B. Section 504, Rehabilitation Act of 1973;
C. Age Discrimination Act of 1975;
D. Title IX, Education Amendments of 1973, as applicable; and
E. Title 43, Part 17, Code of Federal Regulations, Subparts A & B;
and that VENDOR shall subject no person, on the grounds of race, creed, color,
national origin, political affiliation, marital status, sex, age, or handicap,
to discrimination as to any privileges or uses granted by this Agreement or
under any project, program or activity supported by this Agreement.
VENDOR shall allow COUNTY representatives access to its employment records
during regular business hours to verify compliance with the provisions of this
Paragraph 33.0 when so requested by COUNTY.
If COUNTY finds that any of the provisions of this Paragraph 33.0 have been
violated, such violation shall constitute a material breach of this Agreement
upon which COUNTY may terminate or suspend this Agreement. While COUNTY reserves
the right to determine independently that the anti-discrimination provisions of
this Agreement have been violated, in addition, a determination by the
California Fair Employment Practices Commission or the Federal Equal Employment
Opportunity Commission that VENDOR has violated State or Federal
anti-discrimination laws or regulations shall constitute a finding by COUNTY
that VENDOR has violated the anti-discrimination provisions of this Agreement.
<PAGE> 29
The parties agree that in the event VENDOR violates the anti-discrimination
provisions of this Agreement, COUNTY shall, at its, option, be entitled to the
sum of Five Hundred Dollars ($500) for each such violation pursuant to
California Civil Code Section 1671 as liquidated damages in lieu of terminating
or suspending this Agreement.
34.0 Participating Municipalities
At County's sole discretion and option, County may inform other governmental,
excluding federal, entities ("entity") that they may acquire items listed in
this agreement. Such acquisition(s) shall be at the prices stated herein, and
shall be subject to vendor's acceptance.
In no event shall County be considered a dealer, remarketeer, agent or other
representative of vendor. Further, COUNTY is not an agent, partner or
representative of the entity ordering products hereunder, and shall not be
obligated or liable for any order
Vendor and County recognize that from time to time vendor's reasonable
assistance may facilitate and expedite a presentation by the County to any
entity. Such assistance shall be provided, at no cost, by vendor upon the
written request of the County.
Entity purchase orders may, as agreed by County, be submitted by the entity or
by County. In either event, County shall be entitled to an administrative fee
of one percent (1%) of the purchase price, excluding taxes and shipping, for
each such purchase order. Payment of the fee shall be by vendor to County within
thirty (30) days of Vendor's receipt of entity's payment of the purchase order
invoice. Payment to County shall include a statement showing the entity name,
purchase order and date and purchase price. Vendor shall have no claim or right
to all or any portion of the fee.
Payment shall be made out to the County of Los Angeles and delivered to:
<PAGE> 30
County of Los Angeles
ISD/Purchasing and Central Services
2500 South Garfield Avenue
City of Commerce, CA 90040
Attn: Manager
Vendor shall, at its expense, maintain an accounting of purchases made by
entities. Such accounting shall be provided, at vendor's expense, to County's
designated location within ten (10) days of County's written request. County
reserves the right to audit any such accounting for a period of four (4) years
from the date County receives the accounting. In the event of such an audit, the
requested materials shall be provided at the location designated by County.
Vendor authorizes County's use of vendor's name, trademarks and vendor provided
materials in County's presentations and promotions regarding the availability of
use of the Agreement. County makes no representation or guarantee as to any
minimum being purchased by County or entities.
COUNTY WILL NOT BE LIABLE OR RESPONSIBLE FOR ANY OBLIGATIONS, INCLUDING, BUT NOT
LIMITED TO PAYMENT, FOR ANY ITEM ORDERED BY ENTITIES.
COUNTY makes no representation or guarantees as to any minimums being purchased
by COUNTY or ENTITIES.
35.0 CONSUMPTION REPORTS/ITEM NUMBERS/RESTRICTED PURCHASES
Each COUNTY department procurement office and participating agency is to be
assigned a customer number to be used in identifying each sale and proper
billing addresses. VENDOR is required to furnish to Purchasing monthly computer
based usage reports of purchases separated by individual COUNTY departments,
and/or delivery locations, and employee purchases, listing quantities of
separate items purchased and total dollars expended. Usage reports listing items
in alphabetical order and descending dollar volume order must also be furnished.
<PAGE> 31
VENDOR must provide any other usage reports that COUNTY departments or
participating agencies may require for their internal controls.
36.0 ORDERING REQUIREMENTS
VENDOR shall provide the ability for unlimited amount of users to order via
on-line communication with the vendors computer system by COUNTY owned PC/CRT
terminals and printers, or by FAX, telephone, direct mail or walk-in orders.
VENDOR shall design an Input Screen/Order Form to be used on all orders (which
may be supported by normal COUNTY Purchase Order Form). Cost of input form
creation, programming, future changes or modifications, and maintenance shall be
exclusively for VENDOR'S account.
VENDOR shall furnish and deliver annually catalogs and price lists to COUNTY
departments and participating government agencies.
37.0 SHIPPING INSTRUCTIONS:
(F.O.B. Destination) when proprietary equipment (company-owned vehicle) is not
used, please contact County Traffic Management at (213) 720-6883, 6884 or 6886.
38.0 LIMITATION OF COUNTY'S OBLIGATION DUE TO NON-APPROPRIATION OF FUNDS
County's obligation is payable only and solely from funds appropriated for the
purchase of this Agreement.
All funds for payments after June 30th of the current fiscal subject to County's
legislative appropriation for this purpose. Payments during subsequent fiscal
periods are dependent upon the same action.
In the event this Agreement extends into succeeding fiscal year periods, and if
the governing body appropriating the funds does not allocate sufficient funds
for the next succeeding fiscal year's payments, then the affected services shall
be terminated
<PAGE> 32
as of June 30th of the then current fiscal year. County shall notify Contractor
in writing of such non-allocation at the earliest possible date.
AUTHORIZATION OF MASTER AGREEMENT
BY AND BETWEEN
COUNTY OF LOS ANGELES AND
WAREFORCE, INC.
FOR
PERSONAL COMPUTERS, PERIPHERALS, SOFTWARE AND RELATED SERVICES
IN WITNESS WHEREOF, the County of Los Angeles has caused this Agreement
subscribed by its Purchasing Agent and VENDOR has caused this Agreement
subscribed in its behalf by its duly authorized officer, this lst day of
September l997.
COUNTY OF LOS ANGELES
WILLIAM F. STEWART
DIRECTOR, INTERNAL SERVICES
DEPARTMENT/PURCHASING AGENT
By /s/P. Price
------------------------------------
Name: P. Price
Title: Senior Deputy Purchasing Agent
--------------------------------
VENDOR
By: /s/ Orie Rechtman
-----------------------------------
Name: ORIE RECHTMAN
---------------------------------
Title: PRESIDENT
--------------------------------
<PAGE> 1
Exhibit 10.6
CERTIFICATION OF CONTRACT
TITLE: Microsoft Licenses & Maintenance BID NO.: 48-252-001-K
(Rev 31 Mar 99)
CONTRACTOR(S): Wareforce, Inc. (A)
CONTRACT NO.: 252-001-97-1
EFFECTIVE: April 1, 1997 through March 31, 2000
SUPERSEDES: 250-801-95-1
ANY QUESTIONS, SUGGESTIONS, OR CONTRACT SUPPLIER PROBLEMS WHICH MAY ARISE
SHALL BE BROUGHT TO THE ATTENTION OF KAREN ESSER AT (850) 488-7804 SUNCOM
278-7804 E-Mail: esserk@dms state.fl us
A. AUTHORITY - Upon affirmative action taken by the State of Florida
Department of Management Services on March 31, 1997, a contract has been
executed between the State of Florida and the designated contractors.
B. EFFECT - This contract was entered into to provide economies in the
purchase of Microsoft Licenses & Maintenance by all State of Florida
agencies and institutions. Therefore, in compliance with Section 287.042,
Florida Statutes, all purchases of these commodities shall be made under
the terms, prices, and conditions of this contract and with the suppliers
specified.
C. ORDERING INSTRUCTIONS - All purchase orders shall be issued in accordance
with the attached ordering instructions. Purchaser shall order at the
prices indicated, exclusive of all Federal, State and local taxes.
All contract purchase orders shall show the Division of Purchasing contract
number, product number, quantity, description of item, with unit prices
extended and purchase order totaled. _
<PAGE> 2
(This requirement may be waived when purchase is made by a blanket
purchase-order.)
TITLE: Microsoft Licenses & Maintenance
BID NO.: 48-252-001-K
CONTRACT NO.: 252-001-97-1
EFFECTIVE: April 1, 1997 through March 3l,1999
CONTRACTOR(S): Wareforce, Inc. (A)
SUPERSEDES: 250-801-95-1
ANY QUESTIONS, SUGGESTIONS, OR CONTRACT SUPPLIER PROBLEMS WHICH MAY ARISE
SHALL BE BROUGHT TO THE ATTENTION OF KAREN ESSER AT (904) 488-7804 SUNCOM
278-7804.
A. AUTHORITY - Upon affirmative action taken by the State of Florida
Department of Management Services on March 31, 1997, a contract has been
executed between the State of Florida and the designated contractors.
B. EFFECT - This contract was entered into to provide economies in the
purchase of Microsoft Licenses & Maintenance by all State of Florida
agencies and institutions. Therefore, in compliance with Section 287.042,
Florida Statutes, all purchases of these commodities shall be made under
the terms, prices, and conditions of this contract and with the suppliers
specified.
C. ORDERING INSTRUCTIONS - All purchase orders shall be issued in accordance
with the attached ordering instructions. Purchaser shall order at the
prices indicated, exclusive of all Federal, State and local taxes.
All contract purchase orders shall show the Division of Purchasing contract
number, product number, quantity, description of item, with unit prices
extended and purchase order totaled. (This requirement may be waived when
purchase is made by a blanket purchase order.)
<PAGE> 3
PURPOSE
The purpose of this bid is to establish a twenty-four (24) month contract for
the purchase of all Microsoft Software Licenses and Upgrade Advantage offered
under Microsoft Select by all State of Florida agencies and other eligible users
in accordance with Eligible Users paragraph, General Conditions. It is
anticipated that the contract will be effective from April 1, 1997 through March
31, 1999
FEDERAL GOVERNMENT AGENCIES
In addition to "Eligible Users" paragraph, General Conditions, use of State
contracts shall be available to Federal agencies which may desire to purchase
under the terms and conditions of the contract.
OPTIONAL CONTRACT USAGE
In addition to the eligible users referenced above and with the consent of the
successful bidder(s) purchases may be made under the terms and conditions of
this Invitation to Bid/Request for Proposal, by governmental entities located
outside the State of Florida. Appropriate governmental entities' purchasing
laws, rules and regulations shall apply to purchases made under this contract.
ESTIMATED QUANTITIES
It is anticipated that the State of Florida agencies, and other eligible users,
will expend approximately 2.5 million annually under any contract resulting from
this bid. These estimated figures are given only as a guideline for preparing
your bid and should not be construed as representing actual figures under the
contract.
SPECIAL ACCOMMODATION
Any person requiring a special accommodation at the Division of Purchasing
because of a disability should call the Division of Purchasing at (904) 488-8440
at least five (5) workdays prior to
<PAGE> 4
the bid opening. If you are hearing or speech impaired, please contact the
Division by using the Florida Relay Service which can be reached at 1 (800)
955-8771 (TDD).
TECHNICAL SPECIFICATIONS
1. The software and accessories/peripherals specified in this bid will be
installed by the end users.
2. All bids must provide a manufacturer's cost plus percentage based on the
Microsoft products listed on the retail price list(s) included with this
bid. The winning bidder will be verified by the Division of Purchasing to
be a qualified Microsoft Large Account Reseller.
3. The bidder must bid the latest version of all software.
4. Options to purchase Microsoft's official documentation and diskettes must
be included In bid; 3-1/2", 5-1/4", and CD-ROM disk sets, per product pool
(Applications, Systems, Server), if applicable.
5. Products and upgrade advantage to be bid under the MASTER AGREEMENT include
all software offered under MICROSOFT CORPORATE SELECT and MICROSOFT
EDUCATION SELECT.
6. Competitive upgrade products available to the end users are listed on the
Microsoft Select Price List, dated January 1, 1997 and the Microsoft
Education Price List, dated January 1, 1997.
Bidder is urged to offer additional discounts for one time delivery of large
single orders of any assortment of items in the space provided on the price
sheets. Such discounts will not be considered in evaluation of bid.
SALES PROMOTIONS
A contractor, during the term of the contract, may lower prices of products on
the contract, for a specified period of time. The contractor shall document
sales promotions to and receive approval of the Division of Purchasing, prior to
offering sales promotions to contract users. Documentation of sales promotions
shall specify starting and ending dates of the promotion, specify
<PAGE> 5
list prices and promotional prices, and shall contain a statement that the
promotional prices are available to all contract users. Sixty (60) days is
established as the minimum period of time for which a sales promotion can be
offered. Sale pricing shall be made available on contract items only and
promoted to all users of the contract. Evidence of offering of a sales promotion
to a contract user prior to the submittal to and approval of the Division of
Purchasing shall subject the contractor to removal from the contract.
NO SUBSTITUTIONS
The types/versions of software specified in the Invitation to Bid are compatible
with other systems/software currently installed. Therefore, NO SUBSTITUTES
ALLOWED. Compatibility with existing software allows for warehousing of supplies
as well as technical and upgrade advantage support peripheral software.
RESPONSIBILITIES
The successful bidder shall act as "Agent of Record" during the term of the
contract and shall maintain and update the licensing records of each eligible
agency that purchases from the resultant contract. If an Enrollment Form is
required by Microsoft, the bidder will be responsible to contact each agency,
upon receipt of that agency's initial purchase order to have the agency complete
the form. In turn, the agencies shall designate a liaison to maintain pertinent
records and inform the Agent of Record of any changes.
SOFTWARE
All current and future Microsoft Software Licenses shall be bid under the
MICROSOFT SELECT MASTER AGREEMENT and MICROSOFT EDUCATION SELECT MASTER
AGREEMENT, for the term of the contract.
The contractor shall take out and maintain during the life of this agreement,
Worker's Compensation Insurance for all of his employees connected with the work
of this project and, in case any work is sublet, the contractor shall require
the
<PAGE> 6
subcontractor similarly to provide Worker's Compensation Insurance for all of
the latter's employees unless such employees are covered by the protection
afforded by the contractor. Such insurance shall comply fully with the Florida
Worker's Compensation law. In case any class of employees engaged in hazardous
work under this contract at the site of the project is not protected under the
Workmen's Compensation statute, the Contractor shall provide, and cause each
subcontractor to provide, adequate insurance, satisfactory to the Purchaser, for
the protection of his employees not otherwise protected.
EVALUATION & AWARD
Bids will be evaluated and awarded statewide, to a single Large Account Reseller
(USA), qualified to sell products and upgrade advantage listed on the price
lists included with this bid, offering the lowest responsive and responsible
cost plus (%) percentage based on the manufacturer's price at MVLP-D 50,000 unit
level.
The award will be based on the lowest net delivered cost offered on a
predetermined category or categories. The category or categories will be
announced at the time of the bid opening. All other provisions of Awards
paragraph, General Conditions, shall prevail.
<PAGE> 1
EXHIBIT 10.7
LOAN AND SECURITY AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
WAREFORCE INCORPORATED
as Borrower
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS................................................................................1
1.1 "Accounts......................................................................................1
1.2 "Adjusted Net Worth............................................................................1
1.3 "Availability Reserves.........................................................................2
1.4 "Blocked Accounts..............................................................................3
1.5 "Business Day..................................................................................3
1.6 "Code..........................................................................................3
1.7 "Collateral....................................................................................3
1.9 "CYI Loan Agreement............................................................................4
1.10 "Eligible Accounts.............................................................................4
1.11 "Eligible Inventory............................................................................7
1.12 "Environmental Laws............................................................................7
1.13 "Equipment.....................................................................................8
1.14 "ERISA.........................................................................................8
1.15 "ERISA Affiliate...............................................................................8
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
1.16 "Event of Default..............................................................................8
1.17 "Excess Availability...........................................................................9
1.18 "Financing Agreements..........................................................................9
1.19 "GAAP..........................................................................................9
1.20 "Hazardous Materials...........................................................................9
1.21 "Information Certificate......................................................................10
1.22 "Inventory....................................................................................10
1.23 "Inventory Advance Rate.......................................................................10
1.24 "Letter of Credit Accommodations..............................................................10
1.25 "Loans........................................................................................10
1.26 "Maximum Credit...............................................................................10
1.27 "NationsCredit................................................................................10
1.28 "NationsCredit Flooring Line..................................................................10
1.29 "NationsCredit Intercreditor Agreement........................................................10
1.30 "Net Amount of Eligible Accounts..............................................................10
1.31 "Obligations..................................................................................11
1.32 "Obligor......................................................................................11
1.33 "Participant..................................................................................11
1.34 "Payment Account..............................................................................11
1.35 "Person.......................................................................................11
1.36 "Prime Rate...................................................................................11
1.37 "Purchase Agreements..........................................................................11
1.38 "Purchased Stock..............................................................................12
1.39 "Rechtman.....................................................................................12
1.40 "Records......................................................................................12
1.41 "Renewal Date.................................................................................12
1.42 "Revolving Loans..............................................................................12
1.44 "Value........................................................................................12
SECTION 2. CREDIT FACILITIES.........................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
2.1 Revolving Loans...............................................................................13
2.2 Letter of Credit Accommodations...............................................................14
SECTION 3. INTEREST AND FEES.........................................................................17
3.1 Interest......................................................................................17
3.2 Closing Fee...................................................................................18
3.3 Compensation Adjustment.......................................................................18
SECTION 4. CONDITIONS PRECEDENT......................................................................20
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations.....................20
4.2 Conditions Subsequent to Initial Loans and Letter of Credit Accommodations....................24
4.3 Conditions Precedent to All Loans and Letter of Credit Accommodations.........................24
SECTION 5. GRANT OF SECURITY INTEREST................................................................25
SECTION 6. COLLECTION AND ADMINISTRATION.............................................................26
6.1 Borrower's Loan Account.......................................................................26
6.2 Statements....................................................................................26
6.3 Collection of Accounts........................................................................27
6.4 Payments......................................................................................28
6.5 Authorization to Make Loans...................................................................28
6.6 Payments on NationsCredit Flooring Line.......................................................29
6.7 Use of Proceeds...............................................................................29
SECTION 7. COLLATERAL REPORTING AND COVENANTS........................................................29
7.1 Collateral Reporting..........................................................................29
7.2 Accounts Covenants............................................................................30
7.3 Inventory Covenants...........................................................................33
7.4 Equipment Covenants...........................................................................34
7.5 Power of Attorney.............................................................................35
7.6 Right to Cure.................................................................................37
7.7 Access to Premises............................................................................37
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 8. REPRESENTATIONS AND WARRANTIES............................................................38
8.1 Corporate Existence, Power and Authority; Subsidiaries........................................38
8.2 Financial Statements; No Material Adverse Change..............................................38
8.3 Chief Executive Office; Collateral Locations..................................................39
8.4 Priority of Liens; Title to Properties........................................................39
8.5 Tax Returns...................................................................................39
8.6 Litigation....................................................................................39
8.7 Employee Benefits.............................................................................39
8.8 Environmental Compliance......................................................................40
8.9 Compliance with Other Agreements and Applicable Laws..........................................41
8.10 Bank Accounts.................................................................................41
8.11 Accuracy and Completeness of Information......................................................41
8.12 Survival of Warranties; Cumulative............................................................41
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS........................................................42
9.1 Maintenance of Existence......................................................................42
9.2 New Collateral Locations......................................................................42
9.3 Compliance with Laws, Regulations, Etc........................................................42
9.4 Payment of Taxes and Claims...................................................................44
9.5 Insurance.....................................................................................44
9.6 Key Man Life Insurance Policy.................................................................44
9.7 Financial Statements and Other Information....................................................44
9.8 Sale of Assets, Consolidation, Merger, Dissolution, Etc.......................................46
9.9 Encumbrances..................................................................................47
9.10 Indebtedness..................................................................................48
9.11 Loans, Investments, Guarantees, Etc...........................................................49
9.12 Dividends and Redemptions.....................................................................50
9.13 Transactions with Affiliates..................................................................50
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
9.14 Additional Bank Accounts......................................................................50
9.15 Compliance with ERISA.........................................................................51
9.16 Adjusted Net Worth............................................................................51
9.17 Costs and Expenses............................................................................52
9.18 Further Assurances............................................................................52
SECTION 10. EVENTS OF DEFAULT AND REMEDIES............................................................53
10.1 Events of Default.............................................................................53
10.2 Remedies......................................................................................55
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.............................57
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.........................57
11.2 Waiver of Notices.............................................................................58
11.3 Amendments and Waivers........................................................................59
11.4 Waiver of Counterclaims.......................................................................59
11.5 Indemnification...............................................................................59
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS..........................................................59
12.1 Term..........................................................................................59
12.2 Notices.......................................................................................61
12.3 Partial Invalidity............................................................................61
12.4 Successors....................................................................................61
12.5 Entire Agreement..............................................................................61
12.6 Publicity.....................................................................................61
</TABLE>
August 27, 1998
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated August 27, 1998 is entered into
by and between CONGRESS FINANCIAL CORPORATION (WESTERN), a Delaware corporation
("Lender") and WAREFORCE INCORPORATED, a California corporation ("Borrower").
<PAGE> 6
W I T N E S S E T H:
WHEREAS, Wareforce One, Inc., a Nevada corporation ("Buyer"), has
acquired or will acquire all the issued and outstanding capital stock of
Borrower and C.Y. Investment Inc., a California corporation ("CYI"); and
WHEREAS, Borrower and CYI have requested that Lender enter into certain
financing arrangements with Borrower and CYI pursuant to which Lender may make
loans and provide other financial accommodations to Borrower and CYI; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations to CYI on the term and conditions set forth in that
certain Loan and Security Agreement to be entered into between Lender and CYI
concurrently with the execution hereof (the "CYI Loan Agreement"); and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations to Borrower on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS.
All terms used herein which are defined in Article 1 or Article 9 of
the California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the plural
herein shall also mean the singular and to the singular shall also mean the
plural. All references to Borrower and Lender pursuant to the definitions set
forth in the recitals hereto, or to any other person herein, shall include their
respective successors and assigns. The words "hereof", "herein", "hereunder",
"this Agreement" and words of similar import when used in this Agreement shall
refer to this
<PAGE> 7
Agreement as a whole and not any particular provision of this Agreement and as
this Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced. An Event of Default shall exist or
continue or be continuing until such Event of Default is waived in accordance
with Section 11.3. Any accounting term used herein unless otherwise defined in
this Agreement shall have the meaning customarily given to such term in
accordance with GAAP. For purposes of this Agreement, the following terms shall
have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to the sum of:
(a) the difference between:
(i) the aggregate net book value of all assets of such
Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after
deducting from such book values all appropriate reserves in
accordance with GAAP (including all reserves for doubtful
receivables, obsolescence, depreciation and amortization), less
(ii) the aggregate amount of the indebtedness and
other liabilities of such Person and its subsidiaries (including
tax and other proper accruals); plus
(b) indebtedness of such Person and its subsidiaries which is
subordinated in right of payment to the full and final payment of all of the
Obligations on terms and conditions acceptable to Lender.
<PAGE> 8
1.3 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein:
(a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may affect either:
(i) the Collateral or any other property which is
security for the Obligations or its value,
(ii) the assets, business or prospects of Borrower or
any Obligor, or
(iii) the security interests and other rights of
Lender in the Collateral (including the enforceability, perfection
and priority thereof);
(b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect;
(c) to reflect outstanding Letter of Credit Accommodations as
provided in Section 2.2 hereof;
(d) to reflect amounts due to NationsCredit by Borrower or Lender
on behalf of Borrower;
(e) to reflect any disclosed offsets or chargebacks by account
debtors against the aggregate amount of Eligible Accounts; or
(f) in respect of any state of facts which Lender determines in
good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default.
<PAGE> 9
Without limiting the generality of the foregoing, Lender shall establish an
Availability Reserve: (i) in an amount equal to the Accounts resulting from
maintenance services until such time that Borrower has provided Lender the
schedule of Accounts required pursuant to Section 4.2(b) hereof; (ii) in an
amount equal to Twenty Five Thousand Dollars ($25,000) for maintenance billings
billed prior to completion of such maintenance services, which amount shall be
adjusted from time to time based upon the results of recurring audits of
Borrower conducted on behalf of Lender; and (iii) in an amount equal to three
(3) months of Borrower's gross rent and other obligations as lessee for each
leased premises of Borrower at which any Inventory is located and with respect
to which the landlord has not executed a form of waiver and consent acceptable
to Lender.
1.4 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.5 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the State of North Carolina, and a day on
which First Union National Bank, or such other bank as Lender may from time to
time designate, and Lender are open for the transaction of business.
1.6 "Buyer" shall have the meaning set forth in the Recitals hereto.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as the same
now exists or may from time to time hereafter be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.8 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.9 "CYI" shall have the meaning set forth in the Recitals hereto.
1.10 "CYI Loan Agreement" shall have the meaning set forth in the
Recitals hereto.
<PAGE> 10
1.11 "Eligible Accounts" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than sixty (60) days after
the date of the original due date thereof, but in any event, which are unpaid
more than ninety (90) days after the date of the original invoice for them;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America or Canada, or, at
Lender's option, if either:
(i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued by a bank satisfactory to
Lender or confirmed by a bank satisfactory to Lender located in the
United States and payable only in the United States of America and
in U.S. dollars, sufficient to cover such Account, in form and
substance satisfactory to Lender and, if required by Lender, the
original of such letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of the assignment of
the proceeds of such letter of credit to Lender,
(ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on terms and in an
amount acceptable to Lender, or
<PAGE> 11
(iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending formula with respect
thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, maintenance
billings, bill and hold invoices or retainage invoices, except as to bill and
hold invoices, if Lender shall have received an agreement in writing from the
account debtor, in form and substance satisfactory to Lender, confirming the
unconditional obligation of the account debtor to take the goods related thereto
and pay such invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by Borrower to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the
<PAGE> 12
United States of America, any State, political subdivision, department, agency
or instrumentality thereof, upon Lender's request, the Federal Assignment of
Claims Act of 1940, as amended or any similar State or local law, if applicable,
has been complied with in a manner satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty-five (25%) percent of all otherwise Eligible
Accounts, except in the case of the Accounts of Southern California Edison, such
Accounts do not constitute more than forty (40%) percent of all otherwise
Eligible Accounts (but the portion of the Accounts not in excess of such
percentage may be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days after the date of the original
invoice for them which constitute more than fifty (50%) percent of the total
Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Borrower and as approved by Lender from time to
time (but the portion of the Accounts not in excess of such credit limit may
still be deemed Eligible Accounts);
(p) such Accounts are not subject to accrued chargebacks listed on
current agings of receivables (but the portion of the Accounts of such account
debtor in excess of the amount of such chargeback shall be deemed Eligible
Accounts);
(q) such Accounts do not arise from an order by an account debtor
of products licensed from Microsoft Corporation in excess of Two Hundred Fifty
Thousand Dollars ($250,000),
<PAGE> 13
unless Borrower has received from such account debtor an executed customer order
for such products; and
(r) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.12 "Eligible Inventory" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower which
are identified as "Qualified Merchandise" and subject to the "NationsCredit
Repayment Obligation," each as defined in the NationsCredit Intercreditor
Agreement.
In general, Eligible Inventory shall not include: (i) work-in-process;
(ii) components which are not part of finished goods; (iii) spare parts for
equipment; (iv) Inventory stored in open boxes; (v) packaging and shipping
materials; (vi) supplies used or consumed in Borrower's business; (vii)
Inventory in transit; (viii) Inventory at premises other than those owned and
controlled by Borrower, except if Lender shall have received an agreement in
writing from the person in possession of such Inventory and/or the owner or
operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(ix) Inventory subject to a security interest or lien in favor of any person
other than Lender except those permitted in this Agreement; (x) bill and hold
goods; (xi) unserviceable Inventory; (xii) Inventory purchased prior to two (2)
calendar months before the then current month; (xiii) Inventory which is not
subject to the first priority, valid and perfected security interest of Lender;
(xiv) returned, damaged and/or defective Inventory; (xv) Inventory purchased or
sold on consignment; and (xvi) Inventory not
<PAGE> 14
identified as "Qualified Merchandise" in the NationsCredit Intercreditor
Agreement. General criteria for Eligible Inventory may be established and
revised from time to time by Lender in its reasonable credit judgment. Any
Inventory which is not Eligible Inventory shall nevertheless be part of the
Collateral.
1.13 "Environmental Laws" shall mean all federal, state, district,
local and foreign laws, rules, regulations, ordinances, and consent decrees
relating to health, safety, hazardous substances, pollution and environmental
matters, as now or at any time hereafter in effect, applicable to Borrower's
business and facilities (whether or not owned by it), including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes.
1.14 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.15 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.16 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
<PAGE> 15
1.17 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.18 "Excess Availability" shall mean the amount, as determined by
Lender, equal to:
(a) with respect to Borrower:
(i) the lesser of:
(A) the amount of the Revolving Loans available to
Borrower as of such time (based on the applicable advance rates set forth in
Sections 2.1(a)(ii) or 2.1(a)(iii) hereof), subject to the sublimits and
Availability Reserves from time to time established by Lender hereunder, and
(B) the Maximum Credit; minus
(ii) the sum of:
(A) the amount of all then outstanding and unpaid
Obligations (other than the Obligations of Borrower under its Guarantee of even
date herewith in favor of Lender),
(B) the aggregate amount of all trade payables of
Borrower which are more than sixty (60) days past due as of such time,
(C) the aggregate amount of Borrower's book overdrafts,
and
(D) the aggregate amount of Borrower's past due lease
and notes payable; and
(b) with respect to CYI:
(i) the lesser of:
(A) the amount of the "Revolving Loans" available to
CYI as of such time (based on the applicable advance rates set forth in Sections
2.1(a)(ii) or 2.1(a)(iii) of the CYI Loan Agreement), subject to the sublimits
and
<PAGE> 16
"Availability Reserves" from time to time established by Lender under the CYI
Loan Agreement, and
(B) the "Maximum Credit" (as defined in the CYI Loan
Agreement); minus
(ii) the sum of:
(A) the amount of all then outstanding and unpaid
"Obligations" of CYI under the CYI Loan Agreement (other than the obligations of
CYI under its Guarantee of even date herewith in favor of Lender),
(B) the aggregate amount of all trade payables of CYI
which are more than sixty (60) days past due as of such time,
(C) the aggregate amount of CYI's book overdrafts, and
(D) the aggregate amount of CYI's past due lease and
notes payable.
1.19 "Financing Agreements" shall mean, collectively, this Agreement,
the CYI Loan Agreement and all notes, guarantees, security agreements and other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by Borrower or any Obligor in connection with this Agreement,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.20 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.16 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with
<PAGE> 17
those used in the preparation of the audited financial statements delivered to
Lender prior to the date hereof.
1.21 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation, any that are or become classified as hazardous or toxic under any
Environmental Law).
1.22 "Information Certificate" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.23 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.24 "Inventory Advance Rate" shall mean the advance rate applicable to
Eligible Inventory as determined in accordance with Subsection 2.1(a)(iii)(B).
1.25 "Letter of Credit Accommodations" shall mean the letters of
credit, merchandise purchase or other guaranties which are from time to time
either:
(a) issued, opened or provided by Lender for the account of
Borrower or any Obligor; or
<PAGE> 18
(b) with respect to which Lender has agreed to indemnify the issuer
or guaranteed to the issuer the performance by Borrower of its obligations to
such issuer.
1.26 "Loans" shall mean the Revolving Loans.
1.27 "Maximum Credit" shall mean, with reference to the Revolving Loans
and the Letter of Credit Accommodations, the amount of Eighteen Million Dollars
($18,000,000).
1.28 "NationsCredit" shall mean NationsCredit Distribution Finance,
Inc., a North Carolina corporation.
1.29 "NationsCredit Flooring Line" shall mean the floor plan financing
arrangement among NationsCredit, Borrower and CYI , pursuant to which
NationsCredit will from time to time extend certain financing to Borrower and
CYI for the acquisition of certain Inventory.
1.30 "NationsCredit Intercreditor Agreement" shall mean that certain
Intercreditor and Subordination Agreement of even date herewith between
NationsCredit and Lender.
1.31 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less:
(a) sales, excise or similar taxes included in the amount thereof;
and
(b) returns, discounts, claims, credits and allowances of any
nature at any time issued, owing, granted, outstanding, available or claimed
with respect thereto.
1.32 "Obligations" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement, the Guarantee of even date
herewith by Borrower in favor of Lender or otherwise, whether now existing or
hereafter arising, whether
<PAGE> 19
arising before, during or after the initial or any renewal term of this
Agreement or after the commencement of any case with respect to Borrower under
the United States Bankruptcy Code or any similar statute (including, without
limitation, the payment of interest and other amounts which would accrue and
become due but for the commencement of such case, whether or not such amounts
are allowed or allowable in whole or in part in such case), whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, and however
acquired by Lender.
1.33 "Obligor" shall mean Rechtman, CYI and any other guarantor,
endorser, acceptor, surety or other person liable on or with respect to the
Obligations or who is the owner of any property which is security for the
Obligations, other than Borrower.
1.34 "Participant" shall mean any person which at any time participates
with Lender in respect of the Loans, the Letter of Credit Accommodations or
other Obligations or any portion thereof.
1.35 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.36 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability partnership,
business trust, unincorporated association, joint stock corporation, trust,
joint venture or other entity or any government or any agency or instrumentality
or political subdivision thereof.
1.37 "Prime Rate" shall mean the rate from time to time publicly
announced by First Union National Bank, or its successors, from time to time as
its prime rate, whether or not such announced rate is the best rate available at
such bank.
1.38 "Purchase Agreements" shall mean, individually and collectively,
the Stock Purchase Agreement and Escrow
<PAGE> 20
Instructions, dated as of January 1, 1998 between Buyer and Seller and all other
agreements of transfer as are referred to therein and all side letters with
respect thereto, and all agreements, documents and instruments executed and/or
delivered in connection therewith, as all of the foregoing now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.39 "Purchased Stock" shall mean all of the issued and outstanding
shares of common stock of CYI.
1.40 "Rechtman" shall mean Orie Rechtman, an individual.
1.41 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.42 "Renewal Date" shall have the meaning set forth in Section 12.1
hereof.
1.43 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.44 "Seller" shall mean collectively, the Christopher Chu and Alina
Chu Family Trust, Vivien Mak, an individual, Richard Fu, an individual, and
Luisa Fu, an individual, and each of their respective successors and assigns.
1.45 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost under the first-in-first-out method,
net of vendor discounts, or (b) market value.
<PAGE> 21
SECTION 2. CREDIT FACILITIES.
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the least of:
(i) the Maximum Credit, less any Availability
Reserves, other reserves and the then undrawn amounts of
outstanding Letter of Credit Accommodations; or
(ii) during the period commencing February 1 and
ending October 31 of each year, Borrower's aggregate collections
for the trailing sixty (60) day period and during the period
commencing November 1 and ending January 31 of each year,
Borrower's aggregate collections for the trailing ninety (90) day
period, less any Availability Reserves and the then undrawn amounts
of outstanding Letter of Credit Accommodations; or
(iii) the sum of:
(A) eighty-five (85%) percent of the Net Amount of Eligible
Accounts, plus
(B) the lesser of:
(1) seventy-five (75%) percent of the
Value of Eligible Inventory; provided, that if at any
time, the "NationsCredit Repayment Obligation" (as
defined in the NationsCredit Intercreditor Agreement)
is less than seventy-five (75%) of the original
invoice price of "Qualified Merchandise" (as defined
in the NationsCredit Intercreditor Agreement), the
Inventory Advance Rate shall be proportionally reduced
such that the Inventory Advance Rate shall at no time
exceed the applicable percentage in determining the
"NationsCredit Repayment Obligation",
(2) Eight Million Dollars ($8,000,000),
less
1
<PAGE> 22
(C) any Availability Reserves and the then undrawn amounts of
outstanding Letter of Credit Accommodations.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days prior notice to Borrower:
(i) reduce the lending formula with respect to
Eligible Accounts to the extent that Lender determines in good
faith that:
(A) the dilution with respect to the Accounts for any period (based
on the ratio of (1) the aggregate amount of reductions in Accounts other than as
a result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or
(B) the general creditworthiness of account debtors has declined;
or
(ii) reduce the lending formula(s) with respect to
Eligible Inventory to the extent that Lender determines that:
(A) the number of days of the turnover or the mix of such Inventory
for any period has changed in any materially adverse respect,
(B) the liquidation value of the Eligible Inventory, or any
category thereof, has decreased in any material respect, or
(C) the nature and quality of the Inventory has deteriorated in any
material respect.
In determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory or in establishing
Availability Reserves.
<PAGE> 23
(c) Except in Lender's discretion, the aggregate amount of the
Loans, Letter of Credit Accommodations and other Obligations outstanding at any
time shall not exceed the Maximum Credit. In the event that the outstanding
amount of any component of the Loans and Letter of Credit Accommodations, or the
aggregate amount of the outstanding Loans, Letter of Credit Accommodations and
other Obligations, exceed the amounts available under the lending formulas set
forth in Section 2.1(a) hereof, the sublimits for Letter of Credit
Accommodations set forth in Section 2.2(e) or the Maximum Credit, as applicable,
such event shall not limit, waive or otherwise affect any rights of Lender in
that circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible Inventory pursuant to Section 2.1(a)(iii)(B)(2) Lender may
treat the then undrawn amounts of outstanding Letter of Credit Accommodations
for the purpose of purchasing Eligible Inventory as Revolving Loans to the
extent Lender is in effect basing the issuance of the Letter of Credit
Accommodations on the Value of the Eligible Inventory being purchased with such
Letter of Credit Accommodations. In determining the actual amounts of such
Letter of Credit Accommodations to be so treated for purposes of the sublimit,
the outstanding Revolving Loans and Availability Reserves shall be attributed
first to any components of the lending formulas in Section 2.1(a) that are not
subject to such sublimit, before being attributed to the components of the
lending formulas subject to such sublimit.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions contained herein,
at the request of Borrower, Lender agrees to provide or arrange for Letter of
Credit Accommodations with NationsCredit as the beneficiary thereunder for the
purpose of financing the purchase of Inventory on the terms and conditions set
forth in the NationsCredit Intercreditor
<PAGE> 24
Agreement and other Letter of Credit Accommodations for the account of Borrower
containing terms and conditions acceptable to Lender and the issuer thereof. Any
payments made by Lender to any issuer thereof and/or related parties in
connection with the Letter of Credit Accommodations shall constitute additional
Revolving Loans to Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to one (1%) percent
per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month; provided, however, that
such letter of credit fee shall be increased, at Lender's option, without
notice, to three (3%) percent per annum for the period on or after the date of
termination or non-renewal of this Agreement or the date of the occurrence of an
Event of Default. Such letter of credit fee shall be calculated on the basis of
a three hundred sixty (360) day year and actual days elapsed and the obligation
of Borrower to pay such fee shall survive the termination or non-renewal of this
Agreement.
(c) No Letter of Credit Accommodations (other than the Letter of
Credit Accommodations issued pursuant to the terms of the NationsCredit
Intercreditor Agreement) shall be available unless on the date of the proposed
issuance of any Letter of Credit Accommodations, the Revolving Loans available
to Borrower (subject to the Maximum Credit and any Availability Reserves) are
equal to or greater than if the proposed Letter of Credit Accommodation is for
the purpose of purchasing Eligible Inventory, the sum of:
(A) the product of the Value of such Eligible Inventory multiplied
by one minus the Inventory Advance Rate under Section 2.1(a)(iii)(B) as
applicable, plus
(B) freight, taxes, duty and other amounts which Lender estimates
must be paid in connection with such
<PAGE> 25
Inventory upon arrival and for delivery to one of Borrower's locations for
Eligible Inventory within the United States of America;
(d) An Availability Reserve shall be established in the amount set
forth in Section 2.2(c) upon the following:
(i) in the case of an order for the purchase of
Inventory supported by a Letter of Credit Accommodation costing
less than Five Hundred Thousand Dollars ($500,000), upon the
placement of such order by Borrower; and
(ii) in the case of an order for the purchase of
Inventory supported by a Letter of Credit Accommodation costing
Five Hundred Thousand Dollars ($500,000) or more, upon evidence, in
form and substance satisfactory to Lender, of shipment by a vendor
for such order.
Effective upon the issuance of each Letter of Credit Accommodation for a
purpose other than the purchase of Inventory, an Availability Reserve shall be
established in the amount set forth in Section 2.2.
(e) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed Eight
Million Dollars ($8,000,000). At any time an Event of Default exists or has
occurred and is continuing, upon Lender's request, Borrower will either furnish
cash collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash collateral
to Lender for the Letter of Credit Accommodations, and in either case, the
Revolving Loans otherwise available to Borrower shall not be reduced as provided
in Section 2.2(d) to the extent of such cash collateral.
(f) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages,
<PAGE> 26
liabilities, costs and expenses which Lender may suffer or incur in connection
with any Letter of Credit Accommodations and any documents, drafts or
acceptances relating thereto, including, but not limited to, any losses, claims,
damages, liabilities, costs and expenses due to any action taken by any issuer
or correspondent with respect to any Letter of Credit Accommodation. Borrower
assumes all risks with respect to the acts or omissions of the drawer under or
beneficiary of any Letter of Credit Accommodation, including, without
limitation, NationsCredit, and for such purposes the drawer or beneficiary shall
be deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay,
all foreign, Federal, State and local taxes, duties and levies relating to any
goods subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrower hereby releases and holds Lender harmless from
and against any acts, waivers, errors, delays or omissions, whether caused by
Borrower, by any issuer or correspondent or otherwise, unless caused by the
gross negligence or willful misconduct of Lender, with respect to or relating to
any Letter of Credit Accommodation. The provisions of this Section 2.2(f)shall
survive the payment of Obligations and the termination or non-renewal of this
Agreement.
(g) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect to any Letter of Credit
Accommodation provided by an issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not:
<PAGE> 27
(i) at any time an Event of Default exists or has
occurred and is continuing:
(A) approve or resolve any questions of non-compliance of
documents,
(B) give any instructions as to acceptance or rejection of any
documents or goods, or
(C) execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders; and
(ii) at all times:
(A) grant any extensions of the maturity of, time of payment for,
or time of presentation of, any drafts, acceptances, or documents, or
(B) agree to any amendments, renewals, extensions, modifications,
changes or cancellations of any of the terms or conditions of any of the
applications, Letter of Credit Accommodations, or documents, drafts or
acceptances thereunder or any letters of credit included in the Collateral.
Lender may take such actions either in its own name or in Borrower's name.
(h) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
<PAGE> 28
SECTION 3. INTEREST AND FEES.
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at a rate equal to the Prime
Rate, except that Borrower shall pay to Lender interest, at Lender's option,
without notice, at the rate of two percent (2.0%) percent per annum in excess of
the Prime Rate:
(i) on the non-contingent Obligations for the period
from and after the date of termination or non-renewal hereof, or
the date of the occurrence of an Event of Default, and for so long
as such Event of Default is continuing as determined by Lender and
until such time as Lender has received full and final payment of
all such Obligations (notwithstanding entry of any judgment against
Borrower); and
(ii) on the Revolving Loans at any time outstanding in
excess of the amounts available to Borrower under Section 2
(whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an
Event of Default).
All interest accruing hereunder on and after the occurrence of any of the events
referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above shall be payable on
demand.
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such change occurs. In no event
shall charges constituting interest payable by Borrower to Lender exceed the
maximum amount or the rate permitted under any applicable law or regulation, and
if any part or provision of
<PAGE> 29
this Agreement is in contravention of any such law or regulation, such part or
provision shall be deemed amended to conform thereto.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the
amount of Twenty Four Thousand Dollars ($24,000) which shall be fully earned as
of the date hereof and payable in two installments as follows: (a) Twelve
Thousand Dollars ($12,000) on the date hereof; and (b) Twelve Thousand Dollars
($12,000) on the first anniversary of the date hereof.
3.3 Compensation Adjustment.
(a) If after the date of this Agreement the introduction of, or any
change in, any law or any governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or any interpretation
thereof, or compliance by Lender or any Participant therewith:
(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from Borrower (excluding
franchise taxes imposed upon, and taxation of the overall net
income of Lender or any Participant), or changes the basis of
taxation of payments, in either case in respect of amounts due it
hereunder, or
(ii) imposes or increases or deems applicable any
reserve requirement or other reserve, assessment, insurance charge,
special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by Lender or any
Participant, or
(iii)imposes any other condition the result of which
is to increase the cost to Lender or any Participant of making,
funding or maintaining the Revolving Loans or Letter of Credit
Accommodations or reduces any amount receivable by Lender or any
Participant in connection with the Loans or Letter of Credit
Accommodations, or requires Lender or any Participant to make
payment calculated by references to the amount of loans held or
interest received by it, by an amount deemed material by Lender or
any Participant, or
<PAGE> 30
(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be maintained
by Lender or any Participant or any corporation controlling Lender
or any Participant, and Lender or any Participant determines that
such imposition or increase in capital requirements or increase in
the amount of capital expected to be maintained is based upon the
existence of this Agreement or the Loans or Letter of Credit
Accommodations hereunder, all of which may be determined by
Lender's or any Participant's reasonable allocation of the
aggregate of its impositions or increases in capital required or
expected to be maintained, and the result of any of the foregoing
is to increase the cost to Lender or any Participant of making,
renewing or maintaining the Loans or Letter of Credit
Accommodations, or to reduce the rate of return to Lender or any
Participant on the Loans or Letter of Credit Accommodations;
then upon demand by Lender, Borrower shall pay to Lender or any Participant, and
continue to make periodic payments to Lender or any Participant, such additional
amounts as may be necessary to compensate Lender or any Participant for any such
additional cost incurred or reduced rate of return realized.
(b) A certificate of Lender claiming entitlement to compensation as
set forth above will be conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence giving rise to such
compensation, the additional amount or amounts to be paid and the compensation
and the method by which such amounts were determined. In determining any
additional amounts due from Borrower under this Section 3.3, Lender shall act
reasonably and in good faith and will, to the extent that the increased costs,
reductions, or amounts received or receivable relate to the Lender's or a
Participant's loans or commitments generally and are not specifically
attributable to the Loans and commitments hereunder, use averaging and
attribution methods which are reasonable and equitable and which cover all loans
and commitments under this Agreement by the Lender or such Participant, as the
case may be, whether or not the loan documentation for such other loans and
commitments permits the
<PAGE> 31
Lender or such Participant to receive compensation costs of the type described
in this Section 3.3.
SECTION 4. CONDITIONS PRECEDENT.
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance satisfactory
to Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination by the existing lender or
lenders to Borrower of their respective financing arrangements with Borrower and
the termination and release by it or them, as the case may be, of any interest
in and to any assets and properties of Borrower and each Obligor, duly
authorized, executed and delivered by it or each of them, including, but not
limited to:
(i) UCC termination statements for all UCC financing
statements previously filed by it or any of them or their
predecessors, as secured party and Borrower or any Obligor, as
debtor, and
(ii) satisfactions and discharges of any mortgages,
deeds of trust or deeds to secure debt by Borrower or any Obligor
in favor of such existing lender or lenders, in form acceptable for
recording in the appropriate government office;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid, perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended as security for the Obligations or the liability of any Obligor in
respect thereto, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
<PAGE> 32
(c) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(d) Lender shall have received the CYI Loan Agreement duly executed
by CYI, in form and substance satisfactory to Lender and all conditions
precedent set forth therein shall have been satisfied in a manner acceptable to
Lender;
(e) Lender shall have received, in form and substance satisfactory
to Lender, evidence that the Purchase Agreements have been fully executed and
delivered by and to the appropriate parties thereto and the transactions
contemplated under the terms of the Purchase Agreements have been consummated;
(f) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(g) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender, not more than three (3) Business Days
prior to the date hereof;
(h) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments
<PAGE> 33
and other agreements from third persons which Lender may deem necessary or
desirable in order to permit, protect and perfect its security interests in and
liens upon the Collateral or to effectuate the provisions or purposes of this
Agreement and the other Financing Agreements, including, without limitation,
acknowledgements by lessors, mortgagees and warehousemen of Lender's security
interests in the Collateral, waivers by such persons of any security interests,
liens or other claims by such persons to the Collateral and agreements
permitting Lender access to, and the right to remain on, the premises to
exercise its rights and remedies and otherwise deal with the Collateral;
(i) The NationsCredit Flooring Line shall have been established and
in effect on terms and conditions satisfactory to Lender and Lender and its
counsel shall have received and reviewed all financing agreements entered into
by Borrower in connection therewith;
(j) Lender shall have received, in form and substance satisfactory
to Lender, the NationsCredit Intercreditor Agreement, as acknowledged and agreed
to by Borrower, and CYI providing for such parties' relative rights and
priorities with respect to the assets and properties of Borrower and CYI and
related matters, duly authorized, executed and delivered by NationsCredit;
(k) Lender shall have been satisfied that an acceptable system of
reporting has been established by NationsCredit through which NationsCredit will
report to Lender on a daily basis, all liabilities incurred by Borrower and CYI
in connection with its floor plan financing arrangement with NationsCredit,
Inventory financed by NationsCredit on order with vendors, and returns by
Borrower and CYI of Inventory to vendors and credited to NationsCredit;
(l) Lender shall have received, in form and substance satisfactory
to Lender, a Guarantee by Borrower in favor of Lender, guaranteeing the
obligations of CYI under the CYI Loan Agreement, together with a Security
Agreement securing the obligations under such Guarantee;
<PAGE> 34
(m) Lender shall have received, in form and substance satisfactory
to Lender, a Guarantee by CYI in favor of Lender, guaranteeing the Obligations
herein, together with a Security Agreement securing the obligations under such
Guarantee;
(n) Lender shall have received, in form and substance satisfactory
to Lender, Subordination agreements pursuant to which the security interests and
liens in favor of Ingram Micro Inc., a Delaware corporation, are subject to and
subordinate in priority to the security interests and liens of Lender;
(o) Lender shall have received, in form and substance satisfactory
to Lender, a continuing guarantee duly executed and delivered by Rechtman
guaranteeing the Obligations up to One Million Five Hundred Thousand Dollars
($1,500,000), together with his personal financial statements;
(p) Lender shall have received, in form and substance satisfactory
to Lender, a collateral assignment from Borrower to Lender of that certain
Promissory Note dated February 18, 1998 in the original principal amount of Two
Million Dollars ($2,000,000) by Orie Rechtman in favor of Borrower, as well as
any other notes or instruments evidencing from loans Borrower to Rechtman;
(q) Lender shall have received current agings of receivables,
current perpetual inventory records and/or rollforwards of accounts and
inventory through the date hereof, together with supporting documentation
sufficient for Lender to accurately identify and verify the eligible Collateral
as of or prior to the date hereof in a manner satisfactory to Lender, including
documentation with respect to inventory in-transit and inventory at third-party
locations;
(r) Lender shall have received, in form and substance satisfactory
to Lender, projections of Borrower's profit and loss and balance sheet, all
prepared on a monthly basis through December 31, 1998 which shall reflect the
loans to
<PAGE> 35
Orie Rechtman in the aggregate principal amount of Three Million Dollars
($3,000,000);
(s) Lender shall have received, in form and substance satisfactory
to Lender, an agreement with respect to the Blocked Accounts, pursuant to
Section 6.3(a) hereof, duly executed by Lender, Borrower and the applicable
depository bank;
(t) Lender shall have received and reviewed to its satisfaction any
and all licensing agreements which Borrower has in place with its vendors,
including, without limitation, Microsoft Corporation;
(u) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(v) Lender shall have received from Borrower a plan identifying the
proposed management of Borrower;
(w) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements, the Purchase Agreements and such other matters as Lender
may request;
(x) the combined Excess Availability of Borrower and CYI as
determined by Lender, as of the date hereof, shall be not less than One Million
Dollars ($1,000,000) after giving effect to the initial Loans made or to be
made, the Letter of Credit Accommodations issued or to be issued hereunder and
under the CYI Loan Agreement and the payment of all fees and expenses payable
upon the consummation of the initial transactions contemplated by this Agreement
and the CYI Loan Agreement; and
(y) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly
<PAGE> 36
executed and delivered to Lender, in form and substance satisfactory to Lender.
4.2 Conditions Subsequent to Initial Loans and Letter of Credit
Accommodations. Borrower shall perform the following conditions within the time
frames set forth below:
(a) within twenty-five (25) days from the date hereof, Lender shall
have received, in form and substance satisfactory to Lender, a pro-forma balance
sheet of Borrower reflecting the initial transactions contemplated hereunder,
including, but not limited to, (i) the transactions contemplated by the Purchase
Agreements and (ii) the Loans and Letter of Credit Accommodations provided by
Lender to Borrower on the date hereof and the use of the proceeds of the initial
Loans as provided herein, accompanied by a certificate, dated of even date
herewith, of the chief financial officer of Borrower, stating that such
pro-forma balance sheet represents the reasonable, good faith opinion of such
officer as to the subject matter thereof as of the date of such certificate;
(b) within sixty (60) days from the date hereof, Borrower shall
deliver to Lender, in form and substance satisfactory to Lender, evidence that
Borrower has filed with the appropriate offices in the State of California the
certificate and documents necessary to effectively dissolve Los Angeles
Micromart, Inc., a wholly owned subsidiary of Borrower;
(c) within sixty (60) days from the date hereof, Lender shall have
received audited financial statements of Borrower, and the accompanying notes
thereto, for the fiscal year ended December 31, 1997, together with the
unqualified opinion of Arthur Andersen LLP that such financial statements have
been prepared in accordance with GAAP, and present fairly the results of
operations and financial condition of Borrower for the fiscal year then ended;
(d) within sixty (60) days from the date hereof, Borrower shall
provide evidence to Lender that Borrower is capable of providing in a manner
satisfactory to Lender a
<PAGE> 37
schedule of revenues identifying revenues based upon maintenance services,
product sales and licensing pursuant to Section 7.1(a) hereof; and
(e) within one hundred twenty (120) days from the date hereof,
Borrower shall provide evidence to Lender in form and substance satisfactory to
Lender that CYI's system has been converted to the Wareforce COVE system.
4.3 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST.
To secure payment and performance of all Obligations, Borrower
hereby grants to Lender a continuing security interest in, a lien upon, and a
right of set off against, and hereby assigns to Lender as security, the
following property and interests in property of Borrower, whether now owned or
hereafter acquired or existing, and wherever located (collectively, the
"Collateral"):
5.1 Accounts and other indebtedness owed to Borrower;
<PAGE> 38
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
investment property, letters of credit, proceeds of letters of credit, workmen's
compensation claims, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation,
(a) rights and remedies under or relating to guaranties, contracts
of suretyship, letters of credit and credit and other insurance related to the
Collateral,
(b) rights of stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party,
(c) goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or evidencing, Accounts
or other Collateral, including, without limitation, returned, repossessed and
reclaimed goods, and
(d) deposits by and property of account debtors or other persons
securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
<PAGE> 39
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION.
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded:
(a) all Loans, all Letter of Credit Accommodations and all other
Obligations and the Collateral,
(b) all payments made by or on behalf of Borrower, and
(c) all other appropriate debits and credits as provided in this
Agreement, including, without limitation, fees, charges, costs, expenses and
interest.
All entries in the loan account(s) shall be made in accordance with
Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
<PAGE> 40
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense, a
blocked account or lockboxes and related blocked accounts (in either case, each
a "Blocked Account" and collectively the "Blocked Accounts"), as Lender may
specify, with such bank or banks as are acceptable to Lender into which Borrower
shall promptly deposit and direct its account debtors to directly remit all
payments on Accounts and all payments constituting proceeds of Inventory or
other Collateral in the identical form in which such payments are made, whether
by cash, check or other manner. Each bank at which a Blocked Account is
established shall enter into an agreement, in form and substance satisfactory to
Lender, providing (unless otherwise agreed to by Lender) that all items received
or deposited in such Blocked Account are the Collateral of Lender, that the
depository bank has no lien upon, or right to setoff against, the Blocked
Accounts, the items received for deposit therein, or the funds from time to time
on deposit therein and that the depository bank will wire, or otherwise
transfer, in immediately available funds, on a daily basis, all funds received
or deposited into such Blocked Account to such bank account of Lender as Lender
may from time to time designate for such purpose (the "Payment Account").
Borrower agrees that all amounts deposited in the Blocked Accounts or other
funds received and collected by Lender, whether as proceeds of Inventory, the
collection of Accounts or other Collateral or otherwise shall be the Collateral
of Lender.
(b) For purposes of calculating the amount of the Loans available
to Borrower, such payments will be applied (conditional upon final collection)
to the Obligations on the Business Day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next Business Day. For the purposes
of calculating interest on the Obligations, such payments or other funds
received will be applied (conditional upon final collection) to the Obligations
one (1) Business Day following
<PAGE> 41
the date of receipt of immediately available funds by Lender in the Payment
Account provided such payments or other funds and notice thereof are received in
accordance with Lender's usual and customary practices as in effect from time to
time and within sufficient time to credit Borrower's loan account on such day,
and if not, then on the next Business Day. If no monetary obligations by
Borrower are outstanding on any day, Borrower shall pay interest at the
applicable rate set forth in Section 3.1(a) on the amount of any payments or
other funds that are received by Lender (irrespective of the characterization of
whether receipts are owned by Lender or Borrower) for such day.
(c) Borrower and all of its affiliates, subsidiaries, shareholders,
directors, employees or agents shall, acting as trustee for Lender, receive, as
the property of Lender, any monies, cash, checks, notes, drafts or any other
payment relating to and/or proceeds of Accounts or from sales of Inventory or
other Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Lender. In no event shall any such monies, checks, notes,
drafts or other payments be commingled with Borrower's own funds. Borrower
agrees to reimburse Lender on demand for any amounts owed or paid to any bank at
which a Blocked Account is established or any other bank or person involved in
the transfer of funds to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person, unless such payment or
indemnification obligation of Lender was a result of Lender's gross negligence
or willful misconduct. The obligation of Borrower to reimburse Lender for such
amounts pursuant to this Section 6.3 shall survive the termination or
non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including, without limitation, the monetary proceeds
<PAGE> 42
of collections or of realization upon any Collateral) to such of the
Obligations, whether or not then due, in such order and manner as Lender
determines. At Lender's option, all principal, interest, fees, costs, expenses
and other charges provided for in this Agreement or the other Financing
Agreements may be charged directly to the loan account(s) of Borrower. Borrower
shall make all payments to Lender on the Obligations free and clear of, and
without deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, withholding,
restrictions or conditions of any kind. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and
hold Lender harmless for the amount of any payments or proceeds surrendered or
returned. This Section 6.4 shall remain effective notwithstanding any contrary
action which may be taken by Lender in reliance upon such payment or proceeds.
This Section 6.4 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
10:30 a.m. Pacific time on any day shall be deemed to have been made as of the
opening of business on the immediately following Business Day. All Loans and
Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrower
<PAGE> 43
when deposited to the credit of Borrower or otherwise disbursed or established
in accordance with the instructions of Borrower or in accordance with the terms
and conditions of this Agreement.
6.6 Payments on NationsCredit Flooring Line. Any and all payments by
Borrower under the NationsCredit Flooring Line shall be wired from the account
of Borrower by Lender to NationsCredit per Borrower's instructions on the fifth,
fifteenth and twenty-fifth day of each calendar month, or if such day is not a
Business Day then on the next Business Day and in accordance with Section 6.5
hereof.
6.7 Use of Proceeds. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof; and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS.
7.1 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender:
(a) on a regular basis as required by Lender, a schedule of
Accounts identifying Accounts based upon maintenance services, product sales and
licensing, sales made, credits issued, cash received and any pre-billed
Accounts;
<PAGE> 44
(b) on a daily basis:
(i) perpetual inventory reports identifying "Qualified
Merchandise" (as defined in the NationsCredit Intercreditor
Agreement), and
(ii) inventory reports by category;
(c) on or before the fifth Business Day of each month, a
calculation of the value of Inventory that is not Eligible Inventory;
(d) on a monthly basis or more frequently as Lender may request,
agings of accounts payable and accounts receivable;
(e) upon Lender's request:
(i) copies of customer statements and credit memos,
remittance advices and reports, and copies of deposit slips and
bank statements,
(ii) copies of shipping and delivery documents, and
(iii) copies of purchase orders, invoices and delivery
documents for Inventory and Equipment acquired by Borrower; and
(f) such other reports as to the Collateral or other property which
is security for the Obligations as Lender shall request from time to time.
If any of Borrower's records or reports of the Collateral or other
property which is security for the Obligations are prepared or maintained by an
accounting service, contractor, shipper or other agent, Borrower hereby
irrevocably authorizes such service, contractor, shipper or agent to deliver
such records, reports, and related documents to Lender and to follow Lender's
instructions with respect to further services at any time that an Event of
Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
<PAGE> 45
(a) Borrower shall notify Lender promptly of:
(i) any material delay in Borrower's performance of
any of its obligations to any account debtor or the assertion of
any claims, offsets, defenses or counterclaims by any account
debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof,
(ii) all material adverse information relating to the
financial condition of any account debtor, and
(iii) any event or circumstance which, to Borrower's
knowledge would cause Lender to consider any then existing Accounts
as no longer constituting Eligible Accounts.
No credit, discount, allowance or extension or agreement for any of
the foregoing shall be granted to any account debtor, except in the ordinary
course of Borrower's business in accordance with its most recent past practices
and policies. So long as no Event of Default exists or has occurred and is
continuing, Borrower may settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor in the ordinary course of
Borrower's business in accordance with its most recent past practices and
policies. At any time that an Event of Default exists or has occurred and is
continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors or grant any credits, discounts or allowances.
(b) Without limiting the obligation of Borrower to deliver any
other information to Lender, Borrower shall promptly report to Lender any return
of Inventory by any one account debtor if the Inventory so returned in such case
has a value in excess of Twenty Five Thousand Dollars ($25,000). At any time
that Inventory is returned, reclaimed or repossessed, the Account (or portion
thereof) which arose from the sale of such returned, reclaimed or repossessed
Inventory shall not be deemed an Eligible Account. In the event any account
debtor returns Inventory when an Event of Default exists or has
<PAGE> 46
occurred and is continuing, Borrower shall, upon Lender's request:
(i) hold the returned Inventory in trust for Lender,
(ii) segregate all returned Inventory from all of its
other property,
(iii) dispose of the returned Inventory solely
according to Lender's instructions, and
(iv) not issue any credits, discounts or allowances
with respect thereto without Lender's prior written consent.
(c) With respect to each Account:
(i) the amounts shown on any invoice delivered to
Lender or schedule thereof delivered to Lender shall be true and
complete,
(ii) no payments shall be made thereon except payments
delivered to Lender pursuant to the terms of this Agreement or in
accordance with the NationsCredit Intercreditor Agreement,
(iii) no credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account
debtor except as reported to Lender in accordance with this
Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's
business in accordance with practices and policies previously
disclosed to Lender,
(iv) there shall be no setoffs, deductions, contras,
defenses, counterclaims or disputes existing or asserted with
respect thereto except as reported to Lender in accordance with the
terms of this Agreement,
(v) none of the transactions giving rise thereto will
violate any applicable State or Federal
<PAGE> 47
Laws or regulations, all documentation relating thereto will be
legally sufficient under such laws and regulations and all such
documentation will be legally enforceable in accordance with its
terms, and
(vi) Borrower shall not pre-bill any account debtor.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred:
(i) notify any or all account debtors that the
Accounts have been assigned to Lender and that Lender has a
security interest therein and Lender may direct any or all account
debtors to make payments of Accounts directly to Lender,
(ii) extend the time of payment of, compromise, settle
or adjust for cash, credit, return of merchandise or otherwise, and
upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or
release the account debtor or any other party or parties in any way
liable for payment thereof without affecting any of the
Obligations,
(iii) demand, collect or enforce payment of any
Accounts or such other obligations, but without any duty to do so,
and Lender shall not be liable for its
<PAGE> 48
failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto, and
(iv) take whatever other action Lender may deem
necessary or desirable for the protection of its interests.
At any time that an Event of Default exists or has occurred and is
continuing, at Lender's request, all invoices and statements sent to any account
debtor shall state that the Accounts due from such account debtor and such other
obligations have been assigned to Lender and are payable directly and only to
Lender and Borrower shall deliver to Lender such originals of documents
evidencing the sale and delivery of goods or the performance of services giving
rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory:
(a) Borrower shall at all times maintain and provide Lender with
inventory records reasonably satisfactory to Lender, keeping correct and
accurate records itemizing and describing the kind, type, quality, age and
quantity of Inventory, the amount of open box Inventory, the amount of Eligible
Inventory and Inventory that is not Eligible Inventory, Borrower's cost therefor
and daily withdrawals therefrom and additions thereto;
(b) Borrower shall cause a third party firm acceptable to Lender to
conduct a complete physical count of the Inventory a minimum of once every
twelve (12) months, but at any time or times as Lender may request upon the
occurrence of an Event of Default, and promptly following such physical count,
such firm shall supply Lender with a report in the form and with such
specificity as may be reasonably satisfactory to Lender concerning such physical
count;
(c) Borrower shall not remove any Inventory from the locations set
forth or permitted herein, without the prior written consent of Lender, except
for sales of Inventory in the ordinary course of Borrower's business and except
to move
<PAGE> 49
Inventory directly from one location set forth or permitted herein to another
such location;
(d) upon Lender's request, Borrower shall, at its expense, no more
than once in any twelve (12) month period, but at any time or times as Lender
may request upon the occurrence of an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely
(with the understanding that Lender may revise the definition of "Eligible
Inventory" hereunder or establish Availability Reserves as Lender may deem
advisable in its sole discretion based upon the results of such update
appraisals);
(e) Borrower shall produce, use, store and maintain the Inventory
with all reasonable care and caution and in accordance with applicable standards
of any insurance and in conformity with applicable laws (including, but not
limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as
amended and all rules, regulations and orders related thereto);
(f) Borrower assumes all responsibility and liability arising from
or relating to the production, use, sale or other disposition of the Inventory;
(g) Borrower shall not sell Inventory to any customer on approval,
or any other basis which entitles the customer to return or may obligate
Borrower to repurchase such Inventory;
(h) Borrower shall keep the Inventory in good and marketable
condition; and
(i) Borrower shall not, without prior written notice
to Lender, acquire or accept any Inventory on consignment or
approval.
7.4 Equipment Covenants. With respect to the Equipment:
<PAGE> 50
(a) upon Lender's request, Borrower shall, at its expense, at any
time or times as Lender may request on or after an Event of Default, deliver or
cause to be delivered to Lender written reports or appraisals as to the
Equipment in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender;
(b) Borrower shall keep the Equipment in good order, repair,
running and marketable condition (ordinary wear and tear excepted);
(c) Borrower shall use the Equipment with all reasonable care and
caution and in accordance with applicable standards of any insurance and in
conformity with all applicable laws;
(d) the Equipment is and shall be used in Borrower's business and
not for personal, family, household or farming use;
(e) Borrower shall not remove any Equipment from the locations set
forth or permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of Borrower or to
move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by or
for the benefit of Borrower in the ordinary course of business;
(f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and
(g) Borrower assumes all responsibility and liability arising from
the use of the Equipment.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to:
<PAGE> 51
(a) at any time an Event of Default or event which with notice or
passage of time or both would constitute an Event of Default exists or has
occurred and is continuing:
(i) demand payment on Accounts or other proceeds of
Inventory or other Collateral,
(ii) enforce payment of Accounts or other Obligations
included in the Collateral by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies
to collect any Account or other proceeds of Inventory or other
Collateral,
(iv) sell or assign any Account upon such terms, for
such amount and at such time or times as the Lender deems
advisable,
(v) settle, adjust, compromise, extend or renew an
Account,
(vi) discharge and release any Account or other
Obligations included in the Collateral,
(vii) prepare, file and sign Borrower's name on any
proof of claim in bankruptcy or other similar document against an
account debtor,
(viii) notify the post office authorities to change
the address for delivery of Borrower's mail to an address
designated by Lender, and open and dispose of all mail addressed to
Borrower, and
(ix) do all acts and things which are necessary, in
Lender's determination, to fulfill Borrower's obligations under
this Agreement and the other Financing Agreements; and
(b) at any time, subject to the terms of the agreement(s) relating
to the Blocked Account(s) to:
<PAGE> 52
(i) take control in any manner of any item of payment
or proceeds thereof,
(ii) have access to any lockbox or postal box into
which Borrower's mail is deposited,
(iii) endorse Borrower's name upon any items of
payment or proceeds thereof and deposit the same in the Lender's
account for application to the Obligations,
(iv) endorse Borrower's name upon any chattel paper,
document, instrument, invoice, or similar document or agreement
relating to any Account or any goods pertaining thereto or any
other Collateral,
(v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors, and
(vi) execute in Borrower's name and file any UCC
financing statements or amendments thereto.
Borrower hereby releases Lender and its officers, employees and designees from
any liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option: (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral, and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have
<PAGE> 53
assumed any obligation or liability of Borrower. Any payment made or other
action taken by Lender under this Section 7.6 shall be without prejudice to any
right to assert an Event of Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at
the cost and expense of Borrower:
(a) Lender or its designee shall have complete access to all of
Borrower's premises during normal business hours and after notice to Borrower,
or at any time and without notice to Borrower if an Event of Default exists or
has occurred and is continuing, for the purposes of inspecting, verifying and
auditing the Collateral and all of Borrower's books and records, including,
without limitation, the Records;
(b) Borrower shall promptly furnish to Lender such copies of such
books and records or extracts therefrom as Lender may request; and
(c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is
a corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse
<PAGE> 54
effect on Borrower's financial condition, results of operation or business or
the rights of Lender in or to any of the Collateral. The execution, delivery and
performance of this Agreement, the other Financing Agreements and the
transactions contemplated hereunder and thereunder are all within Borrower's
corporate powers, have been duly authorized and are not in contravention of law
or the terms of Borrower's articles of incorporation, by-laws, or other
organizational documentation, or any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower or its property are bound. This
Agreement and the other Financing Agreements constitute legal, valid and binding
obligations of Borrower enforceable in accordance with their respective terms.
Borrower does not have any subsidiaries except as set forth on the Information
Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operations of Borrower as at the
dates and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof and to the best of Borrower's
knowledge, the holders of any mortgages on such locations.
<PAGE> 55
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.9 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.9 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other
<PAGE> 56
Financing Agreements to which it is a party or of Lender to enforce any
Obligations or realize upon any Collateral.
8.7 Employee Benefits.
(a) Borrower has not engaged in any transaction in connection with
which Borrower or any of its ERISA Affiliates could be subject to either a civil
penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section
4975 of the Code, including any accumulated funding deficiency described in
Section 8.7(c) hereof and any deficiency with respect to vested accrued benefits
described in Section 8.7(d) hereof.
(b) No liability to the Pension Benefit Guaranty Corporation has
been or is expected by Borrower to be incurred with respect to any employee
benefit plan of Borrower or any of its ERISA Affiliates. There has been no
reportable event (within the meaning of Section 4043(b) of ERISA) or any other
event or condition with respect to any employee pension benefit plan of Borrower
or any of its ERISA Affiliates which presents a risk of termination of any such
plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which Borrower or any
of its ERISA Affiliates is required under Section 302 of ERISA and Section 412
of the Code to have paid under the terms of each employee benefit plan as
contributions to such plan as of the last day of the most recent fiscal year of
such plan ended prior to the date hereof, and no accumulated funding deficiency
(as defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, exists with respect to any employee benefit plan, including any penalty
or tax described in Section 8.7(a) hereof and any deficiency with respect to
vested accrued benefits described in Section 8.7(d) hereof.
(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the assets of such plans
allocable to
<PAGE> 57
such vested accrued benefits, including any penalty or tax described in Section
8.7(a) hereof and any accumulated funding deficiency described in Section 8.7(c)
hereof. The terms "current value" and "accrued benefit" have the meanings
specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
8.8 Environmental Compliance.
(a) Except as set forth on Schedule 8.8 hereto, Borrower has not
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of Borrower complies in all material
respects with all Environmental Laws and all licenses, permits, certificates,
approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.8 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects Borrower or its
business, operations or assets or any properties at which Borrower has
transported, stored or disposed of any Hazardous Materials.
(c) Borrower has no material liability (contingent or otherwise) in
connection with a release, spill or discharge,
<PAGE> 58
threatened or actual, of any Hazardous Materials or the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates, approvals or
similar authorizations required to be obtained or filed in connection with the
operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect.
8.9 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound except for the financing agreements with FINOVA Capital Corporation which
agreements shall be terminated concurrently with the initial funding
contemplated herein, and Borrower is in compliance in all material respects with
all applicable provisions of laws, rules, regulations, licenses, permits,
approvals and orders of any foreign, Federal, State or local governmental
authority.
8.10 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of Borrower to establish new accounts in accordance with Section 9.14
below.
8.11 Acquisition of Purchased Stock.
(a) The Purchase Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed in accordance with
their terms by the respective parties thereto in all respects, including the
fulfillment (not merely the waiver, except as may be disclosed to Lender and
consented to in writing by Lender) of all conditions precedent set forth therein
and giving effect to the terms of
<PAGE> 59
the Purchase Agreements and the assignments to be executed and delivered by
Seller thereunder, Buyer acquired and has good and marketable title to the
Purchased Stock, free and clear of all claims, liens, pledges and encumbrances
of any kind, except as disclosed in writing to Lender.
(b) All actions and proceedings required by the Purchase
Agreements, applicable law or regulation (including, but not limited to,
compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended) have been taken and the transactions required thereunder have been duly
and validly taken and consummated.
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Purchase Agreements and no governmental or other
action or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Purchase Agreements.
(d) Borrower has delivered, or caused to be delivered, to Lender
true, correct and complete copies of the Purchase Agreements.
8.12 Capitalization.
(a) Upon the consummation of the transactions contemplated under
the Purchase Agreement, all of the issued and outstanding shares of capital
stock of Borrower and CYI will be directly and beneficially owned and held by
Buyer and all of such shares have been duly authorized and are fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of
any kind, except as disclosed in writing to Lender.
(b) Borrower is solvent and will continue to be solvent after the
creation of the Obligations, the security interests of Lender and the other
transaction contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
<PAGE> 60
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present fair salable value are, and will be, greater than
the indebtedness of Borrower, and including subordinated and contingent
liabilities computed at the amount which, to the best of Borrower's knowledge,
represents an amount which can reasonably be expected to become an actual or
matured liability.
8.13 Accuracy and Completeness of Information. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the business, assets or prospects of
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
8.14 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and
<PAGE> 61
maintain in full force and effect all permits, licenses, trademarks, tradenames,
approvals, authorizations, leases and contracts necessary to carry on the
business as presently or proposed to be conducted. Borrower shall give Lender
thirty (30) days prior written notice of any proposed change in its corporate
name, which notice shall set forth the new name and Borrower shall deliver to
Lender a copy of the amendment to the Articles of Incorporation of Borrower
providing for the name change certified by the Secretary of State of the
jurisdiction of incorporation of Borrower as soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower: (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location; and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including, without limitation, UCC financing statements and, if
Borrower leases such new location, provides a favorable landlord waiver or
subordination.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply in all material respects
with all laws, rules, regulations, licenses, permits, approvals and orders
applicable to it and duly observe all requirements of any Federal, State or
local governmental authority, including, without limitation, the Employee
Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard
Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and
all statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Borrower shall take prompt and appropriate action to respond to
any non-compliance with any of the Environmental Laws and shall report to Lender
on such response.
<PAGE> 62
(c) Borrower shall give both oral and written notice to Lender
immediately upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of:
(i) the occurrence of any event involving the release,
spill or discharge, threatened or actual, of any Hazardous
Material; or
(ii) any investigation, proceeding, complaint, order,
directive, claims, citation or notice with respect to:
(A) any non-compliance with or violation of any Environmental Law
by Borrower,
(B) the release, spill or discharge, threatened or actual, of any
Hazardous Material,
(C) the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials, or
(D) any other environmental, health or safety matter, which affects
Borrower or its business, operations or assets or any properties at which
Borrower transported, stored or disposed of any Hazardous Materials.
(d) Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including, without limitation, the costs of
any required or necessary repair, cleanup or other remedial work with respect to
any property of Borrower and the preparation and implementation of any closure,
remedial or other required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall
<PAGE> 63
survive the payment of the Obligations and the termination or non-renewal of
this Agreement.
9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and
<PAGE> 64
Borrower shall obtain non-contributory lender's loss payable endorsements to all
insurance policies in form and substance satisfactory to Lender. Such lender's
loss payable endorsements shall specify that the proceeds of such insurance
shall be payable to Lender as its interests may appear and further specify that
Lender shall be paid regardless of any act or omission by Borrower or any of its
affiliates. At its option, Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Key Man Life Insurance Policy. Borrower shall use its best efforts
to obtain a Key Man Life Insurance Policy insuring the life of Rechtman, which
policy, shall be in an amount of not less than Two Million Dollars ($2,000,000)
and once obtained, shall be beneficially assigned to Lender.
9.7 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Lender:
(i) within twenty-five (25) days after the end of each
fiscal month, monthly unaudited consolidated financial statements,
and, if Borrower has any subsidiaries, unaudited consolidating
financial statements (including in each case balance sheets and
statements of income and loss), all in reasonable detail, fairly
presenting the financial position and the results of the operations
of Borrower and its subsidiaries as of the end of and through such
fiscal month; and
(ii) within ninety (90) days after the end of each
fiscal year, audited consolidated financial statements and, if
Borrower has any subsidiaries,
<PAGE> 65
audited consolidating financial statements of Borrower and its
subsidiaries (including in each case balance sheets, statements of
income and loss, statements of cash flow and statements of
shareholders' equity), and the accompanying notes thereto, all in
reasonable detail, fairly presenting the financial position and the
results of the operations of Borrower and its subsidiaries as of
the end of and for such fiscal year, together with the unqualified
opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by
Borrower and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present
fairly the results of operations and financial condition of
Borrower and its subsidiaries as of the end of and for the fiscal
year then ended.
(b) Borrower shall promptly notify Lender in writing of the details
of:
(i) any loss, damage, investigation, action, suit,
proceeding or claim relating to the Collateral or any other
property which is security for the Obligations or which would
result in any material adverse change in Borrower's business,
properties, assets, goodwill or condition, financial or otherwise,
and
(ii) the occurrence of any Event of Default or event
which, with the passage of time or giving of notice or both, would
constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all financial reports which
Borrower sends to its stockholders generally and copies of all reports and
registration statements which Borrower files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
<PAGE> 66
(d) Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information in respect of the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Lender, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrower and to disclose to Lender such information as they may have
regarding the business of Borrower. Any documents, schedules, invoices or other
papers delivered to Lender may be destroyed or otherwise disposed of by Lender
one (1) year after the same are delivered to Lender, except as otherwise
designated by Borrower to Lender in writing.
9.8 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly:
(a) merge into or with or consolidate with any other Person or
permit any other Person to merge into or with or consolidate with it without the
prior written consent of Lender, which consent shall not be unreasonably
withheld;
(b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person, except for:
(i) sales of Inventory in the ordinary course of
business; and
(ii) the disposition of worn-out or obsolete Equipment
or Equipment no longer used in the business of Borrower so long as:
(A) if an Event of Default exists or has occurred and is
continuing, any proceeds are paid to Lender, and
<PAGE> 67
(B) such sales do not involve Equipment, together with any
equipment disposed by CYI, having an aggregate fair market value in excess of
Twenty-Five Thousand Dollars ($25,000) for all such equipment disposed of by
Borrower and CYI in any fiscal year of Borrower;
(c) form or acquire any subsidiaries;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.9 Encumbrances. Borrower shall not create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including, without limitation, the Collateral, except:
(a) the liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or
the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books;
(c) security deposits in the ordinary course of business;
(d) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of Borrower's business to the
extent:
(i) such liens secure indebtedness which is not
overdue, or
(ii) such liens secure indebtedness relating to claims
or liabilities which are fully insured and being defended at the
sole cost and expense and at the sole risk of the insurer (subject
to applicable deductibles) or being contested in good faith by
appropriate proceedings diligently pursued and available to
Borrower, in each case prior to the
<PAGE> 68
commencement of foreclosure or other similar proceedings and with
respect to which adequate reserves have been set aside on its
books;
(e) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property which do not interfere in any
material respect with the use of such real property or ordinary conduct of the
business of Borrower as presently conducted thereon or materially impair the
value of the real property which may be subject thereto;
(f) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate, together with the
then aggregate purchase money security interests in equipment and purchase money
mortgages on real estate outstanding by CYI, not to exceed Two Hundred Thousand
Dollars ($200,000) in the aggregate at any time outstanding so long as such
security interests and mortgages do not apply to any property of Borrower other
than the Equipment or real estate so acquired, and the indebtedness secured
thereby does not exceed the cost of the Equipment or real estate so acquired, as
the case may be;
(g) the liens and security interests of NationsCredit on the assets
of Borrower consisting of Inventory to secure the indebtedness of Borrower to
NationsCredit permitted under Section 9.10 hereof, which liens and security
interests are, in all respects, subject and subordinate in priority to the liens
and security interests of Lender pursuant to the NationsCredit Intercreditor
Agreement; and
(h) the security interests and liens set forth on Schedule 8.4
hereto.
9.10 Indebtedness. Borrower shall not incur, create, assume, become
or be liable in any manner with respect to, or permit to exist, any obligations
or indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course of
business not yet due and payable, or with
<PAGE> 69
respect to which Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in violation
of any other provision of this Agreement;
(d) obligations or indebtedness set forth on the Information
Certificate; provided, that:
(i) Borrower may only make regularly scheduled
payments of principal and interest in respect of such indebtedness
in accordance with the terms of the agreement or instrument
evidencing or giving rise to such indebtedness as in effect on the
date hereof;
(ii) Borrower shall not, directly or indirectly:
(A) amend, modify, alter or change the terms of such indebtedness
or any agreement, document or instrument related thereto as in effect on the
date hereof, or
(B) except as otherwise permitted under this Agreement, redeem,
retire, defease, purchase or otherwise acquire such indebtedness, or set aside
or otherwise deposit or invest any sums for such purpose; and
(iii) Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by
Borrower or on its behalf, promptly after the receipt thereof, or
sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be;
(e) indebtedness subordinated to the Obligations pursuant to an
agreement, in form and substance satisfactory to Lender and provided, that
Borrower has obtained the prior written consent of Lender to the assumption of
such subordinated debt; and
<PAGE> 70
(f) indebtedness of Borrower to NationsCredit evidenced by that
certain Security Agreement dated August 27, 1998 between Borrower and
NationsCredit, which indebtedness is subject and subordinate in right of payment
to the right of Lender to receive the prior final payment and satisfaction in
full of all of the Obligations pursuant to the NationsCredit Intercreditor
Agreement.
9.11 Loans, Investments, Guarantees, Etc. Borrower shall not, directly
or indirectly, make any loans or advance money or property to any person, or
invest in (by capital contribution, dividend or otherwise) or purchase or
repurchase the stock or indebtedness or all or a substantial part of the assets
or property of any person, or guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do any of the foregoing,
except:
(a) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(b) investments in:
(i) short-term direct obligations of the United States
Government,
(ii) negotiable certificates of deposit issued by any
bank satisfactory to Lender, payable to the order of the Borrower
or to bearer and delivered to Lender, and
(iii) commercial paper rated A1 or P1;
(c) loans to employees of Borrower which together with any loans
outstanding to the employees of CYI shall not at any time exceed One Hundred
Thousand Dollars ($100,000) in the aggregate;
(d) the loans to Rechtman in an amount not to exceed Three Million
Dollars ($3,000,000) a portion of which proceeds thereof have been paid to Anita
Gabriel in exchange for all of her interest in Borrower;
<PAGE> 71
(e) loans to CYI in an amount not to exceed at any one time Seven
Hundred Fifty Thousand Dollars ($750,000);
(f) an investment with DOJI Capital Partners, LP in an amount not
to exceed One Hundred Fifty Thousand Dollars ($150,000); provided, that, as to
any of the foregoing, unless waived in writing by Lender, Borrower shall take
such actions as are deemed necessary by Lender to perfect the security interest
of Lender in such investments, including, without limitation, collaterally
assigning to Lender its rights under any promissory notes evidencing the loans
to any employees of Borrower, Rechtman, CYI and DOJI Capital Partners, LP; and
(g) the guarantees set forth in the Information Certificate.
9.12 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of any class
of capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
9.13 Transactions with Affiliates. Borrower shall not enter into any
transaction for the purchase, sale or exchange of property or the rendering of
any service to or by any affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person. Borrower
shall at no time transfer to Los Angeles Micromart, Inc., a wholly owned
subsidiary of Borrower, any assets or property of Borrower.
9.14 Additional Bank Accounts. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit
<PAGE> 72
account, investment account or any other account with any bank or other
financial institution, other than the Blocked Accounts and the accounts set
forth in Schedule 8.10 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new
or additional accounts which contain any Collateral or proceeds thereof, with
the prior written consent of Lender and subject to such conditions thereto as
Lender may establish; and
(b) as to any accounts used by Borrower to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
9.15 Compliance with ERISA.
(a) Borrower shall not with respect to any "employee pension
benefit plans" maintained by Borrower or any of its ERISA Affiliates:
(i) terminate any of such employee pension benefit
plans so as to incur any liability to the Pension Benefit Guaranty
Corporation established pursuant to ERISA;
(ii) allow or suffer to exist any prohibited
transaction involving any of such employee pension benefit plans or
any trust created thereunder which would subject Borrower or such
ERISA Affiliate to a tax or penalty or other liability on
prohibited transactions imposed under Section 4975 of the Code or
ERISA;
(iii) fail to pay to any such employee pension benefit
plan any contribution which it is obligated to pay under Section
302 of ERISA, Section 412 of the Code or the terms of such plan;
(iv) allow or suffer to exist any accumulated funding
deficiency, whether or not waived, with respect to any such
employee pension benefit plan;
<PAGE> 73
(v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a
material risk of termination by the Pension Benefit Guaranty
Corporation of any such employee pension benefit plan that is a
single employer plan, which termination could result in any
liability to the Pension Benefit Guaranty Corporation; or
(vi) incur any withdrawal liability with respect to
any multiemployer pension plan.
(b) As used in this Section 9.15, the terms "employee pension
benefit plans", "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
Section 4975 of the Code and ERISA.
9.16 Adjusted Net Worth. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than the Adjusted Net Worth of Borrower as of
August 31, 1998 as reflected on Borrower's financial statements, less Eight
Hundred Thousand Dollars ($800,000).
9.17 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to:
(a) all costs and expenses of filing or recording (including
Uniform Commercial Code financing statement filing taxes and fees, documentary
taxes, intangibles taxes and mortgage recording taxes and fees, if applicable);
<PAGE> 74
(b) all costs and expenses and fees for all title insurance and
other insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees;
(c) all costs and expenses of remitting loan proceeds, collecting
checks and other items of payment, and establishing and maintaining the Blocked
Accounts, together with Lender's customary charges and fees with respect
thereto;
(d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations;
(e) costs and expenses of preserving and protecting the Collateral;
(f) costs and expenses paid or incurred in connection with
obtaining payment of the Obligations, enforcing the security interests and liens
of Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including, without limitation,
preparations for and consultations concerning any such matters);
(g) all out-of-pocket expenses and costs heretofore and from time
to time hereafter incurred by Lender's examiners in the conduct of their
periodic field examinations of the Collateral and Borrower's operations, plus a
per diem charge at the rate of Six Hundred Fifty Dollars ($650) per person per
day for Lender's examiners in the field and office, provided, however, so long
as no Event of Default has occurred, such out-of-pocket expenses and costs shall
not exceed One Thousand Dollars ($1,000) in any one calendar year and such per
diem charge shall not exceed Ten Thousand Dollars ($10,000) in any one calendar
year; and
(h) the fees and disbursements of counsel (including legal
assistants) to Lender in connection with any of the foregoing.
<PAGE> 75
9.18 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing on behalf of Borrower that all conditions precedent to the
making of Loans and providing Letter of Credit Accommodations contained herein
are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined that such conditions are satisfied. Where permitted by
law, Borrower hereby authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or fails
to perform any of the terms, covenants, conditions or provisions contained in
this Agreement or any of the other Financing Agreements (including, without
limitation, the NationsCredit Intercreditor Agreement or the Guarantee of even
date herewith by Borrower in favor of Lender);
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
<PAGE> 76
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of Twenty-Five Thousand Dollars ($25,000) in
any one case or in excess of Fifty Thousand Dollars ($50,000) in the aggregate
and shall remain undischarged or unvacated for a period in excess of thirty (30)
days or execution shall at any time not be effectively stayed, or any judgment
other than for the payment of money, or injunction, attachment, garnishment or
execution is rendered against Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of an
Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
<PAGE> 77
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property;
(i) any default by Borrower or any Obligor from and after the
Closing under any agreement, document or instrument relating to any indebtedness
for borrowed money owing to any person other than Lender, or any capitalized
lease obligations, contingent indebtedness in connection with any guarantee,
letter of credit, indemnity or similar type of instrument in favor of any person
other than Lender, in any case in an amount in excess of Fifty Thousand Dollars
($50,000), which default continues for more than the applicable cure period, if
any, with respect thereto, or any default by Borrower or any Obligor under any
material contract, lease, license or other obligation to any person other than
Lender, which default continues for more than the applicable cure period, if
any, with respect thereto;
(j) the NationsCredit Flooring Line is terminated and no longer in
effect;
(k) the CYI Loan Agreement is terminated and no longer in effect;
(l) without the prior written consent of Lender, any change in the
controlling ownership of Borrower which would reduce Orie Rechtman's ownership
interest in Borrower to less than twenty percent (20%) of the issued and
outstanding capital stock of Borrower;
(m) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
<PAGE> 78
include forfeiture of any of the property of Borrower or such Obligor;
(n) there shall be a material adverse change in the business,
assets or prospects of Borrower or any Obligor after the date hereof; or
(o) there shall be an event of default under any of the other
Financing Agreements, including without limitation, the CYI Loan Agreement.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation:
(i) accelerate the payment of all Obligations and
demand immediate payment thereof to Lender (provided, that, upon
the occurrence of any Event of Default described in Sections
10.1(g) and 10.1(h), all
<PAGE> 79
Obligations shall automatically become immediately due and
payable);
(ii) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any
of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all
or any portion of the Collateral;
(iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the
Collateral at any place and time designated by Lender;
(iv) collect, foreclose, receive, appropriate,
setoff and realize upon any and all Collateral;
(v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or
for any other purpose;
(vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without
limitation, entering into contracts with respect thereto, public
or private sales at any exchange, broker's board, at any office of
Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the
Lender having the right to purchase the whole or any part of the
Collateral at any such public sale, all of the foregoing being
free from any right or equity of redemption of Borrower, which
right or equity of redemption is hereby expressly waived and
released by Borrower; and/or
(vii) terminate this Agreement.
If any of the Collateral is sold or leased by Lender upon credit terms or for
future delivery, the Obligations shall not be reduced as a result thereof until
payment therefor
<PAGE> 80
is finally collected by Lender. If notice of disposition of Collateral is
required by law, five (5) days prior notice by Lender to Borrower designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and Borrower waives any other notice. In the event
Lender institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, Borrower waives the posting of any bond
which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice:
(i) cease making Loans or arranging for Letter of
Credit Accommodations or reduce the lending formulas or amounts of
Revolving Loans and Letter of Credit Accommodations available to
Borrower; and/or
(ii) terminate any provision of this Agreement
providing for any future Loans or Letter of Credit Accommodations
to be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
<PAGE> 81
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and of the United States District Court for the Central
District of California and waive any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising, and whether in contract, tort, equity or otherwise, and agree that any
dispute with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring any action or
proceeding against Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against Borrower or its
property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Lender against Borrower for the amount
of the claim and other relief requested.
<PAGE> 82
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION: (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS; OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or
<PAGE> 83
further notice or demand in the same, similar or other circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section 11.5 may be unenforceable
because it violates any law or public policy, Borrower shall pay the maximum
portion which it is permitted to pay under applicable law to Lender in
<PAGE> 84
satisfaction of indemnified matters under this Section 11.5. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS.
12.1 Term.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date two (2) years from the
date hereof (the "Renewal Date"), and upon mutual agreement by Lender and
Borrower, for one (1) year thereafter, unless sooner terminated pursuant to the
terms hereof. Lender or Borrower may terminate this Agreement and the other
Financing Agreements effective on the Renewal Date or on the anniversary of the
Renewal Date in any year by giving to the other party at least sixty (60) days
prior written notice; provided, that, this Agreement and all other Financing
Agreements must be terminated simultaneously and this Agreement and all other
Financing Agreements shall immediately terminate upon the termination of the
NationsCredit Flooring Line or the NationsCredit Intercreditor Agreement. Upon
the effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Lender has not yet received final and indefeasible payment. Such
payments in respect of the Obligations and cash collateral shall be remitted by
wire transfer in Federal funds to such bank account of Lender, as Lender may, in
its discretion, designate in writing to Borrower for such purpose. Interest
shall be due until and including the next Business Day, if the amounts so paid
by
<PAGE> 85
Borrower to the bank account designated by Lender are received in such bank
account later than 10:30 a.m., Pacific time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the
end of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
<PAGE> 86
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(i) 1% of Maximum Credit From the date hereof to and including
the first anniversary of the date
hereof; and
(ii) 0.25% of Maximum Credit After the first anniversary of the date
hereof or at any time during a renewal
term, if any.
</TABLE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and: (a) made to Lender at its address set forth below and to Borrower
at its chief executive office set forth below, or to such other address as
either party may designate by written notice to the other in accordance with
this provision; and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with instructions to deliver the
next Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
<PAGE> 87
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
<PAGE> 88
12.6 Publicity. Borrower consents to Lender publishing a tombstone or
similar advertising material relating to the financing transaction contemplated
by this Agreement.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION (WESTERN) WAREFORCE INCORPORATED
By: /s/ Matthew Grimes By: /s/ Dan Ricketts
----------------------------------- -------------------------
Title: Vice President Title: General Counsel
-------------------------------- ----------------------
Address: Chief Executive Office:
- --------------------------------------- -----------------------------
225 South Lake Avenue, Suite 1000 2361 Rosecrans, Suite 155
Pasadena, California 91101 El Segundo, California 90245
<PAGE> 1
Exhibit 10.8
LOAN AND SECURITY AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION (WESTERN)
as Lender
and
C.Y. INVESTMENT INC.
as Borrower
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS................................................................................1
1.1 "Accounts".....................................................................................2
1.2 "Adjusted Net Worth"...........................................................................2
1.3 "Availability Reserves"........................................................................2
1.4 "Blocked Accounts".............................................................................3
1.5 "Business Day".................................................................................3
1.6 "Buyer"........................................................................................3
1.7 "Code".........................................................................................3
1.8 "Collateral"...................................................................................3
1.9 "Eligible Accounts"............................................................................3
1.10 "Eligible Inventory"...........................................................................5
1.11 "Environmental Laws"...........................................................................6
1.12 "Equipment"....................................................................................6
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
1.13 "ERISA"........................................................................................6
1.14 "ERISA Affiliate"..............................................................................7
1.15 "Event of Default".............................................................................7
1.16 "Excess Availability"..........................................................................7
1.17 "Financing Agreements".........................................................................8
1.18 "GAAP".........................................................................................8
1.19 "Hazardous Materials"..........................................................................8
1.20 "Information Certificate"......................................................................8
1.21 "Inventory"....................................................................................9
1.22 "Inventory Advance Rate".......................................................................9
1.23 "Letter of Credit Accommodations"..............................................................9
1.24 "Loans"........................................................................................9
1.25 "Maximum Credit"...............................................................................9
1.26 "NationsCredit"................................................................................9
1.27 "NationsCredit Flooring Line"..................................................................9
1.28 "NationsCredit Intercreditor Agreement"........................................................9
1.29 "Net Amount of Eligible Accounts"..............................................................9
1.30 "Obligations"..................................................................................9
1.31 "Obligor".....................................................................................10
1.32 "Participant".................................................................................10
1.33 "Payment Account".............................................................................10
1.34 "Person"......................................................................................10
1.35 "Prime Rate"..................................................................................10
1.36 "Purchase Agreements".........................................................................10
1.37 "Purchased Stock".............................................................................10
1.38 "Rechtman"....................................................................................10
1.39 "Records".....................................................................................10
1.40 "Renewal Date"................................................................................10
1.41 "Revolving Loans".............................................................................11
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
1.42 "Seller"......................................................................................11
1.43 "Value".......................................................................................11
1.44 "Wareforce"...................................................................................11
1.45 "Wareforce Loan Agreement"....................................................................11
SECTION 2. CREDIT FACILITIES.........................................................................11
2.1 Revolving Loans...............................................................................11
2.2 Letter of Credit Accommodations...............................................................13
SECTION 3. INTEREST AND FEES.........................................................................16
3.1 Interest......................................................................................16
3.2 Closing Fee...................................................................................17
3.3 Compensation Adjustment.......................................................................17
SECTION 4. CONDITIONS PRECEDENT......................................................................18
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations.....................18
4.2 Conditions Subsequent to Initial Loans and Letter of Credit Accommodations....................21
4.3 Conditions Precedent to All Loans and Letter of Credit Accommodations.........................22
SECTION 5. GRANT OF SECURITY INTEREST................................................................22
SECTION 6. COLLECTION AND ADMINISTRATION.............................................................23
6.1 Borrower's Loan Account.......................................................................23
6.2 Statements....................................................................................23
6.3 Collection of Accounts........................................................................23
6.4 Payments......................................................................................25
6.5 Authorization to Make Loans...................................................................25
6.6 Payments on NationsCredit Flooring Line.......................................................25
6.7 Use of Proceeds...............................................................................25
SECTION 7. COLLATERAL REPORTING AND COVENANTS........................................................26
7.1 Collateral Reporting..........................................................................26
7.2 Accounts Covenants............................................................................27
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
7.3 Inventory Covenants...........................................................................29
7.4 Equipment Covenants...........................................................................30
7.5 Power of Attorney.............................................................................31
7.6 Right to Cure.................................................................................32
7.7 Access to Premises............................................................................32
SECTION 8. REPRESENTATIONS AND WARRANTIES............................................................33
8.1 Corporate Existence, Power and Authority; Subsidiaries........................................33
8.2 Financial Statements; No Material Adverse Change..............................................33
8.3 Chief Executive Office; Collateral Locations..................................................33
8.4 Priority of Liens; Title to Properties........................................................34
8.5 Tax Returns...................................................................................34
8.6 Litigation....................................................................................34
8.7 Employee Benefits.............................................................................34
8.8 Environmental Compliance......................................................................35
8.9 Compliance with Other Agreements and Applicable Laws..........................................36
8.10 Bank Accounts.................................................................................36
8.13 Accuracy and Completeness of Information......................................................37
8.14 Survival of Warranties; Cumulative............................................................37
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS........................................................37
9.1 Maintenance of Existence......................................................................37
9.2 New Collateral Locations......................................................................38
9.3 Compliance with Laws, Regulations, Etc........................................................38
9.4 Payment of Taxes and Claims...................................................................39
9.5 Insurance.....................................................................................39
9.6 Key Man Life Insurance Policy.................................................................40
9.7 Financial Statements and Other Information....................................................40
9.8 Sale of Assets, Consolidation, Merger, Dissolution, Etc.......................................41
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
9.9 Encumbrances..................................................................................41
9.10 Indebtedness..................................................................................42
9.11 Loans, Investments, Guarantees, Etc...........................................................43
9.12 Dividends and Redemptions.....................................................................44
9.13 Transactions with Affiliates..................................................................44
9.14 Additional Bank Accounts......................................................................44
9.15 Compliance with ERISA.........................................................................45
9.16 Adjusted Net Worth............................................................................45
9.17 Costs and Expenses............................................................................45
9.18 Further Assurances............................................................................46
SECTION 10. EVENTS OF DEFAULT AND REMEDIES............................................................47
10.1 Events of Default.............................................................................47
10.2 Remedies......................................................................................48
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.............................50
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.........................50
11.2 Waiver of Notices.............................................................................51
11.3 Amendments and Waivers........................................................................52
11.4 Waiver of Counterclaims.......................................................................52
11.5 Indemnification...............................................................................52
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS..........................................................52
12.1 Term..........................................................................................52
12.2 Notices.......................................................................................54
12.3 Partial Invalidity............................................................................54
12.4 Successors....................................................................................54
12.5 Entire Agreement..............................................................................54
12.6 Publicity.....................................................................................54
</TABLE>
<PAGE> 6
August 27, 1998
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated August 27, 1998 is entered into
by and between CONGRESS FINANCIAL CORPORATION (WESTERN), a California
corporation ("Lender") and C.Y. INVESTMENT INC., a California corporation
("Borrower").
W I T N E S S E T H:
WHEREAS, Wareforce One, Inc., a Nevada corporation ("Buyer"), has
acquired or will acquire all the issued and outstanding capital stock of
Borrower and Wareforce Incorporated, a California corporation ("Wareforce"); and
WHEREAS, Borrower and Wareforce have requested that Lender enter into
certain financing arrangements with Borrower and Wareforce pursuant to which
Lender may make loans and provide other financial accommodations to Borrower and
Wareforce; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations to Wareforce on the terms and conditions set forth in
that certain Loan and Security Agreement to be entered into between Lender and
Wareforce concurrently with the execution hereof (the "Wareforce Loan
Agreement"); and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations to Borrower on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
<PAGE> 7
SECTION 1 DEFINITIONS.
All terms used herein which are defined in Article 1 or Article 9 of
the California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the plural
herein shall also mean the singular and to the singular shall also mean the
plural. All references to Borrower and Lender pursuant to the definitions set
forth in the recitals hereto, or to any other person herein, shall include their
respective successors and assigns. The words "hereof", "herein", "hereunder",
"this Agreement" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not any particular provision of this
Agreement and as this Agreement now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced. An Event of
Default shall exist or continue or be continuing until such Event of Default is
waived in accordance with Section 11.3. Any accounting term used herein unless
otherwise defined in this Agreement shall have the meaning customarily given to
such term in accordance with GAAP. For purposes of this Agreement, the following
terms shall have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to the sum of:
(a) the difference between:
(i) the aggregate net book value of all assets of such
Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after
deducting from such book values all appropriate reserves in
accordance with GAAP (including all reserves for doubtful
receivables, obsolescence, depreciation and amortization), less
<PAGE> 8
(ii) the aggregate amount of the indebtedness and
other liabilities of such Person and its subsidiaries (including
tax and other proper accruals); plus
(b) indebtedness of such Person and its subsidiaries which is
subordinated in right of payment to the full and final payment of all of the
Obligations on terms and conditions acceptable to Lender.
1.3 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein:
(a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may affect either:
(i) the Collateral or any other property which is
security for the Obligations or its value,
(ii) the assets, business or prospects of Borrower or
any Obligor, or
(iii) the security interests and other rights of
Lender in the Collateral (including the enforceability, perfection
and priority thereof);
(b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect;
(c) to reflect outstanding Letter of Credit Accommodations as
provided in Section 2.2 hereof;
<PAGE> 9
(d) to reflect amounts due to NationsCredit by Borrower or Lender
on behalf of Borrower;
(e) to reflect any disclosed offsets or chargebacks by account
debtors against the aggregate amount of Eligible Accounts; or
(f) in respect of any state of facts which Lender determines in
good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default.
Without limiting the generality of the foregoing, Lender shall establish an
Availability Reserve: (i) in an amount equal to the Accounts resulting from
maintenance services until such time that Borrower has provided Lender the
schedule of Accounts required pursuant to Section 4.2(b) hereof; and (ii) in an
amount equal to three (3) months of Borrower's gross rent and other obligations
as lessee for each leased premises of Borrower at which any Inventory is located
and with respect to which the landlord has not executed a form of waiver and
consent acceptable to Lender.
1.4 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.5 "Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the State of North Carolina, and a day on
which First Union National Bank or such other bank as Lender may from time to
time designate, and Lender are open for the transaction of business.
1.6 "Buyer" shall have the meaning set forth in the Recitals hereto.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as the same
now exists or may from time to time hereafter be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
<PAGE> 10
1.8 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.9 "Eligible Accounts" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than sixty (60) days after
the date of the original due date thereof, but in any event, which are unpaid
more than ninety (90) days after the date of the original invoice for them;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent; (e) the chief
executive office of the account debtor with respect to such Accounts is located
in the United States of America or Canada, or, at Lender's option, if either:
(i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued by a bank satisfactory to
Lender or confirmed by a bank satisfactory to Lender located in the
United States and payable only in the United States of America and
in U.S. dollars, sufficient to cover such Account, in form and
substance satisfactory to Lender and, if required by Lender, the
original of such letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of the assignment of
the proceeds of such letter of credit to Lender,
<PAGE> 11
(ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on terms and in an
amount acceptable to Lender, or
(iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending formula with respect
thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, maintenance
billings, bill and hold invoices or retainage invoices, except as to bill and
hold invoices, if Lender shall have received an agreement in writing from the
account debtor, in form and substance satisfactory to Lender, confirming the
unconditional obligation of the account debtor to take the goods related thereto
and pay such invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by Borrower to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
<PAGE> 12
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty-five (25%) percent of all otherwise Eligible
Accounts (but the portion of the Accounts not in excess of such percentage may
be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days after the date of the original
invoice for them which constitute more than fifty (50%) percent of the total
Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Borrower and as approved by Lender from time to
time (but the portion of the Accounts not in excess of such credit limit may
still be deemed Eligible Accounts);
(p) such Accounts are not subject to accrued chargebacks listed on
current agings of receivables (but the portion of the Accounts of such account
debtor in excess of the amount of such chargeback shall be deemed Eligible
Accounts);
(q) such Accounts do not arise from an order by an account debtor
of products licensed from Microsoft Corporation
<PAGE> 13
in excess of Two Hundred Fifty Thousand Dollars ($250,000), unless Borrower has
received from such account debtor an executed customer order for such products;
and
(r) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.10 "Eligible Inventory" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower which
are identified as "Qualified Merchandise" and subject to the "NationsCredit
Repayment Obligation," each as defined in the NationsCredit Intercreditor
Agreement.
In general, Eligible Inventory shall not include: (i) work-in-process;
(ii) components which are not part of finished goods; (iii) spare parts for
equipment; (iv) Inventory stored in open boxes; (v) packaging and shipping
materials; (vi) supplies used or consumed in Borrower's business; (vii)
Inventory in transit; (viii) Inventory at premises other than those owned and
controlled by Borrower, except if Lender shall have received an agreement in
writing from the person in possession of such Inventory and/or the owner or
operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(ix) Inventory subject to a security interest or lien in favor of any person
other than Lender except those permitted in this Agreement; (x) bill and hold
goods; (xi) unserviceable Inventory; (xii) Inventory purchased prior to two (2)
calendar months before the then current month; (xiii) Inventory which is not
subject to the first priority, valid and perfected security interest of Lender;
(xiv) returned, damaged and/or defective Inventory; (xv) Inventory
<PAGE> 14
purchased or sold on consignment; and (xvi) Inventory not identified as
"Qualified Merchandise" in the NationsCredit Intercreditor Agreement. General
criteria for Eligible Inventory may be established and revised from time to time
by Lender in its reasonable credit judgment. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
1.11 "Environmental Laws" shall mean all federal, state, district,
local and foreign laws, rules, regulations, ordinances, and consent decrees
relating to health, safety, hazardous substances, pollution and environmental
matters, as now or at any time hereafter in effect, applicable to Borrower's
business and facilities (whether or not owned by it), including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes.
1.12 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.13 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.14 "ERISA Affiliate" shall mean any person required to be aggregated
with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
<PAGE> 15
1.15 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.16 "Excess Availability" shall mean the amount, as determined by
Lender, equal to:
(a) with respect to Borrower:
(i) the lesser of:
(A) the amount of the Revolving Loans available to Borrower as of
such time (based on the applicable advance rates set forth in Sections
2.1(a)(ii) or 2.1(a)(iii) hereof), subject to the sublimits and Availability
Reserves from time to time established by Lender hereunder, and
(B) the Maximum Credit; minus
(ii) the sum of:
(A) the amount of all then outstanding and unpaid Obligations
(other than the Obligations of Borrower under its Guarantee of even date
herewith in favor of Lender),
(B) the aggregate amount of all trade payables of Borrower which
are more than sixty (60) days past due as of such time,
(C) the aggregate amount of Borrower's book overdrafts, and
(D) the aggregate amount of Borrower's past due lease and notes
payable; and
(b) with respect to Wareforce:
(i) the lesser of:
(A) the amount of the "Revolving Loans" available to Wareforce as
of such time (based on the applicable advance rates set forth in Sections
<PAGE> 16
2.1(a)(i) or 2.1(a)(iii) of the Wareforce Loan Agreement), subject to the
sublimits and "Availability Reserves" from time to time established by Lender
under the Wareforce Loan Agreement, and
(B) the "Maximum Credit" (as defined in the Wareforce Loan
Agreement); minus
(ii) the sum of:
(A) the amount of all then outstanding and unpaid "Obligations" of
Wareforce under the Wareforce Loan Agreement (other than the obligations of
Wareforce under its Guarantee of even date herewith in favor of Lender),
(B) the aggregate amount of all trade payables of Wareforce which
are more than sixty (60) days past due as of such time,
(C) the aggregate amount of Wareforce's book overdrafts, and
(D) the aggregate amount of Wareforce's past due lease and notes
payable.
1.17 "Financing Agreements" shall mean, collectively, this Agreement,
the Wareforce Loan Agreement and all notes, guarantees, security agreements and
other agreements, documents and instruments now or at any time hereafter
executed and/or delivered by Borrower or any Obligor in connection with this
Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.18 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.16 hereof, GAAP shall be
<PAGE> 17
determined on the basis of such principles in effect on the date hereof and
consistent with those used in the preparation of the audited financial
statements delivered to Lender prior to the date hereof.
1.19 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are or become regulated under any Environmental Law (including, without
limitation, any that are or become classified as hazardous or toxic under any
Environmental Law).
1.20 "Information Certificate" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.21 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.22 "Inventory Advance Rate" shall mean the advance rate applicable to
Eligible Inventory as determined in accordance with Subsection 2.1(a)(iii)(B).
1.23 "Letter of Credit Accommodations" shall mean the letters of
credit, merchandise purchase or other guaranties which are from time to time
either:
<PAGE> 18
(a) issued, opened or provided by Lender for the account of
Borrower or any Obligor; or
(b) with respect to which Lender has agreed to indemnify the issuer
or guaranteed to the issuer the performance by Borrower of its obligations to
such issuer.
1.24 "Loans" shall mean the Revolving Loans.
1.25 "Maximum Credit" shall mean, with reference to the Revolving Loans
and the Letter of Credit Accommodations, the amount of Twelve Million Dollars
($12,000,000).
1.26 "NationsCredit" shall mean NationsCredit Distribution Finance,
Inc., a North Carolina corporation.
1.27 "NationsCredit Flooring Line" shall mean the floor plan financing
arrangement among NationsCredit, Borrower and Wareforce, pursuant to which
NationsCredit will from time to time extend certain financing to Borrower and
Wareforce for the acquisition of certain Inventory.
1.28 "NationsCredit Intercreditor Agreement" shall mean that certain
Intercreditor and Subordination Agreement of even date herewith between
NationsCredit and Lender.
1.29 "Net Amount of Eligible Accounts" shall mean the gross amount of
Eligible Accounts less:
(a) sales, excise or similar taxes included in the amount thereof;
and
(b) returns, discounts, claims, credits and allowances of any
nature at any time issued, owing, granted, outstanding, available or claimed
with respect thereto.
1.30 "Obligations" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement,
<PAGE> 19
the Guarantee of even date herewith by Borrower in favor of Lender or otherwise,
whether now existing or hereafter arising, whether arising before, during or
after the initial or any renewal term of this Agreement or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by
Lender.
1.31 "Obligor" shall mean Rechtman, Wareforce and any other guarantor,
endorser, acceptor, surety or other person liable on or with respect to the
Obligations or who is the owner of any property which is security for the
Obligations, other than Borrower.
1.32 "Participant" shall mean any person which at any time participates
with Lender in respect of the Loans, the Letter of Credit Accommodations or
other Obligations or any portion thereof.
1.33 "Payment Account" shall have the meaning set forth in Section
ERROR! REFERENCE SOURCE NOT FOUND. hereof.
1.34 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), limited liability company, limited liability partnership,
business trust, unincorporated association, joint stock corporation, trust,
joint venture or other entity or any government or any agency or instrumentality
or political subdivision thereof.
1.35 "Prime Rate" shall mean the rate from time to time publicly
announced by First Union National Bank, or its successors, from time to time as
its prime rate, whether or not such announced rate is the best rate available at
such bank.
<PAGE> 20
1.36 "Purchase Agreements" shall mean, individually and collectively,
the Stock Purchase Agreement and Escrow Instructions, dated as of January 1,
1998 between Buyer and Seller and all other agreements of transfer as are
referred to therein and all side letters with respect thereto, and all
agreements, documents and instruments executed and/or delivered in connection
therewith, as all of the foregoing now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.37 "Purchased Stock" shall mean all of the issued and outstanding
shares of common stock of Borrower.
1.38 "Rechtman" shall mean Orie Rechtman, an individual.
1.39 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.40 "Renewal Date" shall have the meaning set forth in Section ERROR!
REFERENCE SOURCE NOT FOUND. hereof.
1.41 "Revolving Loans" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section ERROR! REFERENCE
SOURCE NOT FOUND. hereof.
1.42 "Seller" shall mean collectively, the Christopher Chu and Alina
Chu Family Trust, Vivien Mak, an individual, Richard Fu, an individual, and
Luisa Fu, an individual, and each of their respective successors and assigns.
1.43 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost under the
<PAGE> 21
first-in-first-out method, net of vendor discounts or (b) market value.
1.44 "Wareforce" shall have the meaning set forth in the Recitals
hereto.
1.45 "Wareforce Loan Agreement" shall have the meaning set forth in the
Recitals hereto.
SECTION 2. CREDIT FACILITIES.
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the least of:
(i) the Maximum Credit, less any Availability
Reserves, other reserves and the then undrawn amounts of
outstanding Letter of Credit Accommodations; or
(ii) during the period commencing February 1 and
ending October 31 of each year, Borrower's aggregate collections
for the trailing sixty (60) day period and during the period
commencing November 1 and ending January 31 of each year,
Borrower's aggregate collections for the trailing ninety (90) day
period, less any Availability Reserves and the then undrawn amounts
of outstanding Letter of Credit Accommodations; or
(iii) the sum of:
(A) eighty-five (85%) percent of the Net Amount of Eligible
Accounts, plus
(B) the lesser of:
(1) seventy-five (75%) percent of the
Value of Eligible Inventory; provided, that, if at any
time, the "NationsCredit Repayment Obligation" (as
defined in the NationsCredit Intercreditor Agreement)
is less than seventy-five (75%) of the original
invoice price of "Qualified Merchandise" (as defined
in the
<PAGE> 22
NationsCredit Intercreditor Agreement), the Inventory
Advance Rate shall be proportionally reduced such that
the Inventory Advance Rate shall at no time exceed the
applicable percentage in determining the
"NationsCredit Repayment Obligation," or
(2) Seven Million Dollars ($7,000,000);
less
(C) any Availability Reserves and the then undrawn amounts of
outstanding Letter of Credit Accommodations.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days prior notice to Borrower:
(i) reduce the lending formula with respect to
Eligible Accounts to the extent that Lender determines in good
faith that:
(A) the dilution with respect to the Accounts for any period (based
on the ratio of (1) the aggregate amount of reductions in Accounts other than as
a result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels; or
(B) the general creditworthiness of account debtors has declined;
or
(ii) reduce the lending formula(s) with respect to
Eligible Inventory to the extent that Lender determines that:
<PAGE> 23
(A) the number of days of the turnover or the mix of such Inventory
for any period has changed in any materially adverse respect;
(B) the liquidation value of the Eligible Inventory, or any
category thereof, has decreased in any material respect; or
(C) the nature and quality of the Inventory has deteriorated in any
material respect.
In determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory or in establishing
Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of the
Loans, Letter of Credit Accommodations and other Obligations outstanding at any
time shall not exceed the Maximum Credit. In the event that the outstanding
amount of any component of the Loans and Letter of Credit Accommodations, or the
aggregate amount of the outstanding Loans, Letter of Credit Accommodations and
other Obligations, exceed the amounts available under the lending formulas set
forth in Section 2.1(a) hereof, the sublimits for Letter of Credit
Accommodations set forth in Section 2.2(e) or the Maximum Credit, as applicable,
such event shall not limit, waive or otherwise affect any rights of Lender in
that circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible Inventory pursuant to Section 2.1(a)(iii)(B)(2). Lender may
treat the then undrawn amounts of outstanding Letter of Credit Accommodations
for the purpose of purchasing Eligible Inventory as Revolving Loans to the
extent
<PAGE> 24
Lender is in effect basing the issuance of the Letter of Credit Accommodations
on the Value of the Eligible Inventory being purchased with such Letter of
Credit Accommodations. In determining the actual amounts of such Letter of
Credit Accommodations to be so treated for purposes of the sublimit, the
outstanding Revolving Loans and Availability Reserves shall be attributed first
to any components of the lending formulas in Section 2.1(a) that are not subject
to such sublimit, before being attributed to the components of the lending
formulas subject to such sublimit.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions contained herein,
at the request of Borrower, Lender agrees to provide or arrange for Letter of
Credit Accommodations with NationsCredit as the beneficiary thereunder for the
purpose of financing the purchase of Inventory on the terms and conditions set
forth in the NationsCredit Intercreditor Agreement and other Letter of Credit
Accommodations for the account of Borrower containing terms and conditions
acceptable to Lender and the issuer thereof. Any payments made by Lender to any
issuer thereof and/or related parties in connection with the Letter of Credit
Accommodations shall constitute additional Revolving Loans to Borrower pursuant
to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to one (1%) percent
per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable in
arrears as of the first day of each succeeding month; provided, however, that
such letter of credit fee shall be increased, at Lender's option, without
notice, to three (3%) percent per annum for the period on or after the date of
termination or non-renewal of this Agreement or the date of the occurrence of an
Event of Default. Such letter of credit fee shall be calculated on the basis of
a
<PAGE> 25
three hundred sixty (360) day year and actual days elapsed and the obligation of
Borrower to pay such fee shall survive the termination or non-renewal of this
Agreement.
(c) No Letter of Credit Accommodations (other than the Letter of
Credit Accommodations issued pursuant to the terms of the NationsCredit
Intercreditor Agreement) shall be available unless on the date of the proposed
issuance of any Letter of Credit Accommodations, the Revolving Loans available
to Borrower (subject to the Maximum Credit and any Availability Reserves) are
equal to or greater than:
(i) if the proposed Letter of Credit Accommodation is
for the purpose of purchasing Eligible Inventory, the sum of:
(A) the product of the Value of such Eligible Inventory multiplied
by one minus the Inventory Advance Rate under Section 2.1(a)(iii)(A) as
applicable, plus
(B) freight, taxes, duty and other amounts which Lender estimates
must be paid in connection with such Inventory upon arrival and for delivery to
one of Borrower's locations for Eligible Inventory within the United States of
America; and
(ii) if the proposed Letter of Credit Accommodation is
for standby letters of credit guaranteeing the purchase of Eligible
Inventory or for any other purpose, an amount equal to one hundred
(100%) percent of the face amount thereof and all other commitments
and obligations made or incurred by Lender with respect thereto.
(d) An Availability Reserve shall be established in the amount set
forth in Section 2.2(c)(i) upon the following:
(i) in the case of an order for the purchase of
Inventory supported by a Letter of Credit Accommodation costing
less than Five Hundred Thousand
<PAGE> 26
Dollars ($500,000), upon the placement of such order by Borrower;
and
(ii) in the case of an order for the purchase of
Inventory supported by a Letter of Credit Accommodation costing
Five Hundred Thousand Dollars ($500,000) or more, upon evidence, in
form and substance satisfactory to Lender, of shipment by a vendor
for such order.
Effective upon the issuance of each Letter of Credit Accommodation
for a purpose other than the purchase of Inventory, an Availability Reserve
shall be established in the amount set forth in Section 2.2(c)(ii).
(e) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed Seven
Million Dollars ($7,000,000). At any time an Event of Default exists or has
occurred and is continuing, upon Lender's request, Borrower will either furnish
cash collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash collateral
to Lender for the Letter of Credit Accommodations, and in either case, the
Revolving Loans otherwise available to Borrower shall not be reduced as provided
in Section 2.2(d) to the extent of such cash collateral.
(f) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with respect
to any Letter of Credit Accommodation. Borrower assumes all risks with respect
to the acts or omissions of the drawer under or beneficiary of any
<PAGE> 27
Letter of Credit Accommodation, including, without limitation, NationsCredit,
and for such purposes the drawer or beneficiary shall be deemed Borrower's
agent. Borrower assumes all risks for, and agrees to pay, all foreign, Federal,
State and local taxes, duties and levies relating to any goods subject to any
Letter of Credit Accommodations or any documents, drafts or acceptances
thereunder. Borrower hereby releases and holds Lender harmless from and against
any acts, waivers, errors, delays or omissions, whether caused by Borrower, by
any issuer or correspondent or otherwise, unless caused by the gross negligence
or willful misconduct of Lender, with respect to or relating to any Letter of
Credit Accommodation. The provisions of this Section 2.2(f) shall survive the
payment of Obligations and the termination or non-renewal of this Agreement.
(g) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect to any Letter of Credit
Accommodation provided by an issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not:
(i) at any time an Event of Default exists or has
occurred and is continuing:
(A) approve or resolve any questions of non-compliance of
documents,
(B) give any instructions as to acceptance or rejection of any
documents or goods, or
<PAGE> 28
(C) execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders, and
(ii) at all times:
(A) grant any extensions of the maturity of, time of payment for,
or time of presentation of, any drafts, acceptances, or documents, or
(B) agree to any amendments, renewals, extensions, modifications,
changes or cancellations of any of the terms or conditions of any of the
applications, Letter of Credit Accommodations, or documents, drafts or
acceptances thereunder or any letters of credit included in the Collateral.
Lender may take such actions either in its own name or in
Borrower's name.
(h) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
SECTION 3. INTEREST AND FEES.
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at a rate equal to the Prime
Rate, except that Borrower shall pay to Lender interest, at Lender's option,
without notice, at
<PAGE> 29
the rate of two percent (2.0%) percent per annum in excess of the Prime Rate:
(i) on the non-contingent Obligations for the period
from and after the date of termination or non-renewal hereof, or
the date of the occurrence of an Event of Default, and for so long
as such Event of Default is continuing as determined by Lender and
until such time as Lender has received full and final payment of
all such Obligations (notwithstanding entry of any judgment against
Borrower); and
(ii) on the Revolving Loans at any time outstanding in
excess of the amounts available to Borrower under Section 2
(whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an
Event of Default).
All interest accruing hereunder on and after the occurrence of any
of the events referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above
shall be payable on demand.
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such change occurs. In no event
shall charges constituting interest payable by Borrower to Lender exceed the
maximum amount or the rate permitted under any applicable law or regulation, and
if any part or provision of this Agreement is in contravention of any such law
or regulation, such part or provision shall be deemed amended to conform
thereto.
<PAGE> 30
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the
amount of Twenty Four Thousand Dollars ($24,000) which shall be fully earned as
of the date hereof and payable in two installments as follows: (a) Twelve
Thousand Dollars ($12,000) on the date hereof; and (b) Twelve Thousand Dollars
($12,000) on the first anniversary of the date hereof.
3.3 Compensation Adjustment.
(a) If after the date of this Agreement the introduction of, or any
change in, any law or any governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or any interpretation
thereof, or compliance by Lender or any Participant therewith:
(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from Borrower (excluding
franchise taxes imposed upon, and taxation of the overall net
income of Lender or any Participant), or changes the basis of
taxation of payments, in either case in respect of amounts due it
hereunder, or
(ii) imposes or increases or deems applicable any
reserve requirement or other reserve, assessment, insurance charge,
special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by Lender or any
Participant, or
(iii) imposes any other condition the result of which
is to increase the cost to Lender or any Participant of making,
funding or maintaining the Revolving Loans or Letter of Credit
Accommodations or reduces any amount receivable by Lender or any
Participant in connection with the Loans or Letter of Credit
Accommodations, or requires Lender or any Participant to make
payment calculated by references to the amount of loans held or
interest received by it, by an amount deemed material by Lender or
any Participant, or
(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be maintained
by Lender or any Participant or any corporation controlling Lender
or any Participant, and Lender
<PAGE> 31
or any Participant determines that such imposition or increase in
capital requirements or increase in the amount of capital expected
to be maintained is based upon the existence of this Agreement or
the Loans or Letter of Credit Accommodations hereunder, all of
which may be determined by Lender's or any Participant's reasonable
allocation of the aggregate of its impositions or increases in
capital required or expected to be maintained, and the result of
any of the foregoing is to increase the cost to Lender or any
Participant of making, renewing or maintaining the Loans or Letter
of Credit Accommodations, or to reduce the rate of return to Lender
or any Participant on the Loans or Letter of Credit Accommodations;
then upon demand by Lender, Borrower shall pay to Lender or any Participant, and
continue to make periodic payments to Lender or any Participant, such additional
amounts as may be necessary to compensate Lender or any Participant for any such
additional cost incurred or reduced rate of return realized.
(b) A certificate of Lender claiming entitlement to compensation as
set forth above will be conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence giving rise to such
compensation, the additional amount or amounts to be paid and the compensation
and the method by which such amounts were determined. In determining any
additional amounts due from Borrower under this Section ERROR! REFERENCE SOURCE
NOT FOUND., Lender shall act reasonably and in good faith and will, to the
extent that the increased costs, reductions, or amounts received or receivable
relate to the Lender's or a Participant's loans or commitments generally and are
not specifically attributable to the Loans and commitments hereunder, use
averaging and attribution methods which are reasonable and equitable and which
cover all loans and commitments under this Agreement by the Lender or such
Participant, as the case may be, whether or not the loan documentation for such
other loans and commitments permits the Lender or such Participant to receive
compensation costs of the type described in this Section 3.3.
<PAGE> 32
SECTION 4. CONDITIONS PRECEDENT.
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance satisfactory
to Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination by the existing lender or
lenders to Borrower of their respective financing arrangements with Borrower and
the termination and release by it or them, as the case may be, of any interest
in and to any assets and properties of Borrower and each Obligor, duly
authorized, executed and delivered by it or each of them, including, but not
limited to:
(i) UCC termination statements for all UCC financing
statements previously filed by it or any of them or their
predecessors, as secured party and Borrower or any Obligor, as
debtor; and
(ii) satisfactions and discharges of any mortgages,
deeds of trust or deeds to secure debt by Borrower or any Obligor
in favor of such existing lender or lenders, in form acceptable for
recording in the appropriate government office;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid, perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended as security for the Obligations or the liability of any Obligor in
respect thereto, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
<PAGE> 33
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities; (d)
Lender shall have received the Wareforce Loan Agreement duly executed by
Wareforce, in form and substance satisfactory to Lender and all conditions
precedent set forth therein shall have been satisfied in a manner acceptable to
Lender;
(e) Lender shall have received, in form and substance satisfactory
to Lender, evidence that the Purchase Agreements have been fully executed and
delivered by and to the appropriate parties thereto and the transactions
contemplated under the terms of the Purchase Agreements have been consummated;
(f) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(g) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender, not more than three (3) Business Days
prior to the date hereof;
(h) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to
<PAGE> 34
effectuate the provisions or purposes of this Agreement and the other Financing
Agreements, including, without limitation, acknowledgements by lessors,
mortgagees and warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral and agreements permitting Lender access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(i) The NationsCredit Flooring Line shall have been established and
in effect on terms and conditions satisfactory to Lender and Lender and its
counsel shall have received and reviewed all financing agreements entered into
by Borrower in connection therewith;
(j) Lender shall have received, in form and substance satisfactory
to Lender, the NationsCredit Intercreditor Agreement, as acknowledged and agreed
to by Borrower and Wareforce, providing for such parties' relative rights and
priorities with respect to the assets and properties of Borrower and Wareforce
and related matters, duly authorized, executed and delivered by NationsCredit;
(k) Lender shall have been satisfied that an acceptable system of
reporting has been established by NationsCredit through which NationsCredit will
report to Lender on a daily basis, all liabilities incurred by Borrower and
Wareforce in connection with its floor plan financing arrangement with
NationsCredit, Inventory financed by NationsCredit on order with vendors, and
returns by Borrower and Wareforce of Inventory to vendors and credited to
NationsCredit;
(l) Lender shall have received, in form and substance satisfactory
to Lender, a Guarantee by Borrower in favor of Lender, guaranteeing the
obligations of Wareforce under the Wareforce Loan Agreement, together with a
Security Agreement securing the obligations under such Guarantee;
(m) Lender shall have received, in form and substance satisfactory
to Lender, a Guarantee by Wareforce in favor of
<PAGE> 35
Lender, guaranteeing the Obligations herein, together with a Security Agreement
securing the obligations under such Guarantee;
(n) Lender shall have received, in form and substance satisfactory
to Lender, a continuing guarantee duly executed and delivered by Rechtman
guaranteeing the Obligations up to One Million Five Hundred Thousand Dollars
($1,500,000), together with his personal financial statements;
(o) Lender shall have received, in form and substance satisfactory
to Lender, a collateral assignment from Wareforce to Lender of that certain
Promissory Note dated February 18, 1998 in the original principal amount of Two
Million Dollars ($2,000,000) by Orie Rechtman in favor of Wareforce, as well as
any other notes or instruments evidencing loans from Borrower or Wareforce to
Rechtman;
(p) Lender shall have received current agings of receivables,
current perpetual inventory records and/or rollforwards of accounts and
inventory through the date hereof, together with supporting documentation
sufficient for Lender to accurately identify and verify the eligible Collateral
as of or prior to the date hereof in a manner satisfactory to Lender, including
documentation with respect to inventory in-transit and inventory at third-party
locations;
(q) Lender shall have received, in form and substance satisfactory
to Lender, projections of Borrower's profit and loss and balance sheet, all
prepared on a monthly basis through December 31, 1998;
(r) Lender shall have received, in form and substance satisfactory
to Lender, an agreement with respect to the Blocked Accounts, pursuant to
Section 6.3(a) hereof, duly executed by Lender, Borrower and the applicable
depository bank;
(s) Lender shall have received and reviewed to its satisfaction any
and all licensing agreements which Borrower
<PAGE> 36
has in place with its vendors, including, without limitation, Microsoft
Corporation;
(t) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(u) Lender shall have received from Borrower a plan identifying the
proposed management of Borrower;
(v) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements, the Purchase Agreements and such other matters as Lender
may request;
(w) the combined Excess Availability of Borrower and Wareforce as
determined by Lender, as of the date hereof, shall be not less than One Million
Dollars ($1,000,000) after giving effect to the initial Loans made or to be
made, the Letter of Credit Accommodations issued or to be issued hereunder and
under the Wareforce Loan Agreement and the payment of all fees and expenses
payable upon the consummation of the initial transactions contemplated by this
Agreement and the Wareforce Loan Agreement; and
(x) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
4.2 Conditions Subsequent to Initial Loans and Letter of Credit
Accommodations. Borrower shall perform the following conditions within the time
frames set forth below:
(a) within twenty-five (25) days from the date hereof, Lender shall
have received, in form and substance satisfactory to Lender, a pro-forma balance
sheet of Borrower reflecting the initial transactions contemplated hereunder,
including, but not limited to, (i) the transactions contemplated by the
<PAGE> 37
Purchase Agreements and (ii) the Loans and Letter of Credit Accommodations
provided by Lender to Borrower on the date hereof and the use of the proceeds of
the initial Loans as provided herein, accompanied by a certificate, dated of
even date herewith, of the chief financial officer of Borrower, stating that
such pro-forma balance sheet represents the reasonable, good faith opinion of
such officer as to the subject matter thereof as of the date of such
certificate;
(b) within sixty (60) days from the date hereof, Lender shall have
received audited financial statements of Borrower, and the accompanying notes
thereto, for the fiscal year ended December 31, 1997, together with the
unqualified opinion of Arthur Andersen LLP that such financial statements have
been prepared in accordance with GAAP, and present fairly the results of
operations and financial condition of Borrower for the fiscal year then ended;
(c) within sixty (60) days from the date hereof, Borrower shall
provide evidence to Lender that Borrower is capable of providing in a manner
satisfactory to Lender a schedule of revenues identifying revenues based upon
maintenance services, product sales and licensing pursuant to Section 7.1(a)
hereof; and
(d) within one hundred twenty (120) days from the date hereof,
Borrower shall provide evidence to Lender in form and substance satisfactory to
Lender that Borrower's system has been converted to the Wareforce COVE system.
4.3 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on
<PAGE> 38
and as of the date of the making of each such Loan or providing each such Letter
of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST.
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts and other indebtedness owed to Borrower;
5.2 all present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
investment property, letters of credit, proceeds of letters of credit, workmen's
compensation claims, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests,
<PAGE> 39
rights, remedies, title and interest in, to and in respect of Accounts and other
Collateral, including, without limitation,
(a) rights and remedies under or relating to guaranties, contracts
of suretyship, letters of credit and credit and other insurance related to the
Collateral,
(b) rights of stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party,
(c) goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or evidencing, Accounts
or other Collateral, including, without limitation, returned, repossessed and
reclaimed goods, and
(d) deposits by and property of account debtors or other persons
securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION.
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded:
(a) all Loans, all Letter of Credit Accommodations and all other
Obligations and the Collateral,
(b) all payments made by or on behalf of Borrower, and
(c) all other appropriate debits and credits as provided in this
Agreement, including, without limitation, fees, charges, costs, expenses and
interest.
<PAGE> 40
All entries in the loan account(s) shall be made in accordance with
Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense, a
blocked account or lockboxes and related blocked accounts (in either case, each
a "Blocked Account" and collectively the "Blocked Accounts"), as Lender may
specify, with such bank or banks as are acceptable to Lender into which Borrower
shall promptly deposit and direct its account debtors to directly remit all
payments on Accounts and all payments constituting proceeds of Inventory or
other Collateral in the identical form in which such payments are made, whether
by cash, check or other manner. Each bank at which a Blocked Account is
established shall enter into an agreement, in form and substance satisfactory to
Lender, providing (unless otherwise agreed to by Lender) that all items received
or deposited in such Blocked Account are the Collateral of Lender, that the
depository bank has no lien upon, or right to setoff against, the Blocked
Accounts, the items received for deposit therein, or the funds from time to time
on deposit therein and that the depository bank will wire, or otherwise
<PAGE> 41
transfer, in immediately available funds, on a daily basis, all funds received
or deposited into such Blocked Account to such bank account of Lender as Lender
may from time to time designate for such purpose (the "Payment Account").
Borrower agrees that all amounts deposited in the Blocked Accounts or other
funds received and collected by Lender, whether as proceeds of Inventory, the
collection of Accounts or other Collateral or otherwise shall be the Collateral
of Lender.
(b) For purposes of calculating the amount of the Loans available
to Borrower, such payments will be applied (conditional upon final collection)
to the Obligations on the Business Day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next Business Day. For the purposes
of calculating interest on the Obligations, such payments or other funds
received will be applied (conditional upon final collection) to the Obligations
one (1) Business Day following the date of receipt of immediately available
funds by Lender in the Payment Account provided such payments or other funds and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next Business Day.
If no monetary obligations by Borrower are outstanding on any day, Borrower
shall pay interest at the applicable rate set forth in Section 3.1(a) on the
amount of any payments or other funds that are received by Lender (irrespective
of the characterization of whether receipts are owned by Lender or Borrower) for
such day.
(c) Borrower and all of its affiliates, subsidiaries, shareholders,
directors, employees or agents shall, acting as trustee for Lender, receive, as
the property of Lender, any monies, cash, checks, notes, drafts or any other
payment relating to and/or proceeds of Accounts or from sales of Inventory or
other Collateral which come into their possession or under their control and
immediately upon receipt thereof,
<PAGE> 42
shall deposit or cause the same to be deposited in the Blocked Accounts, or
remit the same or cause the same to be remitted, in kind, to Lender. In no event
shall any such monies, checks, notes, drafts or other payments be commingled
with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any
amounts owed or paid to any bank at which a Blocked Account is established or
any other bank or person involved in the transfer of funds to or from the
Blocked Accounts arising out of Lender's payments to or indemnification of such
bank or person, unless such payment or indemnification obligation of Lender was
a result of Lender's gross negligence or willful misconduct. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.4 shall
survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment
Account as provided in Section 6.3 or such other place as Lender may designate
from time to time. Lender may apply payments received or collected from Borrower
or for the account of Borrower (including, without limitation, the monetary
proceeds of collections or of realization upon any Collateral) to such of the
Obligations, whether or not then due, in such order and manner as Lender
determines. At Lender's option, all principal, interest, fees, costs, expenses
and other charges provided for in this Agreement or the other Financing
Agreements may be charged directly to the loan account(s) of Borrower. Borrower
shall make all payments to Lender on the Obligations free and clear of, and
without deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, withholding,
restrictions or conditions of any kind. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does
<PAGE> 43
hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a Business Day) and the amount of the requested Loan. Requests received after
10:30 a.m. Pacific time on any day shall be deemed to have been made as of the
opening of business on the immediately following Business Day. All Loans and
Letter of Credit Accommodations under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for the benefit of,
Borrower when deposited to the credit of Borrower or otherwise disbursed or
established in accordance with the instructions of Borrower or in accordance
with the terms and conditions of this Agreement.
6.6 Payments on NationsCredit Flooring Line. Any and all payments by
Borrower under the NationsCredit Flooring Line shall be wired from the account
of Borrower by Lender to NationsCredit per Borrower's instructions on the fifth,
fifteenth and twenty-fifth day of each calendar month, or if such day is not a
Business Day then on the next Business Day and in accordance with Section 6.5
hereof.
6.7 Use of Proceeds. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof; and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
<PAGE> 44
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS.
7.1 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender:
(a) on a regular basis as required by Lender, a schedule of
Accounts identifying Accounts based upon maintenance services, product sales and
licensing, sales made, credits issued, cash received and any pre-billed
Accounts;
(b) on a daily basis:
(i) perpetual inventory reports identifying "Qualified
Merchandise" (as defined in the NationsCredit Intercreditor
Agreement), and
(ii) inventory reports by category;
(c) on or before the fifth Business Day of each month, a
calculation of the value of Inventory that is not Eligible Inventory;
(d) on a monthly basis or more frequently as Lender may request,
agings of accounts payable and accounts receivable;
(e) upon Lender's request:
<PAGE> 45
(i) copies of customer statements and credit memos,
remittance advices and reports, and copies of deposit slips and
bank statements,
(ii) copies of shipping and delivery documents, and
(iii) copies of purchase orders, invoices and delivery
documents for Inventory and Equipment acquired by Borrower; and
(f) such other reports as to the Collateral or other property which
is security for the Obligations as Lender shall request from time to time.
If any of Borrower's records or reports of the Collateral or other
property which is security for the Obligations are prepared or maintained by an
accounting service, contractor, shipper or other agent, Borrower hereby
irrevocably authorizes such service, contractor, shipper or agent to deliver
such records, reports, and related documents to Lender and to follow Lender's
instructions with respect to further services at any time that an Event of
Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
(a) Borrower shall notify Lender promptly of:
(i) any material delay in Borrower's performance of
any of its obligations to any account debtor or the assertion of
any claims, offsets, defenses or counterclaims by any account
debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof,
(ii) all material adverse information relating to the
financial condition of any account debtor, and
(iii) any event or circumstance which, to Borrower's
knowledge would cause Lender to consider
<PAGE> 46
any then existing Accounts as no longer constituting Eligible
Accounts.
No credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor, except in the ordinary course
of Borrower's business in accordance with its most recent past practices and
policies. So long as no Event of Default exists or has occurred and is
continuing, Borrower may settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor in the ordinary course of
Borrower's business in accordance with its most recent past practices and
policies. At any time that an Event of Default exists or has occurred and is
continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors or grant any credits, discounts or allowances.
(b) Without limiting the obligation of Borrower to deliver any
other information to Lender, Borrower shall promptly report to Lender any return
of Inventory by any one account debtor if the Inventory so returned in such case
has a value in excess of Twenty Five Thousand Dollars ($25,000). At any time
that Inventory is returned, reclaimed or repossessed, the Account (or portion
thereof) which arose from the sale of such returned, reclaimed or repossessed
Inventory shall not be deemed an Eligible Account. In the event any account
debtor returns Inventory when an Event of Default exists or has occurred and is
continuing, Borrower shall, upon Lender's request:
(i) hold the returned Inventory in trust for Lender,
(ii) segregate all returned Inventory from all of its
other property,
(iii) dispose of the returned Inventory solely
according to Lender's instructions, and
(iv) not issue any credits, discounts or allowances
with respect thereto without Lender's prior written consent.
<PAGE> 47
(c) With respect to each Account:
(i) the amounts shown on any invoice delivered to
Lender or schedule thereof delivered to Lender shall be true and
complete,
(ii) no payments shall be made thereon except payments
delivered to Lender pursuant to the terms of this Agreement or in
accordance with the NationsCredit Intercreditor Agreement,
(iii) no credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account
debtor except as reported to Lender in accordance with this
Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's
business in accordance with practices and policies previously
disclosed to Lender,
(iv) there shall be no setoffs, deductions, contras,
defenses, counterclaims or disputes existing or asserted with
respect thereto except as reported to Lender in accordance with the
terms of this Agreement,
(v) none of the transactions giving rise thereto will
violate any applicable State or Federal Laws or regulations, all
documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be
legally enforceable in accordance with its terms, and
(vi) Borrower shall not pre-bill any account debtor.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
<PAGE> 48
(e) Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred:
(i) notify any or all account debtors that the
Accounts have been assigned to Lender and that Lender has a
security interest therein and Lender may direct any or all account
debtors to make payments of Accounts directly to Lender,
(ii) extend the time of payment of, compromise, settle
or adjust for cash, credit, return of merchandise or otherwise, and
upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or
release the account debtor or any other party or parties in any way
liable for payment thereof without affecting any of the
Obligations,
(iii) demand, collect or enforce payment of any
Accounts or such other obligations, but without any duty to do so,
and Lender shall not be liable for its failure to collect or
enforce the payment thereof nor for the negligence of its agents or
attorneys with respect thereto, and
(iv) take whatever other action Lender may deem
necessary or desirable for the protection of its interests.
At any time that an Event of Default exists or has occurred and is
continuing, at Lender's request, all invoices and statements sent to any account
debtor shall state that the Accounts due from such account debtor and such other
obligations have been assigned to Lender and are payable directly and only to
Lender and Borrower shall deliver to Lender such originals of
<PAGE> 49
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory:
(a) Borrower shall at all times maintain and provide Lender with
inventory records reasonably satisfactory to Lender, keeping correct and
accurate records itemizing and describing the kind, type, quality, age and
quantity of Inventory, the amount of open box Inventory, the amount of Eligible
Inventory and Inventory that is not Eligible Inventory, Borrower's cost therefor
and daily withdrawals therefrom and additions thereto;
(b) Borrower shall cause a third party firm acceptable to Lender to
conduct a complete physical count of the Inventory a minimum of once every
twelve (12) months, but at any time or times as Lender may request upon the
occurrence of an Event of Default, and promptly following such physical count,
such firm shall supply Lender with a report in the form and with such
specificity as may be reasonably satisfactory to Lender concerning such physical
count;
(c) Borrower shall not remove any Inventory from the locations set
forth or permitted herein, without the prior written consent of Lender, except
for sales of Inventory in the ordinary course of Borrower's business and except
to move Inventory directly from one location set forth or permitted herein to
another such location;
(d) upon Lender's request, Borrower shall, at its expense, no more
than once in any twelve (12) month period, but at any time or times as Lender
may request upon the occurrence of an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Inventory in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely
(with the understanding that Lender may revise the definition of "Eligible
Inventory" hereunder or establish Availability
<PAGE> 50
Reserves as Lender may deem advisable in its sole discretion based upon the
results of such update appraisals);
(e) Borrower shall produce, use, store and maintain the Inventory
with all reasonable care and caution and in accordance with applicable standards
of any insurance and in conformity with applicable laws (including, but not
limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as
amended and all rules, regulations and orders related thereto);
(f) Borrower assumes all responsibility and liability arising from
or relating to the production, use, sale or other disposition of the Inventory;
(g) Borrower shall not sell Inventory to any customer on approval,
or any other basis which entitles the customer to return or may obligate
Borrower to repurchase such Inventory;
(h) Borrower shall keep the Inventory in good and marketable
condition; and
(i) Borrower shall not, without prior written notice to Lender,
acquire or accept any Inventory on consignment or approval.
7.4 Equipment Covenants. With respect to the Equipment:
(a) upon Lender's request, Borrower shall, at its expense, at any
time or times as Lender may request on or after an Event of Default, deliver or
cause to be delivered to Lender written reports or appraisals as to the
Equipment in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender;
(b) Borrower shall keep the Equipment in good order, repair,
running and marketable condition (ordinary wear and tear excepted);
(c) Borrower shall use the Equipment with all reasonable care and
caution and in accordance with applicable
<PAGE> 51
standards of any insurance and in conformity with all applicable laws;
(d) the Equipment is and shall be used in Borrower's business and
not for personal, family, household or farming use;
(e) Borrower shall not remove any Equipment from the locations set
forth or permitted herein, except to the extent necessary to have any Equipment
repaired or maintained in the ordinary course of the business of Borrower or to
move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by or
for the benefit of Borrower in the ordinary course of business;
(f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and
(g) Borrower assumes all responsibility and liability arising from
the use of the Equipment.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to:
(a) at any time an Event of Default or event which with notice or
passage of time or both would constitute an Event of Default exists or has
occurred and is continuing:
(i) demand payment on Accounts or other proceeds of
Inventory or other Collateral,
(ii) enforce payment of Accounts or other Obligations
included in the Collateral by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies
to collect any Account or other proceeds of Inventory or other
Collateral,
<PAGE> 52
(iv) sell or assign any Account upon such terms, for
such amount and at such time or times as the Lender deems
advisable,
(v) settle, adjust, compromise, extend or renew an
Account,
(vi) discharge and release any Account or other
Obligations included in the Collateral,
(vii) prepare, file and sign Borrower's name on any
proof of claim in bankruptcy or other similar document against an
account debtor,
(viii) notify the post office authorities to change
the address for delivery of Borrower's mail to an address
designated by Lender, and open and dispose of all mail addressed to
Borrower, and
(ix) do all acts and things which are necessary, in
Lender's determination, to fulfill Borrower's obligations under
this Agreement and the other Financing Agreements; and
(b) at any time, subject to the terms of the agreement(s) relating
to the Blocked Account(s) to:
(i) take control in any manner of any item of payment
or proceeds thereof,
(ii) have access to any lockbox or postal box into
which Borrower's mail is deposited,
(iii) endorse Borrower's name upon any items of
payment or proceeds thereof and deposit the same in the Lender's
account for application to the Obligations,
(iv) endorse Borrower's name upon any chattel paper,
document, instrument, invoice, or similar document or agreement
relating to any Account or any goods pertaining thereto or any
other Collateral,
<PAGE> 53
(v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors, and
(vi) execute in Borrower's name and file any UCC
financing statements or amendments thereto.
Borrower hereby releases Lender and its officers, employees and designees from
any liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option: (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower: (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral; and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
ERROR! REFERENCE SOURCE NOT FOUND. shall be without prejudice to any right to
assert an Event of Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at
the cost and expense of Borrower:
(a) Lender or its designee shall have complete access to all of
Borrower's premises during normal business hours and after notice to Borrower,
or at any time and without notice to Borrower if an Event of Default exists or
has occurred and is continuing, for the purposes of inspecting, verifying and
<PAGE> 54
auditing the Collateral and all of Borrower's books and records, including,
without limitation, the Records;
(b) Borrower shall promptly furnish to Lender such copies of such
books and records or extracts therefrom as Lender may request; and
(c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is
a corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's articles of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their
<PAGE> 55
respective terms. Borrower does not have any subsidiaries except as set forth on
the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operations of Borrower as at the
dates and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof and to the best of Borrower's
knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.9 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
<PAGE> 56
Schedule 8.4 hereto or permitted under Section 9.9 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
8.7 Employee Benefits.
(a) Borrower has not engaged in any transaction in connection with
which Borrower or any of its ERISA Affiliates could be subject to either a civil
penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section
4975 of the Code, including any accumulated funding deficiency
<PAGE> 57
described in Section 8.7(c) hereof and any deficiency with respect to vested
accrued benefits described in Section 8.7(d) hereof.
(b) No liability to the Pension Benefit Guaranty Corporation has
been or is expected by Borrower to be incurred with respect to any employee
benefit plan of Borrower or any of its ERISA Affiliates. There has been no
reportable event (within the meaning of Section 4043(b) of ERISA) or any other
event or condition with respect to any employee pension benefit plan of Borrower
or any of its ERISA Affiliates which presents a risk of termination of any such
plan by the Pension Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which Borrower or any
of its ERISA Affiliates is required under Section 302 of ERISA and Section 412
of the Code to have paid under the terms of each employee benefit plan as
contributions to such plan as of the last day of the most recent fiscal year of
such plan ended prior to the date hereof, and no accumulated funding deficiency
(as defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, exists with respect to any employee benefit plan, including any penalty
or tax described in Section 8.7(a) hereof and any deficiency with respect to
vested accrued benefits described in Section 8.7(d) hereof.
(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.7(a) hereof and any accumulated funding deficiency
described in Section 8.7(c) hereof. The terms
<PAGE> 58
"current value" and "accrued benefit" have the meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.
8.8 Environmental Compliance.
(a) Except as set forth on Schedule 8.8 hereto, Borrower has not
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of Borrower complies in all material
respects with all Environmental Laws and all licenses, permits, certificates,
approvals and similar authorizations thereunder.
(b) Except as set forth on Schedule 8.8 hereto, there has been no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor is any pending or
to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects Borrower or its
business, operations or assets or any properties at which Borrower has
transported, stored or disposed of any Hazardous Materials.
(c) Borrower has no material liability (contingent or otherwise) in
connection with a release, spill or discharge, threatened or actual, of any
Hazardous Materials or the
<PAGE> 59
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates, approvals or
similar authorizations required to be obtained or filed in connection with the
operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect.
8.9 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound, and Borrower is in compliance in all material respects with all
applicable provisions of laws, rules, regulations, licenses, permits, approvals
and orders of any foreign, Federal, State or local governmental authority.
8.10 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of Borrower to establish new accounts in accordance with Section 9.14
below.
8.11 Acquisition of Purchased Stock.
(a) The Purchase Agreements and the transactions contemplated
thereunder have been duly executed, delivered and performed in accordance with
their terms by the respective parties thereto in all respects, including the
fulfillment (not merely the waiver, except as may be disclosed to Lender and
consented to in writing by Lender) of all conditions precedent set forth therein
and giving effect to the terms of the Purchase Agreements and the assignments to
be executed and delivered by Seller thereunder, Buyer acquired and has good and
marketable title to the Purchased Stock, free and clear of
<PAGE> 60
all claims, liens, pledges and encumbrances of any kind, except as disclosed in
writing to Lender.
(b) All actions and proceedings required by the Purchase
Agreements, applicable law or regulation (including, but not limited to,
compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended) have been taken and the transactions required thereunder have been duly
and validly taken and consummated.
(c) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Purchase Agreements and no governmental or other
action or proceeding has been threatened or commenced, seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Purchase Agreements.
(d) Borrower has delivered, or caused to be delivered, to Lender
true, correct and complete copies of the Purchase Agreements.
8.12 Capitalization.
(a) Upon the consummation of the transactions contemplated under
the Purchase Agreement, all of the issued and outstanding shares of capital
stock of Borrower and Wareforce will be directly and beneficially owned and held
by Buyer and all of such shares have been duly authorized and are fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of
any kind, except as disclosed in writing to Lender.
(b) Borrower is solvent and will continue to be solvent after the
creation of the Obligations, the security interests of Lender and the other
transaction contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their
<PAGE> 61
present fair salable value are, and will be, greater than the indebtedness of
Borrower, and including subordinated and contingent liabilities computed at the
amount which, to the best of Borrower's knowledge, represents an amount which
can reasonably be expected to become an actual or matured liability.
8.13 Accuracy and Completeness of Information. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading. No
event or circumstance has occurred which has had or could reasonably be expected
to have a material adverse affect on the business, assets or prospects of
Borrower, which has not been fully and accurately disclosed to Lender in
writing.
8.14 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or
<PAGE> 62
proposed to be conducted. Borrower shall give Lender thirty (30) days prior
written notice of any proposed change in its corporate name, which notice shall
set forth the new name and Borrower shall deliver to Lender a copy of the
amendment to the Articles of Incorporation of Borrower providing for the name
change certified by the Secretary of State of the jurisdiction of incorporation
of Borrower as soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower: (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location; and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including, without limitation, UCC financing statements and, if
Borrower leases such new location, provides a favorable landlord waiver or
subordination.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply in all material respects
with all laws, rules, regulations, licenses, permits, approvals and orders
applicable to it and duly observe all requirements of any Federal, State or
local governmental authority, including, without limitation, the Employee
Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard
Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and
all statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.
(b) Borrower shall take prompt and appropriate action to respond
to any non-compliance with any of the Environmental Laws and shall report to
Lender on such response.
(c) Borrower shall give both oral and written notice to Lender
immediately upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of:
<PAGE> 63
(i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any
Hazardous Material; or
(ii) any investigation, proceeding, complaint,
order, directive, claims, citation or notice with respect to:
(A) any non-compliance with or violation of any Environmental Law
by Borrower;
(B) the release, spill or discharge, threatened or actual, of any
Hazardous Material;
(C) the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials; or
(D) any other environmental, health or safety matter, which
affects Borrower or its business, operations or assets or any properties at
which Borrower transported, stored or disposed of any Hazardous Materials.
(d) Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including, without limitation, the costs of
any required or necessary repair, cleanup or other remedial work with respect to
any property of Borrower and the preparation and implementation of any closure,
remedial or other required plans. All representations, warranties, covenants and
indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
<PAGE> 64
9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance
<PAGE> 65
satisfactory to Lender. Such lender's loss payable endorsements shall specify
that the proceeds of such insurance shall be payable to Lender as its interests
may appear and further specify that Lender shall be paid regardless of any act
or omission by Borrower or any of its affiliates. At its option, Lender may
apply any insurance proceeds received by Lender at any time to the cost of
repairs or replacement of Collateral and/or to payment of the Obligations,
whether or not then due, in any order and in such manner as Lender may determine
or hold such proceeds as cash collateral for the Obligations.
9.6 Key Man Life Insurance Policy. Borrower shall use its best efforts
to obtain a Key Man Life Insurance Policy insuring the life of Rechtman, which
policy, shall be in an amount of not less than Two Million Dollars ($2,000,000)
and once obtained, shall be beneficially assigned to Lender.
9.7 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Lender:
(i) within twenty-five (25) days after the end of each
fiscal month, monthly unaudited consolidated financial statements,
and, if Borrower has any subsidiaries, unaudited consolidating
financial statements (including in each case balance sheets, and
statements of income and loss), all in reasonable detail, fairly
presenting the financial position and the results of the operations
of Borrower and its subsidiaries as of the end of and through such
fiscal month; and
(ii) within ninety (90) days after the end of each
fiscal year, audited consolidated financial statements and, if
Borrower has any subsidiaries, audited consolidating financial
statements of Borrower and its subsidiaries (including in each case
balance
<PAGE> 66
sheets, statements of income and loss, statements of cash flow and
statements of shareholders' equity), and the accompanying notes
thereto, all in reasonable detail, fairly presenting the financial
position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together
with the unqualified opinion of independent certified public
accountants, which accountants shall be an independent accounting
firm selected by Borrower and reasonably acceptable to Lender, that
such financial statements have been prepared in accordance with
GAAP, and present fairly the results of operations and financial
condition of Borrower and its subsidiaries as of the end of and for
the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the details
of:
(i) any loss, damage, investigation, action, suit,
proceeding or claim relating to the Collateral or any other
property which is security for the Obligations or which would
result in any material adverse change in Borrower's business,
properties, assets, goodwill or condition, financial or otherwise,
and
(ii) the occurrence of any Event of Default or event
which, with the passage of time or giving of notice or both, would
constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all financial reports which
Borrower sends to its stockholders generally and copies of all reports and
registration statements which Borrower files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.
(d) Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information in respect of the
Collateral and the business of
<PAGE> 67
Borrower, as Lender may, from time to time, reasonably request. Lender is
hereby authorized to deliver a copy of any financial statement or any other
information relating to the business of Borrower to any court or other
government agency or to any participant or assignee or prospective participant
or assignee. Borrower hereby irrevocably authorizes and directs all accountants
or auditors to deliver to Lender, at Borrower's expense, copies of the financial
statements of Borrower and any reports or management letters prepared by such
accountants or auditors on behalf of Borrower and to disclose to Lender such
information as they may have regarding the business of Borrower. Any documents,
schedules, invoices or other papers delivered to Lender may be destroyed or
otherwise disposed of by Lender one (1) year after the same are delivered to
Lender, except as otherwise designated by Borrower to Lender in writing.
9.8 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly:
(a) merge into or with or consolidate with any other Person or
permit any other Person to merge into or with or consolidate with it without the
prior written consent of Lender, which consent shall not be unreasonably
withheld;
(b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person, (except for:
(i) sales of Inventory in the ordinary course of
business; and
(ii) the disposition of worn-out or obsolete Equipment
or Equipment no longer used in the business of Borrower so long as:
(A) if an Event of Default exists or has occurred and is
continuing, any proceeds are paid to Lender, and
(B) such sales do not involve Equipment, together with any
equipment disposed by Wareforce, having an
<PAGE> 68
aggregate fair market value in excess of Twenty-Five Thousand Dollars ($25,000)
for all such equipment disposed of by Borrower and Wareforce in any fiscal year
of Borrower);
(c) form or acquire any subsidiaries;
(d) wind up, liquidate or dissolve; or
(e) agree to do any of the foregoing.
9.9 Encumbrances. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including, without
limitation, the Collateral, except:
(a) the liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or
the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books;
(c) security deposits in the ordinary course of business;
(d) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of Borrower's business to the
extent:
(i) such liens secure indebtedness which is not
overdue, or
(ii) such liens secure indebtedness relating to claims
or liabilities which are fully insured and being defended at the
sole cost and expense and at the sole risk of the insurer (subject
to applicable deductibles) or being contested in good faith by
appropriate proceedings diligently pursued and available to
Borrower, in each case prior to the commencement of foreclosure or
other similar
<PAGE> 69
proceedings and with respect to which adequate reserves have been
set aside on its books;
(e) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property which do not interfere in any
material respect with the use of such real property or ordinary conduct of the
business of Borrower as presently conducted thereon or materially impair the
value of the real property which may be subject thereto;
(f) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate, together with the
then aggregate purchase money security interests in equipment and purchase money
mortgages on real estate outstanding by Wareforce, not to exceed Two Hundred
Thousand Dollars ($200,000) in the aggregate at any time outstanding so long as
such security interests and mortgages do not apply to any property of Borrower
other than the Equipment or real estate so acquired, and the indebtedness
secured thereby does not exceed the cost of the Equipment or real estate so
acquired, as the case may be;
(g) the liens and security interests of NationsCredit on the assets
of Borrower consisting of Inventory to secure the indebtedness of Borrower to
NationsCredit permitted under Section ERROR! REFERENCE SOURCE NOT FOUND. hereof,
which liens and security interests are, in all respects, subject and subordinate
in priority to the liens and security interests of Lender pursuant to the
NationsCredit Intercreditor Agreement; and
(h) the security interests and liens set forth on Schedule 8.4
hereto.
9.10 Indebtedness. Borrower shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course of
business not yet due and payable, or with
<PAGE> 70
respect to which Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in violation
of any other provision of this Agreement;
(d) obligations or indebtedness set forth on the Information
Certificate; provided, that:
(i) Borrower may only make regularly scheduled
payments of principal and interest in respect of such indebtedness
in accordance with the terms of the agreement or instrument
evidencing or giving rise to such indebtedness as in effect on the
date hereof;
(ii) Borrower shall not, directly or indirectly:
(A) amend, modify, alter or change the terms of such indebtedness
or any agreement, document or instrument related thereto as in effect on the
date hereof, or
(B) except as otherwise permitted under this Agreement, redeem,
retire, defease, purchase or otherwise acquire such indebtedness, or set aside
or otherwise deposit or invest any sums for such purpose; and
(iii) Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by
Borrower or on its behalf, promptly after the receipt thereof, or
sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be;
(e) indebtedness subordinated to the Obligations pursuant to an
agreement, in form and substance satisfactory to Lender and provided, that
Borrower has obtained the prior written consent of Lender to the assumption of
such subordinated debt; and
<PAGE> 71
(f) indebtedness of Borrower to NationsCredit evidenced by that
certain Security Agreement dated August 27, 1998, between Borrower and
NationsCredit, which indebtedness is subject and subordinate in right of payment
to the right of Lender to receive the prior final payment and satisfaction in
full of all of the Obligations pursuant to the NationsCredit Intercreditor
Agreement.
9.11 Loans, Investments, Guarantees, Etc. Borrower shall not, directly
or indirectly, make any loans or advance money or property to any person, or
invest in (by capital contribution, dividend or otherwise) or purchase or
repurchase the stock or indebtedness or all or a substantial part of the assets
or property of any person, or guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do any of the foregoing,
except:
(a) the endorsement of instruments for collection or deposit in the
ordinary course of business; (b) investments in:
(i) short-term direct obligations of the United States
Government;
(ii) negotiable certificates of deposit issued by any
bank satisfactory to Lender, payable to the order of the Borrower
or to bearer and delivered to Lender; and
(iii) commercial paper rated A1 or P1;
(c) loans to employees of Borrower which, together with any loans
outstanding to the employees of Wareforce shall not at any time exceed One
Hundred Thousand Dollars ($100,000) in the aggregate;
(d) loans to Wareforce in an amount not to exceed at any one time
Seven Hundred Fifty Thousand Dollars ($750,000); provided, that, as to any of
the foregoing, unless waived in writing by Lender, Borrower shall take such
actions as are
<PAGE> 72
deemed necessary by Lender to perfect the security interest of Lender in such
investments, including, without limitation, collaterally assigning to Lender its
rights under any promissory notes evidencing the loans to any employees of
Borrower and Wareforce; and
(e) the guarantees set forth in the Information Certificate.
9.12 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of any class
of capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
9.13 Transactions with Affiliates. Borrower shall not enter into any
transaction for the purchase, sale or exchange of property or the rendering of
any service to or by any affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person.
9.14 Additional Bank Accounts. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.10 hereto,
except:
(a) as to any new or additional Blocked Accounts and other such new
or additional accounts which contain any Collateral or proceeds thereof, with
the prior written consent
<PAGE> 73
of Lender and subject to such conditions thereto as Lender may establish; and
(b) as to any accounts used by Borrower to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
9.15 Compliance with ERISA.
(a) Borrower shall not with respect to any "employee pension
benefit plans" maintained by Borrower or any of its ERISA Affiliates:
(i) terminate any of such employee pension benefit
plans so as to incur any liability to the Pension Benefit Guaranty
Corporation established pursuant to ERISA;
(ii) allow or suffer to exist any prohibited
transaction involving any of such employee pension benefit plans or
any trust created thereunder which would subject Borrower or such
ERISA Affiliate to a tax or penalty or other liability on
prohibited transactions imposed under Section 4975 of the Code or
ERISA;
(iii) fail to pay to any such employee pension benefit
plan any contribution which it is obligated to pay under Section
302 of ERISA, Section 412 of the Code or the terms of such plan;
(iv) allow or suffer to exist any accumulated funding
deficiency, whether or not waived, with respect to any such
employee pension benefit plan;
(v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a
material risk of termination by the Pension Benefit Guaranty
Corporation of any such employee pension benefit plan that is a
single employer plan, which termination could result in any
<PAGE> 74
liability to the Pension Benefit Guaranty Corporation; or
(vi) incur any withdrawal liability with respect to
any multiemployer pension plan.
(b) As used in this Section 9.15, the terms "employee pension
benefit plans", "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
Section 4975 of the Code and ERISA.
9.16 Adjusted Net Worth. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than the Adjusted Net Worth of Borrower as of
August 31, 1998 reflected on Borrower's financial statements, less One Hundred
Thousand Dollars ($100,000).
9.17 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to:
(a) all costs and expenses of filing or recording (including
Uniform Commercial Code financing statement filing taxes and fees, documentary
taxes, intangibles taxes and mortgage recording taxes and fees, if applicable);
(b) all costs and expenses and fees for all title insurance and
other insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees;
<PAGE> 75
(c) all costs and expenses of remitting loan proceeds, collecting
checks and other items of payment, and establishing and maintaining the Blocked
Accounts, together with Lender's customary charges and fees with respect
thereto;
(d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations;
(e) costs and expenses of preserving and protecting the Collateral;
(f) costs and expenses paid or incurred in connection with
obtaining payment of the Obligations, enforcing the security interests and liens
of Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including, without limitation,
preparations for and consultations concerning any such matters);
(g) all out-of-pocket expenses and costs heretofore and from time
to time hereafter incurred by Lender's examiners in the conduct of their
periodic field examinations of the Collateral and Borrower's operations, plus a
per diem charge at the rate of Six Hundred Fifty Dollars ($650) per person per
day for Lender's examiners in the field and office, provided, however, so long
as no Event of Default has occurred, such out-of-pocket expenses and costs shall
not exceed One Thousand Dollars ($1,000) in any one calendar year and such per
diem charge shall not exceed Ten Thousand Dollars ($10,000) in any one calendar
year; and
(h) the fees and disbursements of counsel (including legal
assistants) to Lender in connection with any of the foregoing.
9.18 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper
<PAGE> 76
to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing on behalf of Borrower that all conditions precedent to the
making of Loans and providing Letter of Credit Accommodations contained herein
are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined that such conditions are satisfied. Where permitted by
law, Borrower hereby authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or fails
to perform any of the terms, covenants, conditions or provisions contained in
this Agreement or any of the other Financing Agreements (including, without
limitation, the NationsCredit Intercreditor Agreement or the Guarantee of even
date herewith by Borrower in favor of Lender);
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
<PAGE> 77
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of Twenty-Five Thousand Dollars ($25,000) in
any one case or in excess of Fifty Thousand Dollars ($50,000) in the aggregate
and shall remain undischarged or unvacated for a period in excess of thirty (30)
days or execution shall at any time not be effectively stayed, or any judgment
other than for the payment of money, or injunction, attachment, garnishment or
execution is rendered against Borrower or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of an
Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect
<PAGE> 78
(whether at a law or equity) is filed by Borrower or any Obligor or for all or
any part of its property;
(i) any default by Borrower or any Obligor from and after the
Closing under any agreement, document or instrument relating to any indebtedness
for borrowed money owing to any person other than Lender, or any capitalized
lease obligations, contingent indebtedness in connection with any guarantee,
letter of credit, indemnity or similar type of instrument in favor of any person
other than Lender, in any case in an amount in excess of Fifty Thousand Dollars
($50,000), which default continues for more than the applicable cure period, if
any, with respect thereto, or any default by Borrower or any Obligor under any
material contract, lease, license or other obligation to any person other than
Lender, which default continues for more than the applicable cure period, if
any, with respect thereto;
(j) the NationsCredit Flooring Line is terminated and no longer in
effect;
(k) the Wareforce Loan Agreement is terminated and no longer in
effect;
(l) any change in the controlling ownership of Borrower which would
reduce Buyer's ownership interest in Borrower;
(m) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
(n) there shall be a material adverse change in the business,
assets or prospects of Borrower or any Obligor after the date hereof; or
(o) there shall be an event of default under any of the other
Financing Agreements, including without limitation, the Wareforce Loan
Agreement.
<PAGE> 79
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation:
(i) accelerate the payment of all Obligations and
demand immediate payment thereof to Lender (provided, that, upon
the occurrence of any Event of Default described in Sections
10.1(g) and 10.1(h), all Obligations shall automatically become
immediately due and payable);
(ii) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any of
the Collateral may be located and take possession of the Collateral
or complete processing, manufacturing and repair of all or any
portion of the Collateral;
<PAGE> 80
(iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the
Collateral at any place and time designated by Lender;
(iv) collect, foreclose, receive, appropriate, setoff
and realize upon any and all Collateral;
(v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or for
any other purpose;
(vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including, without
limitation, entering into contracts with respect thereto, public or
private sales at any exchange, broker's board, at any office of
Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the
Lender having the right to purchase the whole or any part of the
Collateral at any such public sale, all of the foregoing being free
from any right or equity of redemption of Borrower, which right or
equity of redemption is hereby expressly waived and released by
Borrower; and/or
(vii) terminate this Agreement.
If any of the Collateral is sold or leased by Lender upon credit terms or for
future delivery, the Obligations shall not be reduced as a result thereof until
payment therefor is finally collected by Lender. If notice of disposition of
Collateral is required by law, five (5) days prior notice by Lender to Borrower
designating the time and place of any public sale or the time after which any
private sale or other intended disposition of Collateral is to be made, shall be
deemed to be reasonable notice thereof and Borrower waives any other notice. In
the event Lender institutes an action to recover any Collateral or seeks
recovery of any Collateral by way of prejudgment remedy,
<PAGE> 81
Borrower waives the posting of any bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an Event
of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice:
(i) cease making Loans or arranging for Letter of
Credit Accommodations or reduce the lending formulas or amounts of
Revolving Loans and Letter of Credit Accommodations available to
Borrower; and/or
(ii) terminate any provision of this Agreement
providing for any future Loans or Letter of Credit Accommodations
to be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW.
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the
<PAGE> 82
County of Los Angeles, State of California and of the United States District
Court for the Central District of California and waive any objection based on
venue or forum non conveniens with respect to any action instituted therein
arising under this Agreement or any of the other Financing Agreements or in any
way connected with or related or incidental to the dealings of the parties
hereto in respect of this Agreement or any of the other Financing Agreements or
the transactions related hereto or thereto, in each case whether now existing or
hereafter arising, and whether in contract, tort, equity or otherwise, and agree
that any dispute with respect to any such matters shall be heard only in the
courts described above (except that Lender shall have the right to bring any
action or proceeding against Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against Borrower or its
property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Lender against Borrower for the amount
of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION: (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS; OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT,
<PAGE> 83
TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed
<PAGE> 84
by an authorized officer of Lender. Any such waiver shall be enforceable only to
the extent specifically set forth therein. A waiver by Lender of any right,
power and/or remedy on any one occasion shall not be construed as a bar to or
waiver of any such right, power and/or remedy which Lender would otherwise have
on any future occasion, whether similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section 11.5. may be unenforceable
because it violates any law or public policy, Borrower shall pay the maximum
portion which it is permitted to pay under applicable law to Lender in
satisfaction of indemnified matters under this Section 11.5. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
<PAGE> 85
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS.
12.1 Term.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date two (2) years from the
date hereof (the "Renewal Date"), and upon mutual agreement by Lender and
Borrower, for one (1) year thereafter, unless sooner terminated pursuant to the
terms hereof. Lender or Borrower may terminate this Agreement and the other
Financing Agreements effective on the Renewal Date or on the anniversary of the
Renewal Date in any year by giving to the other party at least sixty (60) days
prior written notice; provided, that, this Agreement and all other Financing
Agreements must be terminated simultaneously and this Agreement and all other
Financing Agreements shall immediately terminate upon the termination of the
NationsCredit Flooring Line or the NationsCredit Intercreditor Agreement. Upon
the effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Lender has not yet received final and indefeasible payment. Such
payments in respect of the Obligations and cash collateral shall be remitted by
wire transfer in Federal funds to such bank account of Lender, as Lender may, in
its discretion, designate in writing to Borrower for such purpose. Interest
shall be due until and including the next Business Day, if the amounts so paid
by Borrower to the bank account designated by Lender are received in such bank
account later than 10:30 a.m., Pacific time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid,
<PAGE> 86
and Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason this Agreement is terminated prior to the end
of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(i) 1% of Maximum Credit From the date hereof to and including
the first anniversary of the date
hereof; and
(ii) 0.25% of Maximum Credit After the first anniversary of the date
hereof or at any time during a renewal
term, if any.
</TABLE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section
<PAGE> 87
12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and: (a) made to Lender at its address set forth below and to Borrower
at its chief executive office set forth below, or to such other address as
either party may designate by written notice to the other in accordance with
this provision; and (b) deemed to have been given or made: if delivered in
person, immediately upon delivery; if by telex, telegram or facsimile
transmission, immediately upon sending and upon confirmation of receipt; if by
nationally recognized overnight courier service with instructions to deliver the
next Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
<PAGE> 88
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
12.6 Publicity. Borrower consents to Lender publishing a tombstone or
similar advertising material relating to the financing transaction contemplated
by this Agreement.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION (WESTERN) C.Y. INVESTMENT INC.
By: Matthew Grimes By: Dan Ricketts
------------------------------------ ------------------------
Title: Vice President Title: General Counsel
--------------------------------- ---------------------
Address: Chief Executive Office:
- ---------------------------------------- ----------------------------
225 South Lake Avenue, Suite 1000 4820 South Eastern Avenue,
Pasadena, California 91101 Suite C
Commerce, California 90040
<PAGE> 1
Exhibit 10.9
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment"), dated as
of March 22, 1999, is entered into between CONGRESS FINANCIAL CORPORATION
(WESTERN), a California corporation ("Lender") and WAREFORCE INCORPORATED, a
California corporation ("Borrower").
RECITAL
A. Borrower and Lender have previously entered into that certain Loan
and Security Agreement dated as of August 27, 1998 (the "Loan Agreement"),
pursuant to which Lender has made certain loans and financial accommodations
available to Borrower. Terms used herein without definition shall have the
meanings ascribed to them in the Loan Agreement.
B. Borrower has informed Lender that it intends to purchase
substantially all the assets of Kennsco, Inc., a Minnesota corporation
("Kennsco"), pursuant to the terms and conditions of that certain Asset Purchase
Agreement dated as of February 4, 1999 between Kennsco and Borrower (together
with any bills of sale, quitclaim deeds, assignment and assumption agreements
and such other instruments of transfer as are referred to therein and all side
letters with respect thereto, and all agreements, documents and instruments
executed and/or delivered in connection therewith, as all of the foregoing now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced, the "Kennsco Purchase Agreements").
C. Pursuant to the terms of the Loan Agreement, Borrower has requested
that Lender consent to such purchase and in connection therewith amend the Loan
Agreement to provide a Two Million Dollars ($2,000,000) revolving sub-facility
to be
<PAGE> 2
advanced against the Accounts purchased pursuant to the Kennsco Purchase
Agreements.
D. Lender is willing to give such consent and amend the Loan Agreement
under the terms and conditions set forth in this Amendment. Borrower is entering
into this Amendment with the understanding and agreement that, except as
specifically provided herein, none of Lender's rights or remedies as set forth
in the Loan Agreement is being waived or modified by the terms of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Consent to Kennsco Acquisition. Subject to the terms and conditions
set forth herein, including, without limitation the conditions set forth in
paragraph 3 below, Lender hereby consents to the purchase by Borrower of
substantially all the assets of Kennsco pursuant to the Kennsco Purchase
Agreements, the terms and conditions of which shall be satisfactory to Lender.
Borrower hereby acknowledges that Lender has relied upon information furnished
by Borrower to Lender as of the date hereof in granting the foregoing consent,
including copies of drafts of the Kennsco Purchase Agreements. In the event
Congress after the date hereof shall discover that any such information was
materially incorrect or shall discover additional relevant facts that cause the
information furnished by Borrower to have been materially incorrect, Lender
hereby reserves the right to amend, modify or revoke the consent set forth
herein as Lender shall determine.
2. Amendments to Loan Agreement.
(a) The following definitions are hereby added to Section 1 of the
Loan Agreement in their proper numerical and alphabetical order:
"1.__ `Eligible Kennsco Accounts' shall mean
<PAGE> 3
Eligible Accounts consisting of Accounts arising from or associated
with the assets and business purchased from Kennsco, pursuant to the
Kennsco Purchase Agreements."
"1.__ `Fidelity Subordination Agreement' shall mean that
certain Subordination Agreement dated as of March 19, 1999 between
Lender and Fidelity Bank."
"1.__ `Kennsco' shall mean Kennsco, Inc., a Minnesota
corporation."
"1.__ `Kennsco Purchase Agreements' shall mean,
individually and collectively, that certain Asset Purchase
Agreement, dated as of February 4, 1999, between Borrower and
Kennsco, together with any bills of sales, quitclaim deeds,
assignment and assumption agreements and such other instruments of
transfer as are referred to therein and all side letters with
respect thereto, and all agreements, documents and instruments
executed and/or delivered in connection therewith, as all of the
foregoing now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced; provided,
that the term "Kennsco Purchase Agreements" as used herein shall not
include any of the Financing Agreements as such term is defined
herein."
"1.__ `Searl Subordination Agreement' shall mean that
certain Subordination Agreement dated as of March 22, 1999 between
Lender and Kenneth H. Searl, Jr."
(b) The following is hereby added to Section 1.11 of the Loan
Agreement (the definition of "Eligible Accounts") as paragraph (r) and the
existing paragraph (r) is hereby re-designated as paragraph (s):
"(r) such Accounts do not arise from a lease of
equipment, the rights of Borrower under which lease has been
assigned to Guardian Capital Inc., or
<PAGE> 4
its successor or assign; and"
(c) Section 2.1(a)(iii)(A) of the Loan Agreement is hereby amended
in its entirety to read as follows:
"(A) eighty-five percent (85%) of the Net Amount of Eligible
Account; provided, however, the aggregate amount of Revolving Loans
outstanding advanced against Eligible Kennsco Accounts shall at no
time exceed Two Million Dollars ($2,000,000); plus"
(d) Section 9.8 (b) is hereby amended and restated as follows:
"(b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets
to any other Person, except for:
(i) sales of Inventory in the ordinary course of
business;
(ii) the disposition of worn-out or obsolete Equipment
or Equipment no longer used in the business of Borrower so long as:
(A) if an Event of Default exists or has occurred and is continuing,
any proceeds are paid to Lender,
(B) such sales do not involve Equipment, together with any equipment
disposed by CYI, having an aggregate fair market value in excess of Twenty-Five
Thousand Dollars ($25,000) for all such equipment disposed of by Borrower and
CYI in any fiscal year of Borrower; and
(iii) sales of leases and equipment relating to such
leases to GLC, Inc. to the extent permitted under this Agreement."
(e) The following is hereby added to the end of Section 9.9 of the
Loan Agreement as paragraphs (i), (l), (j) and (k) respectively:
"(i) the liens and security interest granted to Kenneth H. Searl
Jr., an individual, on the assets of
<PAGE> 5
Borrower set forth in Exhibit A to the Searl Subordination Agreement
to secure the indebtedness of Borrower to Kenneth H. Searl, Jr.
permitted under Section 9.10 hereof; " "(j) the liens and security
interest granted to Fidelity Bank on the assets of Borrower set
forth in Exhibit A to the Fidelity Subordination Agreement, to
secure the indebtedness of Borrower to Fidelity Bank permitted under
Section 9.10 hereof; and" "(k) the security interests and liens of
GCI Capital, Inc. (formerly known as Guardian Capital, Inc.) or any
assignee of GCI Capital, Inc. on certain leases, the rights of
Borrower to which have been purchased by GCI Capital, Inc. and the
equipment relating to such leases."
(f) The following is hereby added to the end of Section 9.10 of the
Loan Agreement as paragraphs (g), (h) and (i) respectively:
"(g) indebtedness of Borrower to Kenneth H. Searl, Jr. in an amount
not to exceed Two Hundred Fifty Thousand Dollars ($ 250,000 ) as
evidenced by that certain Promissory Note by Borrower in favor of
Kenneth H. Searl, Jr. dated as of March ___, 1999, which
indebtedness shall at all time be subject to the terms and
conditions of the Searl Subordination Agreement;" "(h) indebtedness
of Borrower to Fidelity Bank in an amount not to exceed Four Hundred
Fifty Thousand Dollars ($450,000) as evidenced by that certain
Promissory Note by Borrower in favor of Fidelity Bank dated as of
March ___, 1999, which indebtedness shall at all times be subject to
the terms and conditions of the Fidelity Subordination Agreement;
and" "(i) indebtedness of Borrower to Kennsco in an amount not to
exceed Two Hundred Fifty Thousand Dollars ($250,000), as evidenced
by that certain Promissory Note by Borrower in favor of Kennsco
dated as of March ___, 1999, provided, that, such indebtedness is
payable solely in shares of common stock of Buyer."
<PAGE> 6
(g) Effective as of August 27, 1998, Section 9.11(d) of the Loan
Agreement is hereby amended in its entirety as follows:
"(d) the loans to Richtman in an amount not to exceed Three Million
Three Hundred Thousand Dollars ($3,300,000) a portion of which proceeds thereof
have been paid to Anita Gabriel in exchange for all of her interest in
Borrower,"
(h) A new Section 9.19 of the Loan Agreement is hereby added as
follows:
"9.19 Commingling of Inventory. Borrower shall not permit Inventory
arising out of or associated with Borrower's operations (excluding the division
which will continue the operations conducted by Kennsco prior to the effective
date of the Kennsco Purchase Agreements) to be commingled with Inventory
associated with such division or used in or associated with the operations of
such division."
(i) The chart set forth in Section 12.1(c) of the Loan Agreement
constituting clauses (i) and (ii) is hereby amended in its entirety to read as
follows:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(i) 1% of Maximum Credit From the date hereof to and including
March 22, 1999; and
(ii) 0.25% of Maximum Credit After March 22, 1999 or at any time
during a renewal term, if any.
</TABLE>
3. Effectiveness of this Amendment. Lender must have received the
following items, in form and content acceptable to Lender, before this Amendment
is effective and before Lender is
<PAGE> 7
required to extend any credit to Borrower as provided for by this Amendment. The
date on which all of the following conditions have been satisfied is the
"Closing Date".
(a) Amendment. This Amendment fully executed in a sufficient number
of counterparts for distribution to Lender and Borrower.
(b) Authorizations. Evidence that the execution, delivery and
performance by Borrower and each guarantor or subordinating creditor of this
Amendment and any instrument or agreement required under this Amendment have
been duly authorized.
(c) Representations and Warranties. The representations and
warranties set forth in the Loan Agreement must be true and correct.
(d) Kennsco Purchase Agreements. Evidence that the Kennsco Purchase
Agreements have been duly executed and delivered by and to the appropriate
parties thereto and the transactions contemplated thereunder have been
consummated prior to or on the Closing Date.
(e) Termination of Existing Financing and Security Interests. All
releases and terminations and such other documents as Lender may request to
evidence and effectuate the termination by the existing lender or lenders of
Kennsco of their respective financing arrangements with Kennsco and the
termination and release by it or them, as the case may be, of any interest in
and to any assets and properties acquired by Borrower pursuant to the Kennsco
Purchase Agreements, duly authorized, executed and delivered by it or each of
them, including, but not limited to (i) UCC termination statements for all UCC
financing statements previously filed by it or any of them or their
predecessors, as secured party and Kennsco or Borrower, as debtor, and (ii)
satisfactions and discharges of any mortgages, deeds of trust or deeds to secure
debt by Kennsco in favor of such existing lender or lenders, in form acceptable
for recording in the appropriate government office.
<PAGE> 8
(f) First Priority Lien. Evidence that Lender has valid, perfected
and first priority security interests in and liens upon the assets acquired by
Borrower pursuant to the Kennsco Purchase Agreements and any other property
which is intended as security for the Obligations or the liability of any
Obligor in respect thereto, subject only to the security interests and liens
permitted in the Loan Agreement or the other Financing Agreements.
(g) Fidelity Subordination Agreement. The Fidelity Subordination
Agreement duly executed by Fidelity Bank.
(h) Searl Subordination Agreement. The Searl Subordination Agreement
duly executed by Kenneth H. Searl, Jr.
(i) Supplement to Lockbox Agreement. An agreement with respect to
the additional Blocked Account, pursuant to Section 6.1(a) of the Loan
Agreement, duly executed by Borrower and the applicable depository bank.
(j) Third Party Consents. All consents, waivers and acknowledgments
and other agreement from third persons which Lender may deem necessary or
desirable in order to permit, protect and perfect its security interests in and
liens upon the assets acquired by Borrower pursuant to the Kennsco Purchase
Agreements or to effectuate the provisions or purposes of the Loan Agreement and
the other Financing Agreements, including, without limitation, acknowledgements
by lessors, mortgagees and warehousemen of Lender's security interests in such
assets, waivers by such persons of any security interests, liens or other claims
by such persons to such assets and agreements permitting Lender access to, and
the right to remain on, the premises to exercise its rights and remedies and
otherwise deal with such assets.
(k) Opinion of Counsel. The opinion letters of counsels to Borrower
and Kennsco with respect to the effectiveness of the Kennsco Purchase Agreements
and such other matters as Lender may request.
(l) Pro-Forma Balance Sheet. A pro-forma balance sheet of Borrower
reflecting the transaction contemplated
<PAGE> 9
hereunder, including, but not limited to, (i) the consummation of the
acquisition of the assets to be purchased by Borrower from Kennsco and the other
transactions contemplated by the Kennsco Purchase Agreements and (ii) the Loans
provided by Lender to Borrower on the Closing Date and the use of the proceeds
of such Loans as provided herein, accompanied by a certificate dated of even
date herewith of the chief financial officer of Borrower stating that such
pro-forma balance sheet represents the reasonable, good faith opinion of such
officer as to the subject matter thereof as of the date of such certificate.
(m) Pass- Through Letter. The agreement of Kennsco consenting to the
collateral assignment by Borrower to Lender of all of Borrower's rights and
remedies and claims for damages or other relief under the Kennsco Purchase
Agreements and granting Lender such other rights as Lender may require, duly
authorized, executed and delivered by Kennsco.
(n) Excess Availability. The availability of Borrower with respect
to the Eligible Kennsco Accounts as determined by Lender, as of the Closing
Date, shall be not less than Two Hundred Thousand Dollars ($200,000) after
giving effect to the Loans made or to be made on the Closing Date and the
payment of all fees and expense payable upon the consummation of the
transactions contemplated hereunder. For purposes of this sub-paragraph (m)
only, availability of Borrower with respect to the Eligible Kennsco Accounts
shall mean the amount, as determined by Lender, equal to: (i) the lesser of (A)
the amount of the Revolving Loans available to Borrower to be advanced against
Eligible Kennsco Accounts as of the Closing Date (based on the applicable
advance rate set forth in Section 2.1(a)(ii) of the Loan Agreement), subject to
the sub-limits and Availability Reserves from time to time established by Lender
under the Loan Agreement, and (B) Two Million Dollars ($2,000,000); minus (ii)
the sum of: (A) the aggregate amount of all trade payables of Kennsco acquired
by Borrower which are more than sixty (60) days past due as of the Closing Date,
(C) the aggregate amount of Kennsco's book overdrafts acquired by Borrower, and
(D) the aggregate amount of Kennsco's past due lease and notes payable acquired
by Borrower.
<PAGE> 10
(o) Consent. The Consent appended hereto (the "Consent") executed by
each of C.Y. Investment Inc. and Orie Rechtman (together with the Borrower, each
a "Loan Party" and, collectively, the "Loan Parties").
(p) Other Required Documentation. All other documents and legal
matters in connection with the transactions contemplated by this Amendment shall
have been delivered or executed or recorded and shall be in form and substance
satisfactory to Lender.
(q) Payment of Modification Fee. Lender shall have received from
Borrower a modification fee of Five Thousand Dollars ($5,000) for the processing
and approval of this Amendment.
4. Representations and Warranties. The Borrower represents and warrants
as follows:
(a) Authority. The Borrower and each other Loan Party has the
requisite corporate power and authority to execute and deliver this Amendment or
the Consent, as applicable, and to perform its obligations hereunder and under
the Financing Agreements (as amended or modified hereby) to which it is a party.
The execution, delivery and performance by the Borrower of this Amendment and by
each other Loan Party of the Consent, and the performance by each Loan Party of
each Loan Document (as amended or modified hereby) to which it is a party have
been duly approved by all necessary corporate action of such Loan Party and no
other corporate proceedings on the part of such Loan Party are necessary to
consummate such transactions.
(b) Enforceability. This Amendment has been duly executed and
delivered by the Borrower. The Consent has been duly executed and delivered by
each Guarantor. This Amendment and each Loan Document (as amended or modified
hereby) is the legal, valid and binding obligation of each Loan Party hereto or
thereto, enforceable against such Loan Party in accordance with its terms, and
is in full force and effect.
(c) Acquisition of Purchased Assets.
<PAGE> 11
(i) The Kennsco Purchase Agreements and the transactions
contemplated thereunder have been duly executed, delivered and
performed in accordance with their terms by the respective parties
thereto in all respects, including the fulfillment (not merely the
waiver, except as may be disclosed to Lender and consented to in
writing by Lender) of all conditions precedent set forth therein and
giving effect to the terms of the Kennsco Purchase Agreements and
the assignments to be executed and delivered by Kennsco (or any of
its affiliates or subsidiaries) thereunder, Borrower acquired and
has good and marketable title to the assets purchased pursuant to
the Kennsco Purchase Agreements, free and clear of all claims,
liens, pledges and encumbrances of any kind, except as permitted
hereunder.
(ii) All actions and proceedings, required by the
Kennsco Purchase Agreements, applicable law or regulation
(including, but not limited to, compliance with the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended,
or applicable laws dealing with bulk transfers) have been taken and
the transactions required thereunder have been duly and validly
taken and consummated.
(iii) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits
consummation of the transactions described in the Kennsco Purchase
Agreements and no governmental or other action or proceeding has
been threatened or commenced, seeking any injunction, restraining
order or other order which seeks to void or otherwise modify the
transactions described in the Kennsco Purchase Agreements.
(iv) Borrower has delivered, or caused to be delivered,
to Lender, true, correct and complete copies of the Kennsco Purchase
Agreements.
<PAGE> 12
(d) Representations and Warranties. The representations and
warranties contained in each Loan Document (other than any such representations
or warranties that, by their terms, are specifically made as of a date other
than the date hereof) are correct on and as of the date hereof as though made on
and as of the date hereof.
(e) No Default. No event has occurred and is continuing that
constitutes an Event of Default.
5. Condition Subsequent to Amendment. Within ninety (90) days from the
Closing Date, Borrower shall deliver or cause to delivered to Lender an opening
balance sheet of Borrower after giving effect to the transactions contemplated
hereunder and the Kennsco Purchase Agreements, together with the unqualified
opinion of independent certified public accountants which accountants shall be
an independent accounting firm selected by Borrower and reasonably acceptable to
Lender, to the effect that such opening balance sheet has been prepared in
accordance with GAAP and presents fairly the financial condition of Borrower as
of such date. Borrower's failure to comply with this condition subsequent shall
constitute an Event of Default under the Loan Agreement.
6. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California governing contracts only to be performed in that
State.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument. Delivery of
an executed counterpart of a signature page to this Amendment or the Consent by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Amendment or such Consent.
<PAGE> 13
8. Due Execution. The execution, delivery and performance of this
Amendment are within the power of Borrower, have been duly authorized by all
necessary corporate action, have received all necessary governmental approval,
if any, and do not contravene any law or any contractual restrictions binding on
Borrower.
9. Reference to and Effect on the Loan Documents.
(a) Upon and after the effectiveness of this Amendment, each
reference in the Loan Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Loan Agreement, and each reference in the
other Loan Documents to "the Loan Agreement", "thereof" or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as modified and amended hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other Loan Documents, are and shall continue to be in full force and effect and
are hereby in all respects ratified and confirmed and shall constitute the
legal, valid, binding and enforceable obligations of Borrower to Lender.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Lender under any of the Loan Documents, nor constitute
a waiver of any provision of any of the Loan Documents.
(d) To the extent that any terms and conditions in any of the Loan
Documents shall contradict or be in conflict with any terms or conditions of the
Loan Agreement, after giving effect to this Amendment, such terms and conditions
are hereby deemed modified or amended accordingly to reflect the terms and
conditions of the Loan Agreement as modified or amended hereby.
10. Ratification. Borrower hereby restates, ratifies and reaffirms each
and every term and condition set forth in the Loan Agreement, as amended hereby,
and the Loan Documents effective as of the date hereof.
<PAGE> 14
11. Estoppel. To induce Lender to enter into this Amendment and to
continue to make advances to Borrower under the Loan Agreement, Borrower hereby
acknowledges and agrees that, after giving effect to this Amendment, as of the
date hereof, there exists no Event of Default and no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect to
the Obligations.
IN WITNESS WHEREOF, the parties have entered into this Amendment as
of the date first above written.
"BORROWER"
WAREFORCE INCORPORATED,
a California corporation
By: /s/ Dan Ricketts
-------------------------------------
Title: General Counsel
----------------------------------
"LENDER"
CONGRESS FINANCIAL CORPORATION (WESTERN),
a California corporation
By: /s/ [Illegible]
-------------------------------------
Title: Vice President
----------------------------------
<PAGE> 15
CONSENT
Dated as of March ___, 1999
The undersigned, C.Y. INVESTMENT INC., a California corporation ("CYI"), and
ORIE RECHTMAN, an individual ("Rechtman"), in consideration of the continued
extension of credit to Wareforce Incorporated by Congress Financial Corporation
(Western) ("Congress"), each hereby consents and agrees to the foregoing First
Amendment to Loan and Security Agreement (the "Amendment") and hereby confirms
and agrees that their respective Guarantees dated August 27, 1999 in favor of
Congress are, and shall continue to be in, in full force and effect and are
hereby ratified and confirmed in all respects except that, upon the
effectiveness of, and on and after the date of the Amendment, each reference in
their Guarantees to the Loan Agreement (as defined in the Amendment),
"thereunder", "thereof" or words of like import referring to the "Loan
Agreement", shall mean and be a reference to the Loan Agreement as amended or
modified by the Amendment. Although Congress has informed CYI and Rechtman of
the matters set forth above, and CYI and Rechtman have each acknowledged the
same, CYI and Rechtman each understands and agrees that Congress has no duty
under the Loan Agreement, their respective Guarantees or any other agreement
with CYI or Rechtman to so notify CYI or Rechtman or to seek such an
acknowledgement, and nothing contained herein is intended to or shall create
such a duty as to any advances or transaction hereafter.
C.Y. INVESTMENT INC.,
a California corporation
By: Dan Ricketts
---------------------------------
Title: General Counsel
------------------------------
/s/Orie Rechtman
-------------------------------------
ORIE RECHTMAN, an individual
<PAGE> 1
Exhibit 10.10
STOCK PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS
This Stock Purchase Agreement (the "Agreement") is made effective as of January
1, 1998 by and between CHRISTOPHER CHU AND ALINA CHU FAMILY TRUST, VIVIEN MAK,
RICHARD FU AND LUISA FU, hereinafter collectively referred to as "SELLER" and
WAREFORCE ONE INCORPORATED a successor in interest of Wareforce, Inc.,
hereinafter referred to as "BUYER"
WHEREAS, SELLER is the owner and holder of all of the outstanding stock of C.Y.
INVESTMENTS, INC., hereinafter referred to as "CY". CY is currently doing
business as Impres Technology, MicroAge Computer Center, and Advanced Optical
Distribution; and
WHEREAS, SELLER is desirous of selling to BUYER, and BUYER is desirous of
purchasing from SELLER all of the shares of the capital stock of C.Y.
INVESTMENTS, INC. (the "CY Stock") upon the terms and conditions and for the
consideration hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
ARTICLE 1.
PURCHASE
Section 1.1 For the purchase price and on the terms and subject to the
conditions set forth in this Agreement, SELLER hereby sells, assigns, transfers,
and delivers to BUYER, and BUYER hereby purchases from SELLER, all of his right,
title and interest in and to the CY Stock now owned by him, consisting of all of
the shares of CY common stock as determined at closing.
<PAGE> 2
ARTICLE 2.
PURCHASE PRICE
Section 2.1 The purchase price to be paid by BUYER to SELLER for all of the
shares of CY Stock is THREE MILLION DOLLARS ($3,000,000.00) if escrow is closed
on or before August 31, 1998, and the purchase price is THREE MILLION AND FIFTY
THOUSAND DOLLARS ($3,050,000) if escrow is closed between September 1 and 15,
1998.
Section 2.2 Payment. The payment of the foregoing amount shall be made as
follows:
(a) The purchase price shall be paid in full by wire transfer, payable
to SELLER on the date of Closing per the SELLER'S wire transfer instructions.
(b) Basis of purchase price. SELLER has provided to BUYER a copy of
CY's unaudited financial statements for the year ended December 31, 1997, which
contains (i) a Reviewed balance sheet, (ii) a Reviewed statement of income, and
(iii) a Reviewed statement of cash flows (collectively the "Financial
Statements"). The purchase price set forth in this letter of intent is based on
the parties' assumption that CY's Financial Statements for the year ended
December 31, 1997, fairly represent CY's financial condition at the at time and
the results of its operations for that period after taking into consideration
certain potential accounting adjustments to that Financial Statements, including
any possible adjustments to the ending inventory for the year ended December 31,
1997. BUYER acknowledges that it has been informed of certain potential
accounting adjustments to the Financial Statements, including any possible
adjustments to the ending inventory for the year ended December 31, 1997.
(c) The purchase price is meant to fully represent the price to be
paid. Therefore, SELLER shall not be entitled to receive any of the net profit
earned by CY for the period from January 1, 1998 to the date of closing nor
shall SELLER be entitled to receive any tax refund for the year 1997, subject to
the terms of Sections 10.1(a) and 11.11(b) of this Agreement . Likewise, BUYER
shall not receive any adjustment to the purchase
<PAGE> 3
price as a result of any accounting adjustments made to CY's Financial
Statements for the year ended December 31, 1997. BUYER agrees to assume any and
all liabilities of CY with the exception of liability describe in Section
10.1(a) of this Agreement.
(d) Sale of Stock. The purchase price is based on BUYER'S promise and
warranty not to elect to treat the stock purchase as assets acquisition under
Section 338 of the Internal Revenue Code.
ARTICLE 3.
OTHER AGREEMENTS
Section 3.1 CY's Employee Retirement Plan. BUYER shall assume the responsibility
to continue CY's employee retirement plan after closing, or to combine CY's plan
with BUYER'S existing employee retirement plan.
Section 3.2 Financial Statements. It is hereby acknowledged by BUYER that
unaudited statements of income and retained earnings of CY for the fiscal years
ending December 31, 1997, along with the corporate tax returns as well as all
supporting documents have already been tendered to BUYER for its review.
Section 3.3 Documents and Information. It is hereby acknowledged by BUYER that
it has been given full access to CY's business books and records for
examination, and that it has been given reasonable opportunity to inspect CY's
business premises and inventories.
Section 3.4 Document Retention. For a period of five (5) years following the
Closing Date, BUYER shall retain all material corporate books, records,
financial statements, ledgers and other documentation of CY.
Section 3.5 Christopher Chu agrees to sign management letters and the like,
which are agreeable to Christopher Chu, as requested by BUYER and BUYER'S
auditors concerning audited financial statements for periods prior to the
Closing provided
<PAGE> 4
that such financial statements are prepared in accordance with the generally
accepted accounting principles.
ARTICLE 4.
WARRANTIES OF SELLER
Section 4.1 SELLER hereby warrants, represents, and covenants to BUYER as of the
Closing Date, and this Agreement is made in reliance on the following, each of
which is deemed to be a separate covenant, representation, and warranty:
(a) Ownership of Stock. As of the date of closing, SELLER collectively
owns, beneficially and of record, free and clear of all liens, pledges, charges,
claims, equities, restrictions, or encumbrances, the shares of CY Stock, and has
the full right, power and authority to sell, transfer, and deliver to BUYER, in
accordance with this Agreement, the Stock, free and clear of all liens, pledges,
charges, claims, equities, restrictions, and encumbrances. The sale by SELLER of
the Stock does not constitute a breach or violation of, or default under, any
will, deed or trust, agreement, or other instrument by which either of them is
bound.
(b) Liens Created by Sale. The execution and carrying out of the
provisions of this Agreement and compliance with the provisions hereof by SELLER
will not violate any provision of law and will not conflict with or result in
any breach of any of the terms, conditions, or provisions of, or constitute a
default under, or result in the creation of, any lien, charge, or encumbrance
upon any of the properties or assets of CY pursuant to the Articles of
Incorporation, By-Laws, or any indenture, mortgage, deed of trust, agreement or
other instrument to which CY is a party or by which it is bound or affected.
(c) Duly Organized. C.Y. INVESTMENTS, INC., is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
California, and has its principal place of business at 4820 S. Eastern Avenue,
#C,
<PAGE> 5
Commerce, California. A copy of the Articles of Incorporation and all amendments
thereto, and a copy of the By-Laws, have been delivered to BUYER prior to the
Closing and shall be complete and correct as of said date. To the best of SELLER
knowledge, CY is not qualified in any other jurisdiction than California.
(d) Authorized Capital. CY has an authorized capital of one million
(1,000,000) shares of common stock, $1.00 par value, of which four hundred and
ten thousand (410,000) shares are validly issued and outstanding, fully paid and
non-assessable, all of which are held by SELLER. Both Richard Fu and Luisa Fu
own stock options in CY which options will be exercised prior to Closing and the
stock will be subject to this Agreement. There are no other outstanding stock
options or warrants with respect to, or privileges or rights to purchase or
subscribe for, any capital stock of, obligations or securities issued by CY
convertible into or exchangeable for shares of capital stock of CY, agreements
provided for or relating to any other options, warrants, purchase rights,
privileges, convertible obligations, or securities to which CY is a party, or
any other agreements by CY to issue, sell, or acquire any of its capital stock.
(e) Officers and Directors. The following constitute all of the present
officers and directors of CY: Christopher Chu, President, Chairman of the Board
and Secretary; Vivien Mak, Vice-President and Director; and James Choi, Chief
Financial Officer.
(f) Statement. To the best of SELLER'S knowledge, CY has delivered to
BUYER a true and complete list, as of the date hereof and, showing:
(i) The current compensation and payroll information for CY
for the present fiscal year;
(ii) The name of each bank in which CY has an account and the
names of all persons authorized to draw thereon;
(iii) The names of all persons, if any, holding tax or other
powers of attorney from CY and a summary
<PAGE> 6
statement of the terms thereof;
(iv) The patents, trademarks, trade names, copyrights or other
intangible assets of CY;
(v) All labor and employment agreements, or other similar
agreements, including (without limitation) any collective bargaining
agreement, to which CY is a party or affected thereby; and
(vi) All employee benefit plans (as defined in Section 3(3) of
ERISA) and any stock option, stock bonus, stock ownership or stock
purchase plan, any cash bonus or other incentive program, any
split-dollar or corporate-owned life insurance program or special
welfare benefit program reserved for a select group of officers or
employees (including the plan documents and all amendments, the related
trust documents, insurance policies, contracts and other authorizing
documents, employee booklets, summary plan descriptions, summaries of
material modifications and any other material employee communications).
(g) To the best of SELLER'S knowledge, SELLER represents and warrants
that it knows of no undisclosed liabilities of CY incurred outside the ordinary
course of business for which BUYER will become responsible upon closing. BUYER
is aware of an audit of CY's 1996 corporate income tax return by the Internal
Revenue Service (the "IRS Audit") as well as a potential dispute with Novell
(the "Novell Dispute") over licenses sold by CY in the past years. See Sections
2.2(c), 10.1(a) and 11.11(b) for treatment and indemnity of undisclosed
liabilities.
(h) Acts by CY. To the best of SELLER'S knowledge, since the signing of
the letter of intent on May 26, 1998, CY has not:
(i) Incurred any obligation or liability, absolute or
contingent, known or unknown, except current liabilities incurred in
the ordinary course of business;
<PAGE> 7
(ii) Discharged or satisfied any lien or encumbrance, or paid
any obligation or liability, absolute or contingent, other than current
liabilities;
(iii) Declared or paid any dividends, made any payment or
distribution of any kind to shareholders, or purchased or redeemed or
otherwise acquired any shares of capital stock, except there was a
dividend distribution to the shareholders in the total amount of
$10,000 on May 11, 1998;
(iv) Mortgaged, pledged, or subjected to lien, charge, or
other encumbrance, any of its assets, tangible or intangible;
(v) Sold or transferred any of its tangible assets, or
canceled any debts or claims, except in the ordinary course of
business;
(vi) Sold, assigned, transferred, or granted licenses or
rights in any patents, trademarks, trade names, copyrights, or other
intangible assets;
(vii) Engaged in any transactions affecting its business or
properties not in the ordinary course of business, or waived any rights
of substantial value;
(viii) Made or authorized any change in its outstanding stock
except the exercise of the stock options by Richard Fu and Luisa Fu, or
in its Articles of Incorporation or By-Laws;
(ix) Granted or agreed to grant any increase in compensation
to, or paid or agreed to pay any bonus to, any of its directors,
officers, employees or agents not in the ordinary course of business;
(x) Suffered any damage, destruction, or loss
<PAGE> 8
(whether or not covered by insurance) materially and adversely
affecting its properties or business, or of any item carried in its
property account at more than FIFTY THOUSAND DOLLARS ($50,000.00); or
(xi) Experienced any labor trouble, or any event or condition
of any character, materially and adversely affecting its business or
properties.
(i) Change in Business. To the best of SELLER'S knowledge, since the
Financial Statements dated December 31, 1997, there have been no material
changes in the assets, liabilities, business, or condition of CY other than
changes in the ordinary course of business, which changes have not adversely
affected its business, properties, prospects, or condition.
(j) Contracts. To the best of SELLER'S knowledge, since the signing of
the letter of intent on May 26, 1998, CY is not a party to any written or oral
contract not made in the ordinary course of business:
(i) Contract for the employment of any officer or individual
employee;
(ii) Contract with any labor union;
(iii) Contract continuing over a period of more than one year
from the date hereof;
(iv) Contract not terminable on thirty (30) days' notice or
less without liability on the part of CY;
(v) Lease;
(vi) Bonus, pension, profit-sharing, retirement, stock
purchase, stock option, hospitalization, insurance, or similar plan or
practice, formal or informal, in effect with respect to its employees
or others, with the exception of an amendment to deferred compensation
agreement with SELLER'S controller Eddy Law; or
<PAGE> 9
(k) Obligations. CY has performed all obligations required to be
performed by it to date, and is not in default under any contract, agreement,
lease, commitment, indenture, mortgage, deed of trust, or other document to
which it is a party.
(l) Taxes. To the best of SELLER'S knowledge, CY has filed all federal
and state tax returns which are required to be filed, and has paid all taxes
which have become due pursuant to such returns or pursuant to any assessment
received by CY. To the best of SELLER'S knowledge, CY's tax returns, including
amendments to date, have been prepared without misrepresentation and are
complete and accurate in all material respects. BUYER is aware of the fact that
CY is currently under an IRS audit of CY's 1996 corporate income tax return.
(m) Restrictions on Operations. To the best of SELLER'S knowledge,
except for its five (5) real property leases, respectively, for the business
premises located at (1) 4820 S. Eastern Avenue, Suite C, Commerce, California
90040 (CY's headquarters), (2) 16530 Ventura Boulevard, Suite 105, Encino,
California 91436 (CY's satellite office), (3) 16 Technology, Suite 205, Irvine,
California 92618 (CY's satellite office), (4) 5710 Bandini Boulevard, Commerce,
California 90040 (CY's warehouse), and (5) 5700 Bandini Boulevard, Commerce,
California 90040 (sublet to Battery Technology, Inc.), CY is not a party to any
contract or agreement, or subject to any charter or other corporate restriction,
which materially and adversely affects, or with the giving of notice or the
passage of time would affect, its business, property, assets, operations, or
conditions, financial or otherwise.
(n) Compliance With Laws. To the best of SELLER'S knowledge, CY has
complied with, and is complying with, all applicable laws, orders, rules, and
regulations promulgated by any federal, state, municipal, or other governmental
authority relating to the operation and conduct of the property and business of
CY, and there are no material violations of any such law, order, rule, or
regulation existing or threatened. CY has not received any notices of violation
of any applicable zoning
<PAGE> 10
regulation or order, or other law, order, regulation, or requirement relating to
the operation of its business or to its properties.
(o) Litigation. To the best of SELLER'S knowledge, there are no
actions, suits, claims, proceedings, investigations, or litigation pending, or
to the knowledge of CY threatened against or affecting CY, at law or in equity
or admiralty, or before any federal, state, municipal, or other governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, except as to small claims court matters and a current IRS tax audit
which is pending. CY is not in default with respect to any order, writ,
injunction, or decree of any court or federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality,
domestic or foreign. BUYER acknowledges that it has been informed of a potential
claim by SELLER against GTSI, Inc., for interference with SELLER'S contract with
the U.S. Navy.
(p) Title to Assets. To the best of SELLER'S knowledge, CY has good and
sufficient title in and to all of the assets listed on the Financial Statements
or acquired by it after such date, other than inventories sold or otherwise
disposed of in the ordinary course of business subsequent to such date; and such
assets are in each case free and clear of all mortgages, liens, charges,
encumbrances, equities, pledges, conditional sales agreements, or claims of any
nature whatsoever, except as stated in the Financial Statements and CY's books
and records.
(q) Condition of Assets. To the best of SELLER'S knowledge, the assets
of CY are in good operating condition and repair, and conform with all
applicable ordinances, regulations, zoning and other laws.
(r) Inventories. To the best of SELLER'S knowledge, all data, documents
and materials and all access necessary to conduct a physical inventory of CY
have been provided to BUYER.
(s) Insurance. To the best of SELLER'S knowledge, CY is not in default
under any policies of fire, liability, and
<PAGE> 11
other forms of insurance held by CY and material to its business. All insurance
policies maintained by CY are in full force and effect, and CY has received no
notice or other indication from any insurer or agent of any intent to cancel or
not renew any of such insurance policies.
(t) Labor Matters. To the best of SELLER'S knowledge, none of the
facilities or operations of CY has been the subject of any strike, work
stoppage, boycott, union organizational effort, unfair labor practice charge or
employment discrimination charge; and, to the knowledge of CY, no such action is
threatened.
(u) Permits. To the best of SELLER'S knowledge, CY holds all permits,
licenses, franchises, certificates and authorizations that are required by any
governmental agency to permit it to conduct its business as conducted now or as
previously conducted by it, and all such permits, licenses, franchises,
certificates and authorizations are valid and in full force and effect and will
remain so upon consummation of the transaction contemplated by this Agreement.
No suspension, cancellation or termination of any of such permits, licenses,
franchises, certificates and authorizations is threatened or imminent.
(v) No Brokers or Finders. Except for MARTIN WOLF ASSOCIATES which has
been retained by SELLER to act as SELLER'S financial consultant with respect to
the transaction contemplated by this Agreement, no agent, broker, finder, or
investment or commercial banker, or other person or firm engaged by or acting on
behalf of SELLER in connection with the negotiation, execution or performance of
this Agreement or the transaction contemplated by this Agreement, is or will be
entitled to any brokerage or finder's or similar fee as a result of this
Agreement or such transaction.
(w) Minute Books. The minute books of CY accurately reflect all actions
and proceedings taken to date by the shareholders and Board of Directors of CY,
and such minute books contain true and complete copies of the charter documents
and By-
<PAGE> 12
Laws of CY and all related amendments.
(x) No Termination of Business Relationship. To the best of SELLER'S
knowledge, since May 26, 1998, no individual, partnership, joint venture,
corporation, trust, organization or government with which CY has a business
relationship relative to its business that is material to that business, taken
as a whole, has given notice of any intention to cancel or otherwise terminate
such business relationship with CY, with the exception that the U.S. Navy has
recently canceled one contract with SELLER.
(y) Conflicts; Consents and Approvals; No Violation or Default. To the
best of SELLER'S knowledge, the consummation by SELLER of the transaction
contemplated hereby as of the closing date will not: (a) conflict with or result
in any breach of any provisions of the Articles of Incorporation or By-Laws or
other charter documents of CY; (b) require any consent, approval, authorization
or permit of, or filing with or notification to, any third party, except that
MicroAge Computer Centers, Inc., CY and Wareforce have signed an agreement
consenting to this transaction; (c) to CY'S knowledge, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to SELLER OR CY,
which violation would have a material adverse effect on CY or its business taken
as a whole; or (d) result in a default (or any event which, with the giving of
notice or the passage of time, or both would constitute a default) under any of
the terms, conditions or provisions of any permit, license, franchise,
certificate or authorization or any contract
(z) Disclosures. To the best of SELLER'S knowledge, no representation
or warranty contained herein, and no statement made in any certificate or
schedule furnished in connection with or attached to this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary to make any such representation, warranty, or statement not misleading
to a prospective purchaser of all of the capital stock of CY .
(aa) No Other Negotiations Pending. SELLER represents
<PAGE> 13
and warrants that they are not negotiating with any other party for the sale of
their stock in CY and have not entered into any understanding, whether binding
or not, relative, thereto, and agree that before July 10, 1998, SELLER will not
negotiate for the sale of or offer to sell CY's business to any other party.
(bb) Employee benefit plans.
(i) Each CY employee pension benefit plan (within the meaning
of Section 3(2) of ERISA) which is a tax-qualified pension,
profit-sharing or stock bonus plan under Section 401 of the Internal
Revenue Code (the "Code") (a "Qualified Plan") has been determined by
the Internal Revenue Service to qualify under Section 401 of the Code,
and the trusts created thereunder have been determined to be exempt
from tax pursuant to the provisions of Section 501 of the Code, and
nothing has occurred which would cause the loss of such qualification
or tax-exempt status. Each Qualified Plan has been operated and
administered in all respects in accordance with its terms and the
applicable provisions of ERISA, the Code and other applicable legal and
regulatory requirements. Each Qualified Plan has at all times been
properly and fully funded; there is no accumulated funding deficiency
under Section 412 of the Code; and CY and any other entity that,
together with CY, is treated as a single employer under Section 414(b),
414(c), 414(m) or 414(o) of the Code (an "ERISA Affiliate") have no
outstanding liabilities under Title IV of ERISA.
(ii) Neither CY nor any ERISA Affiliate is a party to, nor has
made any contribution to or otherwise incurred any obligation under,
any multi-employer plan (within the meaning of Section 3(37)(A) of
ERISA), any multiple employer plan (as described under Section 4064 of
ERISA) or any other single-employer plan (within the meaning of Section
3(41) of ERISA) under Title IV of ERISA. There are no "reportable
events" under Section 4043 of ERISA with respect to any Qualified
Plans, and CY does not have any outstanding liability under Section
4971 or 4977 of the Code.
<PAGE> 14
(iii) No civil penalties have been assessed pursuant to
Section 409 or 502(i) of ERISA, nor have any taxes been incurred
pursuant to Section 4975 or 4979 of the Code, with respect to
transactions involving any Qualified Plan. To the knowledge of CY there
has been no breach of any fiduciary duties owed pursuant to the
provisions of Part 4 of Title I of ERISA to the participants in any
Qualified Plan, and there are no pending claims to, by or on behalf of
any of the Qualified Plans, by any participants or beneficiaries
covered under any such Qualified Plan, or otherwise involving any such
Qualified Plan (other than routine claims for benefits).
(iv) No amounts payable under any of the CY plans will fail to
be deductible for Federal income tax purposes pursuant to Section 280G
of the Code.
(v) Except as previously disclosed by CY to BUYER, the
completion of the transactions contemplated by this Agreement will not
entitle any current or former employee or officer of CY or any ERISA
Affiliate to severance pay, unemployment compensation or any other
payment, except as expressly provided in this Agreement, or accelerate
the time of payment or vesting, or increase the amount of compensation
due any such employee or officer.
ARTICLE 5.
WARRANTIES OF BUYER
Section 5.1 BUYER hereby warrants, represents, and covenants to SELLER as of the
date hereof and the Closing Date, and this Agreement is made in reliance on the
following, each of which is deemed to be a separate representation and warranty:
(a) Authorization to Purchase. BUYER is a duly organized and existing
corporation under the laws of the State of California, has all of the corporate
powers and authority necessary to carry on the business it now conducts, and has
the
<PAGE> 15
power and authority to purchase all of the CY Stock from SELLER on the terms,
conditions, and for the purchase price set forth herein as well as all
additional provisions contained herein incident to this Agreement.
(b) No consent, approval, or authorization of, or declaration, filing,
or registration with, any United States federal or state governmental or
regulatory authority is required to be made or obtained by BUYER in connection
with the execution, delivery, and performance of this agreement and the
consummation of the transactions contemplated by this agreement.
(c) Sale of Stock. The purchase price is based on BUYER'S promise and
warranty not to elect to treat the stock purchase as assets acquisition under
Section 338 of the Internal Revenue Code.
(d) Inspection of Premises and Location. BUYER has had ample
opportunity to inspect the on-site premises of CY as well as the general
neighborhood of the location and warrants that such premises and location are
acceptable to it.
(e) Consents. BUYER shall have obtained all necessary governmental
consents, waivers and approvals to the transaction contemplated hereunder, and
have reported to the California Department of Corporations' the sale of
securities contemplated hereunder as required by California Code of Regulations
Sections 260.141.11 and 260.141.12.
ARTICLE 6.
ESCROW AND SURVIVAL OF WARRANTIES
Section 6.1 Time and Place of Closing. The purchase and sale described in this
Agreement shall be consummated at a closing (the "Closing") scheduled to occur
at 11:00 a.m. Pacific Daylight Saving Time on August 28, 1998, called "the
Closing Date," at Golden Escrow, 1525 S. Garfield Avenue, Alhambra, California
91801, or at another time or location mutually agreeable to the parties.
<PAGE> 16
Section 6.2 Escrow. On July 31, 1998, BUYER has made a nonrefundable payment of
$250,000 to SELLER ("Nonrefundable Payment"). On or about July 31, 1998, BUYER
has deposited One Hundred Thousand Dollars ($100,000.00) as earnest money (the
"Earnest Money Deposit"), to be held in strict joint order escrow (the "Escrow")
by Golden Escrow, 1525 S. Garfield Avenue, Alhambra, California 91801 (the
"Escrow Company"). Escrow shall be opened by delivery of a fully-executed copy
of the letter of intent dated May 26, 1998, whereupon the letter of intent, with
subsequent amendments, and this Agreement shall constitute escrow instructions
to the Escrow Company. SELLER and BUYER agree to execute such additional
instructions as Escrow Company may require, in form reasonably satisfactory to
BUYER and SELLER; provided that if there is any conflict between the provisions
of this Agreement and such additional instructions, this Agreement shall
control. If escrow is closed on or before August 31, 1998, the Nonrefundable
Payment and Earnest Money Deposit herein shall be treated as credits to the
Purchase Price. If escrow is closed between September 1 and 15, 1998, the
Purchase Price shall increase from $3,000,000 to $3,050,000, and the
Nonrefundable Payment and Earnest Money Deposit herein shall be treated as
credits to the Purchase Price. If escrow is not closed on or before September
15, 1998, then the Escrow Company shall disburse the Earnest Money Deposit to
SELLER, and the parties agree to promptly notify the Escrow Company in writing
upon any termination of this Agreement as to which party is entitled to the
Earnest Money Deposit. Any interest earned on the Earnest Money Deposit shall be
the sole property of the party entitled to the Earnest Money Deposit pursuant to
the terms of this Agreement.
Section 6.3 Due Diligence Period.
(a) BUYER shall complete due diligence on or before June 25, 1998, by
delivering to SELLER by facsimile a written notice of completion of due
diligence. BUYER'S failure to complete due diligence within the 30-day period
shall constitute BUYER'S default. At BUYER'S default, SELLER may terminate this
<PAGE> 17
letter of intent and any agreement entered into on the basis of this letter of
intent, and seek remedies as set forth in Article 7 herein.
(b) BUYER shall retain the services of a "Big 6" accounting firm of
BUYER'S choice to conduct the due diligence audit of the books and records of CY
for the purpose of verifying the financial information contained in CY's
unaudited financial statements for the year ended December 31, 1997. BUYER
acknowledges that is has been informed of certain potential accounting
adjustments to the Financial Statements, including and possible adjustments to
the ending inventory for the year ended December 31, 1997.
(c) The accountants for both BUYER and SELLER shall meet on or before
May 30, 1998. SELLER shall provide BUYER and its representatives full access to
CY's books, records and information concerning its business and financial
condition and any of CY's personnel that would enable BUYER and BUYER'S
attorney's, accountant, etc., to fully investigate the financial condition of
CY's business.
(d) All information gather from such due diligence shall be maintained
in confidence by BUYER and its representatives. BUYER, and on behalf of its
agents and representatives, agrees to be bound by the terms of the
confidentiality agreement, dated April 24, 1998 which was signed by BUYER and
CY. All of the terms of the confidentiality agreement are incorporated herein by
reference.
Section 6.4. Duties of Parties Prior to Closing.
(a) CY's business will be conducted in the ordinary course consistent
with previous practices.
(b) SELLER represents and warrants that they are not negotiating with
any other party for the sale of their stock in CY and have not entered into any
understanding, whether binding or not, relative thereto, and agree that for a
period between May 26, 1998, and September 15, 1998, SELLER will not negotiate
for
<PAGE> 18
the sale of or offer to sell CY's business to any other party.
Section 6.5 Escrow Closing. It is the intent of both BUYER AND SELLER that the
purchase shall be completed on or before September 15, 1998. BUYER'S failure to
complete the purchase on or before September 15, 1998 shall constitute BUYER'S
default. At BUYER'S default, SELLER may terminate this Agreement, and seek
remedies as set forth in Article 7 herein.
Section 6.6 Obligations at Closing.
(a) Documents from SELLER. SELLER shall deliver to Escrow Company at
least one (1) business days before Closing the following executed documents in
form and content acceptable to Purchaser;
(i) CY's corporate resolution approving the sale of all of the
common stock of C.Y. Investment, Inc., to BUYER.
(ii) Resignations by Christopher Chu and Vivien Mak as
officers and directors of CY, effective as of the Closing date.
(iii) Seller's stock certificates representing 100% of the CY
common stock duly endorsed for immediate transfer to BUYER.
(iv) CY Personal Property. CY's property keys, pass codes,
security service codes, calling cards, and cooperate in new bank
signature card with new officers of C. Y. INVESTMENTS, INC.
(v) Affidavits. Affidavit(s) stating that (1) SELLER is not a
foreign person or entity; and (2) such other affidavits as Escrow
Company may reasonably require.
(vi) Authority. Such evidence or documents as may be
reasonably required by BUYER or the Escrow Company evidencing the
status and capacity of SELLER and the authority of the person or
persons who are executing the
<PAGE> 19
various documents on behalf of SELLER in connection with the sale of CY
Stock, including corporate resolutions.
(vii) Closing Statement. Signed copies of a closing statement
prepared by the parties or by Escrow.
(b) Documents from BUYER. BUYER shall deliver at least one (1) business
day before Closing the following executed documents in form or content
acceptable to SELLER:
(i) Closing Statement. Signed copies of a closing statement
prepared by the parties or by Escrow.
(ii) Authority. Such evidence or documents as may be
reasonably required by SELLER or the Escrow Company evidencing the
status and capacity of BUYER and the authority of the person or persons
who are executing the various documents on behalf of BUYER in
connection with the acquisition of CY Stock, including corporate
resolutions.
(iii) BUYER'S corporate resolution approving the acquisition
of all of the common stock of C.Y. Investment, Inc., approving the
assumption of any and all of the CY's liabilities as reflected in CY's
books and records (with the exception of the potential liability
arising from the IRS audit of CY's 1996 corporate income tax return and
from the inquiry by Novell, Inc.), and authorizing Mr. Rechtman to sign
the Stock Purchase Agreement And Escrow Instructions.
(iv) Release of all of the SELLER's personal guaranties
provided as security for CY's indebtedness, including but not limited
to, loans from financial institutions, lines of credit from financing
companies, extension of credit from vendors and commercial leases.
BUYER shall provide letters from all entities who have received
personal guaranties from SELLER showing that the credit or loan
extended to CY has been fully paid and terminated as of the date of
closing, and that SELLER's personal guaranties either have already been
released or will be released in the near future. SELLER's obligation to
effectuate the release of SELLER's personal guaranties
<PAGE> 20
extends beyond the closing date, until all such personal guaranties
have been released. Escrow will not be closed unless Buyer has produced
documents from Congress Financial Corporation (Western) showing the
remittance of funds to completely pay off the account balance of the
obligations owed by C.Y. Investment, Inc., to the following companies:
(1) Deutsche Financial Services
(2) IBM Credit Corporation
(3) MicroAge Computer Stores, Inc. (Pinacor)
(4) Far East National Bank
(5) AT&T Commercial Finance Corporation
(6) ITT Commercial Finance Corp.
(7) Finova Capital Corp.
(v) Acknowledgment. BUYER'S acknowledgment that it has been
provided a copy of all of the documents referred to in this Agreement,
and that it has been given reasonable opportunity to inspect CY's books
and records, and to inspect CY's business premises including CY's
inventories.
(vi) Other Documents. Such other documents required by this
Agreement and/or which the Escrow Company may reasonably require.
(c) Payment. The Purchase Price, subject to any credits for
Nonrefundable Payment and Earnest Money Deposit, shall be paid in cash, by wire
transferred funds or by any other means as may be required by Escrow.
(d) Resignations. Christopher Chu and Vivien Mak shall have submitted
their resignations as officers and directors in writing to CY, effective as of
the Closing date. CY shall not incur any cost or expense in connection with, or
as a result of, the termination of employment of such officers and directors,
including, but not limited to, severance benefits.
(e) SELLER will pay at the Closing, from the proceeds
<PAGE> 21
of the funds they receive pursuant to Section 2.2, the consulting or finder's
fee payable to MARTIN WOLF ASSOCIATES. Each party hereto represents, warrants,
and agrees that all negotiations relative to this Agreement have been carried on
by him, her or its responsible officer, or his, her or its representative,
directly with the other party without the intervention of any person. Other than
MARTIN WOLF ASSOCIATES, no intermediary or broker brought about this sale on
his, her or its behalf. Each party will indemnify and hold the other party
harmless from any and all claims, suits, and actions for brokerage or other
commissions, and from and against all expenses of any character, including
reasonably attorney's fees incurred by the other by reason of any claim by any
person or broker claiming to have been engaged by, or on behalf of, the
indemnifying party,
(f) Expenses.
(i) Each party agrees to pay the legal and other fees and
expenses incurred by it with respect to this transaction, whether or
not the Closing occurs.
(ii) BUYER shall pay for the escrow and closing costs of
Progressive Escrow, and SELLER shall pay for the escrow and closing
costs of Golden Escrow.
Section 6.7 Survival of Warranties. If the transaction herein is consummated,
the warranties, representations, and covenants of BUYER and SELLER shall survive
the execution of this Agreement for one (1) year from the Closing date;
provided, however, that CY's warranties, representations and covenants set forth
in Sections 4.1(h) and 4.1(n) hereof, insofar as they relate to taxes of any
kind whatsoever, shall survive until the expiration of the applicable statute(s)
of limitation, or extensions thereof. No extension of any such statute of
limitation may be made by the statement or conduct of BUYER without the express
prior written permission of SELLER insofar as said extension relates to any of
the warranties, representations and covenants set forth in Sections 4.1(h) and
4.1(n) hereof which relate to taxes of any kind whatsoever.
<PAGE> 22
ARTICLE 7.
REMEDIES ON DEFAULT
(a) SELLER'S DEFAULTS: BUYER'S REMEDIES. IN THE EVENT SELLER BREACHES
THIS AGREEMENT AND REFUSES TO COMPLETE THE SALE OF THE STOCK TO BUYER AS HEREIN
PROVIDED, THEN BUYER SHALL AS ITS SOLE REMEDY BE ENTITLED EITHER TO RECOVER ITS
EARNEST MONEY DEPOSIT IN ESCROW OR TO SPECIFIC PERFORMANCE.
/s/ CC /s/ OR
- ----------------- -----------------
SELLER'S INITIALS BUYER'S INITIALS
(b) BUYER'S DEFAULT: SELLER'S REMEDIES. SELLER AND BUYER EXPRESSLY
ACKNOWLEDGE AND AGREE THT IF BUYER FAILS TO PURCHASE THE STOCK IN ACCORDANCE
WITH THIS AGREEMENT, BUYER SHALL BE IN DEFAULT OF THIS AGREEMENT AND SELLER
SHALL BE MATERIALLY DAMAGED. SELLER AND BUYER AGREE IT WOULD BE IMPRACTICABLE
AND EXTREMELY DIFFICULT AT THIS TIME TO ESTIMATE THE AMOUNT OF THE DAMAGE.
SELLER AND BUYER FURTHER AGREE, AFTER NEGOTIATIONS, THAT THE AMOUNTS OF THE
NONREFUNDABLE PAYMENT OF $250,000 AND THE EARNEST MONEY DEPOSIT OF $100,000
DEPOSITED BY BUYER IN ESCROW, TOGETHER WITH INTEREST, CONSTITUTE THEIR BEST
ESTIMATE, BASED ON ALL RELEVANT FACTS, OF THE AMOUNT OF SELLER'S DAMAGE IN THE
EVENT OF BUYER'S DEFAULT. ACCORDINGLY, SELLER AND BUYER AGREE THAT IN THE EVENT
OF DEFAULT BY BUYER, THE NONREFUNDABLE PAYMENT AND THE EARNEST MONEY DEPOSIT,
TOGETHER WITH THE INTEREST, SHALL CONSTITUTE LIQUIDATED DAMAGES, AND ESCROW IS
HEREBY INSTRUCTED BY SELLER AND BUYER TO DELIVER THE EARNEST MONEY DEPOSIT,
TOGETHER WITH INTEREST, TO SELLER. THE LIQUIDATED DAMAGES SHALL CONSTITUTE
SELLER'S REMEDY FOR BUYER'S DEFAULT. IN ADDITION, IN THE EVENT OF BUYER'S
DEFAULT, SELLER OR CY SHALL HAVE RIGHT TO SEEK DAMAGES FOR BUYER'S BREACH OF
THIS CONFIDENTIALITY AGREEMENT DATED APRIL 24, 1998.
/s/ CC /s/ OR
- ----------------- -----------------
SELLER'S INITIALS BUYER'S INITIALS
<PAGE> 23
ARTICLE 8.
COVENANT NOT TO COMPETE
Section 8.1 Covenant. SELLER agrees that it, he or she will not, directly or
indirectly, own, join, control, or participate in the ownership, or control of,
any electronic sale business under any name similar to the name of CY, Impres
Technology, or Advanced Optical Distribution or which competes in any similar
business in the Los Angeles County and Orange County, California for a period of
two years from the date hereof, unless such SELLER obtains the prior written
consent of BUYER. BUYER hereby consents to CHRISTOPHER AND ALINA CHU FAMILY
TRUST's ownership of 1/3 interest in the common stock of Protec Investment, Inc.
dba MicroAge Computer Center, a California corporation, and Christopher Chu's
serving as Protec's secretary and Alina Chu's serving as Protec's director.
BUYER further consents to CHRISTOPHER AND ALINA CHU FAMILY TRUST's ownership of
1/3 interest in the common stock of Able Micro Systems Corp. dba KIS Computer, a
California corporation, and Alina Chu's serving as the secretary and director of
Able Micro Systems Corp. BUYER further consents to VIVIEN MAK's ownership of 1/3
interest in the common stock of Able Micro Systems Corp. dba KIS Computer, a
California corporation, and Vivien Mak's serving as the treasurer and director
of Able Micro Systems Corp.
Section 8.2 Injunctive Relief. SELLER agrees that the remedy at law for any
breach by any of them of any provision of this article will be inadequate and
that, in addition to any other remedies it may have, BUYER shall be entitled to
temporary and permanent injunctive relief without the necessity of proving
actual damage to either CY or to BUYER.
<PAGE> 24
ARTICLE 9.
TERMINATION OF OBLIGATIONS
Section 9.1 Right to Terminate Agreement. The parties agree that the only rights
to cancel this agreement are:
(a) BUYER has the right to cancel this Agreement upon the discovery,
prior to the closing, of a material instance of fraud on the part of the SELLER.
In the case of such discover of fraud, the BUYER may cancel this Agreement by
giving written notice of cancellation to SELLER, with no liability by BUYER to
either SELLER or MARTIN WOLF ASSOCIATES, INC., and
(b) SELLER has the right to cancel this Agreement in the event that
BUYER fails to complete due diligence within the period called for in section
6.3 or that BUYER fails to close escrow within the period called for in Section
6.5 of this Agreement.
ARTICLE 10.
INDEMNIFICATION AND REMEDIES
Section 10.1 Obligation to Indemnify.
(a) SELLER jointly and severally agree to indemnify and hold harmless
BUYER and its directors, officers, employees, affiliates, agents and assigns
(each, a "BUYER Party") from and against any and all losses of any such parties
as a result of a material instance of fraud on the part of SELLER.
(i) BUYER is aware of an Internal Revenue Service audit of
CY's 1996 corporate income tax return (the "IRS Tax Audit") as well as
a potential dispute with Novell over licenses sold by CY in the past
years (the "Novell Dispute"). SELLER agrees to fully defend, indemnify
and hold BUYER harmless for any liability on the part of BUYER due to
either the current IRS Tax Audit or the Novell Dispute. SELLER's
indemnification is limited to BUYER's net loss, if any, arising from
the payment of any IRS adjustments of CY's 1996 corporate income tax
return as a result of the current IRS Tax Audit and the Novell payment.
The term
<PAGE> 25
"net loss" is defined as actual payments made by BUYER to the IRS or
Novell with respect to the current IRS Tax Audit and Novell dispute
after deducting or taking into account any tax benefits (arising from
tax deductions, credits, or net operating loss carry-back or
carry-forward, etc.) to BUYER as a result of such payments by BUYER to
the IRS or Novell.
(ii) BUYER agrees that BUYER shall, at BUYER's costs, handle
the IRS Tax Audit. The costs paid for by BUYER shall be those such as
normal internal costs of accounting, legal, etc. if however BUYER is
required to engage any outside services [accounting, legal, etc.] to
handle the current IRS Tax Audit, the costs of such engagements will be
borne solely by SELLER and CHRISTOPHER CHU shall have prior approval on
the selection of outside services. However, BUYER must notify
CHRISTOPHER CHU if the IRS proposes any tax adjustments arising out of
the current IRS Tax Audit, by which time CHRISTOPHER CHU shall appoint
SELLER's representative, at SELLER's costs, to negotiate a settlement
or litigate the IRS Controversy. BUYER must obtain the written consent
of Christopher Chu prior to any settlement or litigation of the current
IRS Tax Audit. BUYER shall fully cooperate with SELLER in all respects
as to the current IRS Tax Audit.
(iii) CHRISTOPHER CHU shall appoint SELLER's representative,
at SELLER's costs, to handle, settle or litigate the Novell dispute.
BUYER must obtain the written consent of Christopher Chu prior as to
any settlement or litigation of the Novell dispute. BUYER shall fully
cooperate with SELLER in all respects as to the Novell Dispute.
(b) BUYER agrees to indemnify and hold harmless SELLER from and against
any and all losses of any such parties as a result of, or based upon or arising
from (i) any inaccuracy in or breach or nonperformance of any of the
representations, warranties, covenants or agreements made by BUYER under this
Agreement, or (ii) the conduct of the business of CY after the Closing Date.
Section 10.2 Certain Indemnification Procedures.
<PAGE> 26
(a) If and whenever a party to this Agreement (the "Indemnified Party")
shall claim indemnification under Section 10.1, it shall send written notice of
the same to the other party (the "Indemnifying Party") at such person's address
set forth in Section 11.2 hereto (a "Notice of Claim"). Any such claim shall be
made prior to the termination of the survival period applicable to the
representations and warranties as provided in Section 6.7 hereof. A Notice of
Claim hereunder (which in the case of third party claims shall be delivered
promptly after the Indemnified Party receives actual notice of such third party
claim) shall state the basis for such claim supported by relevant information
and documentation with respect thereto and the total amount claimed, and if such
claim is based upon an action, proceeding or claim by a third party, offer the
Indemnifying Party the right to participate in (but not control) the defense of
such action, proceeding or claim at the Indemnifying Party's own expense insofar
as such action, proceeding or claim is the basis on which indemnity is sought.
(b) Within thirty (30) days after receipt of a Notice of Claim, the
Indemnifying Party shall give written notice to the Indemnified Party as to
whether it objects to or acquiesces in the claim, in whole or in part (the
"Claim Response"). If the Indemnifying Party acquiesces to the claim, in whole
or in part, it shall state its acquiescence, or the extent thereof, in the Claim
Response and shall pay the claim in whole, or that part to which it acquiesces,
within such thirty (30) day period. If the Indemnifying Party objects to the
claim, in whole or in part, within such thirty (30) day period, its Claim
Response shall set forth with reasonable particularity the grounds, amount of,
and basis upon which the claim is disputed. If the Indemnifying Party fails to
object to the claim, in whole or in part, within thirty (30) days after receipt
of the Notice of Claim, it shall pay the same in whole, or that portion of the
claim to which it failed to object, within ten (10) days after the expiration of
such thirty (30) day period.
(c) In the event the Indemnifying Party disputes the whole or a portion
of a claim as set forth in this Section 10.2, the Indemnifying and Indemnified
Parties shall meet within five
<PAGE> 27
(5) days of the Indemnifying Party's delivery of the Claim Response and attempt
in good faith to resolve the dispute without third party intervention. The
parties shall have ten (10) days in which to resolve their dispute. If the
parties cannot resolve their dispute within such ten (10) day period, then
either the Indemnifying or the Indemnified Party may demand arbitration of the
matter as set forth in Section 11.10 below.
(d) Notwithstanding any other term or provision of this Agreement, the
Indemnifying Party shall not be liable to the Indemnified Party for any claims
based upon breaches of any warranty, representation, or covenant set forth
herein, unless any such claim exceeds TWELVE THOUSAND FIVE HUNDRED DOLLARS
($12,500) or such breaches exceed in the aggregate an amount equal to
TWENTY-FIVE THOUSAND DOLLARS ($25,000.00).
Section 10.3 Right to Cure. Prior to any party making a claim for monetary
damages under this Agreement, timely and adequate notice of an alleged breach
must be provided in writing to the other parties, concomitant with a thirty (30)
day period for the party alleged to have breached the Agreement to investigate
the claim and to cure it.
ARTICLE 11.
MISCELLANEOUS
Section 11.1 Nonassignability. Neither this Agreement, nor any interest herein,
shall be assignable by BUYER without the prior written consent of SELLER.
Section 11.2 Notices. All notices required or permitted to be given hereunder
shall be in writing and shall be sent by first-class mail, postage prepaid,
deposited in the United States mail in
California, and if intended for SELLER, shall be given to SELLER and shall be
addressed in advance of Closing:
<PAGE> 28
Christopher Chu
c/o BATTERY TECHNOLOGY, INC.
5700 Bandini Blvd.
Commerce, CA 90040
If intended for WAREFORCE, shall be addressed to:
Dan Ricketts
General Counsel
WAREFORCE, INC.
2361 Rosecrans, Suite 155
El Segundo, CA 90245-4916
Any party hereto, by written notice to each of the other parties, may change the
address for notices to be sent to him or her.
Section 11.3 Governing Law. All questions with respect to the construction of
this Agreement, and the rights and liabilities of the parties hereto, shall be
governed by the laws of the State of California.
Section 11.4 Inurement. Subject to the restrictions against assignment as herein
contained, this Agreement shall inure to the benefit of, and shall be binding
upon, the assigns, successors in interest, personal representatives, estates,
heirs, and legatees of each of the parties hereto.
Section 11.5 Confidentiality and Public Announcements. Confidentiality is of
paramount importance to the parties. The parties hereby incorporate by reference
all of the terms and conditions of the Confidentiality Agreement executed by CY
and BUYER dated April 24, 1998, as if fully set forth herein.
Section 11.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
shall be deemed to constitute the same Agreement.
Section 11.7 Severability. If and to the extent that any provision (or any part
thereof) of this Agreement is held to be invalid, illegal or unenforceable, such
holding shall in no way
<PAGE> 29
affect the validity, legality or enforceability of the remainder of this
Agreement.
Section 11.8 Entire Agreement. This Agreement contains the entire agreement of
the parties hereto, and supersedes any prior written or oral agreements between
them concerning the subject matter contained herein. There are no
representations, agreements, arrangements, or understandings, oral or written,
between and among the parties hereto, relating to the subject matter contained
in this Agreement, which are not fully expressed herein.
Section 11.9 Best Efforts: Further Assurances . Both before and after the
Closing, each party will use its reasonable best efforts to cause all conditions
to its obligations under this Agreement to be timely satisfied and to perform
and fulfill all obligations on its part to be performed and fulfilled under this
Agreement, to the end that the transaction contemplated by this Agreement shall
be effected substantially in accordance with its terms as soon as reasonably
practicable. The parties shall cooperate with each other in such actions and in
securing requisite Approvals. Each party shall execute and deliver both before
and after the Closing such further certificates, agreements and other documents
and take such other actions as may be necessary or appropriate to consummate or
implement the transaction contemplated hereby or to evidence such events or
matters.
Section 11.10 Arbitration. Any controversy of claim arising out of or relating
to this Agreement, or the making, performance, or interpretation of it, shall be
settled by binding arbitration in the City of Los Angeles, State of California,
under the then existing Commercial Arbitration
<PAGE> 30
Rules of the American Arbitration Association and judgment on the arbitration
award may be entered in any court having jurisdiction over the subject matter of
the controversy. The arbitrator or arbitrators selected shall be persons
experienced in negotiating, making and consummating acquisition agreements. The
American Arbitration Association shall be asked to appoint one arbitrator to
rule on the matter, such appointment to be in accordance with Commercial
Arbitration Rules of the American Arbitration Association then in effect. Each
party to the dispute shall contribute equally to the payment of the arbitrator's
fees, including administrative fees of the American Arbitration Association.
However, upon the arbitrator's decision, the party against whom such decision is
made shall pay the other side's expenses, including attorneys' fees and the
arbitrator's fees. Judgment on any award rendered by the arbitrator may be
entered by any court of competent jurisdiction.
Section 11. 11 Purchase Price Adjustments.
(a) All payments made by any party to this Agreement after the Closing
Date with respect to amounts due hereunder, including payments made under
Article 10, shall be treated by the parties as adjustments to the purchase price
specified in Article 2 and shall be in lieu of escrow or holdback arrangements
otherwise contemplated by the parties.
(b) All payments made by SELLER to BUYER to cover the liabilities
arising from Section 10.1(a) of this Agreement, including the IRS Audit and
Novell inquiry, after the Closing Date shall be treated by the parties as
adjustments to the purchase price specified in Article 2 and shall be in lieu of
escrow or holdback arrangements otherwise contemplated by the parties. SELLER
may agree among themselves to set aside a portion of the purchase price in a
separate escrow account to cover such liabilities; the set-aside funds shall be
treated by the parties as adjustments to the purchase price, and will only be
considered as income to SELLER upon distribution of such funds to SELLER.
IN WITNESS WHEREOF, the parties hereto intending legally to be bound hereby,
have each caused this Agreement to be duly executed as of this 28th day of
August, 1998, at Los Angeles, California.
<PAGE> 31
"SELLER"
By: /s/ Christopher Chu
------------------------------
Christopher Chu, representing
Christopher and Alina Chu
Family Trust, Vivien Mak,
Richard Fu and Luisa Fu
"BUYER"
WAREFORCE ONE, INC.
By: /s/ Orie Rechtman
------------------------------
ORIE RECHTMAN, President
<PAGE> 1
Exhibit 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of June, 1998, by and between ORIE RECHTMAN an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company and has been the Chief Executive Office ("CEO") and
President.
The Company desires to continue the employment of Employee as the CEO and
President of the Company, and Employee desires to accept such employment, all on
the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render the
services set forth in Sections 2 for a period commencing on June 1, 1998
(the "Start Date") and ending on the third anniversary of such date,
(the "Employment Period") and Employee hereby accepts said employment
and agrees to perform such services during the Employment Period. Unless
this Agreement is terminated pursuant to Section 4 or unless either
party gives the other written notice to the contrary at least six (6)
months prior to an expiration date, this Agreement, together with any
changes which have occurred during the employment period then expiring,
shall automatically renew at the end of an Employment Period for an
additional one (1) year employment period.
2. DUTIES
<PAGE> 2
2.1. CEO AND PRESIDENT: Performing executive work of major importance
to the Company, with the primary focus being the profitable
management and profitable growth of the Company. During the
Employment Period, Employee shall devote his full business time
and attention to performing his duties as CEO and President of
the Company. He shall 1) continue to build and supervise overall
sales profitably sell the Company's products and services to
customers in territories associated with all of the Company's
branches worldwide; 2) manage the overall direction,
coordination, and evaluation of the functional areas of the
Company to achieve or exceed both the earnings-per-share and
gross revenue targets of the Company; 3) assist Board of
Directors in formulating and administering Company policies; 4)
review and analyze the activities, costs, operations of the
Company to define and to track its progress toward achieving its
goals and objectives; 5) manage the Company's overall investor
relations and be ultimately responsible for compliance with all
securities laws and regulations; 6) carry out supervisory
responsibilities in accordance with Company policies, and
applicable laws; 7) interview, hire and train executive
management; 9) plan, assign and direct the work of executive
management, appraise their performance, and reward and
discipline them, and address their complaints; 10) manage the
Company's overall mergers and acquisition strategy with overall
responsibility for the profitability of such mergers and
acquisitions; 11) submit all required documentation to the Board
of Directors in a timely and accurate manner. The above
description of duties is non-exhaustive. Employee shall work out
of the Company's headquarters location and shall report to Board
of Directors. Employee recognizes that the Board of Directors of
the Company may be required under its fiduciary duty to the
Company and to its stockholders to eliminate such position or to
appoint a different person as such officer of this Company. The
parties agree however, that any such elimination or replacement
of Employee by the Company, other than pursuant to Section 4.2.1
or 4.3.2.
<PAGE> 3
hereof, shall constitute a termination of Employee's employment
hereunder by the Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion
thereof is sold or merged or undergoes a change of control
transaction (as defined in the Company's Stock Option Agreement,
a copy of which is attached hereto as Exhibit A), this Agreement
shall survive consummation of such transaction and shall
continue in effect for the remainder of the Employment Period,
but Employee shall serve as an officer of the entity which
succeeds to the business or a substantial portion of the
business of the Company, and is such case shall bear a suitable
title and perform the duties and functions of such office of
such publicly traded or privately held successor, consistent
with those customarily performed by an officer of such a unit,
division or entity comparable to the then business of the
Company, unit, division or entity. Employee may be required to
accept greater or lesser responsibility by any successor, and
agrees to fully cooperate and assist in any resulting transition
for up to the remainder of the Employment Period; and any
adjustments required of Employee to complete the transition to
any successor, unit, division or entity, shall not violate this
Agreement so long as "good reason" does not arise under Sections
4.6.2(ii), (iii) or (v). This Agreement shall apply to the
automatic modification in duties resulting from such transaction
as set forth above, however, notwithstanding the foregoing,
Employee any exercise any "good reason" rights he may have under
Section 4.6.2(iv).
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment and for a period of twelve (12) months thereafter,
employee will not, directly or indirectly, compete with the
Company in any way, or usurp any Company opportunity in any way,
nor will employee act as an officer, director, employee,
consultant, shareholder, lender or agent of any entity which is
engaged in any business in which the Company is now engaged or
in which the Company becomes engaged during the term of
<PAGE> 4
employment. The Company is now engaged in the business of
reselling computer hardware, software and peripherals, primarily
to corporate and governmental accounts, and in the business of
selling computer systems consulting, help and maintenance
services, also primarily to corporate, education and
governmental accounts. The Company is not now engaged in the
business of manufacturing computers or their primary components,
nor is it now in the business of reselling computers to non-end
users. The Company may become engaged in the business of final
assembly of computers and may become engaged in the business of
catalog, mail-order or internet sales of computer hardware,
software and peripherals. Employee also agrees that during the
term of employment and for a period of twelve (12) months
thereafter, Employee will not, directly or indirectly, whether
on his own behalf or on behalf of another, offer employment or a
consulting assignment to any Company employee, nor will
Employee, nor Employee's employer, directly or indirectly,
whether on his own behalf or on behalf of another, actually
employ or grant a consulting assignment to any Company employee.
Employee also agrees that during the term of employment Employee
will not, directly or indirectly, whether on his own behalf or
on behalf of another, contact or solicit any of Company's
clients to do business with any entity other than Company.
3. COMPENSATION. As compensation for his services to be performed
hereunder, the Company shall provide Employee with the following
compensation and benefits:
3.1 BASE SALARY. Employee's base salary shall be $330,000.00 per
year, subject to an annual increase (if any) in the sole
discretion of the Board, payable in accordance with the
Company's payroll practices as in effect from time to time, and
subject to such withholding as is required by law.
3.2 BONUS. Bonus applicable to the fiscal year beginning January 1,
1998 (and prorated accordingly based the
<PAGE> 5
Effective Date of this Agreement), shall be calculated as
follows:
3.2.1. Employee shall receive an annual bonus of $170,000 if
the Company reaches ninety percent (90%) or more of its
annual projections as approved by the Board of Directors
for that year. If any bonus is declared or paid, it
shall be subject to such withholding as is required by
law.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time as
been accrued each pay period since his date of first
hire, less any vacation taken in such amounts and under
such conditions as normally afforded to the Company's
executives. In the event Employee does not use such
vacation, he shall receive, upon termination of the
Employment Period, vacation pay for all unused vacation
calculated as having accrued at the applicable base
salary for each relevant period of his employment.
However, Employee shall endeavor to take vacation time
in the year in which it is allocated to him.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse Employee
for reasonable business expenses incurred by Employee in
the course of performing services for the company and in
compliance with procedures established from time to time
by the Company. This reimbursement shall occur on a
monthly basis, and is subject to Employee providing
original documentation in support of all business
expenses reimbursement sought.
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive
stock options in a manner and in number commensurate
with those granted to other of the Company's executive
officers, subject to the others terms of the Company's
stock option agreement, a
<PAGE> 6
copy of which is attached hereto a Exhibit A. The
issuance and number of the options is subject to
approval by the Company Board of Directors Compensation
Committee.
3.3.4. OTHER BENEFITS. Company shall provide Employee with
employment benefits as 401(k) participation, automobile
allowance, medical insurance and disability insurance,
on the terms and to the extent generally provided by the
Company to its senior executive employees. The amount of
automobile allowance provided by the Company to
Employees shall be $2000.00 per month.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this
agreement; but Employee's compensation and benefits shall be
governed solely by the terms of this Agreement, which shall
supersede all prior understandings or agreements between the
parties concerning terms and benefits of employment of Employee
with the Company. Other officers or employees shall not become
entitled to any benefits under this Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment
Period shall terminate upon the permanent disability (as defined
in Section 4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for
"cause" by seven (7) days advance written notice to
Employee. However, no such advance written notice shall
be given if the Company determines that the Company or a
person would
<PAGE> 7
suffer irreparable harm should the Employee be given
notice.
4.2.1.1. For such termination for "cause", the employee
shall have a ninety (90) day period from the
date of the written notice to cure such
"cause". However, this cure period shall not
apply to termination's wherein the Company's
Board of Directors determines that the Company
would suffer irreparable harm should the
Employee be given the right to cure.
4.2.2. The Company may terminate the Employment Period for any
other reason, with cause other than those described in
Section 4.6.1 or without cause, by thirty (30) days
advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for "good
reason" (as defined in section 4.6.2 below) at any time
by written notice to the company.
4.3.2. Employee may terminate the Employment Period for any
other reason by thirty (30) days advance written notice
to the Company.
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by the
Company for any reason other than pursuant to Section
4.2.1 or Section 4.3.2 hereof or if the Employment
Period is terminated because of a permanent disability
of Employee pursuant to Section 4.1, upon the
effectiveness of any such termination, the Company shall
be obligated to pay to the employee (or his executors,
administrators
<PAGE> 8
or assigns, as the case may be) all unpaid salary,
benefits and bonuses (if any) accrued through the date
of effectiveness of such termination and, in addition, a
cash severance payment equal to five (5) year's total
base salary plus bonuses as if such bonuses were paid at
the maximum rate hereunder, at the rates set forth
herein, and such other benefits as may be required by
law.
4.4.2. In addition, all stock options and general stock
appreciation rights granted by the Company to Employee
which otherwise would have vested within three years
following the Date of Termination for death or
disability shall accelerate and become fully vested and
exercisable on the Date of Termination for death or
disability, and shall remain exercisable for a period
ending on the normal expiration date specified in the
option agreements.
4.4.3. In the event the Employment period is terminated by the
Company pursuant to Section 4.2.1 hereof, or the
Employment Period is terminated by Employee pursuant to
Section 4.3.2 hereof, the Company shall have no
obligation to pay any severance pay to Employee. The
Company shall, however, be obligated to pay to Employee
(or executors, administrators or assigns, as the case
may be) all unpaid salary, benefits and bonuses (if any)
accrued through the date of termination and shall
provide such other benefits as may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the
employment Period pursuant to Section 4.2 or 4.3.1, the Company
shall provide Employee, Employee's spouse or domestic partner
and children, if any, with such normal medical insurance, on the
terms and to the extent generally provided by the Company to its
executive employees on the level comparable to
<PAGE> 9
Employee, for a period of one year from the date of the
termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
4.6.1. The term "cause" shall mean those acts identified in
Section 2924 of the California Labor Code, as that
section exists on October 1, 1997, to wit, any willful
breach of duty by the Employee in the course of his
employment, or in case of his habitual neglect of his
duty or continued incapacity to perform it.
4.6.2. The term "good reason" shall mean the occurrence of one
or more of the following events without Employee's
express written consent (I) removal of Employee from the
position and responsibilities as set forth under Section
2 above; (ii) a material reduction by the company in the
kind or level of employee benefits to which Employee is
entitled immediately prior to such reduction with the
result that Employee's overall benefit package is
significantly reduced; (iii) the relocation of Employee
to a facility or a location outside of California; (iv)
a change in the control of the Company, or (v) any
material breach by the Company of any material provision
of this Agreement which continues uncured for thirty
(30) days following written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which
results in Employee being absent from the performance of
his duties with the Company on a full-time basis for a
period of six (6) consecutive months. The existence or
cessation of a physical or mental illness which renders
Employees absent from the performance of his duties on a
full-time basis shall, if disputed by the Company or
Employee, be conclusively determined by written
<PAGE> 10
opinions rendered by two qualified physicians, one
selected by Employee and one selected by the Company.
During the period of absence, but not beyond the
expiration of the Employment Period, Employee shall be
deemed to be on disability leave of absence, with his
compensation paid in full. During the period of such
disability leave of absence, the Board of Directors may
designate an interim officer with the same title and
responsibilities of Employee on such terms, as it deems
proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate
pursuant to the terms of this Agreement shall be governed solely
by the terms of the underlying plan documents and by applicable
law, and nothing in this Agreement shall impair the Company's
right to amend, modify, replace, and terminate any and all such
plans in its sole discretion as provided by law. This Agreement
is for the sole benefit of Employee and the Company, and is not
intended to create an employee benefit plan or to modify the
terms of any of the Company's existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted
bylaw, any dispute, or claim or controversy of any kind
(including but not limited to tort, contract, and statue)
arising under, in connection with, or relating to this Agreement
or Employee's employment, shall be resolved exclusively by
binding arbitration in Los Angeles County, California in
accordance with the commercial rules of the American Arbitration
Association then in effect. The Company and Employees agree to
waive any objection to personal jurisdiction or venue in any
forum located in Los Angeles County California. No claim,
lawsuit or action of any kind may be filed by either party to
this
<PAGE> 11
Agreement except to compel arbitration or to enforce an
arbitration award; arbitration is the exclusive dispute
resolution mechanism between the parties hereto. Judgment may be
entered on the arbitrator's award in any court having
Jurisdiction. The validity; interpretation, effect and
enforcement of this Agreement shall be governed by the laws of
the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and
shall be binding upon the successors and assigns shall
specifically assume this Agreement. Since this agreement is
based upon the unique abilities of, and the Company's personal
confidence in Employee, Employee shall have no right to assign
this Agreement or any of his rights hereunder without the prior
written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be found
invalid, such findings shall not effect the validity of the
other provisions hereof and the invalid provisions shall be
deemed to have been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure of
any party to exercise any right granted to it hereunder shall
not operate or be construed as the waiver of any subsequent
breach by such other party nor the waiver of the right to
exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans
referred to in Section 5, contains the entire agreement of the
parties. It may not be changed orally but only by an agreement
in writing signed by the parties.
5.6 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally
<PAGE> 12
served or sent by United States mail, and shall be deemed to
have been given when personally served or two days after having
been deposited in the United States mail, registered or
certified mail, return receipt requested, with first-class
postage prepaid and properly addressed as follows. For the
purpose hereof, the addresses of the parties hereto (until
notice of a change thereof is given as provided in this Section
5.6) shall be as follows:
If to Employee:
Orie Rechtman
(street address omitted)
Pacific Palisades, California 90272
If to the Company:
Wareforce Incorporated
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are for
the convenience only and shall not affect the construction
hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from time
to time, and without charge to the other parties, take such
additional actions and execute, deliver and file such additional
instruments as may be reasonably required to give effect to the
transactions contemplated hereby.
5.9. ATTORNEYS' FEES. In the event any party hereto commences
arbitration or legal action in connection with this Agreement,
the prevailing party shall be entitled to its attorneys' fees,
costs and expenses reasonably incurred in such action, and the
amount thereof shall be included in any judgment or award
granted under Section 5.1.
<PAGE> 13
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an
original but all, which together shall constitute one and the
same instrument.
5.11. SEPARATE COUNSEL. The Company has been represented by counsel in
the negotiation and execution of this Agreement and has relied
on such counsel with respect to any matter relating hereto. The
Employee has been invited to have his own counsel review and
negotiate this Agreement and Employee has either obtained has
either obtained his own counsel or has elected not to obtain
counsel.
5.12. INDEMNIFICATION. The Company shall provide to the Employee
insurance coverage under its Director and Officer's Insurance
and General Liability, and Employment Practices policies to the
same extent as it provides to all other similar employees of the
Employee's title and position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
a California corporation
/s/Orie Rechtman By: /s/Dan Ricketts
- ------------------- -------------------------------
Title: General Counsel
----------------------------
<PAGE> 1
Exhibit 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of June, 1998, by and between DON HUGHES an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company and has been the Vice President of Finance, Chief Financial
Officer ("CFO") and Chief Operating Officer ("COO") of the Company.
The Company desires to continue the employment of Employee as the Vice President
of Finance, CFO and COO, and Employee desires to accept such employment, all on
the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render the
services set forth in Sections 2 for a period commencing on June 1, 1998
(the "Start Date") and ending on the third anniversary of such date,
(the "Employment Period") and Employee hereby accepts said employment
and agrees to perform such services during the Employment Period. Unless
this Agreement is terminated pursuant to Section 4 or unless either
party gives the other written notice to the contrary at least six (6)
months prior to an expiration date, this Agreement, together with any
changes which have occurred during the employment period then expiring,
shall automatically renew at the end of an Employment Period for an
additional one (1) year employment period.
2. DUTIES
<PAGE> 2
2.1. VICE PRESIDENT OF FINANCE, CFO AND COO: Performing executive
work of major importance to the Company, with the primary focus
being the profitable management and profitable growth of the
Company as a whole. During the Employment Period, Employee shall
devote his full business time and attention to performing his
duties as Vice President of Finance, CFO and COO of the Company.
He shall 1) continue to build and supervise operations teams to
profitably purchase, inventory and deliver the Company's
products and services to customers in territories associated
with all of the Company's branches, subsidiaries and divisions
in the United States and worldwide; 2) manage the overall
financial direction, coordination, and evaluation of the Company
and its subsidiaries and divisions to achieve or exceed both the
earnings-per-share and gross revenue targets of the Company; 3)
assist the Chief Executive Officer in formulating and
administering Company policies; 4) review and analyze the
activities costs, operations of the Company to define and to
track their progress toward achieving their goals and
objectives; 5) carry out supervisory responsibilities in
accordance with Company policies, and applicable laws; 7)
interview, hire and train sales managers and staff; 9) plan,
assign and direct the work of managers and staff; 8) plan,
assign and direct the work of operations and
accounting/financial managers and staff, appraise their
performance, and reward and discipline them, and address their
complaints; 9) manage the audit function of the Company,
including ensuring the timely completion of the Company's annual
audit; 10) manage all financial and reporting aspects associated
with the Company being a publicly-held company; 12) manage the
cash resources of the Company, including managing banking
relationships; 13) submit all required documentation in a timely
and accurate manner. The above description of duties is
non-exhaustive. Employee shall work out of the Company's
headquarters location and shall report to Company's Chief
Executive Officer. The above description of duties is
<PAGE> 3
non-exhaustive. Employee recognizes that the Board of Directors
of the Company may be required under its fiduciary duty to the
Company and to its stockholders to eliminate such position or to
appoint a different person as such officer of this Company. The
parties agree however, that any such elimination or replacement
of Employee by the Company, other than pursuant to Section 4.2.1
or 4.3.2. hereof, shall constitute a termination of Employee's
employment hereunder by the Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion
thereof is sold or merged or undergoes a change of control
transaction (as defined in the Company's Stock Option Agreement,
a copy of which is attached hereto as Exhibit A), this Agreement
shall survive consummation of such transaction and shall
continue in effect for the remainder of the Employment Period,
but Employee shall serve as an officer of the entity which
succeeds to the business or a substantial portion of the
business of the Company, and is such case shall bear a suitable
title and perform the duties and functions of such office of
such publicly traded or privately held successor, consistent
with those customarily performed by an officer of such a unit,
division or entity comparable to the then business of the
Company, unit, division or entity. Employee may be required to
accept greater or lesser responsibility by any successor, and
agrees to fully cooperate and assist in any resulting transition
for up to the remainder of the Employment Period; and any
adjustments required of Employee to complete the transition to
any successor, unit, division or entity, shall not violate this
Agreement so long as "good reason" does not arise under Sections
4.6.2(ii), (iii) or (v). This Agreement shall apply to the
automatic modification in duties resulting from such transaction
as set forth above, however, notwithstanding the foregoing,
Employee any exercise any "good reason" rights he may have under
Section 4.6.2(iv).
<PAGE> 4
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete
with the Company in any way, or usurp an Company opportunity in
any way, nor will employee act as an officer, director,
employee, consultant, shareholder, lender or agent of any entity
which is engaged in any business in which the Company is now
engaged or in which the Company becomes engaged during the term
of employment. The Company is now engaged in the business of
reselling computer hardware, software and peripherals, primarily
to corporate and governmental accounts, and in the business of
selling computer systems consulting, help and maintenance
services, also primarily to corporate, education and
governmental accounts. The Company is not now engaged in the
business of manufacturing computers or their primary components,
nor is it now in the business of reselling computers to non-end
users. The Company may become engaged in the business of final
assembly of computers and may become engaged in the business of
catalog, mail-order or internet sales of computer hardware,
software and peripherals. Employee also agrees that during the
term of employment, Employee will not, directly or indirectly,
whether on his own behalf or on behalf of another, offer
employment or a consulting assignment to any Company employee,
nor will Employee, nor Employee's employer, directly or
indirectly, whether on his own behalf or on behalf of another,
actually employ or grant a consulting assignment to any Company
employee. Employee also agrees that during the term of
employment Employee will not, directly or indirectly, whether on
his own behalf or on behalf of another, contact or solicit any
of Company's clients to do business with any entity other than
Company.
2.4. During the term of employment with the Company, Employee may
have access to and become acquainted with information of a
confidential, proprietary or secret nature which is or may be
either applicable or related to present or
<PAGE> 5
future business of the Company, its research and development, or
the business of its customers. For example, trade secret
information includes, but is not limited to devices, secret
inventions, processes and compilations of information, records,
specifications and information concerning customers or vendors.
Employees shall not disclose any of the above-mentioned trade
secrets, directly or indirectly or use them in any way, either
during the term of this agreement of at any time thereafter,
except as required in the course of employment with the Company.
2.5. Employee agrees that all customers of the Company, for which the
Employee has or will provide services during the Employee's
employment by the Company, and all prospective customers from
whom the Employee has solicited business while in the employ of
the Company, shall be solely the customers of the Company.
2.6. Employee agrees that, for a period of twelve (12) months
immediately following the termination of employment with the
Company, Employee shall neither directly nor indirectly solicit
business as to products or services competitive with those of
the Company, from any of the Company's customers with whom the
Employee had contact within twelve (12) months prior to the
Employee's termination.
2.7. Employee further agrees that for a period of twelve (12) months
after termination of employment, Employee will not directly or
indirectly induce or solicit any of Company's employees to leave
their employment.
3. COMPENSATION. As compensation for his services to be performed
hereunder, the Company shall provide Employee with the following
compensation and benefits:
3.1 BASE SALARY. Employee's base salary shall be $135,000.00 per
year, subject to an annual increase (if any) in the sole
discretion of the Board, payable in accordance with
<PAGE> 6
the Company's payroll practices as in effect from time to time,
and subject to such withholding as is required by law.
3.2 BONUSES.
3.2.1. Employee shall receive a $10,000 signing bonus upon the
Company's completion of an Initial Public Offering,
Reverse Merger or other similar public financing,
subject to such withholding as is required by law.
3.2.2. Employee shall receive an annual bonus of $50,000.00
should the Company achieve at least 90% of the goals set
by the Company's Board of Directors for the Employee for
the year. If any bonus is declared or paid, it shall be
subject to such withholding as is required by law.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time as
been accrued each pay period since his date of first
hire, less any vacation taken in such amounts and under
such conditions as normally afforded to the Company's
executives. In the event Employee does not use such
vacation, he shall receive, upon termination of the
Employment Period, vacation pay for all unused vacation
calculated as having accrued at the applicable base
salary for each relevant period of his employment.
However, Employee shall endeavor to take vacation time
in the year in which it is allocated to him.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse Employee
for reasonable business expenses incurred by Employee in
the course of performing services for the company and in
compliance with procedures established from time to time
by the Company. This reimbursement shall occur on a
monthly basis, and
<PAGE> 7
is subject to Employee providing original documentation
in support of all business expenses reimbursement
sought.
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive
stock options on the same terms as granted to its senior
executives (excluding the Company's Chief Executive
Officer). The issuance of options is subject to approval
by the Company Board of Directors Compensation
Committee.
3.3.4. OTHER BENEFITS. Company shall provide Employee with
employment benefits as 401(k) participation, automobile
allowance, medical insurance and disability insurance,
on the terms and to the extent generally provided by the
Company to its senior executive employees.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this
agreement; but Employee's compensation and benefits shall be
governed solely by the terms of this Agreement, which shall
supersede all prior understandings or agreements between the
parties concerning terms and benefits of employment of Employee
with the Company. Other officers or employees shall not become
entitled to any benefits under this Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment
Period shall terminate upon the permanent disability (as defined
in Section 4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for
"cause" by seven (7) days advance written
<PAGE> 8
notice to Employee. However, no such advance written
notice shall be given if the Company determines that the
Company or a person would suffer irreparable harm should
the Employee be given notice.
4.2.1.1. For such termination for "cause", the
employee shall have a ninety (90) day period
from the date of the written notice to cure
such "cause". However, this cure period
shall not apply to termination's wherein the
Company's Board of Directors determines that
the Company would suffer irreparable harm
should the Employee be given the right to
cure.
4.2.2. The Company may terminate the Employment Period for any
other reason, with cause other than those described in
Section 4.6.1 or without cause, by thirty (30) days
advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for "good
reason" (as defined in section 4.6.2 below) at any time
by written notice to the company.
4.3.2. Employee may terminate the Employment Period for any
other reason by thirty (30) days advance written notice
to the Company.
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by the
Company for any reason other than pursuant to Section
4.2.1 or Section 4.3.2 hereof or if the Employment
Period is terminated because of a permanent disability
of Employee pursuant to Section 4.1, upon the
effectiveness of any such termination, the Company shall
be obligated to pay
<PAGE> 9
to the employee (or his executors,administrators or
assigns, as the case may be) all unpaid salary, benefits
and bonuses (if any) accrued through the date of
effectiveness of such termination and, in addition, a
cash severance payment equal to eighteen (18) month's
total base salary at the rates set forth herein, and
such other benefits as may be required by law.
4.4.2 In addition, all stock options and general stock
appreciation rights granted by the Company to Employee
which otherwise would have vested within eighteen (18)
months following the Date of Termination for death or
disability shall accelerate and become fully vested and
exercisable on the Date of Termination for death or
disability, and shall remain exercisable for a period
ending on the normal expiration date specified in the
option agreements.
4.4.3. In the event the Employment period is terminated by the
Company pursuant to Section 4.2.1 hereof, or the
Employment Period is terminated by Employee pursuant to
Section 4.3.2 hereof, the Company shall have no
obligation to pay any severance pay to Employee. The
Company shall, however, be obligated to pay to Employee
(or executors, administrators or assigns, as the case
may be) all unpaid salary, benefits and bonuses (if any)
accrued through the date of termination and shall
provide such other benefits as may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the
employment Period pursuant to Section 4.2 or 4.3.1, the Company
shall provide Employee, Employee's spouse or domestic partner
and children, if any, with such normal medical insurance, on the
terms and to the extent generally provided by the Company to its
executive employees on the level comparable to
<PAGE> 10
Employee, for a period of one year from the date of the
termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
4.6.1. The term "cause" shall mean those acts identified in
Section 2924 of the California Labor Code, as that
section exists on October 1, 1997, to wit, any willful
breach of duty by the Employee in the course of his
employment, or in case of his habitual neglect of his
duty or continued incapacity to perform it.
4.6.2. The term "good reason" shall mean the occurrence of one
or more of the following events without Employee's
express written consent (I) removal of Employee from the
position and responsibilities as set forth under Section
2 above; (ii) a material reduction by the company in the
kind or level of employee benefits to which Employee is
entitled immediately prior to such reduction with the
result that Employee's overall benefit package is
significantly reduced; (iii) the relocation of Employee
to a facility or a location outside of California; (iv)
a change in the control of the Company, or (v) any
material breach by the Company of any material provision
of this Agreement which continues uncured for thirty
(30) days following written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which
results in Employee being absent from the performance of
his duties with the Company on a full-time basis for a
period of six (6) consecutive months. The existence or
cessation of a physical or mental illness which renders
Employees absent from the performance of his duties on a
full-time basis shall, if disputed by the Company or
Employee, be conclusively determined by written
<PAGE> 11
opinions rendered by two qualified physicians, one
selected by Employee and one selected by the Company.
During the period of absence, but not beyond the
expiration of the Employment Period, Employee shall be
deemed to be on disability leave of absence, with his
compensation paid in full. During the period of such
disability leave of absence, the Board of Directors may
designate an interim officer with the same title and
responsibilities of Employee on such terms, as it deems
proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate
pursuant to the terms of this Agreement shall be governed solely
by the terms of the underlying plan documents and by applicable
law, and nothing in this Agreement shall impair the Company's
right to amend, modify, replace, and terminate any and all such
plans in its sole discretion as provided by law. This Agreement
is for the sole benefit of Employee and the Company, and is not
intended to create an employee benefit plan or to modify the
terms of any of the Company's existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted by
law, any dispute, or claim or controversy of any kind (including
but not limited to tort, contract, and statue) arising under, in
connection with, or relating to this Agreement or Employee's
employment, shall be resolved exclusively by binding arbitration
in Los Angeles County, California in accordance with the
commercial rules of the American Arbitration Association then in
effect. The Company and Employees agree to waive any objection
to personal jurisdiction or venue in any forum located in Los
Angeles County California. No claim, lawsuit or action of any
kind may be filed by either party to this
<PAGE> 12
Agreement except to compel arbitration or to enforce an
arbitration award; arbitration is the exclusive dispute
resolution mechanism between the parties hereto. Judgment may be
entered on the arbitrator's award in any court having
Jurisdiction.The validity; interpretation, effect and
enforcement of this Agreement shall be governed by the laws of
the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and
shall be binding upon the successors and assigns shall
specifically assume this Agreement. Since this agreement is
based upon the unique abilities of, and the Company's personal
confidence in Employee, Employee shall have no right to assign
this Agreement or any of his rights hereunder without the prior
written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be found
invalid, such findings shall not effect the validity of the
other provisions hereof and the invalid provisions shall be
deemed to have been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure of
any party to exercise any right granted to it hereunder shall
not operate or be construed as the waiver of any subsequent
breach by such other party nor the waiver of the right to
exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans
referred to in Section 5, contains the entire agreement of the
parties. It may not be changed orally but only by an agreement
in writing signed by the parties.
5.6 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally
<PAGE> 13
served or sent by United States mail, and shall be deemed to
have been given when personally served or two days after having
been deposited in the United States mail, registered or
certified mail, return receipt requested, with first-class
postage prepaid and properly addressed as follows. For the
purpose hereof, the addresses of the parties hereto (until
notice of a change thereof is given as provided in this Section
5.6) shall be as follows:
If to Employee:
Don Hughes
(street address omitted)
Palos Verdes Estates, California 90274
If to the Company:
Wareforce Incorporated
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
1.1. HEADINGS. The paragraph and subparagraph headings herein are for
the convenience only and shall not affect the construction
hereof.
1.2. FURTHER ASSURANCES. Each of the parties hereto shall, from time
to time, and without charge to the other parties, take such
additional actions and execute, deliver and file such additional
instruments as may be reasonably required to give effect to the
transactions contemplated hereby.
1.3. ATTORNEYS' FEES. In the event any party hereto commences
arbitration or legal action in connection with this Agreement,
the prevailing party shall be entitled to its attorneys' fees,
costs and expenses reasonably incurred in such action, and the
amount thereof shall be included in any judgment or award
granted under Section 5.1.
1.4. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which
<PAGE> 14
shall be deemed an original but all, which together shall
constitute one and the same instrument.
1.5. SEPARATE COUNSEL. The Company has been represented by counsel in
the negotiation and execution of this Agreement and has relied
on such counsel with respect to any matter relating hereto. The
Employee has been invited to have his own counsel review and
negotiate this Agreement and Employee has either obtained has
either obtained his own counsel or has elected not to obtain
counsel.
1.6. INDEMNIFICATION. The Company shall provide to the Employee
insurance coverage under its Director and Officer's Insurance
and General Liability, and Employment Practices policies to the
same extent as it provides to all other similar employees of the
Employee's title and position.
1.7. ONLY AGREEMENT. This Agreement supercedes any and all previous
employment agreements Employee may have had with Company.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
a California corporation
/s/Don Hughes By: /s/Orie Rechtman
- ------------- ----------------
Don Hughes Title: CEO
---
AMENDMENT NO. 1
TO
EXECUTIVE EMPLOYMENT AGREEMENT
BY AND BETWEEN
DON HUGHES AND WAREFORCE, INC.
<PAGE> 15
THIS AMENDMENT ("Amendment") is executed and effective as of the 14th
day of July, 1998, by and between DON HUGHES an individual ("Employee"),
and WAREFORCE INCORPORATED, a California corporation (the "Company"),
and amends that certain employment agreement between Employee and
Company dated June 1, 1998 as follows:
1. Strike Section 3.1 in its entirety and replace with the following" "BASE
SALARY. Employee's base salary shall be $150,000.00 per year, subject to
an annual increase (if any) in the sole discretion of the Board, payable
in accordance with the Company's payroll practices as in effect from
time to time, and subject to such withholding as is required by law."
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
A California corporation
/s/Don Hughes By: /s/Orie Rechtman
------------- ----------------
Don Hughes Title: CEO
---
<PAGE> 1
Exhibit 10.13
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of June, 1998, by and between DAN RICKETTS an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company and has been the Vice President of Administration and
General Counsel of the Company.
The Company desires to continue the employment of Employee as the Vice President
of Administration and General Counsel, and Employee desires to accept such
employment, all on the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render
the services set forth in Sections 2 for a period commencing on June 1,
1998 (the "Start Date") and ending on the third anniversary of such
date, (the "Employment Period") and Employee hereby accepts said
employment and agrees to perform such services during the Employment
Period. Unless this Agreement is terminated pursuant to Section 4 or
unless either party gives the other written notice to the contrary at
least six (6) months prior to an expiration date, this Agreement,
together with any changes which have occurred during the employment
period then expiring, shall automatically renew at the end of an
Employment Period for an additional one (1) year employment period.
<PAGE> 2
2. DUTIES
2.1. VICE PRESIDENT OF ADMINISTRATION AND GENERAL COUNSEL: Performing
executive work of major importance to the Company, with the primary
focus being the profitable management and profitable growth of the
Company as a whole. During the Employment Period, Employee shall devote
his full business time and attention to performing his duties as Vice
President of Administration and General Counsel of the Company. He
shall 1) administer all Human Resources functions of the Company,
including, but not limited to administration of its employee benefits
programs as well as its regulatory compliance in the human resources
area; 2) manage the overall direction coordination, and evaluation of
the administrative areas of the Company; 3) administer all Legal
functions of the Company, including, but not limited to, contract
review and drafting, corporate record keeping; advice and counsel to
the Company's Board, officers and employees; 4) assist in mergers and
acquisitions; 5) assist the CEO in formulating and administering
Company policies; 6) review and analyze the activities and operations
of the Company to define and to track their progress toward achieving
their goals and objectives in his related functional areas; 7) carry
out supervisory responsibilities in accordance with Company policies,
and applicable laws; 8) interview, hire and train managers and staff in
his functional areas; 9) plan, assign and direct the work of managers
and staff, appraise their performance, and reward and discipline them,
and address their complaints in his functional areas; 10) submit all
required documentation in a timely and accurate manner. The above
description of duties is non-exhaustive. Employee shall work out of the
Company's headquarters location and shall report to Company" Chief
Executive Officer. Employee recognizes that the Board of Directors of
the Company may be required under its fiduciary duty to the Company and
to its stockholders to eliminate such position or to appoint a
different person as such officer of this Company. The parties agree
however, that any such elimination or replacement of Employee by the
Company, other than pursuant to Section 4.2.1 or 4.3.2.
<PAGE> 3
hereof, shall constitute a termination of Employee's employment
hereunder by the Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion thereof is
sold or merged or undergoes a change of control transaction (as defined
in the Company's Stock Option Agreement, a copy of which is attached
hereto as Exhibit A), this Agreement shall survive consummation of such
transaction and shall continue in effect for the remainder of the
Employment Period, but Employee shall serve as an officer of the entity
which succeeds to the business or a substantial portion of the business
of the Company, and is such case shall bear a suitable title and
perform the duties and functions of such office of such publicly traded
or privately held successor, consistent with those customarily
performed by an officer of such a unit, division or entity comparable
to the then business of the Company, unit, division or entity. Employee
may be required to accept greater or lesser responsibility by any
successor, and agrees to fully cooperate and assist in any resulting
transition for up to the remainder of the Employment Period; and any
adjustments required of Employee to complete the transition to any
successor, unit, division or entity, shall not violate this Agreement
so long as "good reason" does not arise under Sections 4.6.2(ii), (iii)
or (v). This Agreement shall apply to the automatic modification in
duties resulting from such transaction as set forth above, however,
notwithstanding the foregoing, Employee any exercise any "good reason"
rights he may have under Section 4.6.2(iv).
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete with the
Company in any way, or usurp an Company opportunity in any way, nor
will employee act as an officer, director, employee, consultant,
shareholder, lender or agent of any entity which is engaged in
any business in which the Company is now engaged or in which the
Company becomes engaged during the term of employment. The Company is
now engaged in
<PAGE> 4
the business of reselling computer hardware, software and peripherals,
primarily to corporate and governmental accounts, and in the business
of selling computer systems consulting, help and maintenance services,
also primarily to corporate, education and governmental accounts. The
Company is not now engaged in the business of manufacturing computers
or their primary components, nor is it now in the business of reselling
computers to non-end users. The Company may become engaged in the
business of final assembly of computers and may become engaged in the
business of catalog, mail-order or internet sales of computer hardware,
software and peripherals. Employee also agrees that during the term of
employment, Employee will not, directly or indirectly, whether on his
own behalf or on behalf of another, offer employment or a consulting
assignment to any Company employee, nor will Employee, nor Employee's
employer, directly or indirectly, whether on his own behalf or on
behalf of another, actually employ or grant a consulting assignment to
any Company employee. Employee also agrees that during the term of
employment Employee will not, directly or indirectly, whether on his
own behalf or on behalf of another, contact or solicit any of Company's
clients to do business with any entity other than Company.
2.4. During the term of employment with the Company, Employee may have
access to and become acquainted with information of a confidential,
proprietary or secret nature which is or may be either applicable or
related to present or future business of the Company, its research and
development, or the business of its customers. For example, trade
secret information includes, but is not limited to devices, secret
inventions, processes and compilations of information, records,
specifications and information concerning customers or vendors.
Employees shall not disclose any of the above-mentioned trade secrets,
directly or indirectly or use them in any way, either during the term
of this agreement of at any time
<PAGE> 5
thereafter, except as required in the course of employment with the
Company.
2.5. Employee agrees that all customers of the Company, for which the
Employee has or will provide services during the Employee's employment
by the Company, and all prospective customers from whom the Employee
has solicited business while in the employ of the Company, shall be
solely the customers of the Company.
2.6. Employee agrees that, for a period of twelve (12) months immediately
following the termination of employment with the Company, Employee
shall neither directly nor indirectly solicit business as to products
or services competitive with those of the Company, from any of the
Company's customers with whom the Employee had contact within twelve
(12) months prior to the Employee's termination.
2.7. Employee further agrees that for a period of twelve (12) months after
termination of employment, Employee will not directly or indirectly
induce or solicit any of Company's employees to leave their employment.
3. COMPENSATION. As compensation for his services to be performed
hereunder, the Company shall provide Employee with the following
compensation and benefits:
3.1 BASE SALARY. Employee's base salary shall be $100,000.00 per
year, subject to an annual increase (if any) in the sole
discretion of the Board, payable in accordance with the
Company's payroll practices as in effect from time to time,
and subject to such withholding as is required by law.
<PAGE> 6
3.2 BONUSES.
3.2.1. Employee shall receive a $10,000.00 signing bonus
upon the Company's completion of an Initial Public
Offering, Reverse Merger or other similar public
financing, subject to such withholding as is required
by law.
3.2.2. Employee shall receive an annual bonus of $50,000.00
should the Company achieve at least 90% of the goals
set by the Company's Board of Directors for the
Employee for the year. If any bonus is declared or
paid, it shall be subject to such withholding as is
required by law.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time
as been accrued each pay period since his date of
first hire, less any vacation taken in such amounts
and under such conditions as normally afforded to the
Company's executives. In the event Employee does not
use such vacation, he shall receive, upon termination
of the Employment Period, vacation pay for all unused
vacation calculated as having accrued at the
applicable base salary for each relevant period of
his employment. However, Employee shall endeavor to
take vacation time in the year in which it is
allocated to him.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse
Employee for reasonable business expenses incurred by
Employee in the course of performing services for the
company and in compliance with procedures established
from time to time by the Company. This reimbursement
shall occur on a monthly basis, and is subject to
Employee providing original documentation in support
of all business expenses reimbursement sought.
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive
stock options on the same terms as
<PAGE> 7
granted to its senior executives (excluding the
Company's Chief Executive Officer). The issuance of
options is subject to approval by the Company Board
of Directors Compensation Committee.
3.3.4. OTHER BENEFITS. Company shall provide Employee with
employment benefits as 401(k) participation,
automobile allowance, medical insurance and
disability insurance, on the terms and to the extent
generally provided by the Company to its senior
executive employees. The amount of automobile
allowance provided by the Company to Employees shall
be $500.00 per month.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this
agreement; but Employee's compensation and benefits shall be
governed solely by the terms of this Agreement, which shall
supersede all prior understandings or agreements between the
parties concerning terms and benefits of employment of
Employee with the Company. Other officers or employees shall
not become entitled to any benefits under this Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment
Period shall terminate upon the permanent disability (as
defined in Section 4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for
"cause" by seven (7) days advance written notice to
Employee. However, no such advance written notice
shall be given if the Company determines that the
Company or a person would
<PAGE> 8
suffer irreparable harm should the Employee be given
notice.
4.2.1.1. For such termination for "cause", the
employee shall have a ninety (90) day period
from the date of the written notice to cure
such "cause". However, this cure period
shall not apply to termination's wherein the
Company's Board of Directors determines that
the Company would suffer irreparable harm
should the Employee be given the right to
cure.
4.2.2. The Company may terminate the Employment Period for
any other reason, with cause other than those
described in Section 4.6.1 or without cause, by
thirty (30) days advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for
"good reason" (as defined in section 4.6.2 below) at
any time by written notice to the company.
4.3.2. Employee may terminate the Employment Period for any
other reason by thirty (30) days advance written
notice to the Company.
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by
the Company for any reason other than pursuant to
Section 4.2.1 or Section 4.3.2 hereof or if the
Employment Period is terminated because of a
permanent disability of Employee pursuant to Section
4.1, upon the effectiveness of any such termination,
the Company shall be obligated to pay to the employee
(or his executors, administrators
<PAGE> 9
or assigns, as the case may be) all unpaid salary,
benefits and bonuses (if any) accrued through the
date of effectiveness of such termination and, in
addition, a cash severance payment equal to eighteen
(18) month's total base salary at the rates set forth
herein, and such other benefits as may be required by
law.
4.4.2 In addition, all stock options and general stock
appreciation rights granted by the Company to
Employee which otherwise would have vested within
eighteen (18) months following the Date of
Termination for death or disability shall accelerate
and become fully vested and exercisable on the Date
of Termination for death or disability, and shall
remain exercisable for a period ending on the normal
expiration date specified in the option agreements.
4.4.3. In the event the Employment period is terminated by
the Company pursuant to Section 4.2.1 hereof, or the
Employment Period is terminated by Employee pursuant
to Section 4.3.2 hereof, the Company shall have no
obligation to pay any severance pay to Employee. The
Company shall, however, be obligated to pay to
Employee (or executors, administrators or assigns, as
the case may be) all unpaid salary, benefits and
bonuses (if any) accrued through the date of
termination and shall provide such other benefits as
may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the
employment Period pursuant to Section 4.2 or 4.3.1, the
Company shall provide Employee, Employee's spouse or domestic
partner and children, if any, with such normal medical
insurance, on the terms and to the extent generally provided
by the Company to its executive employees on the level
comparable to
<PAGE> 10
Employee, for a period of one year from the date of the
termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
4.6.1. The term "cause" shall mean those acts identified in
Section 2924 of the California Labor Code, as that
section exists on October 1, 1997, to wit, any
willful breach of duty by the Employee in the course
of his employment, or in case of his habitual neglect
of his duty or continued incapacity to perform it.
4.6.2. The term "good reason" shall mean the occurrence of
one or more of the following events without
Employee's express written consent (I) removal of
Employee from the position and responsibilities as
set forth under Section 2 above; (ii) a material
reduction by the company in the kind or level of
employee benefits to which Employee is entitled
immediately prior to such reduction with the result
that Employee's overall benefit package is
significantly reduced; (iii) the relocation of
Employee to a facility or a location outside of
California; (iv) a change in the control of the
Company, or (v) any material breach by the Company of
any material provision of this Agreement which
continues uncured for thirty (30) days following
written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which
results in Employee being absent from the performance
of his duties with the Company on a full-time basis
for a period of six (6) consecutive months. The
existence or cessation of a physical or mental
illness which renders Employees absent from the
performance of his duties on a full-time basis shall,
if disputed by the Company or Employee, be
conclusively determined by written
<PAGE> 11
opinions rendered by two qualified physicians, one
selected by Employee and one selected by the Company.
During the period of absence, but not beyond the
expiration of the Employment Period, Employee shall
be deemed to be on disability leave of absence, with
his compensation paid in full. During the period of
such disability leave of absence, the Board of
Directors may designate an interim officer with the
same title and responsibilities of Employee on such
terms, as it deems proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate pursuant to the
terms of this Agreement shall be governed solely by the terms of the underlying
plan documents and by applicable law, and nothing in this Agreement shall impair
the Company's right to amend, modify, replace, and terminate any and all such
plans in its sole discretion as provided by law. This Agreement is for the sole
benefit of Employee and the Company, and is not intended to create an employee
benefit plan or to modify the terms of any of the Company's existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted
bylaw, any dispute, or claim or controversy of any kind
(including but not limited to tort, contract, and statue)
arising under, in connection with, or relating to this
Agreement or Employee's employment, shall be resolved
exclusively by binding arbitration in Los Angeles County,
California in accordance with the commercial rules of the
American Arbitration Association then in effect. The Company
and Employees agree to waive any objection to personal
jurisdiction or venue in any forum located in Los Angeles
County California. No claim, lawsuit or action of any kind may
be filed by either party to this
<PAGE> 12
Agreement except to compel arbitration or to enforce an
arbitration award; arbitration is the exclusive dispute
resolution mechanism between the parties hereto. Judgment may
be entered on the arbitrator's award in any court having
Jurisdiction.The validity; interpretation, effect and
enforcement of this Agreement shall be governed by the laws of
the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and
shall be binding upon the successors and assigns shall
specifically assume this Agreement. Since this agreement is
based upon the unique abilities of, and the Company's personal
confidence in Employee, Employee shall have no right to assign
this Agreement or any of his rights hereunder without the
prior written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be
found invalid, such findings shall not effect the validity of
the other provisions hereof and the invalid provisions shall
be deemed to have been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure
of any party to exercise any right granted to it hereunder
shall not operate or be construed as the waiver of any
subsequent breach by such other party nor the waiver of the
right to exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans
referred to in Section 5, contains the entire agreement of the
parties. It may not be changed orally but only by an agreement
in writing signed by the parties.
5.6 NOTICES. Any notice required or permitted to be given
hereunder shall be in writing and may be personally
<PAGE> 13
served or sent by United States mail, and shall be deemed to
have been given when personally served or two days after
having been deposited in the United States mail, registered or
certified mail, return receipt requested, with first-class
postage prepaid and properly addressed as follows. For the
purpose hereof, the addresses of the parties hereto (until
notice of a change thereof is given as provided in this
Section 5.6) shall be as follows:
If to Employee:
Dan Ricketts
(street address omitted)
Los Angeles, California 90004
If to the Company:
Wareforce Incorporated
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are
for the convenience only and shall not affect the construction
hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from
time to time, and without charge to the other parties, take
such additional actions and execute, deliver and file such
additional instruments as may be reasonably required to give
effect to the transactions contemplated hereby.
5.9. ATTORNEYS' FEES. In the event any party hereto commences
arbitration or legal action in connection with this Agreement,
the prevailing party shall be entitled to its attorneys' fees,
costs and expenses reasonably incurred in such action, and the
amount thereof shall be included in any judgment or award
granted under Section 5.1.
<PAGE> 14
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an
original but all, which together shall constitute one and the
same instrument.
5.11. SEPARATE COUNSEL. The Company has been represented by counsel
in the negotiation and execution of this Agreement and has
relied on such counsel with respect to any matter relating
hereto. The Employee has been invited to have his own counsel
review and negotiate this Agreement and Employee has either
obtained has either obtained his own counsel or has elected
not to obtain counsel.
5.12. INDEMNIFICATION. The Company shall provide to the Employee
insurance coverage under its Director and Officer's Insurance
and General Liability, and Employment Practices policies to
the same extent as it provides to all other similar employees
of the Employee's title and position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
a California corporation
/s/ Dan Ricketts By: /s/ Orie Rechtman
- ----------------------- -----------------------
Title: CEO
--------------------
<PAGE> 15
AMENDMENT NO. 1
TO
EXECUTIVE EMPLOYMENT AGREEMENT
BY AND BETWEEN
DAN RICKETTS AND WAREFORCE, INC.
THIS AMENDMENT ("Amendment") is executed and effective as of the 14th
day of July, 1998, by and between DAN RICKETTS an individual
("Employee"), and WAREFORCE INCORPORATED, a California corporation (the
"Company"), and amends that certain employment agreement between
Employee and Company dated June 1, 1998 as follows:
1. Strike Section 3.1 in its entirety and replace with the following"
"BASE SALARY. Employee's base salary shall be $110,000.00 per year
(retroactive to July 1, 1998), subject to an annual increase (if any)
in the sole discretion of the Board, payable in accordance with the
Company's payroll practices as in effect from time to time, and subject
to such withholding as is required by law."
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
A California corporation
/s/ Dan Ricketts By: /s/Orie Rechtman
----------------------- -------------------
Dan Ricketts Title: President
---------------
<PAGE> 1
Exhibit 10.14
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of June, 1998, by and between DARRELL TATE an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company and has been the Vice President of Sales and Marketing of
the Company.
The Company desires to continue the employment of Employee as the Vice President
of Sales and Marketing, and Employee desires to accept such employment, all on
the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render
the services set forth in Sections 2 for a period commencing on June 1,
1998 (the "Start Date") and ending on the third anniversary of such
date, (the "Employment Period") and Employee hereby accepts said
employment and agrees to perform such services during the Employment
Period. Unless this Agreement is terminated pursuant to Section 4 or
unless either party gives the other written notice to the contrary at
least six (6) months prior to an expiration date, this Agreement,
together with any changes which have occurred during the employment
period then expiring, shall automatically renew at the end of an
Employment Period for an additional one (1) year employment period.
<PAGE> 2
2. DUTIES
2.1. VICE PRESIDENT OF WORLDWIDE SALES AND MARKETING: Performing
executive work of major importance to the Company, with the
primary focus being the profitable management and profitable
growth of the Company as a whole. During the Employment
Period, Employee shall devote his full business time and
attention to performing his duties as Vice President of
Worldwide Sales and Marketing of the Company. He shall 1)
continue to build and supervise sales teams to profitably sell
the Company's products and services to customers in
territories associated with all of the Company's branches,
subsidiaries and divisions in the United States and worldwide;
2) manage the overall direction, coordination, and evaluation
of the Company and its subsidiaries and divisions to achieve
or exceed both the earnings-per-share and gross revenue
targets of the Company; 3) assist the Chief Executive Officer
in formulating and administering Company policies; 4) obtain
profitable sales at the Company; 5) review and analyze the
activities costs, operations of the Company to define and to
track their progress toward achieving their goals and
objectives; 6) carry out supervisory responsibilities in
accordance with Company policies, and applicable laws; 7)
interview, hire and train sales managers and staff; 9) plan,
assign and direct the work of managers and staff, appraise
their performance, and reward and discipline them, and address
their complaints; 10) open new Company offices, subsidiaries
and divisions; 11) submit all required documentation in a
timely and accurate manner. The above description of duties is
non-exhaustive. Employee shall work out of the Company's
headquarters location and shall report to Company" Chief
Executive Officer. Employee recognizes that the Board of
Directors of the Company may be required under its fiduciary
duty to the Company and to its stockholders to eliminate such
position or to appoint a different person as such officer of
this Company. The parties agree however, that any such
elimination or replacement of Employee by the Company, other
than pursuant to Section 4.2.1 or 4.3.2.
<PAGE> 3
hereof, shall constitute a termination of Employee's
employment hereunder by the Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion
thereof is sold or merged or undergoes a change of control
transaction (as defined in the Company's Stock Option
Agreement, a copy of which is attached hereto as Exhibit A),
this Agreement shall survive consummation of such transaction
and shall continue in effect for the remainder of the
Employment Period, but Employee shall serve as an officer of
the entity which succeeds to the business or a substantial
portion of the business of the Company, and is such case shall
bear a suitable title and perform the duties and functions of
such office of such publicly traded or privately held
successor, consistent with those customarily performed by an
officer of such a unit, division or entity comparable to the
then business of the Company, unit, division or entity.
Employee may be required to accept greater or lesser
responsibility by any successor, and agrees to fully cooperate
and assist in any resulting transition for up to the remainder
of the Employment Period; and any adjustments required of
Employee to complete the transition to any successor, unit,
division or entity, shall not violate this Agreement so long
as "good reason" does not arise under Sections 4.6.2(ii),
(iii) or (v). This Agreement shall apply to the automatic
modification in duties resulting from such transaction as set
forth above, however, notwithstanding the foregoing, Employee
any exercise any "good reason" rights he may have under
Section 4.6.2(iv).
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete
with the Company in any way, or usurp an Company opportunity
in any way, nor will employee act as an officer, director,
employee, consultant, shareholder, lender or agent of any
entity which is engaged in any business in which the Company
is now engaged or in which the Company becomes engaged during
the term of employment. The Company is now engaged in
<PAGE> 4
the business of reselling computer hardware, software and
peripherals, primarily to corporate and governmental accounts,
and in the business of selling computer systems consulting,
help and maintenance services, also primarily to corporate,
education and governmental accounts. The Company is not now
engaged in the business of manufacturing computers or their
primary components, nor is it now in the business of reselling
computers to non-end users. The Company may become engaged in
the business of final assembly of computers and may become
engaged in the business of catalog, mail-order or internet
sales of computer hardware, software and peripherals. Employee
also agrees that during the term of employment, Employee will
not, directly or indirectly, whether on his own behalf or on
behalf of another, offer employment or a consulting assignment
to any Company employee, nor will Employee, nor Employee's
employer, directly or indirectly, whether on his own behalf or
on behalf of another, actually employ or grant a consulting
assignment to any Company employee. Employee also agrees that
during the term of employment Employee will not, directly or
indirectly, whether on his own behalf or on behalf of another,
contact or solicit any of Company's clients to do business
with any entity other than Company.
2.4. During the term of employment with the Company, Employee may
have access to and become acquainted with information of a
confidential, proprietary or secret nature which is or may be
either applicable or related to present or future business of
the Company, its research and development, or the business of
its customers. For example, trade secret information includes,
but is not limited to devices, secret inventions, processes
and compilations of information, records, specifications and
information concerning customers or vendors. Employees shall
not disclose any of the above-mentioned trade secrets,
directly or indirectly or use them in any way, either during
the term of this agreement of at any time
<PAGE> 5
thereafter, except as required in the course of employment
with the Company.
2.5. Employee agrees that all customers of the Company, for which
the Employee has or will provide services during the
Employee's employment by the Company, and all prospective
customers from whom the Employee has solicited business while
in the employ of the Company, shall be solely the customers of
the Company.
2.6. Employee agrees that, for a period of twelve (12) months
immediately following the termination of employment with the
Company, Employee shall neither directly nor indirectly
solicit business as to products or services competitive with
those of the Company, from any of the Company's customers with
whom the Employee had contact within twelve (12) months prior
to the Employee's termination.
2.7. Employee further agrees that for a period of twelve (12)
months after termination of employment, Employee will not
directly or indirectly induce or solicit any of Company's
employees to leave their employment.
3. COMPENSATION. As compensation for his services to be performed
hereunder, the Company shall provide Employee with the following
compensation and benefits:
3.1 BASE SALARY. Employee's base salary shall be $110,000.00 per
year, subject to an annual increase (if any) in the sole
discretion of the Board, payable in accordance with the
Company's payroll practices as in effect from time to time,
and subject to such withholding as is required by law.
<PAGE> 6
3.2 BONUSES.
3.2.1. Employee shall receive an annual bonus of $50,000.00
should the Company achieve at least 90% of the goals
set by the Company's Board of Directors for the
Employee for the year. If any bonus is declared or
paid, it shall be subject to such withholding as is
required by law.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time
as been accrued each pay period since his date of
first hire, less any vacation taken in such amounts
and under such conditions as normally afforded to the
Company's executives. In the event Employee does not
use such vacation, he shall receive, upon termination
of the Employment Period, vacation pay for all unused
vacation calculated as having accrued at the
applicable base salary for each relevant period of
his employment. However, Employee shall endeavor to
take vacation time in the year in which it is
allocated to him.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse
Employee for reasonable business expenses incurred by
Employee in the course of performing services for the
company and in compliance with procedures established
from time to time by the Company. This reimbursement
shall occur on a monthly basis, and is subject to
Employee providing original documentation in support
of all business expenses reimbursement sought.
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive
stock options on the same terms as granted to its
senior executives (excluding the Company's Chief
Executive Officer). The issuance of options is
subject to approval by the Company Board of Directors
Compensation Committee.
<PAGE> 7
3.3.4. OTHER BENEFITS. Company shall provide Employee with
employment benefits as 401(k) participation,
automobile allowance, medical insurance and
disability insurance, on the terms and to the extent
generally provided by the Company to its senior
executive employees. The amount of automobile
allowance provided by the Company to Employees shall
be $500.00 per month.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this
agreement; but Employee's compensation and benefits shall be
governed solely by the terms of this Agreement, which shall
supersede all prior understandings or agreements between the
parties concerning terms and benefits of employment of
Employee with the Company. Other officers or employees shall
not become entitled to any benefits under this Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment
Period shall terminate upon the permanent disability (as
defined in Section 4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for
"cause" by seven (7) days advance written notice to
Employee. However, no such advance written notice
shall be given if the Company determines that the
Company or a person would suffer irreparable harm
should the Employee be given notice.
4.2.1.1. For such termination for "cause", the
employee shall have a ninety (90) day period
from the date of the written notice to cure
<PAGE> 8
such "cause". However, this cure period
shall not apply to termination's wherein the
Company's Board of Directors determines that
the Company would suffer irreparable harm
should the Employee be given the right to
cure.
4.2.2. The Company may terminate the Employment Period for
any other reason, with cause other than those
described in Section 4.6.1 or without cause, by
thirty (30) days advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for
"good reason" (as defined in section 4.6.2 below) at
any time by written notice to the company.
4.3.2. Employee may terminate the Employment Period for any
other reason by thirty (30) days advance written
notice to the Company.
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by
the Company for any reason other than pursuant to
Section 4.2.1 or Section 4.3.2 hereof or if the
Employment Period is terminated because of a
permanent disability of Employee pursuant to Section
4.1, upon the effectiveness of any such termination,
the Company shall be obligated to pay to the employee
(or his executors,administrators or assigns, as the
case may be) all unpaid salary, benefits and bonuses
(if any) accrued through the date of effectiveness of
such termination and, in addition, a cash severance
payment equal to eighteen (18) month's total base
salary at the
<PAGE> 9
rates set forth herein, and such other benefits as
may be required by law.
4.4.2 In addition, all stock options and general stock
appreciation rights granted by the Company to
Employee which otherwise would have vested within
eighteen (18) months following the Date of
Termination for death or disability shall accelerate
and become fully vested and exercisable on the Date
of Termination for death or disability, and shall
remain exercisable for a period ending on the normal
expiration date specified in the option agreements.
4.4.3. In the event the Employment period is terminated by
the Company pursuant to Section 4.2.1 hereof, or the
Employment Period is terminated by Employee pursuant
to Section 4.3.2 hereof, the Company shall have no
obligation to pay any severance pay to Employee. The
Company shall, however, be obligated to pay to
Employee (or executors, administrators or assigns, as
the case may be) all unpaid salary, benefits and
bonuses (if any) accrued through the date of
termination and shall provide such other benefits as
may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the
employment Period pursuant to Section 4.2 or 4.3.1, the
Company shall provide Employee, Employee's spouse or domestic
partner and children, if any, with such normal medical
insurance, on the terms and to the extent generally provided
by the Company to its executive employees on the level
comparable to Employee, for a period of one year from the date
of the termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
<PAGE> 10
4.6.1. The term "cause" shall mean those acts identified in
Section 2924 of the California Labor Code, as that
section exists on October 1, 1997, to wit, any
willful breach of duty by the Employee in the course
of his employment, or in case of his habitual neglect
of his duty or continued incapacity to perform it.
4.6.2. The term "good reason" shall mean the occurrence of
one or more of the following events without
Employee's express written consent (I) removal of
Employee from the position and responsibilities as
set forth under Section 2 above; (ii) a material
reduction by the company in the kind or level of
employee benefits to which Employee is entitled
immediately prior to such reduction with the result
that Employee's overall benefit package is
significantly reduced; (iii) the relocation of
Employee to a facility or a location outside of
California; (iv) a change in the control of the
Company, or (v) any material breach by the Company of
any material provision of this Agreement which
continues uncured for thirty (30) days following
written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which
results in Employee being absent from the performance
of his duties with the Company on a full-time basis
for a period of six (6) consecutive months. The
existence or cessation of a physical or mental
illness which renders Employees absent from the
performance of his duties on a full-time basis shall,
if disputed by the Company or Employee, be
conclusively determined by written opinions rendered
by two qualified physicians, one selected by Employee
and one selected by the Company. During the period of
absence, but not beyond the expiration of the
Employment Period, Employee shall be deemed to be on
disability leave
<PAGE> 11
of absence, with his compensation paid in full.
During the period of such disability leave of
absence, the Board of Directors may designate an
interim officer with the same title and
responsibilities of Employee on such terms, as it
deems proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate pursuant
to the terms of this Agreement shall be governed solely by the terms of
the underlying plan documents and by applicable law, and nothing in
this Agreement shall impair the Company's right to amend, modify,
replace, and terminate any and all such plans in its sole discretion as
provided by law. This Agreement is for the sole benefit of Employee and
the Company, and is not intended to create an employee benefit plan or
to modify the terms of any of the Company's existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted by
law, any dispute, or claim or controversy of any kind
(including but not limited to tort, contract, and statue)
arising under, in connection with, or relating to this
Agreement or Employee's employment, shall be resolved
exclusively by binding arbitration in Los Angeles County,
California in accordance with the commercial rules of the
American Arbitration Association then in effect. The Company
and Employees agree to waive any objection to personal
jurisdiction or venue in any forum located in Los Angeles
County California. No claim, lawsuit or action of any kind may
be filed by either party to this Agreement except to compel
arbitration or to enforce an arbitration award; arbitration is
the exclusive dispute resolution mechanism between the parties
hereto. Judgment may be entered on the arbitrator's award in
any court having Jurisdiction. The validity;
<PAGE> 12
interpretation, effect and enforcement of this Agreement shall
be governed by the laws of the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and
shall be binding upon the successors and assigns shall
specifically assume this Agreement. Since this agreement is
based upon the unique abilities of, and the Company's personal
confidence in Employee, Employee shall have no right to assign
this Agreement or any of his rights hereunder without the
prior written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be
found invalid, such findings shall not effect the validity of
the other provisions hereof and the invalid provisions shall
be deemed to have been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure
of any party to exercise any right granted to it hereunder
shall not operate or be construed as the waiver of any
subsequent breach by such other party nor the waiver of the
right to exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans
referred to in Section 5, contains the entire agreement of the
parties. It may not be changed orally but only by an agreement
in writing signed by the parties.
5.6 NOTICES. Any notice required or permitted to be given
hereunder shall be in writing and may be personally served or
sent by United States mail, and shall be deemed to have been
given when personally served or two days after having been
deposited in the United States mail, registered or certified
mail, return receipt requested, with first-class postage
prepaid
<PAGE> 13
and properly addressed as follows. For the purpose hereof, the
addresses of the parties hereto (until notice of a change
thereof is given as provided in this Section 5.6) shall be as
follows:
If to Employee:
Darrell Tate
(street address omitted)
Los Angeles, California 90049
If to the Company:
Wareforce Incorporated
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are
for the convenience only and shall not affect the construction
hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from
time to time, and without charge to the other parties, take
such additional actions and execute, deliver and file such
additional instruments as may be reasonably required to give
effect to the transactions contemplated hereby.
5.9. ATTORNEYS' FEES. In the event any party hereto commences
arbitration or legal action in connection with this Agreement,
the prevailing party shall be entitled to its attorneys' fees,
costs and expenses reasonably incurred in such action, and the
amount thereof shall be included in any judgment or award
granted under Section 5.1.
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an
original but all, which together shall constitute one and the
same instrument.
<PAGE> 14
5.11. SEPARATE COUNSEL. The Company has been represented by counsel
in the negotiation and execution of this Agreement and has
relied on such counsel with respect to any matter relating
hereto. The Employee has been invited to have his own counsel
review and negotiate this Agreement and Employee has either
obtained has either obtained his own counsel or has elected
not to obtain counsel.
5.12. INDEMNIFICATION. The Company shall provide to the Employee
insurance coverage under its Director and Officer's Insurance
and General Liability, and Employment Practices policies to
the same extent as it provides to all other similar employees
of the Employee's title and position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
a California corporation
/s/ Darrell Tate By: /s/ Orie Rechtman
- ---------------------- ----------------------
Darrell Tate Title: CEO
-------------------
<PAGE> 1
Exhibit 10.15
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 28th
day of August, 1998, by and between RICHARD FU an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company and has been the General Manager of the Company's
wholly-owned subsidiary CY Investment, Inc. ("CY") d/b/a/ IMPRES Technologies
("IMPRES").
The Company desires to continue the employment of Employee as the Vice President
and General Manager of IMPRES, and Employee desires to accept such employment,
all on the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render the
services set forth in Section 2 for a period commencing on the date of
closing of the sale of the stock of CY to the Company (the "Start Date")
and ending on the third anniversary of such date, (the "Employment Period")
and Employee hereby accepts said employment and agrees to perform such
services during the Employment Period. Unless this Agreement is terminated
pursuant to Section 4 or unless either party gives the other written notice
to the contrary at least three (3) months prior to an expiration date, this
Agreement, together with any changes which have occurred during the
employment period then expiring, shall automatically renew at the end of an
Employment Period for an additional one (1) year employment period.
<PAGE> 2
2. DUTIES
2.1. IMPRES VICE PRESIDENT AND GENERAL MANAGER: Performing executive work
of major importance to the Company, with the primary focus being the
profitable management and profitable growth of the sales of IMPRES as
well as the Company as a whole. During the Employment Period, Employee
shall devote his full business time and attention to performing his
duties as Vice President and General Manager of IMPRES. He shall 1)
continue to build and supervise sales teams to profitably sell IMPRES
products and services to customers in territories associated with all
of the IMPRES branches in the United States and worldwide, including
the headquarters branch; 2) manage the overall direction,
coordination, and evaluation of IMPRES to achieve or exceed both the
earnings-per-share and gross revenue targets of IMPRES; 3) assist the
Vice President of Sales and Marketing in formulating and administering
IMPRES policies; 4) obtain profitable sales at IMPRES; 5) review and
analyze the activities, costs, operations of IMPRES to define and to
track its progress toward achieving their goals and objectives; 6)
carry out supervisory responsibilities in accordance with Company
policies, and applicable laws; 7) interview, hire and train sales
managers and staff for IMPRES; 8) plan, assign and direct the work of
managers and staff for IMPRES, appraise their performance, and reward
and discipline them, and address their complaints; 9) open new IMPRES
offices; 10) submit all required documentation in a timely and
accurate manner. The above description of duties is non-exhaustive.
Employee acknowledges that the Company's IMPRES subsidiary may be
fully merged into the Company's operations and no longer exist as a
separate subsidiary. In the event this happens, Employee may be given
a different positions within the Company. Any such position shall be
comparable to that held by Employee at the Company's IMPRES
subsidiary. Employee shall work out of the IMPRES headquarters
location and shall report to the Company's Chief Executive Officer or,
in his absence, to the
<PAGE> 3
Company's Vice President of Worldwide Sales and Marketing. The above
description of duties is non-exhaustive. Employee recognizes that the
Board of Directors of the Company may be required under its fiduciary
duty to the Company and to its stockholders to eliminate or appoint a
different person as such officer of this Company. The parties agree
however, that any such elimination or replacement of Employee by the
Company, other than pursuant to Section 4.2.1 or 4.3.2. hereof, shall
constitute a termination of Employee's employment hereunder by the
Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion thereof is
sold or merged or undergoes a change of control transaction (as
defined in the Company's Stock Option Agreement, a copy of which is
attached hereto as Exhibit A), this Agreement shall survive
consummation of such transaction and shall continue in effect for the
remainder of the Employment Period, but Employee shall serve as an
officer of the entity which succeeds to the business or a substantial
portion of the business of the Company, and is such case shall bear a
suitable title and perform the duties and functions of such office of
such publicly traded or privately held successor, consistent with
those customarily performed by an officer of such a unit, division or
entity comparable to the then business of the Company, unit, division
or entity. Employee may be required to accept greater or lesser
responsibility by any successor, and agrees to fully cooperate and
assist in any resulting transition for up to the remainder of the
Employment Period; and any adjustments required of Employee to
complete the transition to any successor, unit, division or entity,
shall not violate this Agreement so long as "good reason" does not
arise under Sections 4.6.2(ii), (iii) or (v). This Agreement shall
apply to the automatic modification in duties resulting from such
transaction as set forth above, however, notwithstanding the
foregoing, Employee any exercise any "good reason" rights he may have
under Section 4.6.2(iv).
<PAGE> 4
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete with the
Company in any way, or usurp an Company opportunity in any way, nor
will employee act as an officer, director, employee, consultant,
shareholder, lender or agent of any entity which is engaged in any
business in which the Company is now engaged or in which the Company
becomes engaged during the term of employment. The Company is now
engaged in the business of reselling computer hardware, software and
peripherals, primarily to corporate and governmental accounts, and in
the business of selling computer systems consulting, help and
maintenance services, also primarily to corporate, education and
governmental accounts. The Company may become engaged in the business
of final assembly of computers and may become engaged in the business
of catalog, mail-order or internet sales of computer hardware,
software and peripherals.
2.4. During the term of employment with the Company, Employee may have
access to and become acquainted with information of a confidential,
proprietary or secret nature which is or may be either applicable or
related to present or future business of the Company, its research and
development, or the business of its customers. For example, trade
secret information includes, but is not limited to devices, secret
inventions, processes and compilations of information, records,
specifications and information concerning customers or vendors.
Employees shall not disclose any of the above-mentioned trade secrets,
directly or indirectly, and for twelve (12) months immediately
following the termination of employment with the Company, except as
required in the course of employment with the Company.
2.5. Employee agrees that, for a period of twelve (12) months immediately
following the termination of employment with the Company, Employee
shall neither directly nor indirectly solicit business as to products
or services competitive with those of the Company, from any of the
<PAGE> 5
Company's customers with whom the Employee had contact within twelve
(12) months prior to the Employee's termination.
2.6. Employee further agrees that for a period of twelve (12) months after
termination of employment, Employee will not directly or indirectly
induce or solicit any of Company's employees to leave their
employment.
3. COMPENSATION. As compensation for his services to be performed hereunder,
the Company shall provide Employee with the following compensation and
benefits:
3.1 BASE SALARY. Employee's base salary shall be $110,000.00 per year,
subject to an annual increase (if any) in the sole discretion of the
Board, payable in accordance with the Company's payroll practices as
in effect from time to time, and subject to such withholding as is
required by law.
3.2 BONUSES.
3.2.1. Employee shall receive a $10,000 signing bonus on the Start
Date, subject to such withholding as is required by law.
3.2.2. During the time that Employee is Vice President and General
Manager of the Company's IMPRES subsidiary and subject to such
withholding as required by law, Employee shall receive an
annual bonus of $50,000.00 and based on the Employee meeting at
least 90% of the following goals:
July 1, 1998 - June 30, 1998 Achieve $72 million in
gross revenue for IMPRES
Each July 1 - June 30 thereafter Achieve at least a ten
<PAGE> 6
percent (10%) increase in
gross revenue over the
previous July 1 - June 30
period
3.2.3. During the time that Employee is Vice President and General
Manager of the Company's IMPRESS subsidiary and subject to such
withholding as is required by law, should Employee achieve one
hundred twenty-five percent (125%) or more of Employee's yearly
goal as defined in Section 3.2.2 above, Employee shall receive
an additional bonus equal to one-tenth of one percent (0.1%) of
any revenue amounts that exceed the Employee's revenue goal for
the 12 month period. (Thus, for example, if the Employee's 12
month revenue goal is $72 million and actual revenues for the
period are $82 million, in addition to receiving the $50,000
bonus defined in Section 3.2.2 above, Employee will also
receive a additional bonus for the period of $10,000 ($10
million X .01%).
3.2.4. Employee is aware that the Company may merge its IMPRES
subsidiary into the Company's other operations and at such time
the Company may renegotiate this bonus with Employee. A
increase in this bonus at that time shall not constitute a
termination of the Employee hereunder.
3.3. BENEFITS. Employee's benefits shall be as determined by the Company's
employee handbook, as may be modified from time to time by the
Company, unless otherwise stated in this Agreement. In the case of a
conflict between the terms of this agreement and the Company's
employee handbook, the terms of this Agreement shall govern.
<PAGE> 7
3.3.1. VACATION. Employee shall be entitled to vacation time as been
accrued each pay period since his date of first hire, less any
vacation taken in such amounts and under such conditions as
normally afforded to the Company's executives. In the event
Employee does not use such vacation, he shall receive, upon
termination of the Employment Period, vacation pay for all
unused vacation calculated as having accrued at the applicable
base salary for each relevant period of his employment.
However, Employee shall endeavor to take vacation time in the
year in which it is allocated to him.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse Employee for
reasonable business expenses incurred by Employee in the course
of performing services for the company and in compliance with
procedures established from time to time by the Company. This
reimbursement shall occur on a monthly basis, and is subject to
Employee providing original documentation in support of all
business expenses reimbursement sought.
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive stock
options for 33,359 shares on the Start Date, with the exercise
price being the market price at close of trading on the date
that the options are granted, and subject to the other terms of
the Company's stock option agreement, a copy of which is
attached hereto as Exhibit A. These options shall vest
immediately upon being granted and shall be granted in lieu of
services rendered to the Company. The issuance of any future
options is subject to approval by the Company Board of
Directors Compensation Committee. Grants of stock and stock
options by the Company may be subject to taxes which are the
sole responsibility of the Employee.
<PAGE> 8
3.3.4. OTHER BENEFITS. Company shall provide Employee with employment
benefits as 401(k) participation, automobile allowance, medical
insurance and disability insurance, on the terms and to the
extent generally provided by the Company to its senior
executive employees. The amount of automobile allowance
provided by the Company to Employees shall be $500.00 per
month.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this agreement; but
Employee's compensation and benefits shall be governed solely by the
terms of this Agreement, which shall supersede all prior
understandings or agreements between the parties concerning terms and
benefits of employment of Employee with the Company. Other officers or
employees shall not become entitled to any benefits under this
Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment Period
shall terminate upon the permanent disability (as defined in Section
4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for "cause" by
seven (7) days advance written notice to Employee. However, no
such advance written notice shall be given if the Company
determines that the Company or a person would suffer
irreparable harm should the Employee be given notice.
4.2.1.1. For such termination for "cause", the employee shall
have a ninety (90) day period from the date of the
written notice to cure
<PAGE> 9
such "cause". However, this cure period shall not
apply to termination's wherein the Company's Board of
Directors determines that the Company would suffer
irreparable harm should the Employee be given the
right to cure.
4.2.2. The Company may terminate the Employment Period for any other
reason, with cause other than those described in Section 4.6.1
or without cause, by thirty (30) days advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for "good reason"
(as defined in section 4.6.2 below) at any time by written
notice to the company.
4.3.2. Employee may terminate the Employment Period for any other
reason by thirty (30) days advance written notice to the
Company.
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by the Company
for any reason other than pursuant to Section 4.2.1 or Section
4.3.2 hereof or if the Employment Period is terminated because
of a permanent disability of Employee pursuant to Section 4.1,
upon the effectiveness of any such termination, the Company
shall be obligated to pay to the employee (or his
executors,administrators or assigns, as the case may be) all
unpaid salary, benefits and bonuses (if any) accrued through
the date of effectiveness of such termination and, in addition,
a cash severance payment equal to eighteen (18) month's total
base salary at the
<PAGE> 10
rates set forth herein, and such other benefits as may be
required by law.
4.4.2 In addition, all stock options and general stock appreciation
rights granted by the Company to Employee which otherwise would
have vested within eighteen (18) months following the Date of
Termination for death or disability shall accelerate and become
fully vested and exercisable on the Date of Termination for
death or disability, and shall remain exercisable for a period
ending on the normal expiration date specified in the option
agreements.
4.4.3. In the event the Employment period is terminated by the Company
pursuant to Section 4.2.1 hereof, or the Employment Period is
terminated by Employee pursuant to Section 4.3.2 hereof, the
Company shall have no obligation to pay any severance pay to
Employee. The Company shall, however, be obligated to pay to
Employee (or executors, administrators or assigns, as the case
may be) all unpaid salary, benefits and bonuses (if any)
accrued through the date of termination and shall provide such
other benefits as may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the employment
Period pursuant to Section 4.2 or 4.3.1, the Company shall provide
Employee, Employee's spouse or domestic partner and children, if any,
with such normal medical insurance, on the terms and to the extent
generally provided by the Company to its executive employees on the
level comparable to Employee, for a period of one year from the date
of the termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
<PAGE> 11
4.6.1. The term "cause" shall mean those acts identified in Section
2924 of the California Labor Code, as that section exists on
October 1, 1997, to wit, any willful breach of duty by the
Employee in the course of his employment, or in case of his
habitual neglect of his duty or continued incapacity to perform
it.
4.6.2. The term "good reason" shall mean the occurrence of one or more
of the following events without Employee's express written
consent (I) removal of Employee from the position and
responsibilities as set forth under Section 2 above; (ii) a
material reduction by the company in the kind or level of
employee benefits to which Employee is entitled immediately
prior to such reduction with the result that Employee's overall
benefit package is significantly reduced; (iii) the relocation
of Employee to a facility or a location outside of California;
(iv) a change in the control of the Company, or (v) any
material breach by the Company of any material provision of
this Agreement which continues uncured for thirty (30) days
following written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which results in
Employee being absent from the performance of his duties with
the Company on a full-time basis for a period of six (6)
consecutive months. The existence or cessation of a physical or
mental illness which renders Employees absent from the
performance of his duties on a full-time basis shall, if
disputed by the Company or Employee, be conclusively determined
by written opinions rendered by two qualified physicians, one
selected by Employee and one selected by the Company. During
the period of absence, but not beyond the expiration of the
Employment Period, Employee shall be deemed to be on disability
leave
<PAGE> 12
of absence, with his compensation paid in full. During the
period of such disability leave of absence, the Board of
Directors may designate an interim officer with the same title
and responsibilities of Employee on such terms, as it deems
proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate pursuant
to the terms of this Agreement shall be governed solely by the terms
of the underlying plan documents and by applicable law, and nothing in
this Agreement shall impair the Company's right to amend, modify,
replace, and terminate any and all such plans in its sole discretion
as provided by law. This Agreement is for the sole benefit of Employee
and the Company, and is not intended to create an employee benefit
plan or to modify the terms of any of the Company's existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted by law, any
dispute, or claim or controversy of any kind (including but not
limited to tort, contract, and statue) arising under, in connection
with, or relating to this Agreement or Employee's employment, shall be
resolved exclusively by binding arbitration in Los Angeles County,
California in accordance with the commercial rules of the American
Arbitration Association then in effect. The Company and Employees
agree to waive any objection to personal jurisdiction or venue in any
forum located in Los Angeles County California. No claim, lawsuit or
action of any kind may be filed by either party to this Agreement
except to compel arbitration or to enforce an arbitration award;
arbitration is the exclusive dispute resolution mechanism between the
parties hereto. Judgment may be entered on the arbitrator's award in
any court having Jurisdiction.The validity;
<PAGE> 13
interpretation, effect and enforcement of this Agreement shall be
governed by the laws of the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and shall be
binding upon the successors and assigns shall specifically assume this
Agreement. Since this agreement is based upon the unique abilities of,
and the Company's personal confidence in Employee, Employee shall have
no right to assign this Agreement or any of his rights hereunder
without the prior written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be found
invalid, such findings shall not effect the validity of the other
provisions hereof and the invalid provisions shall be deemed to have
been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure of any
party to exercise any right granted to it hereunder shall not operate
or be construed as the waiver of any subsequent breach by such other
party nor the waiver of the right to exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans referred to
in Section 5, contains the entire agreement of the parties. It may not
be changed orally but only by an agreement in writing signed by the
parties.
5.6 NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be personally served or sent by United States
mail, and shall be deemed to have been given when personally served or
two days after having been deposited in the United States mail,
registered or certified mail, return receipt requested, with
first-class postage prepaid
<PAGE> 14
and properly addressed as follows. For the purpose hereof, the
addresses of the parties hereto (until notice of a change thereof is
given as provided in this Section 5.6) shall be as follows:
If to Employee: If to the Company:
Richard Fu Wareforce Incorporated
(omitted) 2361 Rosecrans Avenue, Suite 155
Monterey Hills, CA 90042 El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are for the
convenience only and shall not affect the construction hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from time to
time, and without charge to the other parties, take such additional
actions and execute, deliver and file such additional instruments as
may be reasonably required to give effect to the transactions
contemplated hereby.
5.9. ATTORNEYS' FEES. In the event any party hereto commences arbitration
or legal action in connection with this Agreement, the prevailing
party shall be entitled to its attorneys' fees, costs and expenses
reasonably incurred in such action, and the amount thereof shall be
included in any judgment or award granted under Section 5.1.
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original but
all, which together shall constitute one and the same instrument.
<PAGE> 15
5.11. SEPARATE COUNSEL. The Company has been represented by counsel in the
negotiation and execution of this Agreement and has relied on such
counsel with respect to any matter relating hereto. The Employee has
been invited to have his own counsel review and negotiate this
Agreement and Employee has either obtained has either obtained his
own counsel or has elected not to obtain counsel.
5.12. INDEMNIFICATION. The Company shall provide to the Employee insurance
coverage under its Director and Officer's Insurance and General
Liability, and Employment Practices policies to the same extent as it
provides to all other similar employees of the Employee's title and
position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
WAREFORCE INCORPORATED
a California corporation
/s/Richard Fu By: /s/Dan Ricketts
- ------------- ----------------
Richard Fu Title: General Counsel
----------------
<PAGE> 1
Exhibit 10.16
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of July, 1998, by and between MARCIA MAZRIA an individual ("Employee"), and
WAREFORCE INCORPORATED, a California corporation (the "Company"), with reference
to the following facts:
Employee is an individual possessing unique management and executive talents of
value to the company.
The Company desires to continue the employment of Employee as the Vice President
of Marketing and Communications, and Employee desires to accept such employment,
all on the terms and conditions set forth in this Agreements.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Company hereby engages Employee to perform the duties and render the
services set forth in Sections 2 for a period commencing on July 1, 1998
(the "Start Date") and ending on the third anniversary of such date, (the
"Employment Period") and Employee hereby accepts said employment and agrees
to perform such services during the Employment Period. Unless this
Agreement is terminated pursuant to Section 4 or unless either party gives
the other written notice to the contrary at least six (6) months prior to
an expiration date, this Agreement, together with any changes which have
occurred during the employment period then expiring, shall automatically
renew at the end of an Employment Period for an additional one (1) year
employment period.
2. DUTIES
<PAGE> 2
2.1. VICE PRESIDENT OF MARKETING AND COMMUNICATIONS: Performing executive
work of major importance to the Company, with the primary focus being
the profitable management and profitable growth of the Company as a
whole. During the Employment Period, Employee shall devote her full
business time and attention to performing her duties as Vice President
of Marketing and Communications of the Company. However, not
withstanding anything else to the contrary in this Agreement, the
Employee may devote such time as is necessary for her to fulfill
certain ongoing current and future consulting engagements with
companies that do not compete with the Company. The time devoted to
these consulting engagements shall not take away from the Employee's
first loyalty to the Company however. She shall 1) continue to build
and supervise marketing and communications teams to profitably market
the Company's products and services to customers in territories
associated with all of the Company's branches, subsidiaries and
divisions in the United States and worldwide; 2) manage the overall
direction, coordination, and evaluation of the Company and its
subsidiaries and divisions' marketing efforts to achieve or exceed
both the earnings-per-share and gross revenue targets of the Company;
3) assist the Chief Executive Officer in formulating and administering
Company policies; 4) successfully communicate to the investment
community the Company's strategies and visions and press releases as
well as supervise outside services in doing so; 5) review and analyze
the activities costs, operations of the Company's marketing efforts to
define and to track their progress toward achieving their goals and
objectives, including but not limited to managing the Company's co-op
and Market Develop Fund activities with vendors; 6) carry out
supervisory responsibilities in accordance with Company policies, and
applicable laws; 7) interview, hire and train marketing and
communications managers and staff; 9) plan, assign and direct the work
of marketing and communications managers and staff, appraise their
performance, and reward and discipline them, and address their
complaints; 10) submit all
<PAGE> 3
required documentation in a timely and accurate manner. The above
description of duties is non-exhaustive. Employee shall work out of
the Company's headquarters location and/or her home office as
determined by her and shall report to Company" Chief Executive
Officer. Employee recognizes that the Board of Directors of the
Company may be required under its fiduciary duty to the Company and to
its stockholders to eliminate such position or to appoint a different
person as such officer of this Company. The parties agree however,
that any such elimination or replacement of Employee by the Company,
other than pursuant to Section 4.2.1 or 4.3.2. hereof, shall
constitute a termination of Employee's employment hereunder by the
Company without cause.
2.2. CHANGE OF CONTROL. If the Company or a significant portion thereof is
sold or merged or undergoes a change of control transaction (as
defined in the Company's Stock Option Agreement, a copy of which is
attached hereto as Exhibit A), this Agreement shall survive
consummation of such transaction and shall continue in effect for the
remainder of the Employment Period, but Employee shall serve as an
officer of the entity which succeeds to the business or a substantial
portion of the business of the Company, and is such case shall bear a
suitable title and perform the duties and functions of such office of
such publicly traded or privately held successor, consistent with
those customarily performed by an officer of such a unit, division or
entity comparable to the then business of the Company, unit, division
or entity. Employee may be required to accept greater or lesser
responsibility by any successor, and agrees to fully cooperate and
assist in any resulting transition for up to the remainder of the
Employment Period; and any adjustments required of Employee to
complete the transition to any successor, unit, division or entity,
shall not violate this Agreement so long as "good reason" does not
arise under Sections 4.6.2(ii), (iii) or (v). This Agreement shall
apply to the automatic modification in duties resulting from such
transaction as set forth above, however,
<PAGE> 4
notwithstanding the foregoing, Employee any exercise any "good reason"
rights he may have under Section 4.6.2(iv).
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete with the
Company in any way, or usurp an Company opportunity in any way, nor
will employee act as an officer, director, employee, consultant,
shareholder, lender or agent of any entity which is engaged in any
business in which the Company is now engaged or in which the Company
becomes engaged during the term of employment. The Company is now
engaged in the business of reselling computer hardware, software and
peripherals, primarily to corporate and governmental accounts, and in
the business of selling computer systems consulting, help and
maintenance services, also primarily to corporate, education and
governmental accounts. The Company is not now engaged in the business
of manufacturing computers or their primary components, nor is it now
in the business of reselling computers to non-end users. The Company
may become engaged in the business of final assembly of computers and
may become engaged in the business of catalog, mail-order or internet
sales of computer hardware, software and peripherals. Employee also
agrees that during the term of employment, Employee will not, directly
or indirectly, whether on his own behalf or on behalf of another,
offer employment or a consulting assignment to any Company employee,
nor will Employee, nor Employee's employer, directly or indirectly,
whether on his own behalf or on behalf of another, actually employ or
grant a consulting assignment to any Company employee. Employee also
agrees that during the term of employment Employee will not, directly
or indirectly, whether on his own behalf or on behalf of another,
contact or solicit any of Company's clients to do business with any
entity other than Company.
<PAGE> 5
2.4. During the term of employment with the Company, Employee may have
access to and become acquainted with information of a confidential,
proprietary or secret nature which is a "trade secret" of the Company
as defined in California Civil Code Section 3426.1(d). Employee shall
not disclose any of the Company's trade secrets, directly or
indirectly or use them in any way, either during the term of this
agreement or at any time thereafter, except as required in the course
of employment with the Company and except as may be permitted in
accordance with the California Uniform Trade Secrets Act (Civil Code
Sections 3426-3426.11)..
2.5. Employee agrees that all customers of the Company, for which the
Employee has provided or will provide services during the Employee's
employment by the Company, and all prospective customers from whom the
Employee has solicited business while in the employ of the Company,
shall be the customers of the Company and not of the Employee during
the term of this Agreement.
2.6. After Employee's employment terminates, she will not engage in any
conduct that constitutes unfair competition with the Company as such
term is defined pursuant to the substantive law of the State of
California.
3. COMPENSATION. As compensation for her services to be performed hereunder,
the Company shall provide Employee with the following compensation and
benefits:
3.1 BASE SALARY. Employee's base salary shall be $80,000.00 per year,
shall never be decreased, and shall be subject to an annual review for
purposes of increase, payable in accordance with the Company's payroll
practices as in effect from time to time, and subject to such
withholding as is required by law.
<PAGE> 6
3.2 BONUSES.
3.2.1. Employee shall receive a quarterly bonus of $5,000 which shall
be subject to such withholding as is required by law.
3.2.2. Employee and Company agree that within ninety (90) days from
the Effective Date of athis Agreement, Company shall establish
a bonus plan for Employee to be based on the amount of Co-op
and Market Development Funds collected by the Company at the
direction of the Employee.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time as has
been accrued each pay period since July 1, 1998, less any
vacation taken in such amounts and under such conditions as
normally afforded to the Company's management and as is defined
in the Company's Employee Handbook. In the event Employee does
not use such vacation, she shall receive, upon termination of
the Employment Period, vacation pay for all unused vacation
calculated as having accrued at the applicable base salary for
each relevant period of his employment. However, Employee shall
endeavor to take vacation time in the year in which it is
allocated to her.
3.3.2. BUSINESS EXPENSES. The Company shall reimburse Employee for
reasonable business expenses incurred by Employee in the course
of performing services for the company and in compliance with
procedures established from time to time by the Company. This
reimbursement shall occur on a monthly basis, and is subject to
Employee providing reasonable and appropriate documentation
(i.e. satisfactory for IRS purposes) in support of all business
expenses reimbursement sought.
<PAGE> 7
3.3.3. STOCK OPTIONS. Company shall grant Employee incentive stock
options on the same terms as granted to its senior executives
(excluding the Company's Chief Executive Officer). The issuance
of options is subject to approval by the Company Board of
Directors Compensation Committee. (See attached copy of Option
Plan and Option Agreement.)
3.3.3.1. Company agrees to make an initial grant to the
Employee of 5,000 fully vested and exercisable options
on July 13, 1998 at a Fair Market Value of $3.00 per
option. These shares shall be granted in partial
consideration of services rendered prior to July 13,
1998. The Employee is responsible for payment of any
taxes associated with such grant.
3.3.4. OTHER BENEFITS. Company shall provide Employee with employment
benefits as 401(k) participation, automobile allowance, medical
insurance and disability insurance, on the terms and to the
extent generally provided by the Company to its other senior
management employees.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this agreement; but
Employee's compensation and benefits shall be governed solely by the
terms of this Agreement, which shall supersede all prior
understandings or agreements between the parties concerning terms and
benefits of employment of Employee with the Company. Other officers or
employees shall not become entitled to any benefits under this
Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment Period
shall terminate upon the permanent
<PAGE> 8
disability (as defined in Section 4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANY
4.2.1. The Company may terminate the Employment Period for "cause" by
seven (7) days advance written notice to Employee. However, no
such advance written notice shall be given if the Company
determines that the Company or a person would suffer
irreparable harm should the Employee be given notice.
4.2.1.1. For such termination for "cause", the employee shall
have a ninety (90) day period from the date of the
written notice to cure such "cause". However, this
cure period shall not apply to termination's wherein
the Company's Board of Directors determines that the
Company would suffer irreparable harm should the
Employee be given the right to cure.
4.2.2. The Company may terminate the Employment Period for any other
reason, with cause other than those described in Section 4.6.1
or without cause, by thirty (30) days advance written notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for "good reason"
(as defined in section 4.6.2 below) at any time by written
notice to the company.
4.3.2. Employee may terminate the Employment Period for any other
reason by thirty (30) days advance written notice to the
Company.
<PAGE> 9
4.4 SEVERENCE PAY
4.4.1 In the event the Employment Period is terminated by the Company
for any reason other than pursuant to Section 4.2.1 or Section
4.3.2 hereof or if the Employment Period is terminated because
of a permanent disability of Employee pursuant to Section 4.1,
upon the effectiveness of any such termination, the Company
shall be obligated to pay to the employee (or his
executors,administrators or assigns, as the case may be) all
unpaid salary, benefits and bonuses (if any) accrued through
the date of effectiveness of such termination and, in addition,
a cash severance payment equal to nine (9) month's total base
salary at the rates set forth herein, and such other benefits
as may be required by law; but in no case shall such severance
benefits be less than those accorded by the Company to any
other one of its senior management employees.
4.4.2 In addition, all stock options and general stock appreciation
rights granted by the Company to Employee which otherwise would
have vested within nine (9) months following the Date of
Termination for death or disability shall accelerate and become
fully vested and exercisable on the Date of Termination for
death or disability, and shall remain exercisable for a period
ending on the normal expiration date specified in the option
agreements.
4.4.3. In the event the Employment period is terminated by the Company
pursuant to Section 4.2.1 hereof, or the Employment Period is
terminated by Employee pursuant to Section 4.3.2 hereof, the
Company shall have no obligation to pay any severance pay to
Employee. The Company shall, however, be obligated to pay to
Employee (or executors, administrators or assigns, as the case
may be) all unpaid salary,
<PAGE> 10
benefits and bonuses (if any) accrued through the date of
termination and shall provide such other benefits as may be
required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the employment
Period pursuant to Section 4.2 or 4.3.1, the Company shall provide
Employee, Employee's spouse or domestic partner and children, if any,
with such normal medical insurance, on the terms and to the extent
generally provided by the Company to its other senior management
employees of the level comparable to Employee, for a period of six (6)
months from the date of the termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
4.6.1. The term "cause" shall mean those acts identified in Section
2924 of the California Labor Code, as that section exists on
October 1, 1997, to wit, any willful breach of duty by the
Employee in the course of his employment, or in case of his
habitual neglect of his duty or continued incapacity to perform
it.
4.6.2. The term "good reason" shall mean the occurrence of one or more
of the following events without Employee's express written
consent (I) removal of Employee from the position and
responsibilities as set forth under Section 2 above; (ii) a
material reduction by the company in the kind or level of
employee benefits to which Employee is entitled immediately
prior to such reduction with the result that Employee's overall
benefit package is significantly reduced; (iii) the relocation
of Employee to a facility or a location outside of California;
(iv) a change in the control of the Company, or (v) any
material breach by the Company of any material provision of
this Agreement which
<PAGE> 11
continues uncured for thirty (30) days following written notice
thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which results in
Employee being absent from the performance of his duties with
the Company on a full-time basis for a period of six (6)
consecutive months. The existence or cessation of a physical or
mental illness which renders Employees absent from the
performance of his duties on a full-time basis shall, if
disputed by the Company or Employee, be conclusively determined
by written opinions rendered by two qualified physicians, one
selected by Employee and one selected by the Company. During
the period of absence, but not beyond the expiration of the
Employment Period, Employee shall be deemed to be on disability
leave of absence, with his compensation paid in full. During
the period of such disability leave of absence, the Board of
Directors may designate an interim officer with the same title
and responsibilities of Employee on such terms, as it deems
proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate pursuant
to the terms of this Agreement shall be governed solely by the terms
of the underlying plan documents and by applicable law, and nothing in
this Agreement shall impair the Company's right to amend, modify,
replace, and terminate any and all such plans in its sole discretion
as provided by law. This Agreement is for the sole benefit of Employee
and the Company, and is not intended to create an employee benefit
plan or to modify the terms of any of the Company's existing plans.
5. MISCELLANEOUS
<PAGE> 12
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted by law, any
dispute, or claim or controversy of any kind (including but not
limited to tort, contract, and statue) arising under, in connection
with, or relating to this Agreement or Employee's employment, shall be
resolved exclusively by binding arbitration in Los Angeles County,
California in accordance with the commercial rules of the American
Arbitration Association then in effect. The Company and Employees
agree to waive any objection to personal jurisdiction or venue in any
forum located in Los Angeles County California. No claim, lawsuit or
action of any kind may be filed by either party to this Agreement
except to compel arbitration or to enforce an arbitration award;
arbitration is the exclusive dispute resolution mechanism between the
parties hereto. Judgment may be entered on the arbitrator's award in
any court having Jurisdiction.The validity; interpretation, effect and
enforcement of this Agreement shall be governed by the laws of the
State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and shall be
binding upon the successors and assigns shall specifically assume this
Agreement. Since this agreement is based upon the unique abilities of,
and the Company's personal confidence in Employee, Employee shall have
no right to assign this Agreement or any of his rights hereunder
without the prior written consent of the Company.
5.3 SEVERABILITY. If any provision of this Agreement shall be found
invalid, such findings shall not effect the validity of the other
provisions hereof and the invalid provisions shall be deemed to have
been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure of any
party to exercise any
<PAGE> 13
right granted to it hereunder shall not operate or be construed as the
waiver of any subsequent breach by such other party nor the waiver of
the right to exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans referred to
in Section 5, contains the entire agreement of the parties. It may not
be changed orally but only by an agreement in writing signed by the
parties.
5.6 NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be personally served or sent by United States
mail, and shall be deemed to have been given when personally served or
two days after having been deposited in the United States mail,
registered or certified mail, return receipt requested, with
first-class postage prepaid and properly addressed as follows. For the
purpose hereof, the addresses of the parties hereto (until notice of a
change thereof is given as provided in this Section 5.6) shall be as
follows:
If to Employee:
Marcia Mazria
(omitted)
Santa Monica, CA (omitted)
If to the Company:
Wareforce Incorporated
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are for the
convenience only and shall not affect the construction hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from time to
time, and without charge to the other
<PAGE> 14
parties, take such additional actions and execute, deliver and file
such additional instruments as may be reasonably required to give
effect to the transactions contemplated hereby.
5.9. ATTORNEYS' FEES. The trier of any dispute between the parties in
connection with this agreement shall have the power (but not the
obligation) to award the party (if any) determined by such trier to
be the prevailing party all or any part os such party's attorneys'
fees and costs.
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original but
all, which together shall constitute one and the same instrument.
5.11. SEPARATE COUNSEL. The Company has been represented by counsel in the
negotiation and execution of this Agreement and has relied on such
counsel with respect to any matter relating hereto. The Employee has
been invited to have his own counsel review and negotiate this
Agreement and Employee has either obtained has either obtained his
own counsel or has elected not to obtain counsel.
5.12. INDEMNIFICATION. The Company shall provide to the Employee insurance
coverage under its Director and Officer's Insurance and General
Liability, and Employment Practices policies to the same extent as it
provides to all other similar employees of the Employee's title and
position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" "COMPANY"
<PAGE> 15
WAREFORCE INCORPORATED
a California corporation
/s/Marcia Mazria By: /s/ Dan Ricketts
- ---------------- ----------------
Marcia Mazria Title: General Counsel
<PAGE> 1
Exhibit 10.17
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed and effective as of the 1st
day of May, 1999, by and between KENNETH SEARL an individual ("Employee"), and
WAREFORCE INCORPORATED a California corporation ("Wareforce"), with reference to
the following facts:
Employee is an individual possessing unique management and executive talents of
value to Wareforce, and Wareforce's parent company, Wareforce.com, Inc.
("Wareforce.com") (collectively the "Companies").
The Companies desire to employ Employee as a Vice President of Wareforce, and as
a Vice President of Wareforce.com, Inc. ("Wareforce.com") and Employee desires
to accept such employment, all on the terms and conditions set forth in this
Agreement.
AGREEMENT
In consideration of the foregoing recitals and of the covenants and agreements
herein, the parties agree as follows:
1. The Companies hereby engage Employee to perform the duties and render the
services set forth in Sections 2 for a period commencing on May 1, 1999
(the "Start Date") and ending on the third anniversary of such date, (the
"Employment Period") and Employee hereby accepts said employment and agrees
to perform such services during the Employment Period. Unless this
Agreement is terminated pursuant to Section 4 or unless either party gives
the other written notice to the contrary at least one (1) month prior to an
expiration date, this Agreement, together with any changes which have
occurred during the employment period then expiring, shall automatically
renew at the end of an Employment Period for an additional one (1) year
employment period.
2.1. For purposes of determining seniority, benefit eligibility and the
like, Employee's original date of hire with Kennsco, Inc. shall be
used.
<PAGE> 2
2. DUTIES
2.1. VICE PRESIDENT OF WAREFORCE.COM AND VICE PRESIDENT OF WAREFORCE'S
KENNSCO SERVICES DIVISION: Performing work of major importance to the
Companies, with the primary focus being the profitable management and
profitable growth of the Companies as a whole. During the Employment
Period, Employee shall devote his full business time and attention to
performing his duties as Vice President of Wareforce.com and Vice
President of Wareforce's Kennsco Service Division (the Division). As
such, Employee shall manage the operations of the Division in a manner
consistent with Employee's management of Kennsco Inc. prior to the
closing of the Asset Purchase Agreement dated February 4, 1999 by and
between Wareforce and Kennsco, Inc. (the "Purchase Agreement). In such
capacity his responsibilities shall include 1) manage the overall
direction coordination, and evaluation of the non-internal (i.e., the
Companies' internal MIS Department and Electronic Commerce
Departments) technical services areas of the Division; 2) assist the
CEO in formulating and administering Companies policies relating to
the sale and provision of technical services to customers for the
Companies; 3) review and analyze the activities and operations of the
Division to define and to track its progress toward achieving its
goals and objectives in his related functional areas; 4) carry out
supervisory responsibilities in accordance with the Companies
policies, and applicable laws; 5) interview, hire and train managers
and staff in his functional areas; 6) plan, assign and direct the work
of managers and staff, appraise their performance, and reward and
discipline them, and address their complaints in his functional areas;
7) submit all required documentation in a timely and accurate manner.
The above description of duties is non-exhaustive. In all manner until
directed otherwise by the Companies' respective Boards of Directors,
Employee understands and agrees that his primary responsibility,
irregardless of anything
<PAGE> 3
contained herein to the contrary, shall be the successful operation of
the Division specifically. Employee shall work out of the Division's
Plymouth, Minnesota location and shall report to Wareforce's Chief
Executive Officer or such executive officer of any of the Companies as
may be directed by the Boards of Directors of the Companies. Employee
recognizes that the Boards of Directors of any of the Companies may be
required under their fiduciary duties and to their stockholders to
eliminate such position or to appoint a different person as such
officer of any of the Companies. The parties agree however, that any
such elimination or replacement of Employee by any of the Companies,
other than pursuant to Section 4.2.1 or 4.3.2. hereof, shall
constitute a termination of Employee's employment hereunder by any of
the Companies, as the case may be, without cause. However, Employee
understands and agrees that the Division may in the future, and in
consultation with Employee, merge or otherwise integrate all of the
relevant technical services of the Wareforce.com group of companies
under one entity and such merger or integration may require the
elimination of Wareforce or the Division in favor a successor entity.
However, Employee understands and agrees that such a merger or
integration shall be for the purposes of simplifying Wareforce.com's
technical services offerings and is not for the purpose of eliminating
or otherwise changing the Employee's functional duties or
responsibilities and shall not be considered a termination of
Employee's employment hereunder.
2.2. CHANGE OF CONTROL. If any of the Companies or a significant portion
thereof is sold or merged or undergoes a change of control transaction
(as defined in the Wareforce.com Stock Option Agreement, this
Agreement shall survive consummation of such transaction and shall
continue in effect for the remainder of the Employment Period, but
Employee shall serve as an officer of the entity which succeeds to the
business or a substantial portion of the business of any of the
Companies, and is
<PAGE> 4
such case shall bear a suitable title and perform the duties and
functions of such office of such publicly traded or privately held
successor, consistent with those customarily performed by an officer
of such a unit, division or entity comparable to the then business of
the Companies, unit, division or entity. Employee may be required to
accept greater or lesser responsibility by any successor, and agrees
to fully cooperate and assist in any resulting transition for up to
the remainder of the Employment Period; and any adjustments required
of Employee to complete the transition to any successor, unit,
division or entity, shall not violate this Agreement so long as "good
reason" does not arise under Sections 4.6.2(ii), (iii) or (v). This
Agreement shall apply to the automatic modification in duties
resulting from such transaction as set forth above, however,
notwithstanding the foregoing, Employee may exercise any "good reason"
rights he may have under Section 4.6.2(iv).
2.3. CONFLICT OF INTEREST. Employee agrees that during the term of
employment Employee will not, directly or indirectly, compete with the
Companies in any way, or usurp an opportunity of the Companies in any
way, nor will employee act as an officer, director, employee,
consultant, shareholder, lender or agent of any entity which is
engaged in any business in which the Companies are now engaged or in
which the Companies become engaged during the term of employment. The
Companies are now engaged in the business of reselling computer
hardware, software and peripherals, primarily to corporate and
governmental accounts, and in the business of selling computer systems
consulting, help and maintenance services, also primarily to
corporate, education and governmental accounts. The Companies are not
now engaged in the business of manufacturing computers or their
primary components, nor is it now in the business of reselling
computers to non-end users. The Companies may become engaged in the
business of final assembly of computers and may become engaged in the
business of catalog, mail-order or Internet sales of computer
<PAGE> 5
hardware, software and peripherals. Employee also agrees that during
the term of employment, Employee will not, directly or indirectly,
whether on his own behalf or on behalf of another, offer employment or
a consulting assignment to any of the Companies employee, nor will
Employee, nor Employee's employer, directly or indirectly, whether on
his own behalf or on behalf of another, actually employ or grant a
consulting assignment to any of the Companies' employees. Employee
also agrees that during the term of employment Employee will not,
directly or indirectly, whether on his own behalf or on behalf of
another, contact or solicit any of Companies' clients to do business
with any entity other than the Companies.
2.4. During the term of employment with the Companies, Employee may have
access to and become acquainted with information of a confidential,
proprietary or secret nature which is or may be either applicable or
related to present or future business of the Companies, its research
and development, or the business of its customers. For example, trade
secret information includes, but is not limited to devices, secret
inventions, processes and compilations of information, records,
specifications and information concerning customers or vendors.
Employees shall not disclose any of the above-mentioned trade secrets,
directly or indirectly or use them in any way, either during the term
of this agreement of at any time thereafter, except as required in the
course of employment with the Companies.
2.5. Employee agrees that all customers of the Companies, for which the
Employee has or will provide services during the Employee's employment
by the Companies, and all prospective customers from whom the Employee
has solicited business while in the employ of the Companies, shall be
solely the customers of the Companies.
2.6. Employee agrees that, for a period of twelve (12) months immediately
following the termination of employment with
<PAGE> 6
the Companies, Employee shall neither directly nor indirectly solicit
business as to products or services competitive with those of the
Companies, from any of the Companies' customers with whom the Employee
had contact within twelve (12) months prior to the Employee's
termination.
2.7. Employee further agrees that for a period of twelve (12) months after
termination of employment, Employee will not directly or indirectly
induce or solicit any of Companies' employees to leave their
employment.
3. COMPENSATION. As compensation for his services to be performed hereunder,
Wareforce shall provide Employee with the following compensation and
benefits:
3.1 BASE SALARY. Employee's base salary shall be $225,000.00 per year,
payable in accordance with Wareforce's payroll practices as in effect
from time to time, and subject to such withholding as is required by
law.
3.2 BONUS. Employee shall receive an annual bonus should the Division
achieve at least 90% of the goals set by the Company's Board of
Directors for the Employee for the year. Goals and bonus amount shall
developed by the Board of Directors within ninety (90) days from the
Start Date. If any bonus is declared or paid, it shall be subject to
such withholding as is required by law.
3.3 Additionally, if the Division generates Earnings Before Interest,
Taxes, Depreciation and Amortization in the twelve (12) month period
commencing March 1, 1999 of at least Six Hundred Thirty Thousand
($630,000) dollars, Wareforce shall pay to the Employee a bonus of Two
Hundred Ten Thousand ($210,000) dollars, payable in twelve (12) equal
monthly installments beginning thirty (30) days following the end of
such annual period. Such bonus shall be calculated by the Wareforce's
accountant in accordance with generally accepted accounting principles
consistently applied, but without any charge being made to the
Division by Wareforce, its parent or
<PAGE> 7
any affiliate for administrative or overhead charges. Such bonus, if
any, shall be subject to such withholding as is required by law.
3.4 LEASE COMMISSION.
3.4.1 For three (3) years subsequent to the date of execution of the
Purchase Agreement, to be paid quarterly, an amount equal to
Fifty Percent (50%) of the gross margin after deducting
commissions and direct administrative costs, for lease
transactions recorded by the Division on new and/or renewal
schedules from customer leases of Kennsco as of the date of
execution of the Purchase Agreement. 3.4.2 Employee specially
agrees that there are no other lease commissions owing to him
at the time of the execution of this Agreement.
3.3. BENEFITS.
3.3.1. VACATION. Employee shall be entitled to vacation time as been
accrued each pay period since his date of first hire, less any
vacation taken in such amounts and under such conditions as
normally afforded to the Companies' executives. In the event
Employee does not use such vacation, he shall receive, upon
termination of the Employment Period, vacation pay for all
unused vacation calculated as having accrued at the applicable
base salary for each relevant period of his employment.
However, Employee shall endeavor to take vacation time in the
year in which it is allocated to him.
3.3.2. BUSINESS EXPENSES. Wareforce shall reimburse Employee for
reasonable business expenses incurred by Employee in the course
of performing services for the Companies and in compliance with
procedures established from time to time by the Companies. This
reimbursement shall occur on a monthly basis, and is subject to
Employee providing original
<PAGE> 8
documentation in support of all business expenses reimbursement
sought.
3.3.3. STOCK OPTIONS. The Companies shall grant Employee incentive
stock options on the same terms as granted to its senior
executives (excluding the Companies' Chief Executive Officer).
The issuance of options is subject to approval by the Companies
Boards of Directors Compensation Committees.
3.3.4. OTHER BENEFITS. Wareforce shall provide Employee with
employment benefits as 401(k) participation, medical insurance
and disability insurance, on the terms and to the extent
generally provided by the Companies to its executive employees.
3.4 OTHER PERSONS. The parties understand that other officers and
employees may be afforded payments and benefits and employment
agreements which differ from those of Employee in this agreement; but
Employee's compensation and benefits shall be governed solely by the
terms of this Agreement, which shall supersede all prior
understandings or agreements between the parties concerning terms and
benefits of employment of Employee with the Companies. Other officers
or employees shall not become entitled to any benefits under this
Agreement.
4. TERMINATION.
4.1. TERMINATION BY REASON OF PERMANENT DISABILITY. The Employment Period
shall terminate upon the permanent disability (as defined in Section
4.6.3 below) of Employee.
4.2. TERMINATION BY COMPANIES
4.2.1. The Companies may terminate the Employment Period for "cause"
by seven (7) days advance written notice to Employee. However,
no such advance written notice shall be given if the Companies
<PAGE> 9
determine that the Companies or a person would suffer
irreparable harm should the Employee be given notice.
4.2.2. The Companies, after the first twelve (12) months of the
Employment Period, may terminate the Employment Period for any
other reason, with cause other than those described in Section
4.6.1 or without cause, by thirty (30) days advance written
notice.
4.3 TERMINATION BY EMPLOYEE
4.3.1. Employee may terminate the Employment Period for "good reason"
(as defined in section 4.6.2 below) at any time by written
notice to the company.
4.3.2. Employee may terminate the Employment Period for any other
reason by thirty (30) days advance written notice to the
Companies.
4.4 SEVERANCE PAY
4.4.1 In the event the Employment Period is terminated by the
Companies for any reason other than pursuant to Section 4.2.1
or Section 4.3.2 hereof or if the Employment Period is
terminated because of a permanent disability of Employee
pursuant to Section 4.1, upon the effectiveness of any such
termination, the Companies shall be obligated to pay to the
employee (or his executors, administrators or assigns, as the
case may be) all unpaid salary, benefits and bonuses (if any)
accrued through the date of effectiveness of such termination
and, in addition, a cash severance payment equal to twelve (12)
month's total base salary at the rates set forth herein, and
such other benefits as may be required by law.
<PAGE> 10
4.4.2 In the event the Employment period is terminated by the
Companies pursuant to Section 4.2.1 hereof, or the Employment
Period is terminated by Employee pursuant to Section 4.3.2
hereof, the Companies shall have no obligation to pay any
severance pay to Employee. The Companies shall, however, be
obligated to pay to Employee (or executors, administrators or
assigns, as the case may be) all unpaid salary, benefits and
bonuses (if any) accrued through the date of termination and
shall provide such other benefits as may be required by law.
4.5 TERMINATION BENEFITS. In the event of termination of the employment
Period pursuant to Section 4.2 or 4.3.1, the Companies shall provide
Employee, Employee's spouse or domestic partner and children, if any,
with such normal medical insurance, on the terms and to the extent
generally provided by the Companies to its executive employees on the
level comparable to Employee, for a period of three (3) months from
the date of the termination of the Employment Period.
4.6 CERTAIN DEFINITIONS. For purposes of this Agreement:
4.6.1. The term "cause" shall mean those acts identified in Section
2924 of the California Labor Code, as that section exists on
October 1, 1997, to wit, any willful breach of duty by the
Employee in the course of his employment, or in case of his
habitual neglect of his duty or continued incapacity to perform
it.
4.6.2. The term "good reason" shall mean the occurrence of one or more
of the following events without Employee's express written
consent (I) removal of Employee from the position and
responsibilities as set forth under Section 2 above; (ii) a
material
<PAGE> 11
reduction by the company in the kind or level of employee
benefits to which Employee is entitled immediately prior to
such reduction with the result that Employee's overall benefit
package is significantly reduced; (iii) the relocation of
Employee to a facility or a location outside of Minneapolis,
Minnesota; (iv) a change in the control of any of the
Companies, or (v) any material breach by the Companies of any
material provision of this Agreement which continues uncured
for thirty (30) days following written notice thereof.
4.6.3. The term "permanent disability" shall mean Employee's
incapacity due to physical or mental illness, which results in
Employee being absent from the performance of his duties with
the Companies on a full-time basis for a period of six (6)
consecutive months. The existence or cessation of a physical or
mental illness which renders Employees absent from the
performance of his duties on a full-time basis shall, if
disputed by the Companies or Employee, be conclusively
determined by written opinions rendered by two qualified
physicians, one selected by Employee and one selected by the
Company. During the period of absence, but not beyond the
expiration of the Employment Period, Employee shall be deemed
to be on disability leave of absence, with his compensation
paid in full. During the period of such disability leave of
absence, the Board of Directors may designate an interim
officer with the same title and responsibilities of Employee on
such terms, as it deems proper.
4.7. EMPLOYEE BENEFIT PLANS
Any employee benefit plans in which employee may participate pursuant
to the terms of this Agreement shall be governed solely by the terms
of the underlying plan
<PAGE> 12
documents and by applicable law, and nothing in this Agreement shall
impair the Companies' right to amend, modify, replace, and terminate
any and all such plans in its sole discretion as provided by law. This
Agreement is for the sole benefit of Employee and the Companies, and
is not intended to create an employee benefit plan or to modify the
terms of any of the Companies' existing plans.
5. MISCELLANEOUS
5.1 ARBITRATION/GOVERNING LAW. To the fullest extent permitted
bylaw, any dispute, or claim or controversy of any kind
(including but not limited to tort, contract, and statue)
arising under, in connection with, or relating to this
Agreement or Employee's employment, shall be resolved
exclusively by binding arbitration in Minneapolis, Minnesota in
accordance with the commercial rules of the American
Arbitration Association then in effect. The Companies and
Employees agree to waive any objection to personal jurisdiction
or venue in any forum located in Minneapolis, Minnesota. No
claim, lawsuit or action of any kind may be filed by either
party to this Agreement except to compel arbitration or to
enforce an arbitration award; arbitration is the exclusive
dispute resolution mechanism between the parties hereto.
Judgment may be entered on the arbitrator's award in any court
having Jurisdiction. The validity, interpretation, effect and
enforcement of this Agreement shall be governed by the laws of
the State of California.
5.2 ASSIGNMENT. This agreement shall inure to the benefit of and
shall be binding upon the successors and assigns shall
specifically assume this Agreement. Since this agreement is
based upon the unique abilities of, and the Companies' personal
confidence in Employee, Employee shall have no right to assign
this Agreement or any of his rights hereunder without the prior
written consent of the Companies.
<PAGE> 13
5.3 SEVERABILITY. If any provision of this Agreement shall be found
invalid, such findings shall not effect the validity of the
other provisions hereof and the invalid provisions shall be
deemed to have been severed herefrom.
5.4 WAIVER OF BREACH. The waiver by any party of the breach of any
provision of this Agreement by the other party or the failure
of any party to exercise any right granted to it hereunder
shall not operate or be construed as the waiver of any
subsequent breach by such other party nor the waiver of the
right to exercise any such right.
5.5 ENTIRE AGREEMENT. This instrument, together with the plans
referred to in Section 5, contains the entire agreement of the
parties. It may not be changed orally but only by an agreement
in writing signed by the parties.
5.6 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally served or sent by
United States mail, and shall be deemed to have been given when
personally served or two days after having been deposited in
the United States mail, registered or certified mail, return
receipt requested, with first-class postage prepaid and
properly addressed as follows. For the purpose hereof, the
addresses of the parties hereto (until notice of a change
thereof is given as provided in this Section 5.6) shall be as
follows:
If to Employee:
Kenneth Searl
(omitted)
Wayzata, MN 55391
If to the Companies:
Wareforce.com, Inc.
<PAGE> 14
2361 Rosecrans Avenue, Suite 155
El Segundo, California 90245
Attention: General Counsel
5.7. HEADINGS. The paragraph and subparagraph headings herein are for the
convenience only and shall not affect the construction hereof.
5.8. FURTHER ASSURANCES. Each of the parties hereto shall, from time to
time, and without charge to the other parties, take such additional
actions and execute, deliver and file such additional instruments as
may be reasonably required to give effect to the transactions
contemplated hereby.
5.9. ATTORNEYS' FEES. In the event any party hereto commences arbitration
or legal action in connection with this Agreement, the prevailing
party shall be entitled to its attorneys' fees, costs and expenses
reasonably incurred in such action, and the amount thereof shall be
included in any judgment or award granted under Section 5.1.
5.10. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original but
all, which together shall constitute one and the same instrument.
5.11. SEPARATE COUNSEL. The Companies have been represented by counsel in
the negotiation and execution of this Agreement and has relied on
such counsel with respect to any matter relating hereto. The Employee
has been invited to have his own counsel review and negotiate this
Agreement and Employee has either obtained has either obtained his
own counsel or has elected not to obtain counsel.
5.12. INDEMNIFICATION. The Companies shall provide to the Employee
insurance coverage under their Director and Officer's Insurance and
General Liability, and Employment Practices policies to the same
extent as it provides to
<PAGE> 15
all other similar employees of the Employee's title and position.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the
day and year first above written.
"EMPLOYEE" WAREFORCE INCORPORATED
a California corporation
/s/Kenneth Searl By: /s/Dan Ricketts
- ---------------- ---------------
Kenneth Searl Title: General Counsel
---------------
WAREFORCE.COM, INC.
a Nevada corporation
By: Dan Ricketts
------------
Title: General Counsel
---------------
<PAGE> 1
EXHIBIT 10.18
WAREFORCE.COM, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
1. PURPOSE OF THE PLAN
This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of WAREFORCE.COM, Inc., a Nevada corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation. This Plan subsumes the Wareforce
Incorporated 1996 Stock Option/Stock Issuance Plan and all outstanding options
granted or other obligations under said plan are hereby assumed within this
Plan. References herein to the Corporation shall include all subsidiaries of the
Corporation and references to employee shall include employees of any subsidiary
corporation.
Capitalized terms shall have the meanings assigned to such terms in the attached
Appendix.
2. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued
<PAGE> 2
shares of Common Stock directly, either through the immediate purchase of
such shares or as a bonus for services rendered the Corporation (or any
Parent or Subsidiary, and
(iii) the Automatic Option Grant Program under which Eligible Directors shall
automatically receive option grants at periodic intervals to purchase
shares of Common Stock.
B. The provisions of Articles One and Six shall apply to all three equity
programs under the Plan and shall accordingly govern the interests of
all persons under the Plan.
3. ADMINISTRATION OF THE PLAN
A. Until the Section 12(g) Registration Date, both the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the
Board. From and after such Section 12(g) Registration Date, the
Discretionary Option Grant and Stock Issuance Programs shall be
administered as described below.
<PAGE> 3
B. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs
with respect to Section 16 Insiders. No non-employee Board member
shall be eligible to serve on the Primary Committee if such individual
has, during the twelve (12)-month period immediately preceding the
date of his or her appointment to the Primary Committee or (if
shorter) the period commencing with the Section 12(g) Registration
Date and ending with the date of his or her appointment to the Primary
Committee, received an option grant or direct stock issuance under the
Plan or any other stock option, stock appreciation, stock bonus or
other stock plan of the Corporation (or any Parent or Subsidiary),
other than pursuant to the Automatic Option Grant Program.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time
terminate the functions of any Secondary Committee and reassume all
powers and authority previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority to establish
such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance
Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem
necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative functions under the Plan shall be final
and binding on all parties who have an interest in the Discretionary
Option Grant or Stock Issuance Program under its jurisdiction or any
option or stock issuance thereunder.
<PAGE> 4
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee. No
member of the Primary Committee or the Secondary Committee shall be
liable for any act or omission made in good faith with respect to the
Plan or any option grants or stock issuances under the Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no
Plan Administrator shall exercise any discretionary functions with
respect to option grants made thereunder.
4. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
<PAGE> 5
(i) Employees,
(ii) non-employee members of the Board (other than those serving as members of
the Primary Committee from and after the Section 12(g) Registration Date)
or the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option
grants under the Discretionary Option Grant Program, which eligible
persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an
Incentive Option or a Non-Statutory Option, the time or times at which
each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the
option is to remain outstanding and (ii) with respect to stock
issuances under the Stock Issuance Program, which eligible persons are
to receive stock issuances, the time or times when such issuances are
to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock
Issuance Program.
D. The individuals eligible to participate in the Automatic Option Grant
Program shall be (i) those individuals who are first elected or
appointed non-employee Board
<PAGE> 6
members on or after the Automatic Option Grant Program Effective Date
and (ii) those individuals who continue to serve as non-employee Board
members after one or more Annual Shareholders Meetings held after the
Automatic Option Grant Program Effective Date. A non-employee Board
member who has previously been in the employ of the Corporation (or
any Parent or Subsidiary) shall not be eligible to receive an initial
option grant under the Automatic Option Grant Program on the Automatic
Option Grant Program Effective Date or (if later) at the time he or
she first becomes a non-employee Board member, but such individual
shall be eligible to receive periodic option grants under the
Automatic Option Grant Program upon his or her continued service as a
non-employee Board member following one or more Annual Shareholders
Meetings.
5. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by
the Corporation on the open market. The maximum number of shares of
Common Stock which may be issued over the term of the Plan shall
initially not exceed one million shares.
<PAGE> 7
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of each
calendar year during the term of the Plan, beginning with the 1999
calendar year, by an amount equal to one percent (1%) of the shares of
Common Stock outstanding on December 31 of the immediately preceding
calendar year. No Incentive Options may be granted on the basis of the
additional shares of Common Stock resulting from such annual
increases.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock
issuances for more than 100,000 shares of Common Stock in the
aggregate per calendar year, beginning with the 1999 calendar year.
D. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full
or (ii) the options are canceled in accordance with the
cancellation-re-grant provisions of Article Two. All shares issued
under the Plan, whether or not those shares are subsequently
repurchased by the Corporation pursuant to its repurchase rights under
the Plan, shall reduce on a share-for-share basis the number of shares
of Common Stock available for subsequent issuance under the Plan. In
addition, should the exercise price of an option under the Plan be
paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the
exercise of an option or the vesting of a stock issuance under the
Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for
which the option is exercised or which vest under the stock issuance,
and not by the net number of shares of
<PAGE> 8
Common Stock issued to the holder of such option or stock issuance.
E. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the maximum number and/or
class of securities issuable under the Plan, (ii) the maximum number
and/or class of securities for which the share reserve is to increase
automatically each year, (iii) the number and/or class of securities
for which automatic option grants are to be made subsequently per
Eligible Director under the Automatic Option Grant Program, and (iv)
the number and/or class of securities and the exercise price per share
in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and
conclusive. In no event shall any such adjustments be made in
connection with the conversion of one or more outstanding shares of
the Corporation's preferred stock into shares of Common Stock.
<PAGE> 9
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
1. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price
1. The exercise price per share shall be fixed by the Plan Administrator but
shall not be less than eighty-five percent (85%) of the Fair Market Value
per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the option
and shall, subject to the provisions of Section I of Article Six and the
documents evidencing the option, be payable in cash, check or promissory
note made payable to the Corporation, but only to the extent approved by
the Plan Administrator. Should the Corporation's outstanding Common Stock
be registered under Section 12(g) of the 1934 Act at the time the option is
exercised, then the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite period necessary to avoid
a charge to the Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares, through a special
sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and
<PAGE> 10
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable Federal, state and
local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver
the certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at such
time or times, during such period and for such number of shares as
shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term
in excess of ten (10) years measured from the option grant date.
<PAGE> 11
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any options held by
the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's cessation of Service
for any reason shall remain exercisable for such period of time thereafter
as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option, but no such option shall be exercisable
after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the optionee at the time of
death may be exercised subsequently by the personal representative of the
Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws
of descent and distribution.
(iii) During the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for
which the option is exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of the applicable exercise period or (if
earlier) upon the expiration of the option term, the option shall terminate
and cease to be outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be outstanding to
the extent the option is not otherwise at that time exercisable for vested
shares.
(iv) Should the Optionee's Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and
cease to be outstanding.
(v) In the event of an Involuntary Termination following a Corporate
Transaction, the provisions of Section III of this Article Two shall govern
the period for which the outstanding
<PAGE> 12
options are to remain exercisable following the Optionee's cessation of
Service and shall supersede any provisions to the contrary in this section.
2. The Plan Administrator shall have the discretion, exercisable either at the
time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain exercisable
following the Optionee's cessation of Service from the period otherwise in
effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the expiration
of the option term, and/or
(ii) permit the option to be exercised, during the applicable post-Service
exercise period, not only with respect to the number of vested shares of
Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no shareholder
rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion to
grant options that are exercisable for unvested shares of Common Stock
under the Plan. Should the Optionee cease Service while holding such
unvested shares, the Corporation shall have the right to repurchase,
at the exercise price paid per share, any or all of those unvested
shares. The terms and conditions upon which such repurchase right
shall be exercisable (including the period and procedure for exercise
and the appropriate vesting schedule for the purchased shares)
<PAGE> 13
shall be established by the Plan Administrator and set forth in the
agreement evidencing such repurchase right.
F. First Refusal Rights. Until such time as the Corporation's outstanding
shares of Common Stock are first registered under Section 12(g) of the
1934 Act, the Corporation shall have the right of first refusal with
respect to any proposed sale or other disposition by the Optionee (or
any successor in interest by reason of purchase, gift or other
transfer) of any shares of Common Stock issued under this
Discretionary Option Grant Program. Such right of first refusal shall
be exercisable in accordance with the terms and conditions established
by the Plan Administrator and set forth in the agreement evidencing
such right.
G. Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the
laws of descent and distribution following the Optionee's death.
However, a Non-Statutory Option may, in connection with the Optionee's
estate plan, be assigned in whole or in part during the Optionee's
lifetime to one or more members of Optionee's immediate family or to a
trust established exclusively for one or more such family members. The
assigned portion may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the
same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate.
<PAGE> 14
2. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or
Subsidiary) may for the first time become exercisable as Incentive
Options during any one (1) calendar year shall not exceed the sum of
One Million Dollars ($1,000,000). To the extent the Employee holds two
(2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied
on the basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the exercise price per share shall
not be less than one hundred ten percent (110%) of the Fair Market
Value per share of Common Stock on the option grant date, and the
option term shall not exceed five (5) years measured from the option
grant date.
<PAGE> 15
3. CORPORATE TRANSACTION/CHANGE OF CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the
time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, an
outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either
to be assumed by the successor corporation (or parent thereof) or to
be replaced with a comparable option to purchase shares of the capital
stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the
unvested option shares at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting
schedule applicable to such option or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to
be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
<PAGE> 16
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent
thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction. Appropriate adjustments shall also be
made to (i) the number and class of securities available for issuance
under the Plan following the consummation of such Corporate
Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for
such securities shall remain the same and (iii) the maximum number of
securities and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year.
E. Any options which are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time, shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights
which do not otherwise terminate at the time of the Corporate
Transaction shall automatically terminate and the shares of Common
Stock subject to those terminated rights shall immediately vest in
full) in the event the Optionee's Service should subsequently
terminate by reason of an Involuntary Termination within eighteen (18)
months following the effective date of such Corporate Transaction. Any
options so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or
(ii) the
<PAGE> 17
expiration of the one (1)-year period measured from the effective date
of the Involuntary Termination.
F. The Plan Administrator shall have the discretion to grant options with
terms different from those in effect under this Section III in
connection with a Corporate Transaction.
G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option
remains outstanding, to (i) provide for the automatic acceleration of
one or more outstanding options (and the automatic termination of one
or more outstanding repurchase rights with the immediate vesting of
the shares of Common Stock subject to those rights) upon the
occurrence of a Change in Control or (ii) condition any such option
acceleration (and the termination of any outstanding repurchase
rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period following the effective date of such
Change in Control. Any options accelerated in connection with a Change
in Control shall remain fully exercisable until the expiration or
sooner termination of the option term.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Million
Dollars ($1,000,000) limitation is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated portion of such option
shall be exercisable as a Non-Statutory Option under the Federal tax
laws.
The outstanding options shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
<PAGE> 18
4. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Discretionary Option Grant Program
and to grant in substitution new options covering the same or different number
of shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
5. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable upon such terms
as the Plan Administrator may establish, to elect between the exercise of
the underlying option for shares of Common Stock and the surrender of that
option in exchange for a distribution from the Corporation in an amount
equal to the excess of (a) the Fair Market Value (on the option surrender
date) of the number of shares in which the Optionee is at the time vested
under the surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be effective unless it is approved by the
Plan Administrator. If the surrender is so approved, then the distribution
to which the Optionee shall be entitled may be made in shares of Common
Stock valued at Fair Market Value on the option surrender date, in cash, or
partly in shares and partly in cash, as the Plan Administrator shall in its
sole discretion deem appropriate.
<PAGE> 19
(iii) If the surrender of an option is rejected by the Plan Administrator, then
the Optionee shall retain whatever rights the Optionee had under the
surrendered option (or surrendered portion thereof) on the option surrender
date and may exercise such rights at any time prior to the later of (a)
five (5) business days after the receipt of the rejection notice or (b) the
last day on which the option is otherwise exercisable in accordance with
the terms of the documents evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more executive officers may be granted limited stock appreciation
rights with respect to their outstanding options after the Section 12(g)
Registration Date.
(ii) Upon the occurrence of a Hostile Take-Over, each such individual holding
one or more options with such a limited stock appreciation right in effect
for at least six (6) months shall have the unconditional right (exercisable
for a thirty (30)-day period following such Hostile Take-Over) to surrender
each such option to the Corporation, to the extent the option is at the
time exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (a) the Take-Over Price of
the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (b) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
(iii) Neither the approval of the Plan Administrator nor the consent of the
Board shall be required in connection with such option surrender and cash
distribution.
<PAGE> 20
(iv) The balance of the option (if any) shall continue in full force and effect
in accordance with the documents evidencing such option.
<PAGE> 21
ARTICLE THREE
STOCK ISSUANCE PROGRAM
1. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement, which
complies with the terms specified below.
A. Purchase Price
1. The purchase price per share shall be fixed by the Plan Administrator, but
shall not be less than eighty-five percent (85%) of the Fair Market Value
per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four, shares of Common
Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or Subsidiary).
B. Vesting Provisions
1. Shares of Common Stock issued under the Stock Issuance Program may, in the
discretion of the Plan Administrator, be fully and immediately vested upon
issuance or may vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives.
The elements of the vesting schedule applicable to any unvested shares of
Common Stock issued under the Stock Issuance Program, namely:
<PAGE> 22
(i) the Service period to be completed by the Participant or the performance
objectives to be attained,
(ii) the number of installments in which the shares are to vest,
(iii) the interval or intervals (if any) which are to lapse between
installments, and
(iv) the effect which death, Permanent Disability or other event designated by
the Plan Administrator is to have upon the vesting schedule, shall be
determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
Any new, substituted or additional securities or other property (including
money paid other than as regular cash dividend) which the Participant may have
the right to receive with respect to the Participant's unvested shares of Common
Stock by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant's unvested shares of Common Stock and (ii) such
escrow arrangements as the Plan administrator shall deem appropriate.
The Participant shall have full shareholder rights with respect to any
shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
Should the Participant cease to remain in Service while holding one or more
unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be obtained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further shareholder rights with respect
<PAGE> 23
to those shares. To the extent the surrendered shares were previously issued to
the Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
2. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All outstanding cancellation rights under the Stock Issuance Program
shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in
the event of any Corporate Transaction, except to the extent (i) those
cancellation rights are assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii)
such accelerated vesting is precluded by other limitations imposed in
the Stock Issuance Agreement.
B. Any cancellation rights that are assigned in the Corporate Transaction
shall automatically terminate, and the shares of Common Stock subject
to those terminated rights shall immediately vest in full, in the
event the Participant's Service should subsequently terminate by
reason of an Involuntary Termination within eighteen
<PAGE> 24
(18) months following the effective date of such Corporate
Transaction.
C. The Plan Administrator shall have the discretion to provide for
cancellation rights with terms different from those in effect under
this Section II in connection with a Corporate Transaction.
The Plan Administrator shall have the discretion, exercisable either at the
time the unvested shares are issued or at any time while the Corporation's
cancellation right remains outstanding, to (i) provide for the automatic
termination of one or more outstanding cancellation rights and the immediate
vesting of the shares of Common Stock subject to those rights upon the
occurrence of a Change in Control or (ii) condition any such accelerated vesting
upon the subsequent Involuntary Termination of the Participant's Service within
a specified period following the effective date of such Change in Control.
3. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
<PAGE> 25
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
1. OPTION TERMS
A. Grant Dates
Option grants shall be made on the dates specified below:
1. Each individual serving as a non-employee Board member on the Automatic
Option Grant Program Effective Date shall automatically be granted at that
time a Non-Statutory Option to purchase 10,000 shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary and has not previously received a
stock option grant from the Corporation.
2. Each individual who is first elected or appointed as a non-employee Board
member at any time after the Automatic Option Grant Program Effective Date
shall automatically be granted, on the Automatic Option Grant Program
Effective Date or on the date of such initial election or appointment (as
the case may be), a Non-Statutory Option to purchase 10,000 shares of
Common Stock, provided such individual has not previously been in the
employ of the Corporation (or any Parent or Subsidiary).
3. On the date of each Annual Shareholders Meeting held after the Automatic
Option Grant Program Effective Date, each individual who is to continue to
serve as an Eligible Director after such meeting, shall automatically be
granted, a Non-Statutory Option to purchase an additional 10,000 shares of
Common Stock, provided such individual has served as a non-employee Board
member for at least six (6) months. There shall be no limit on the number
of such 10,000 share option grants any one Eligible Director may receive
over his or her period of Board service.
B. Exercise Price
<PAGE> 26
The exercise price per share shall be equal to one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the option grant date.
The exercise price shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
C. Option Term
Each option shall have a term of ten (10) years measured from the option grant
date.
D. Exercise and Vesting of Options
Each option shall be immediately exercisable for any or all of the option
shares. However, any shares purchased under the option shall be subject to
repurchase by the Corporation, at the exercise price paid per share, upon the
Optionee's cessation of Board service prior to vesting in those shares. Each
initial grant shall vest, and the Corporation's repurchase right shall lapse, in
a series of four (4) successive and equal annual installments over the
Optionee's period of continued service as a Board member, with the first such
installment to vest upon the Optionee's completion of one (1) year of Board
service measured from the option grant date. Each annual grant shall vest, and
the Corporation's repurchase right shall lapse, upon the Optionee's completion
of one (1) year of Board service measured from the option grant date.
E. Effect of Termination of Board Service
The following provisions shall govern the exercise of any options held by the
Optionee at the time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the personal
representative of the Optionee's estate or the person
<PAGE> 27
or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall have
a twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares of
Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by reason of death or
Permanent Disability, then all shares at the time subject to the option
shall immediately vest so that such option may, during the twelve
(12)-month exercise period following such cessation of Board service, be
exercised for all or any portion of those shares as fully-vested shares of
Common Stock.
(iv) In no event shall the option remain exercisable after the expiration of the
option term. Upon the expiration of the twelve (12)-month exercise period
or (if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Board service for any reason other than death
or Permanent Disability, terminate and cease to be outstanding to the
extent the option is not otherwise at that time exercisable for vested
shares.
2. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common
Stock at the time subject to such
<PAGE> 28
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the
consummation of the Corporate Transaction, each automatic option grant
shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in
Control, become fully exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for all
or any portion of such shares as fully-vested shares of Common Stock.
Each such option shall remain exercisable for such fully-vested option
shares until the expiration or sooner termination of the option term
or the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her for a period of at least six (6)
months. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate
exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to
the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option
surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted,
<PAGE> 29
immediately after such Corporate Transaction, to apply to the number
and class of securities which would have been issuable to the Optionee
in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share
under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
The grant of options under the Automatic Option Grant Program shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
The provisions of this Automatic Option Grant Program, together with the option
grants outstanding thereunder, may not be amended at intervals more frequently
than once every six (6) months, other than to the extent necessary to comply
with applicable Federal income tax laws and regulations.
3. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option Grant
Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program.
<PAGE> 30
ARTICLE FIVE
CALL RIGHT
1. PURPOSE
The purpose of this Article Five is to provide the Corporation with a
vehicle for liquidating the outstanding options under the Plan and any shares of
Common Stock actually issued under the Plan in the event a Liquidity Transaction
does not occur prior to January 1, 1999. Accordingly, in the absence of a
Liquidity Transaction before such date, the Corporation may repurchase all the
outstanding options under the Plan during a limited window period beginning
January 1, 1999.
2. TERMS AND CONDITIONS
A. Should a Liquidity Transaction not be effected prior to January 1,
1999, then the Corporation shall have the right (the "Call Right"), to
repurchase all outstanding options under the Plan upon the following
terms and conditions:
- - The Call Right may be exercised by the Corporation at any time during the
period beginning January 1, 1999 and ending January 31, 1999. The Call
Right shall, during the exercise period, be exercisable by written notice
delivered to each holder of an outstanding option under the Plan and each
holder of shares of Common Stock issued pursuant to the Plan. In no event
may the Call Right be exercised for less than the total number of
outstanding options and shares of Common Stock issued under the Plan.
- - The purchase price payable by the Corporation for each option repurchased
pursuant to the Call Right shall be equal to the number of shares of Common
Stock at the time subject to such option, whether vested or unvested,
multiplied by the excess of (A) the Appraised Value Per Share of Common
Stock as of December 31, 1998 over (B) the exercise price payable per share
under such option. However, no amount shall be payable
<PAGE> 31
by the Corporation for any option which ceases to remain outstanding (by
reason of the Optionee's cessation of Service) prior to the date the
Corporation exercises the Call Right with respect to that option.
- - Within fifteen (15) days following receipt of the Corporation's exercise
notice, the option holder shall deliver to the Corporation the executed
stock option agreement evidencing each outstanding option held by such
individual. The purchase price for each option shall be paid in one
lump-sum cash payment within fifteen (15) days after the Corporation's
receipt of the executed stock option agreement for that option. At the time
such payment is made to the option holder, such individual shall cease to
have any right, title or interest in and to the repurchased option and the
option shares purchasable thereunder, and such individual shall no longer
have any equity or other proprietary interest in the Corporation by reason
of any options issued under the Plan.
B. Repurchase of Common Stock. Shares of Common Stock issued under the
Plan, whether pursuant to the exercise of options granted under the
Discretionary Option Grant Program or direct stock issuances made
under the Stock Issuance Program and whether vested or unvested, may,
in the Plan Administrator's discretion, be held in escrow by the
Corporation or may be issued directly to the Optionee or Participant
with restrictive legends on the certificates for those shares
indicating that such shares remain subject to the Call Right until the
consummation of a Liquidity Transaction. The purchase price payable by
the Corporation shall be equal to the number of shares of Common Stock
repurchased by the Corporation pursuant to the Call Right multiplied
by the Appraised Value Per Share of Common Stock as of the date the
Call Right is exercised. However, any unvested shares of Common Stock
which the Corporation is entitled to repurchase, at the original price
per share paid by the Optionee or the Participant, by reason of the
Optionee's or Participant's cessation of Service prior
<PAGE> 32
to the date the Corporation exercises the Call Right under this
Article Five shall remain purchasable by the Corporation at such
original price per share, and the Corporation shall not repurchase
those shares pursuant to the Call Right provisions of this Article
Five.
Within fifteen (15) days following receipt of the Corporations exercise
notice, the Optionee or Participant shall deliver to the Corporation the stock
certificates for the shares of Common Stock for which the Call Right is being
exercised, with each such certificate to be duly endorsed for transfer by the
holder of record. Payment of the purchase price for the repurchased shares shall
be paid in one lump-sum cash payment within fifteen (15) days after the
Corporation's receipt of such duly-endorsed stock certificates. At the time such
payment is made to the Optionee or Participant, such individual shall cease to
have any right, title or interest in and to the repurchased shares and
accordingly shall no longer have any equity or other proprietary interest in the
Corporation attributable to those shares.
3. TERMINATION OF CALL RIGHT
The Call Right shall terminate and cease to be exercisable immediately upon
the occurrence of a Liquidity Transaction. The Call Right shall also terminate
at the close of business on January 31, 2000, unless the Corporation shall have
previously provided the requisite exercise notice of the Call Right to each
option holder under the Plan.
<PAGE> 33
ARTICLE SIX
MISCELLANEOUS
1. FINANCING
A. The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program
or the purchase price for shares issued under the Stock Issuance
Program by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the
Plan Administrator in its sole discretion. Promissory notes may be
authorized with or without security or collateral. In all events, the
maximum credit available to the Optionee or Participant may not exceed
the sum of (i) the aggregate option exercise price or purchase price
payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share
purchase.
The Plan Administrator may, in its discretion, determine that one or more
such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.
2. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or stock appreciation rights or upon the
issuance or vesting of such shares under the Plan shall be subject to
the satisfaction of all applicable Federal, state and local income and
employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested
<PAGE> 34
shares of Common Stock under the Plan (other than the options granted
or the shares issued under the Automatic Option Grant Program) with
the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise
of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following
formats:
(i) Stock Withholding: The election to have the Corporation withhold, from the
shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such holder (other than in connection
with the option exercise or share vesting triggering the Taxes) with an
aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
3. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date. Options
may be granted under the Discretionary Option Grant Program at any
time on or after the Plan Effective Date. Initial options under the
automatic Option Grant Program shall be made to the Eligible Directors
on the Automatic Option Grant Program Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall
be issued under the Plan, until the Plan is approved by the
Corporation's shareholders. If such shareholder approval is not
obtained within twelve (12) months after the Plan Effective Date, then
all options previously granted under this Plan shall terminate and
cease to be
<PAGE> 35
outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall terminate upon the earliest of (i) January 31, 2010,
(ii) the date on which all shares available for issuance under the
Plan shall have been issued pursuant to the exercise of the options or
the issuance of shares (whether vested or unvested) under the Plan or
(iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such Plan termination, all outstanding
options and unvested stock issuances shall continue to have force and
effect in accordance with the provisions of the documents evidencing
such options or issuances.
4. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, (i) no such
amendment or modification shall adversely affect any rights and
obligations with respect to options, stock appreciation rights or
unvested stock issuances at the time outstanding under the Plan unless
the Optionee or the Participant consents to such amendment or
modification, and (ii) any amendment made to the Automatic Option
Grant Program (or any options outstanding thereunder) shall be in
compliance with the limitations of that program. In addition, the
Board shall not, without the approval of the Corporation's
shareholders, (i) materially increase the maximum number of shares
issuable under the Plan, or the number of shares for which options may
be granted under the Automatic Option Grant Program, except for
permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) materially modify the eligibility
requirements for Plan participation or (iii) materially increase the
benefits accruing to Plan participants.
<PAGE> 36
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in
excess of the number of shares then available for issuance under the
Plan, provided any excess shares actually issued under those programs
are held in escrow until there is obtained shareholder approval of an
amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such shareholder approval is
not obtained within twelve (12) months after the date the first such
excess issuances are made, then (i) any unexercised options granted on
the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the
Optionees and the Participants the exercise or purchase price paid for
any excess shares issued under the Plan and held in escrow, together
with interest (at the applicable Short Term Federal Rate) for the
period the shares were held in escrow, and such shares shall thereupon
be automatically cancelled and cease to be outstanding.
5. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
6. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option or stock
appreciation right under the Plan and the issuance of any shares of Common Stock
(i) upon the exercise of any option or stock appreciation right or (ii) under
the Stock Issuance Program shall be subject to the Corporation's procurement of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options and stock appreciation rights granted under it and
the shares of Common Stock issued pursuant to it. No shares of Common Stock or
other assets shall
<PAGE> 37
be issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities laws
and any applicable listing requirements of any stock exchange (or the Nasdaq
National Market, if applicable) on which Common Stock is then listed for
trading.
7. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining such person) or of the Optionee or
the Participant, which rights are hereby expressly reserved by each, to
terminate such person's Service at any time for any reason, with or without
cause.
<PAGE> 38
APPENDIX
The following definitions shall be in effect under the Plan:
A. Appraised Value Per Share shall mean the fair market value per share of
Common Stock, as determined as of December 31, 1999 through independent
appraisal on the basis of the going-concern value of the Corporation at
that time, without discount for the limited marketability or minority
interest represented by such share of Common Stock.
B. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
C. Automatic Option Grant Program Effective Date shall mean the date on which
the Underwriting Agreement is executed and the initial public offering
price of the Common Stock is established.
D. Board shall mean the Corporation's Board of Directors.
E. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or related group of
persons (other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation's
shareholders which the Board does not recommend such shareholders to
accept, or
(ii) a change in the composition of the Board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members
ceases, by reason of one or more
<PAGE> 39
contested elections for Board membership, to be comprised of individuals
who either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time such election
or nomination was approved by the Board.
F. Code shall mean the Internal Revenue Code of 1986, as amended.
G. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of the
Corporation's assets in complete liquidation or dissolution of the
Corporation.
H. Corporation shall mean WAREFORCE.COM, Inc., a Nevada corporation, and any
corporate successor to all or substantially all of the assets or voting
stock of WAREFORCE.COM, Inc., which shall by appropriate action adopt the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.
J. Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
<PAGE> 40
K. Employee shall mean an individual who is in the employ of the Corporation
(or any Parent or Subsidiary), subject to the control and direction of the
employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National Market,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or
any successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange, then the
Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(iii) For purposes of option grants made on the date of execution of the
Underwriting Agreement, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
<PAGE> 41
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
N. Hostile Take-Over shall mean a change in ownership of the Corporation
effected through the following transaction:
(i) the acquisition, directly or indirectly, by any person or related group of
persons (other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation's
shareholders which the Board does not recommend such shareholders to
accept, and
(ii) more than fifty percent (50%) of the securities so acquired are accepted
from persons other than Section 16 Insiders.
O. Incentive Option shall mean an option that satisfies the requirements of
Code Section 422.
P. Involuntary Termination shall mean the termination of the Service of any
individual that occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her level
of responsibility, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and participation in
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided
<PAGE> 42
and only if such change, reduction or relocation is effected by the Corporation
without the individual's consent.
Q. Liquidity Transaction shall mean either of the following transactions:
- - the completion of a firm commitment underwritten public offering of Common
Stock, pursuant to an effective registration statement under the 1933 Act,
which yields aggregate net proceeds to the Corporation of not less than
Seven Million Five Hundred Thousand Dollars ($7,500,000), or
- - a Corporate Transaction or any other acquisition of the Corporation
effected through a direct sale, exchange or transfer by the Corporation's
stockholders of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities.
R. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or
disclosure by such person of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of
the Corporation (or any Parent or Subsidiary) in a material manner. The
foregoing definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider
as grounds for the dismissal or discharge of any Optionee, Participant or
other person in the Service of the Corporation (or any Parent or
Subsidiary).
S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
T. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
<PAGE> 43
U. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
W. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
X. Permanent Disability or Permanently Disabled shall mean the inability of
the Optionee or the Participant to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more. However, solely for the purposes of the
Automatic Option Grant Program, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to
perform his or her usual duties as a Board member by reason of any
medically determinable physical or mental impairment expected to result in
death or to be of continuous duration of twelve (12) months or more.
Y. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan, as
set forth in this document.
Z. Plan Administrator shall mean the particular entity, whether the Primary
Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such
entity is carrying out its administrative functions under those programs
with respect to the persons under its jurisdiction.
<PAGE> 44
AA. Plan Effective Date shall mean the date on which the Plan is adopted by the
Board.
AB. Primary Committee shall mean the committee of two (2) or more non-employee
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 Insiders.
AC. Secondary Committee shall mean a committee of two (2) or more Board members
appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section
16 Insiders.
AD. Section 16 Insider shall mean an officer or director of the Corporation
subject to the short-swing profit liabilities of Section 16 of the 1934
Act.
AE. Section 12(g) Registration Date shall mean the first date on which the
Common Stock is registered under Section 12(g) of the 1934 Act.
AF. Service shall mean the provision of services to the Corporation (or any
Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided
in the documents evidencing the option grant.
AG. Stock Exchange shall mean either the American Stock Exchange or the New
York Stock Exchange.
AH. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AI. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
<PAGE> 45
AJ. Subsidiary shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
AK. Take-Over Price shall mean the greater of (i) the Fair Market Value per
share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is an
Incentive Option, the Take-Over Price shall not exceed the clause (i) price
per share.
AL. Taxes shall mean the Federal, state and local income and employment tax
liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or
the vesting of those shares.
AM. 10% Shareholder shall mean the owner of stock (as determined under Code
Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Parent or Subsidiary).
AN. Underwriting Agreement shall mean the agreement between the Corporation and
the underwriter or underwriters managing the initial public offering of the
Common Stock.
<PAGE> 46
NOTICE OF EXERCISE
I hereby notify WAREFORCE.COM, Inc. (the "Corporation") that I elect to purchase
shares of the corporation's Common Stock (the "Purchased Shares") at the option
exercise price of _______ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1998 Stock
Option/Stock Issuance Plan on ____________.
Concurrently with the delivery of this Exercise Notice to the Corporation, I
shall hereby pay to the Corporation the Exercise Price for the Purchased Shares
in accordance wit the provisions of my agreement with the Corporation (or other
documents) evidencing the Option and shall deliver whatever additional documents
may be required by such agreement as a condition for exercise. Alternatively, I
may utilize the special broker-dealer sale and remittance procedure specified in
my agreement to effect payment of the Exercise Price.
Date: ______________________
Optionee: ____________________________________________
Address: ____________________________________________
____________________________________________
Print name in exact manner it is to appear on the stock
certificate: ________________________
Address to which certificate is to be sent, if different from
address above: _______________________________________
________________________________________
________________________________________
Social Security Number: ______________________________
<PAGE> 47
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of the
corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean WAREFORCE.COM, Inc., a Nevada corporation.
G. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse
or former spouse of the Optionee.
H. Employee shall mean an individual who is in the employ of the Corporation
(or any Parent or Subsidiary), subject to the control and direction of the
employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the option shall have beer
exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall mean the exercise price per share as specified in the
Grant Notice.
<PAGE> 48
K. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.
L. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the NASDAQ National Market,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question, as the price is reported by the National
Association of Securities Dealers on the NASDAQ National Market or any successor
system. If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange, then the
Fair Market Value shall be the closing selling price per share of Common Stock
on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists. (iii) For purposes of option
grants made on the date of execution of the Underwriting Agreement, the Fair
Market Value shall be deemed to be equal to the price per share at which the
Common Stock is sold in the initial public offering pursuant to the Underwriting
Agreement.
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan Administrator
shall deem appropriate.
M. Grant Date shall mean the date of grant of the option as specified in the
Grant Notice.
<PAGE> 49
N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying
the Agreement, pursuant to which Optionee has been informed of the basic
terms of the option evidenced hereby.
O. Incentive Option shall mean an option, which satisfies the requirements of
Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's Service,
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation (or Parent or Subsidiary employing Optionee) which
materially reduces Optionee's level of responsibility, (B) a reduction in
Optionee's level of compensation (including base salary, fringe benefits and
participation in corporate -performance based bonus or incentive programs) by
more than fifteen percent (15%) or (C) a relocation of Optionee's place of
employment by more than fifty miles, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the
Corporation (or any Parent or Subsidiary).
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Notice of Exercise shall mean the notice of exercise in the form of
Exhibit I.
<PAGE> 50
T. Option Shares shall mean the number of shares of Common Stock subject to
the option as specified in the Grant Notice.
U. Optionee shall mean the person to whom the option is granted as specified
in the Grant Notice.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination , stock possessing fifty percent or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
W. Permanent Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has
lasted or can be expected to last for continuous period of twelve (12)
months or more.
X. Plan shall mean the corporation's 1998 Stock Option/Stock Issuance Plan.
Y. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.
Z. Purchase Agreement shall mean the stock purchase agreement (in form an
substance satisfactory to the Corporation) which grants the Corporation the
right to repurchase at the Exercise Price, any and all unvested Option
Shares held by Optionee at the time c Optionee's cessation of Service and
which precludes the sale, transfer or other disposition any purchased
Option Shares while subject to such repurchase right.
AA. Qualified Domestic Relations Order shall mean a Domestic Relations Order
which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether
a Domestic Relations Order a Qualified Domestic Relations Order.
AB. Service shall mean Optionee's performance of services for the Corporation
(C any Parent or Subsidiary) in
<PAGE> 51
the capacity of an Employee, a non-employee member of the boar of directors
or a consultant or independent advisor.
AC. Stock Exchange shall mean the American Stock Exchange or the New York Stock
Exchange.
AD. Subsidiary shall mean any corporation (other than the Corporation) in a
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination stock possessing fifty percent or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
AE. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, as such vesting schedule is subject to acceleration in the event of
a Corporate Transaction.
<PAGE> 52
WAREFORCE.COM, INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purposes of retaining the services
of selected Employees, non-employee members of the Board or the board of
directors of any Parent or Subsidiary and consultants and other independent
advisors who provide services to the Corporation (or any Parent or
Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a Parent o
Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the corporation's
grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to
then in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of the Grant
Date, an option to purchase up to the number of Option Shares specified in
the Grant Notice. The Option Shares shall be purchasable from time to time
during the option tern specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years measured from
the Grant Date and shall accordingly expire at the close of business on the
Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6
or 17.
3. Limited Transferability. This option shall be neither transferable no
assignable by Optionee other than by will or by the laws of descent and
distribution following Optionees death and may be exercised, during
Optionee's lifetime, only by Optionee. However if this option is designated
a Non-Statutory Option in the Grant Notice, then this option may also be
assigned in whole or in part during Optionee's
<PAGE> 53
lifetime in accordance with the terms of Qualified Domestic Relations
Order. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to such
Qualified Domestic Relations Order. The terms applicable to the assigned
portion shall be the same a~ those in effect for this option immediately
prior to such assignment and shall be set forth in such documents issued to
the assignee as the Plan Administrator may deem appropriate.
(a) This option shall be immediately exercisable for any or all of the
Option Shares, whether or not the Option Shares are vested in
accordance with the Vesting Schedule, and shall remain so exercisable
until the Expiration Date or sooner termination of the option term
under Paragraph 4, 5 or 16. Any unvested Option Shares purchased under
this option shall be subject to repurchase by the Corporation, at the
Exercise Price paid per share, upon Optionee's cessation of Service
prior to vesting in those Option Shares.
(b) Optionee shall, in accordance with the Vesting Schedule, vest in the
Option Shares in one or more installments over his cessation of
Service. Vesting in the Option Shares may be accelerated pursuant to
the provisions of Paragraph 4 or 5. In no event, however, shall any
additional Option Shares vest following Optionee's cessation of
Service.
4. Cessation of Service. The option term specified in Paragraph 2 shall
terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(i) Should Optionee cease to remain in Service for any reason (other than
death, Permanent Disability, or Misconduct) while this option is
outstanding, then Optionee shall have a period of three (3) months
(commencing with the date of such cessation of Service) during which to
exercise this option,
<PAGE> 54
but in no event shall this option be exercisable at any time after the
Expiration Date.
(ii) Should Optionee die while this option is outstanding, then the personal
representative of Optionee's estate or the person or persons to whom the
option is transferred pursuant to Optionee's will or in accordance with the
laws of descent and distribution shall have the right to exercise this
option. Such right shall lapse and this option shall cease to be
outstanding upon the earlier of (A) the expiration of the twelve (12) month
period measured from the date of Optionee's death or (B) the Expiration
Date.
(iii) Should Optionee cease Service by reason of Permanent Disability while this
option is outstanding, then Optionee shall have a period of twelve (12)
months (commencing with the date of such cessation of Service) during which
to exercise this option. In no event shall this option be exercisable at
any time after the Expiration Date.
(iv) During the limited post-Service exercise period, this option may not be
exercised in the aggregate for more than the number of Option Shares in
which Optionee is, at the time of Optionee's cessation of Service, vested
in accordance with the Vesting Schedule. Upon the expiration of such
limited exercise period or (if earlier) upon the Expiration Date, this
option shall terminate and cease to be outstanding for any vested Option
Shares for which the option has not been exercised To the extent Optionee
is not vested in the Option Shares at the time of Optionee's cessation of
Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.
(v) Should Optionee's Service be terminated for Misconduct then this option
shall terminate immediately and cease to remain outstanding.
(vi) In the event of a Corporate Transaction, the provisions c Paragraph 6 shall
govern the period for which this option is to remain exercisable following
Optionees cessation of Service
<PAGE> 55
and shall supersede any provisions to the contrary in this paragraph.
5. Special Acceleration of Option.
(a) All the Option Shares subject to this option at the time of a
Corporate Transaction but not otherwise vested shall automatically
vest and the Corporation's repurchase rights with respect to those
Option Shares shall immediately terminate so that this option shall,
immediately prior to the effective date of the Corporate Transaction,
become exercisable for all of the Option Shares as fully vested shares
of Common Stock and may be exercised for any or all of those Option
Shares. No such accelerated vesting of the Option Shares, however,
shall occur if and to the extent: (i) this option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable
option to purchase shares of the capital stock of the successor
corporation (or parent thereof), and the corporation's repurchase
rights with respect to the unvested Option Shares are to be assigned
to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested Option
Shares at the time of the Corporate Transaction (the excess of the
Fair Market Value of those Option Shares over the Exercise Price
payable for such shares) and provides for subsequent payout in
accordance with the Vesting Schedule.
(b) Immediately following the Corporate Transaction, this option shall
terminate and cease to be outstanding, except to the extent assumed by
the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(c) If this option is assumed in connection with a Corporate Transaction,
then this option shall be
<PAGE> 56
appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been
issuable to Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the
same.
(d) Should there occur an Involuntary Termination of Optionee's Service
within eighteen (18) months following a Corporate Transaction in which
this option is assumed or replaced and the corporation's repurchase
rights with respect to the unvested Option Shares are assigned, then
all the Option Shares at the time subject to this option but not
otherwise vested shall automatically vest and the corporation's
repurchase rights with respect to those Option Shares shall terminate
so that this option shall immediately become exercisable for all those
Option Shares as fully-vested shares of Common Stock and may be
exercised for any or all of those vested Option Shares at any time
prior to the earlier of (i) the Expiration Date or (ii) the expiration
of the one (1)-year period measured from the date of such Involuntary
Termination.
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or
assets.
6. Adjustment in Option Shares. Should any change be made to the Common Stock
by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding
Common Stock as a class without the Corporations receipt of consideration,
appropriate adjustments shall be made to (i) the total number and/or class
of securities subject to this option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
<PAGE> 57
7. Shareholder Rights. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such persons
have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.
8. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or any part of
the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must
take the following actions:
(i) To the extent the option is exercised for vested Option Shares, execute and
deliver to the Corporation a Notice of Exercise for the Option Shares for
which the option is exercised. To the extent this option is exercised for
unvested Option Shares, execute and deliver to the Corporation a Purchase
Agreement for those shares.
(ii) Pay the aggregate Exercise Price for the purchased shares in one or more of
the following forms:
(a) cash or check made payable to the Corporation;
(b) a promissory note payable Corporation, but only to the extent
authorized by Administrator in accordance with Paragraph 13,1934 paid
to the Plan. Should the Common Stock be registered under Section 12(g)
of the Act at the time this option is exercised, then the Exercise
Price may also be as follows:
(c) in shares of Common Stock held by Optionee (or any other person or
persons exercising the option) for the requisite period necessary to
avoid a charge to the corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date; or
<PAGE> 58
(d) to the extent the option is exercised for vested Option Shares,
through a special sale and remittance procedure pursuant to which
Optionee (or any other person or persons exercising the option) shall
concurrently provide irrevocable written instructions (I) to a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (II) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent the sale and remittance procedure is utilized in
connection with the option exercise, payment of the Exercise Price
must accompany the Notice of Exercise (or the Purchase Agreement)
delivered to the Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate documentation that the person or
persons exercising the option (if other than Optionee) have the right to
exercise this option.
(iv) Make appropriate arrangements with the corporation (or Parent of
Subsidiary employing or retaining Optionee) for the satisfaction of all
Federal, state and local income and employment tax withholding
requirements applicable to the option exercise.
(a) As soon as practical alter the Exercise Date, the Corporation shall
issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto. To the extent any such
Option Shares are unvested, the certificates for those Option Shares
shall be endorsed with an appropriate legend
<PAGE> 59
evidencing the Corporation's repurchase rights and may be held in
escrow with the Corporation until such shares vest.
(b) In no event may this option be exercised for any fractional shares.
10. Repurchase Rights. All option shares acquired upon the exercise of this
option shall be subject to certain rights of the corporation and its
assigns to repurchase those shares in accordance with the terms specified
in the purchase agreement.
11. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of the Option Shares upon
such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and
with all applicable regulations of any stock exchange (or the NASDAQ
National Market, if applicable) on which the Common Stock may be
listed for trading at the time of such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock pursuant
to this option shall relieve the Corporation of any liability with
respect to the non-issuance or sale of the Common Stock as to which
such approval shall not have been obtained. The Corporation, however,
shall use its best efforts to obtain all such approvals.
12. Successors and Assigns. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionees assigns and the legal representatives,
heirs and legatees of Optionees estate.
13. Notices. Any notice required to be given or delivered to the Corporation
under the terms of this Agreement shall be in writing and addressed to the
Corporation at its principal
<PAGE> 60
corporate offices. Any notice required to be given or delivered to Optionee
shall be in writing and addressed to Optionee at the address indicated
below Optionee's signature line on the Grant Notice. All notices shall be
deemed effective upon personal delivery or upon deposit in the U.S. mail,
postage prepaid and properly addressed to the party to be notified.
14. Financing. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise Price
for the purchased Option Shares by delivering a promissory note. The terms
of any such promissory note (including the interest rate, the requirements
for collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.(1)
15. Construction. This Agreement and me option evidenced hereby are made and
granted pursuant to the Plan and are in all respects limited by and subject
to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.
16. Governing Law. The interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-laws rules.
17. Shareholder Approval.
(a) The grant of this option is subject to approval of the Plan by the
Corporation's shareholders within twelve (12) months after the adoption of
the Plan by the Board. Notwithstanding any provision of this Agreement to
the contrary. this option may not be exercised in whole or in Dart until
such shareholder approval is obtained. In the event that such shareholder
approval is not obtained then
- --------------
(1) Authorization of payment of the Exercise Price by a promissory note may,
under currently proposed Treasury Regulations, result in the loss of
incentive stock option treatment under the Federal tax laws.
<PAGE> 61
this option shall terminate in its entirety and Optionee shall have no
further rights to acquire any Option Shares hereunder.
(b) If the Option Shares covered by this Agreement exceed, as of the Grant
Date, the number of shares of Common Stock which may without stockholder
approval be issued under the Plan, then this option shall be void with
respect to such excess shares, unless stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under
the Plan is obtained in accordance with the provisions of the Plan.
18. Additional Terms Applicable to an Incentive Option. In the event this
option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(i) This option shall cease to qualify for favorable tax treatment as an
Incentive Option if (and to the extent) this option is exercised for one or
more Option Shares: (A) more than three (3) months after the date Optionee
ceases to be an Employee for any reason other than death or Permanent
Disability or (B) more than twelve (12) months after the date Optionee
ceases to be an Employee by reason of Permanent Disability.
(ii) This option shall not become exercisable in the calendar year in which
granted if (and to the extent) the aggregate Fair Market Value (determined
at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added
to the aggregate value (determined as of the respective date or dates of
grant) of the Common Stock and any other securities for which one or more
other Incentive Options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To
the extent the exercisability of this option is deferred by reason of the
foregoing limitation, the deferred portion shall
<PAGE> 62
become exercisable in the first calendar year or years thereafter in which
the One Hundred Thousand Dollar ($100,000) limitation of this immediately
prior to the effective date of a Corporate Transaction in which this
option is not to be assumed or the Optionee's Involuntary Termination in
connection with Corporate Transaction, whereupon the option shall become
immediately exercisable as a Non-Statutory Option for the deferred portion
of the Option Shares.
(iii) Should Optionee hold in addition to this option one o more other options
to purchase Common Stock which become exercisable for the first time in
the same calendar year as time option, then the foregoing limitations,
then the foregoing limitations on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which such
options are granted.
<PAGE> 63
EXHIBIT 1
NOTICE OF EXERCISE
I hereby notify WAREFORCE.COM, Inc. (the "Corporation") that I elect to purchase
shares of the corporation's Common Stock (the "Purchased Shares") at the option
exercise price of _______ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1998 Stock
Option/Stock Issuance Plan on ____________.
Concurrently with the delivery of this Exercise Notice to the Corporation, I
shall hereby pay to the Corporation the Exercise Price for the Purchased Shares
in accordance wit the provisions of my agreement with the Corporation (or other
documents) evidencing the Option and shall deliver whatever additional documents
may be required by such agreement as a condition for exercise. Alternatively, I
may utilize the special broker-dealer sale and remittance procedure specified in
my agreement to effect payment of the Exercise Price.
Date: ______________________
Optionee: ____________________________________________
Address: ____________________________________________
____________________________________________
Print name in exact manner it is to appear on the stock
certificate: ________________________
Address to which certificate is to be sent, if different from
address above: _______________________________________
________________________________________
________________________________________
Social Security Number: ______________________________
<PAGE> 64
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of the
corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean WAREFORCE.COM, Inc., a Nevada corporation.
G. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse
or former spouse of the Optionee.
H. Employee shall mean an individual who is in the employ of the Corporation
(or any Parent or Subsidiary), subject to the control and direction of the
employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the option shall have beer
exercised in accordance with Paragraph 9 of the Agreement.
<PAGE> 65
J. Exercise Price shall mean the exercise price per share as specified in the
Grant Notice.
K. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.
L. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the NASDAQ National Market,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the NASDAQ National Market or
any successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange, then the
Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(iii) For purposes of option grants made on the date of execution of the
Underwriting Agreement, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the
Plan Administrator after
<PAGE> 66
taking into account such factors as the Plan Administrator shall deem
appropriate.
M. Grant Date shall mean the date of grant of the option as specified in the
Grant Notice.
N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying
the Agreement, pursuant to which Optionee has been informed of the basic
terms of the option evidenced hereby.
O. Incentive Option shall mean an option, which satisfies the requirements of
Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's Service,
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation (or Parent or Subsidiary employing Optionee)
which materially reduces Optionee's level of responsibility, (B) a
reduction in Optionee's level of compensation (including base salary,
fringe benefits and participation in corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a relocation
of Optionee's place of employment by more than fifty miles, provided and
only if such change, reduction or relocation is effected by the Corporation
without Optionee's consent.
Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary may consider as grounds for the dismissal or
discharge of Optionee or any
<PAGE> 67
other individual in the Service of the Corporation (or any Parent or
Subsidiary).
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Notice of Exercise shall mean the notice of exercise in the form of Exhibit
I.
T. Option Shares shall mean the number of shares of Common Stock subject to
the option as specified in the Grant Notice.
U. Optionee shall mean the person to whom the option is granted as specified
in the Grant Notice.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination , stock possessing fifty percent or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
W. Permanent Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has
lasted or can be expected to last for continuous period of twelve (12)
months or more.
X. Plan shall mean the Corporation's 1998 Stock Option/Stock lssuance Plan.
Y. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.
Z. Purchase Agreement shall mean the stock purchase agreement (in form an
substance satisfactory to the Corporation) which grants the Corporation the
right to repurchase at the Exercise Price, any and all unvested Option
Shares held by Optionee at the time c Optionee's cessation of Service and
which precludes the sale, transfer or other disposition any purchased
Option Shares while subject to such repurchase right.
AA. Qualified Domestic Relations Order shall mean a Domestic Relations Order
which substantially complies with the
<PAGE> 68
requirements of Code Section 414(p). The Plan Administrator shall have the
sole discretion to determine whether a Domestic Relations Order a Qualified
Domestic Relations Order.
AB. Service shall mean Optionee's performance of services for the Corporation
(C any Parent or Subsidiary) in the capacity of an Employee, a non-employee
member of the boar of directors or a consultant or independent advisor.
AC. Stock Exchange shall mean the American Stock Exchange or the New York Stock
Exchange.
AD. Subsidiary shall mean any corporation (other than the Corporation) in a
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination stock possessing fifty percent or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
AE. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, as such vesting schedule is subject to acceleration in the event of
a Corporate Transaction.
<PAGE> 69
WAREFORCE.COM
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of _______, by and between
WAREFORCE.COM, Inc., a Nevada corporation and _____________, Optionee under the
Corporation's 1998 Stock Option/Stock Issuance Plan.
All capitalized terms in this Agreement shall have the meaning assigned to them
in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
1. Exercise. Optionee hereby purchases ____________ unvested shares of Common
Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on (the "Grant Date") to purchase up to ________
shares of Common Stock under the Plan at the exercise price of $__________
per share (the "Exercise Price").
2. Payment. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares
in accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment
Separate from Certificate (in the form attached hereto as Exhibit I) with
respect to the Purchased Shares.
3. Delivery of Certificates. The certificates representing the Purchased
Shares shall be held in escrow in accordance with the provisions of this
Agreement.
4. Shareholder Rights. Until such time as the Corporation exercises the
Repurchase Right, Optionee (or any successor in interest) shall have all
the rights of a shareholder (including voting, dividend and Liquidation
rights) with respect to the Purchased Shares, subject, however, to the
transfer restrictions of Articles B and C.
<PAGE> 70
B. SECURITIES LAW COMPLIANCE
1. Restricted Securities. The Purchased Shares have not been registered under
the 1933 Act and are being issued to Optionee in reliance upon the
exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Optionee
hereby confirms that Optionee has been informed that the Purchased Shares
are restricted securities under the 1933 Act and may not be resold or
transferred unless the Purchased Shares are first registered under the
Federal securities laws or unless an exemption from such registration is
available. Accordingly, Optionee hereby acknowledges that Optionee is
prepared to hold the Purchased Shares for an indefinite period and that
Optionee is aware that SEC Rule 144 issued under the 1933 Act which exempts
certain resales of unrestricted securities is not presently available to
exempt the resale of the Purchased Shares from the registration
requirements of the 1933 Act.
2. Disposition of Purchased Shares. Optionee shall make no disposition of the
Purchased Shares (other than a Permitted Transfer) unless and until there
is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a written summary of the
terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of this Agreement
applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with written assurances, in
form and substance satisfactory to the Corporation, that (a) the proposed
disposition does not require registration of the Purchased Shares under the
1933 Act or (b) all appropriate action necessary for compliance with the
registration requirements of the 1933 Act or any
<PAGE> 71
exemption from registration available under the 1933 Act (including
Rule 144) has been taken.
(iv) Optionee shall have provided the Corporation with written assurances, in
form and substance satisfactory to the Corporation, that the proposed
disposition will not result in the contravention of any transfer
restrictions applicable to the Purchased Shares pursuant to the provisions
of the Rules of the California Corporations Commissioner.
The Corporation shall not be required (i) to transfer on its books any
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to,
any transferee to whom the Purchased Shares have been transferred in
contravention of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased Shares shall
be endorsed with one or more of the following restrictive legends:
(i) "The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares may not be sold or offered for sale
in the absence of (a) an effective registration statement for the shares
under such Act, (b) a "no action" letter of the Securities and Exchange
Commission with respect to such sale or offer or (c) satisfactory
assurances to the Corporation that registration under such Act is not
required with respect to such sale or offer."
(ii) "The shares represented by this certificate are subject to certain
repurchase rights and rights of first refusal granted to the Corporation
and accordingly may not be sold, assigned, transferred, encumbered, or in
any manner disposed of except in conformity with the terms of a written
agreement dated _______________ between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). A
<PAGE> 72
copy of such agreement is maintained at the Corporation's principal
corporate offices."
C. TRANSFER RESTRICTIONS
1. Restriction on Transfer. Except for any Permitted Transfer, Optionee shall
not transfer, assign, encumber or otherwise dispose of any of the Purchased
Shares which are subject to the Repurchase Right. In addition, Purchased
Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention
of the First Right of the Market Stand-Off.
2. Transferee Obligations. Each person (other than the Corporation) to whom
the Purchased Shares are transferred by means of a Permitted Transfer must,
as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of
this Agreement and that the transferred shares are subject to (i) the
Repurchase Right, (ii) the First Refusal Right and (iii) the Market
Stand-Off, to the same extent such shares would be so subject if retained
by Optionee.
3. Market Stand-Off.
(a) In connection with any underwritten public offering by the Corporation of
its equity securities pursuant to an effective registration statement filed
under the 1933 Act, including the Corporation's initial public offering,
Owner shall not sell, make any short sale of, loan, hypothecate, pledge,
grant any option for the purchase of or otherwise dispose or transfer for
value or otherwise agree to engage in any of the foregoing transactions
with respect to, any Purchased Shares without the prior written consent of
the Corporation or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested
by the Corporation or such underwriters. In no event, however, shall such
period exceed one hundred eighty (180) days and
<PAGE> 73
the Market Stand-Off shall in all events terminate two (2) years after the
effective date of the Corporation's initial public offering.
(b) Owner shall be subject to the Market Stand-Off provided and only if the
officers and directors of the Corporation are also subject to similar
restrictions.
(c) Any new, substituted or additional securities which are by reason of any
Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off to
the same extent the Purchased Shares are at such time covered by such
provisions.
(d) In order to enforce the Market Stand-Off, the Corporation may impose
stop-transfer instructions with respect to the Purchased Shares until the
end of the applicable stand-off period.
D. REPURCHASE RIGHT
1. Grant. The Corporation is hereby granted the right (the "Repurchase Right"),
exercisable at any time during the ninety (90) day period following the date
Optionee ceases for any reason to remain in Service or (if later) during the
ninety (90) day period following the execution date of this Agreement, to
repurchase at the Exercise Price all or any portion of the Purchased Shares
in which Optionee is not, at the time of his or her cessation of Service,
vested in accordance with the Vesting Schedule (such shares to be
hereinafter referred to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be exercisable
by written notice delivered to each Owner of the Unvested Shares prior to
the expiration of the ninety (90) day exercise period. The notice shall
indicate the number of Unvested Shares to repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30)
days after the date of such notice. The
<PAGE> 74
certificates representing the Unvested Shares to be repurchased shall be
delivered to the Corporation prior to the close of business on the date
specified for the repurchase. Concurrently with the receipt of such stock
certificates, the Corporation shall pay to Owner, in cash or cash
equivalents (including the cancellation of any purchase-money
indebtedness), an amount equal to the Exercise Price previously paid for
the Unvested Shares which are to be repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall terminate
with respect to any Unvested Shares for which it is not timely exercised
under Paragraph D.2. In addition, the Repurchase Right shall terminate and
cease to be exercisable with respect to any and all Purchased Shares in
which Optionee vests in accordance with the Vesting Schedule.
4. Aggregate Vesting Limitation. If the Option is exercised in more than one
increment so that Optionee is a party to one or more other Stock Purchase
Agreements (the "Prior Purchase Agreements") which are executed prior to
the date of this Agreement, then the total number of Purchased Shares as to
which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the
aggregate the number of Purchased Shares in which Optionee would otherwise
at the time be vested, in accordance with the Vesting Schedule, had all the
Purchased Shares (including those acquired under the Prior Purchase
Agreements) been acquired exclusively under this Agreement.
5. Recapitalization. Any new, substituted or additional securities or other
property (including cash paid other than as a regular cash dividend) which
is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right, but
only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments to reflect such distribution shall be made
to the number and/or class of Purchased Shares subject to this Agreement
and to the price per share to be paid upon the exercise of the Repurchase
Right
<PAGE> 75
in order to reflect the effect of any such Recapitalization upon the
Corporation's capital structure; provided, however, that the aggregate
exercise price shall remain the same.
6. Corporate Transaction.
(a) Immediately prior to the consummation of any Corporate Transaction, the
Repurchase Right shall automatically lapse in its entirety, except to the
extent the Repurchase Right is to be assigned to the successor corporation
(or parent thereof) in connection with the Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect following a Corporate
Transaction, such right shall apply to the new capital stock or other
property (including any cash payments) received in exchange for the
Purchased Shares in consummation of the Corporate Transaction, but only to
the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments shall be made to the price per share payable upon
exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation's capital structure; provided, however,
that the aggregate exercise price shall remain the same.
(c) The Repurchase Right shall automatically lapse in its entirety, and all the
Purchased Shares shall immediately vest in full, upon an Involuntary
Termination of Optionee's Service within eighteen (18) months following the
effective date of a Corporate Transaction in which the Repurchase Right has
been assigned.
E. ESCROW
1. Deposit. Upon issuance, the certificates for the Purchased Shares shall be
deposited in escrow with the Corporation to be held in accordance with the
provisions of this Article E. Each deposited certificate shall be
accompanied by a duly-executed Assignment Separate from Certificate in the
form of Exhibit I. The deposited certificates, together with any other
assets or
<PAGE> 76
securities from time to time deposited with the Corporation pursuant to the
requirements of this Agreement, shall remain in escrow until such time or
times as the certificates (or other assets and securities) are to be
released or otherwise surrendered for cancellation in accordance with
Paragraph E.3. Upon delivery of the certificates (or other assets and
securities) to the Corporation, Owner shall be issued a receipt
acknowledging the number of Purchased Shares (or other assets and
securities) delivered in escrow.
2. Recapitalization/Reorganization. Any new, substituted or additional
securities or other property which is by reason of any Recapitalization or
Reorganization distributed with respect to the Purchased Shares shall be
immediately delivered to the Corporation to be held in escrow under this
Article E, but only to the extent the Purchased Shares are at the time
subject to the escrow requirements hereunder. However, all regular cash
dividends on the Purchased Shares (or other securities at the time held in
escrow) shall be paid directly to Owner and shall not be held in escrow.
3. Release/Surrender. The Purchased Shares, together with any other assets or
securities held in escrow hereunder, shall be subject to the following
terms relating to their release from escrow or their surrender to the
Corporation for repurchase and cancellation:
(i) Should the Corporation elect to exercise the Repurchase Right with respect
to any Unvested Shares, then the escrowed certificates for those Unvested
Shares (together with any other assets or securities attributable thereto)
shall be surrendered to the Corporation concurrently with the payment to
Owner of an amount equal to the aggregate Exercise Price paid for those
Unvested Shares, and Owner shall cease to have any further rights or claims
with respect to such Unvested Shares (or other assets or securities
attributable thereto).
(ii) Should the Corporation elect not to exercise the Repurchase Right with
respect to any Unvested Shares held at the time in escrow hereunder, then
the escrowed certificates for those
<PAGE> 77
shares (together with any other assets or securities attributable thereto)
shall be released to Owner.
(iii) As the Purchased Shares (or any other assets or securities attributable
thereto) vest in accordance with the Vesting Schedule the certificates for
those vested shares (as well as all other vested assets and securities)
shall be released from escrow upon Owner's request.
(iv) Upon any earlier termination of the Repurchase Right in connection with a
Corporate Transaction or Involuntary Termination, any Purchased Shares (or
other assets or securities) at the time held in escrow hereunder shall
promptly be released to Owner.
F. RIGHT OF FIRST REFUSAL
1. Grant. The Corporation is hereby granted the right of first refusal (the
"First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in accordance
with the Vesting Schedule. For purposes of this Article F, the term
"transfer" shall include any sale assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall
not include any Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of Purchased Shares
in which Optionee has vested desires to accept a bona fide third-party
offer for the transfer of any or all of such shares (the Purchased Shares
subject to such offer to be hereinafter referred to as the "Target
Shares"), Owner shall promptly (i) deliver to the Corporation written
notice (the "Disposition Notice") of the terms of the offer, including the
purchase price and the identity of the third-party offeror, and (ii)
provide satisfactory proof that the disposition of the Target Shares to
such third-party offeror would not be in contravention of the provisions
set forth in Articles B and C.
<PAGE> 78
3. Exercise of the First Refusal Right. The Corporation shall, for a period of
twenty-five (25) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon
such other terms (not materially different from those specified in the
Disposition Notice) to which Owner consents. Such right shall be
exercisable by delivery of written notice (the "Exercise Notice") to Owner
prior to the expiration of the twenty-five (25)-day exercise period. If
such right is exercised with respect to all the Target Shares, then the
Corporation shall effect the repurchase of such shares, including payment
of the purchase price, not more than five (5) business days after delivery
of the Exercise Notice; and at such time the certificates representing the
Target Shares shall be delivered to the Corporation.
Should the purchase price specified in the Disposition Notice be payable in
property other than cash or evidences of indebtedness, the Corporation
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If Owner and the Corporation cannot
agree on such cash value within ten (10) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an
appraiser of recognized standing selected by Owner and the Corporation or,
if they cannot agree on an appraiser within twenty (20) days after the
Corporation's receipt of the Disposition Notice, each shall select an
appraiser of recognized standing and the two (2) appraisers shall designate
a third appraiser of recognized standing, whose appraisal shall be
determinative of such value. The cost of such appraisal shall be shared
equally by Owner and the Corporation. The closing shall then be held on the
later of (i) the fifth (5th) business day following delivery of the
Exercise Notice or (ii) the fifth (5th) business day after such valuation
shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the Exercise Notice
is not given to Owner prior to the expiration of the twenty-five (25) day
exercise period, Owner shall have
<PAGE> 79
a period of thirty (30) days thereafter in which to sell or otherwise
dispose of the Target Shares to the third-party offeror identified in the
Disposition Notice upon terms (including the purchase price) no more
favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition
must not be effected in contravention of the provisions of Articles B and
C. The third-party offeror shall acquire the Target Shares free and clear
of the Repurchase Right and the First Right of Refusal, but the acquired
shares shall remain subject to the provisions of Article B and Paragraph
C.3. In the event Owner does not effect such sale or disposition of the
Target Shares within the specified thirty (30) day period, the First
Refusal Right shall continue to be applicable to any subsequent disposition
of the Target Shares by Owner until such right lapses.
5. Partial Exercise of the First Refusal Right. In the event the Corporation
makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Corporation delivered within five (5) business days after Owner's receipt
of the Exercise Notice, to effect the sale of the Target Shares pursuant to
either of the following alternatives:
(i) sale or other disposition of all the Target Shares to the third-party
offeror identified in the Disposition Notice, but in full compliance with
the requirements of Paragraph F.4, as if the Corporation did not exercise
the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares which the
Corporation has elected to purchase, such sale to be effected in
substantial conformity with the provisions of Paragraph F.3. The First
Refusal Right shall continue to be applicable to any subsequent disposition
of the remaining Target Shares until such right lapses.
<PAGE> 80
Failure of Owner to deliver timely notification to the Corporation shall be
deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
(a) Any new, substituted or additional securities or other property which is by
reason of any Recapitalization distributed with respect to the Purchased
Shares shall be immediately subject to the First Refusal Right, but only to
the extent the Purchased Shares are at the time covered by such right.
(b) In the event of a Reorganization, the First Refusal Right shall remain in
full force and effect and shall apply to the new capital stock or other
property received in exchange for the Purchased Shares in consummation of
the Reorganization, but only to the extent the Purchased Shares are at the
time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to occur of
(i) the first date on which shares of the Common Stock are held of record
by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common
Stock or (iii) a firm commitment underwritten public offering, pursuant to
an effective registration statement under the 1933 Act, covering the offer
and sale of the Common Stock in the aggregate amount of at least ten
million dollars ($10,000,000). However, the Market Stand-Off shall continue
to remain in full force and effect following the lapse of the First Refusal
Right.
G. MARITAL DISSOLUTION OR LEGAL SEPARATION
1. Grant. In connection with the dissolution of Optionee's marriage or legal
separation of Optionee and Optionee's spouse, the Corporation shall have
the right (the "Special Purchase Right") to purchase from Optionee's
spouse, in accordance with the provisions of Paragraph G.3, all or any
<PAGE> 81
portion of the Purchased Shares which would otherwise be awarded to such
spouse in settlement of any community property or other marital property
rights such spouse may have in such shares.
2. Notice of Decree or Agreement. Optionee shall promptly provide the
Corporation with written notice (the "Dissolution Notice") of (i) the entry
of any judicial decree or order resolving the property rights of Optionee
and Optionee's spouse in connection with their marital dissolution or legal
separation or (ii) the execution of any contract or agreement relating to
the distribution or division of such property rights. The Dissolution
Notice shall be accompanied by a copy of the actual decree or order of
dissolution or contract or agreement between Optionee and Optionee's spouse
which provides for the award to the spouse of one or more Purchased Shares
in settlement of any community property or other marital property rights
such spouse may have in such shares.
3. Exercise of the Special Purchase Right. The Special Purchase Right shall be
exercisable by delivery of written notice (the "Purchase Notice") to
Optionee and Optionee's spouse within forty-five (45) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice shall
indicate the number of shares to be purchased by the Corporation, the date
such purchase is to be effected (such date to be not less than five (5)
business days, nor more than fifteen (15) business days, after the date of
the Purchase Notice) and the Fair Market Value to be paid for such
Purchased Shares. Optionee (or Optionee's spouse, to the extent such spouse
has physical possession of the Purchased Shares) shall, prior to the close
of business on the date specified for the purchase, deliver to the
Corporation the certificates representing the shares to be purchased. The
Corporation shall, concurrently with the receipt of the stock certificates,
pay to Optionee's spouse (in cash or cash equivalents) an amount equal to
the Fair Market Value specified for such shares in the Purchase Notice.
If Optionee's spouse does not agree with the Fair Market Value specified
for the shares in the Purchase Notice, then the
<PAGE> 82
spouse shall promptly notify the Corporation in writing of such
disagreement and the fair market value of such shares shall thereupon be
determined by an appraiser of recognized standing selected by the
Corporation and the spouse. If they cannot agree on an appraiser within
fifteen (15) days after the date of the Purchase Notice, each shall select
an appraiser of recognized standing, and the two (2) appraisers shall
designate a third appraiser of recognized standing whose appraisal shall be
determinative of such value. The cost of the appraisal shall be shared
equally by the Corporation and Optionee's spouse. The closing shall then be
held on the fifteenth (15th) business day following the completion of such
appraisal; provided, however, that if the appraised value is more than
twenty-five percent (25%) greater than the Fair Market Value specified for
the shares in the Purchase Notice, the Corporation shall have the right,
exercisable prior to the expiration of such fifteen (15) business-day
period, to rescind the exercise of the Special Purchase Right and thereby
revoke its election to purchase the shares awarded to the spouse. In the
event the Corporation so revokes its election, the Corporation shall bear
the entire cost of the appraisal.
4. Lapse. The Special Purchase Right shall lapse upon the earlier to occur of
(i) the lapse of the First Refusal Right or (ii) the expiration of the
exercise period specified in Paragraph G.3, to the extent the Special
Purchase Right is not timely exercised in accordance with such paragraph.
H. SPECIAL TAX ELECTION
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II.
OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX
CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES
<PAGE> 83
AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
HIS OR HER BEHALF.
I. GENERAL PROVISIONS
1. Assignment. The Corporation may assign the Repurchase Right to any person
or entity selected by the Board, including (without limitation) one or more
shareholders of the Corporation.
2. No Employment or Service Contract. Nothing in this Agreement or in the Plan
shall confer upon Optionee any right to continue in Service for any period
of specific duration or interfere with or otherwise restrict in any way the
rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly
reserved by each, to terminate Optionee's Service at any time for any
reason, with or without cause.
3. Notices. Any notice required to be given under this Agreement shall be in
writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and
properly addressed to the party entitled to such notice at the address
indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to exercise the
Repurchase Right shall not constitute a waiver of any other repurchase
rights that may subsequently arise under the provisions of this Agreement
or any other agreement between the Corporation and Optionee. No waiver of
any breach or condition of this Agreement shall be deemed to be a waiver of
any other or subsequent breach or condition, whether of like or different
nature.
<PAGE> 84
5. Cancellation of Shares. If the Corporation shall make available, at the
time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person
from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be
deemed purchased in accordance with the applicable provisions hereof and
the Corporation shall be deemed the owner and holder of such shares,
whether or not the certificates therefor have been delivered as required by
this Agreement.
6. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without resort that
State's conflict conflict-of laws rules.
7. Successors and Assigns. The provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and
assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees Optionee's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first indicated above.
WAREFORCE.COM, INC.
By:
----------------------------------
Title:
-------------------------------
Address: 10350 Santa Monica Blvd.
Suite 130
West Los Angeles, CA 90025
<PAGE> 85
OPTIONEE
Address:
-----------------------------
-----------------------------
<PAGE> 86
EXHIBIT 1
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ________________________ hereby sell(s), assign(s) and
transfer(s) unto WAREFORCE.COM, Inc. (the "Corporation")
________________________ (____) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No.__________ herewith and does hereby irrevocably constitute and
appoint Attorney to transfer the said stock on the books of the Corporation with
full power of substitution in the premises.
Dated:
-------------------------------
- --------------------------------------
Signature
<PAGE> 87
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE> 88
EXHIBIT II
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
1. Federal Income Tax Consequences and Section 83(b) Election For Exercise of
Non-Statutory Option. If the Purchased Shares are acquired pursuant to the
exercise of a Non-Statutory Option, as specified in the Grant Notice, then
under Code Section 83, the excess o the fair market value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares
lapse over the Exercise Price paid for such shares will be reportable as
ordinary income on the lapse date. For this purpose, the term "forfeiture
restrictions" includes the right o the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right However, Optionee may
elect under Code Section 83(b) to be taxed at the time the Purchased Shares
are acquired, rather than when and as such Purchased Shares cease to be
subject to such forfeiture restrictions. Such election must be filed with
the Internal Revenue Service within thirty (30) days after the date of the
Agreement. Even if the fair market value of the Purchased Shares on the
date of the Agreement equals the Exercise Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences in
the future. The form for making this election is attached as part of this
exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30) DAY
PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE
FORFEITURE RESTRICTIONS LAPSE.
2. Federal Income Tax Consequences and Conditional Section 83(b) Election For
Exercise of Incentive Option. If the Purchased Shares are acquired pursuant
to the exercise of an Incentive Option, as specified in the Grant Notice,
then the following tax principles shall be applicable to the Purchased
Shares:
(i) For regular tax purposes, no taxable income will be recognized at the time
the Option is exercised.
<PAGE> 89
(ii) The excess of (A) the fair market value of the Purchased Shares or the date
the Option is exercised or (if later) on the date any forfeiture
restriction applicable to the Purchased Shares lapse over (B) the Exercise
Price paid for the Purchased Shares will be includible in Optionee's
taxable income for alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the Purchased Shares,
then Optionee will recognize ordinary income in the year of such
disposition equal in amount to the excess of (A) the fair market value of
the Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased Shares
lapse over the Exercise Price paid for the Purchased Shares. Any additional
gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which
the Purchase Shares are held prior to the disposition.
(iv) For purposes of the foregoing, the term "forfeiture restrictions" will
include the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased Shares within (2)
years after the Grant Date or within one (1) year after the exercise date
of the Option.
(v) In the absence of final Treasury Regulations relating I Incentive Options,
it is not certain whether Optionee may, in connection with the exercise of
the Option for any Purchased Shares at the time subject to forfeiture
restrictions, file a protective election under Code Section 83(b) which
would limit (A) Optionee's alternative minimum taxable income upon exercise
and (B) Optionee's ordinary income upon a disqualifying disposition the
excess of the fair market value of the Purchased Shares on the date the
Option is exercise
- ----------
(1) Generally a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse,
a transfer into joint ownership with right of survivorship if Optionee
remains one of the joint owners, a pledge, a transfer by bequest or
inheritance or certain tax free exchanges permitted under the Code.
<PAGE> 90
over the Exercise Price paid for the Purchased Shares. Accordingly, such
election if proper filed will only be allowed to the extent the final
Treasury Regulations permit such a protective election. Page 2 of the
attached form for making the election should be filed with any election
made in connection with the exercise of an Incentive Option.
<PAGE> 91
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
Pursuant to Treas. Reg. Section 1.83.2.
(1) The taxpayer who performed the services is:
Name:
--------------------------------------------------
Address:
-----------------------------------------------
Taxpayer Identification No.:
---------------------------
(2) The property with respect to which the election is being made is
___________ shares of the common stock of Wareforce Incorporated.
(3) The property was issued on _______________ .
(4) The taxable year in which the election is being made is the calendar
year _______.
(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original purchase
price if for any reason taxpayers employment with the issuer is
terminated. The issuer's repurchase right lapses in a series of
installments over a five (5)-year period ending on _______________.
(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $_________ per share.
(7) The amount paid for such property is $________ per share.
<PAGE> 92
(8) A copy of this statement was furnished to Wareforce Incorporated for
whom taxpayer rendered the services underlying the transfer of
property.
(9) This statement is executed on _______________.
- ------------------------------------- ---------------------------------------
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and State tax returns for the current tax year and an additional
copy for his or her records.
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 42 of the Internal Revenue Code (the "Code"). Accordingly,
it is the intent of the Taxpayer to utilize this election to achieve the
following tax results:
The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value o such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this election,
such alternative minimum taxable income would be measured by the spread between
the fair market value of the purchased shares and the purchase price, which
exists on the various lapse dates in effect for the forfeiture restriction
<PAGE> 93
applicable to such shares. The election is to be effective to the full extent
permitted under the Code.
Section 421(a)(l) of the Code expressly excludes from income any excess of
the fair market value of the purchased shares over the amount paid for such
shares. Accordingly, this election is also intended to be effective in the event
there is a "disqualifying disposition" of the shares, within the meaning of
Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess c the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
<PAGE> 94
IN WITNESS WHEREOF, Wareforce Incorporated has caused this Addendum to be
executed by its duly authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
WAREFORCE INCORPORATED
By:
----------------------------------
Title:
-------------------------------
- --------------------------------------
OPTIONEE
EFFECTIVE DATE:
-----------------------
<PAGE> 95
ADDENDUM
TO
STOCK PURCHASE AGREEMENT
The following provisions are hereby incorporated into, and hereby made a
part of, that certain Stock Purchase Agreement dated ____________________ (the
"Purchase Agreement") by and between Wareforce Incorporated (the "Corporation")
and ____________________ ("Optionee") evidencing the purchase by Optionee of
certain shares of the Common Stock of the Corporation (the "Purchased Shares"),
pursuant to an option granted to Optionee under the terms of the Corporation's
1996 Stock Option/Stock Issuance Plan (the "Plan"), and such provisions shall be
effective as of the Effective Date specified below. All capitalized terms in
this Addendum, to the extent not specifically defined herein, shall have the
meanings assigned to them in the Purchase Agreement.
CALL RIGHT
1. Terms. The Purchased Shares shall be subject to the special right (the
"Call Right") of the Corporation to repurchase such Shares in accordance
with the following terms and conditions:
- - The Call Right may be exercised by the Corporation at any time during the
period beginning January 1, 2000 and ending January 31, 2000. However, in
no event may the Call Right be exercised for less than the total number of
outstanding options and shares of Common Stock issued under the Plan.
- - The Purchased Shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Call Right lapses or may be issued
directly to Optionee with restrictive legends on the certificates
evidencing the Purchased Shares indicating that such shares remain subject
to the Call Right.
- - The Purchase Price payable by the Corporation for the Purchased Shares (the
"Purchase Price") shall be equal to the total number of the Purchased
Shares to be repurchased from
<PAGE> 96
the Owner multiplied by the Appraised Value Per Share of Common Stock on
the date the Corporation exercises the Call Right.
- - The Call Right shall be exercisable by written notice to each Owner of the
Purchased Shares. The exercise notice shall specify the amount of the
Purchase Price. The Call Right as so exercised shall cover all of Owner's
right, title and interest in and to the Purchased Shares.
- - Within fifteen (15) days following receipt of the Corporation's exercise
notice, Owner shall deliver to the Corporation his or her executed copy of
the Purchase Agreement, together with the stock certificates and any other
documentation evidencing the Purchased Shares or Owner's interest in such
Purchased Shares. The Purchase Price shall be paid to Owner in one lump sum
cash payment within fifteen (15) days after the Corporation's receipt of
Owner's executed Purchase Agreement and any related documentation
evidencing Owner's interest in the Purchased Shares.
- - At the time such payment is made to Owner, Owner shall cease to have any
right, title or interent in and to the Purchased Shares, and such Owner
shall no longer have any equity or other proprietary interest in the
Corporation pursuant to the Purchased Shares.
2. Termination of Call Right. The Call Right shall terminate and cease to be
exercisable immediately upon the consummation of a Liquidity Transaction.
3. Definitions. For purposes of this Addendum, the following definitions shall
be in effect:
Appraised Value Per Share: the fair market value per share of Common Stock
through independent appraisal based upon the going-concern value of the
Corporation at that time.
Liquidity Transaction: either of the following transactions:
<PAGE> 97
(i) the completion of a firm commitment underwritten public offering of Common
Stock, pursuant to an effective registration statement under the 1933 Act,
which yields aggregate net proceeds to the Corporation of not less than
Seven Million Five Hundred Thousand Dollars ($7,500,000), or
(ii) a Corporate Transaction or any other acquisition of the Corporation
effected through a direct sale, exchange or transfer by the Corporation's
stockholders of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities.
<PAGE> 98
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved Transactions:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all o the
Corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean Wareforce One, Inc., a Nevada corporation.
G. Disposition Notice shall have the meaning assigned to such term in
Paragraph F.2.
H. Exercise Notice shall have the meaning assigned to such term in Paragraph
F.3.
I. Exercise Price shall have the meaning assigned to such term in Paragraph
A.1.
J. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article F.
K. Grant Date shall have the meaning assigned to such term in Paragraph A.1.
L. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.
M. Incentive Option shall mean an option, which satisfies the requirements of
Code Section 422.
<PAGE> 99
N. Involuntary Termination shall mean the termination of Optionee's Service
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee'
position with the Corporation which materially reduces Optionee's level of
responsibility (B) a reduction in Optionee's level of compensation
(including base salary, fringE benefits and participation in
corporate-performance based bonus or incentive programs by more than
fifteen percent (15%) or (C) a relocation of Optionee's place of employment
by more than fifty (50) miles, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
O. Market Stand-Off shall mean the market stand-off restriction specified in
Paragraph C.3.
P. Misconduct shall mean the commission of any act of fraud, embezzlement o
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary may consider as grounds for the dismissal or
discharge of Optionee or any other person in the Service of the Corporation
(or any Parent or Subsidiary).
Q. 1933 Act shall mean the Securities Act of 1933, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option shall have the meaning assigned to such term in Paragraph A.1.
T. Option Agreement shall mean all agreements and other documents evidencing
the Option.
<PAGE> 100
U. Optionee shall mean the person to whom the Option is granted under the
Plan.
V. Owner shall mean Optionee and all subsequent holders of the Purchased Share
who derive their chain of ownership through a Permitted Transfer from
Optionee.
W. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
X. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate
succession following Optionee's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness
incurred by Optionee in connection with the acquisition of the Purchased
Shares.
Y. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan.
Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.
AA. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph C.4.
AB. Purchased Shares shall have the meaning assigned to such term in Paragraph
Al.
AC. Recapitalization shall mean any stock split, stock dividend,
recapitalization combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration.
AD. Reorganization shall mean any of the following transactions:
<PAGE> 101
(i) a merger or consolidation in which the Corporation is not the surviving
entity,
(ii) all of the Corporation's assets, a sale, transfer or other disposition of
all or substantially,
(iii) a reverse merger in which the Corporation is the surviving entity but in
which the Corporation's outstanding voting securities are transferred in
whole or in par to a person or persons different from the persons holding
those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which the
Corporation is incorporated or to create a holding company structure.
AE. Repurchase Right shall mean the right granted to the Corporation in
accordance with Article C.
AF. SEC shall mean the Securities and Exchange Commission.
AG. Service shall mean Optionee's performance of services for the Corporation
(or an Parent or Subsidiary) in the capacity of an employee, subject to
the control and direction of this employer entity as to both the work to
be performed and the manner and method of performance, a non-employee
member of the board of directors or a consultant or independent advisor.
AH. Subsidiary shall mean any Corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AI. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, subject to the acceleration provisions upon an Involuntary
Termination following a Corporate Transaction.
<PAGE> 102
AJ. Unvested Shares shall have the meaning assigned to such term in Paragraph
C.1.
<PAGE> 103
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
1. Federal Income Tax Consequences and Section 83(b) Election For Exercise of
Non-Statutory Option. If the Purchased Shares are acquired pursuant to the
exercise of a Non-Statutory Option, as specified in the Grant Notice, then
under Code Section 83, the excess of the fair market value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares
lapse over the Exercise Price paid for such shares will be reportable as
ordinary income on the lapse date. For this purpose, the term "forfeiture
restrictions" includes the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right However, Optionee may
elect under Code Section 83(b) to be taxed at the time the Purchased Shares
are acquired, rather than when and as such Purchased Shares cease to be
subject to such forfeiture restrictions. Such election must be filed with
the Internal Revenue Service within thirty (30) days after the date of the
Agreement. Even if the fair market value of the Purchased Shares on the
date of the Agreement equals the Exercise Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences in
the future. The form for making this election is attached as part of this
exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30) DAY
PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE
FORFEITURE RESTRICTIONS LAPSE.
2. Federal Income Tax Consequences and Conditional Section 83(b) Election For
Exercise of Incentive Option. If the Purchased Shares are acquired pursuant
to the exercise of an Incentive Option, as specified in the Grant Notice,
then the following tax principles shall be applicable to the Purchased
Shares:
(i) For regular tax purposes, no taxable income will be recognized at the time
the Option is exercised.
(ii) The excess of (A) the fair market value of the Purchased Shares or the date
the Option is exercised or (if later) on the date any forfeiture
restriction applicable to the
<PAGE> 104
Purchased Shares lapse over (B) the Exercise Price paid for the Purchased
Shares will be includible in Optionee's taxable income for alternative
minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the Purchased Shares,
then Optionee will recognize ordinary income in the year of such
disposition equal in amount to the excess of (A) the fair market value of
the Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased Shares
lapse over the Exercise Price paid for the Purchased Shares. Any additional
gain recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for which
the Purchase Shares are held prior to the disposition.
(iv) For purposes of the foregoing, the term "forfeiture restrictions" will
include the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased Shares within (2)
years after the Grant Date or within one (1) year after the exercise date
of the Option.
(v) In the absence of final Treasury Regulations relating I Incentive Options,
it is not certain whether Optionee may, in connection with the exercise of
the Option for any Purchased Shares at the time subject to forfeiture
restrictions, file a protective election under Code Section 83(b) which
would limit (A) Optionee's alternative minimum taxable income upon exercise
and (B) Optionee's ordinary income upon a disqualifying disposition the
excess of the fair market value of the Purchased Shares on the date the
Option is exercise over the Exercise Price paid for the Purchased Shares.
Accordingly, such election if proper filed will only be allowed to the
extent the final Treasury Regulations permit
- ----------
(1) Generally a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse,
a transfer into joint ownership with right of survivorship if Optionee
remains one of the joint owners, a pledge, a transfer by bequest or
inheritance or certain tax free exchanges permitted under the Code.
<PAGE> 105
such a protective election. Page 2 of the attached form for making the
election should be filed with any election made in connection with the
exercise of an Incentive Option.
<PAGE> 106
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
Pursuant to Treas. Reg. Section 1.83.2.
(1) The taxpayer who performed the services is:
Name:
------------------------------------------------
Address:
---------------------------------------------
Taxpayer Identification No.:
-------------------------
(2) The property with respect to which the election is being made is
___________ shares of the common stock of Wareforce Incorporated.
(3) The property was issued on __________________.
(4) The taxable year in which the election is being made is the calendar
year _______.
(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original purchase
price if for any reason taxpayers employment with the issuer is
terminated. The issuer's repurchase right lapses in a series of
installments over a five (5)-year period ending on __________________.
(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $_________ per share.
(7) The amount paid for such property is $_________ per share.
(8) A copy of this statement was furnished to Wareforce Incorporated for
whom taxpayer rendered the services underlying the transfer of
property.
<PAGE> 107
(9) This statement is executed on ___________________.
- ------------------------------------- ---------------------------------------
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and State tax returns for the current tax year and an additional
copy for his or her records.
The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 42 of the Internal Revenue Code (the "Code"). Accordingly,
it is the intent of the Taxpayer to utilize this election to achieve the
following tax results:
The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value o such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this election,
such alternative minimum taxable income would be measured by the spread between
the fair market value of the purchased shares and the purchase price, which
exists on the various lapse dates in effect for the forfeiture restriction
applicable to such shares. The election is to be effective to the full extent
permitted under the Code.
<PAGE> 108
Section 421(a)(l) of the Code expressly excludes from income any excess of
the fair market value of the purchased shares over the amount paid for such
shares. Accordingly, this election is also intended to be effective in the event
there is a "disqualifying disposition" of the shares, within the meaning of
Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess c the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
<PAGE> 109
IN WITNESS WHEREOF, Wareforce Incorporated has caused this Addendum to be
executed by its duly authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
WAREFORCE INCORPORATED
By:
----------------------------------
Title:
-------------------------------
- --------------------------------------
OPTIONEE
EFFECTIVE DATE:
-----------------------
<PAGE> 110
ADDENDUM
TO
STOCK PURCHASE AGREEMENT
The following provisions are hereby incorporated into, and hereby made a
part of, that certain Stock Purchase Agreement dated _________________________
(the "Purchase Agreement") by and between Wareforce Incorporated (the
"Corporation") and _________________________ ("Optionee") evidencing the
purchase by Optionee of certain shares of the Common Stock of the Corporation
(the "Purchased Shares"), pursuant to an option granted to Optionee under the
terms of the Corporation's 1996 Stock Option/Stock Issuance Plan (the "Plan"),
and such provisions shall be effective as of the Effective Date specified below.
All capitalized terms in this Addendum, to the extent not specifically defined
herein, shall have the meanings assigned to them in the Purchase Agreement.
CALL RIGHT
1. Terms. The Purchased Shares shall be subject to the special right (the
"Call Right") of the Corporation to repurchase such Shares in accordance
with the following terms and conditions:
- - The Call Right may be exercised by the Corporation at any time during the
period beginning January 1, 2000 and ending January 31, 2000. However, in
no event may the Call Right be exercised for less than the total number of
outstanding options and shares of Common Stock issued under the Plan.
- - The Purchased Shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Call Right lapses or may be issued
directly to Optionee with restrictive legends on the certificates
evidencing the Purchased Shares indicating that such shares remain subject
to the Call Right.
- - The Purchase Price payable by the Corporation for the Purchased Shares (the
"Purchase Price") shall be equal to the total number of the Purchased
Shares to be repurchased from
<PAGE> 111
the Owner multiplied by the Appraised Value Per Share of Common Stock on
the date the Corporation exercises the Call Right.
- - The Call Right shall be exercisable by written notice to each Owner of the
Purchased Shares. The exercise notice shall specify the amount of the
Purchase Price. The Call Right as so exercised shall cover all of Owner's
right, title and interest in and to the Purchased Shares.
- - Within fifteen (15) days following receipt of the Corporation's exercise
notice, Owner shall deliver to the Corporation his or her executed copy of
the Purchase Agreement, together with the stock certificates and any other
documentation evidencing the Purchased Shares or Owner's interest in such
Purchased Shares. The Purchase Price shall be paid to Owner in one lump sum
cash payment within fifteen (15) days after the Corporation's receipt of
Owner's executed Purchase Agreement and any related documentation
evidencing Owner's interest in the Purchased Shares.
- - At the time such payment is made to Owner, Owner shall cease to have any
right, title or interent in and to the Purchased Shares, and such Owner
shall no longer have any equity or other proprietary interest in the
Corporation pursuant to the Purchased Shares.
2. Termination of Call Right. The Call Right shall terminate and cease to be
exercisable immediately upon the consummation of a Liquidity Transaction.
3. Definitions. For purposes of this Addendum, the following definitions shall
be in effect:
Appraised Value Per Share: the fair market value per share of Common Stock
through independent appraisal based upon the going-concern value of the
Corporation at that time.
Liquidity Transaction: either of the following transactions:
<PAGE> 112
(i) the completion of a firm commitment underwritten public offering of Common
Stock, pursuant to an effective registration statement under the 1933 Act,
which yields aggregate net proceeds to the Corporation of not less than
Seven Million Five Hundred Thousand Dollars ($7,500,000), or
(ii) Corporate Transaction or any other acquisition of the Corporation effected
through a direct sale, exchange or transfer by the Corporation's
stockholders of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities.
<PAGE> 113
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved Transactions:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of the
Corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean Wareforce One, Inc., a Nevada corporation.
G. Disposition Notice shall have the meaning assigned to such term in
Paragraph F.2.
H. Exercise Notice shall have the meaning assigned to such term in Paragraph
F.3.
I. Exercise Price shall have the meaning assigned to such term in Paragraph
A.1.
J. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article F.
K. Grant Date shall have the meaning assigned to such term in Paragraph A.1.
L. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.
M. Incentive Option shall mean an option, which satisfies the requirements of
Code Section 422.
<PAGE> 114
N. Involuntary Termination shall mean the termination of Optionee's Service
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation which materially reduces Optionee's level of
responsibility (B) a reduction in Optionee's level of compensation
(including base salary, fringE benefits and participation in
corporate-performance based bonus or incentive programs by more than
fifteen percent (15%) or (C) a relocation of Optionee's place of employment
by more than fifty (50) miles, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
O. Market Stand-Off shall mean the market stand-off restriction specified in
Paragraph C.3.
P. Misconduct shall mean the commission of any act of fraud, embezzlement o
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation
(or any Parent or Subsidiary may consider as grounds for the dismissal or
discharge of Optionee or any other person in the Service of the Corporation
(or any Parent or Subsidiary).
Q. 1933 Act shall mean the Securities Act of 1933, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option shall have the meaning assigned to such term in Paragraph A.1.
T. Option Agreement shall mean all agreements and other documents evidencing
the Option.
U. Optionee shall mean the person to whom the Option is granted under the
Plan,
<PAGE> 115
V. Owner shall mean Optionee and all subsequent holders of the Purchased Share
who derive their chain of ownership through a Permitted Transfer from
Optionee.
W. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
X. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws o intestate
succession following Optionee's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness
incurred by Optionee in connection with the acquisition of the Purchased
Shares.
Y. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan.
Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.
AA. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph C.4.
AB. Purchased Shares shall have the meaning assigned to such term in Paragraph
Al.
AC. Recapitalization shall mean any stock split, stock dividend,
recapitalization combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration.
AD. Reorganization shall mean any of the following transactions:
<PAGE> 116
(i) a merger or consolidation in which the Corporation is not the surviving
entity,
(ii) all of the Corporation's assets, a sale, transfer or other disposition of
all or substantially,
(iii) a reverse merger in which the Corporation is the surviving entity but in
which the Corporation's outstanding voting securities are transferred in
whole or in par to a person or persons different from the persons holding
those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which the
Corporation is incorporated or to create a holding company structure.
AE. Repurchase Right shall mean the right granted to the Corporation in
accordance with Article C.
AF. SEC shall mean the Securities and Exchange Commission.
AG. Service shall mean Optionee's performance of services for the Corporation
(or an Parent or Subsidiary) in the capacity of an employee, subject to the
control and direction of this employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant or independent advisor.
AH. Subsidiary shall mean any Corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
AI. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, subject to the acceleration provisions upon an Involuntary
Termination following a Corporate Transaction.
AJ. Unvested Shares shall have the meaning assigned to such term in Paragraph
C.1.
<PAGE> 1
Exhibit 10.19
UMEMBER.COM, INC.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
1. PURPOSE OF THE PLAN
This 1999 Stock Option/Stock Issuance Plan is intended to promote the
interests of , Inc., a California corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation. References herein to the
Corporation shall include all subsidiaries of the Corporation and references to
employee shall include employees of any subsidiary corporation.
Capitalized terms shall have the meanings assigned to such terms in the attached
Appendix.
2. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which eligible persons may,
at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or
Subsidiary, and
<PAGE> 2
(iii) the Automatic Option Grant Program under which Eligible Directors shall
automatically receive option grants at periodic intervals to purchase
shares of Common Stock.
B. The provisions of Articles One and Six shall apply to all three
equity programs under the Plan and shall accordingly govern the
interests of all persons under the Plan.
3. ADMINISTRATION OF THE PLAN
A. Until the Section 12(g) Registration Date, both the Discretionary
Option Grant and Stock Issuance Programs shall be administered by
the Board. From and after such Section 12(g) Registration Date, the
Discretionary Option Grant and Stock Issuance Programs shall be
administered as described below.
<PAGE> 3
B. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders. No non-employee Board
member shall be eligible to serve on the Primary Committee if such
individual has, during the twelve (12)-month period immediately
preceding the date of his or her appointment to the Primary
Committee or (if shorter) the period commencing with the Section
12(g) Registration Date and ending with the date of his or her
appointment to the Primary Committee, received an option grant or
direct stock issuance under the Plan or any other stock option,
stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary), other than pursuant to
the Automatic Option Grant Program.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time
terminate the functions of any Secondary Committee and reassume all
powers and authority previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and
authority to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option
Grant and Stock Issuance Programs and to make such determinations
under, and issue such interpretations of, the provisions of such
programs and any outstanding options or stock issuances thereunder
as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an
interest in the Discretionary Option Grant or Stock Issuance Program
under its jurisdiction or any option or stock issuance thereunder.
<PAGE> 4
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such
committee shall accordingly be entitled to full indemnification and
reimbursement as Board members for their service on such committee.
No member of the Primary Committee or the Secondary Committee shall
be liable for any act or omission made in good faith with respect to
the Plan or any option grants or stock issuances under the Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no
Plan Administrator shall exercise any discretionary functions with
respect to option grants made thereunder.
4. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
<PAGE> 5
(i) Employees,
(ii) non-employee members of the Board (other than those serving as members
of the Primary Committee from and after the Section 12(g) Registration
Date) or the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority
(subject to the provisions of the Plan) to determine, (i) with
respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the
time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the
time or times at which each option is to become exercisable, the
vesting schedule (if any) applicable to the option shares and the
maximum term for which the option is to remain outstanding and (ii)
with respect to stock issuances under the Stock Issuance Program,
which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable
to the issued shares and the consideration to be paid by the
Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock
Issuance Program.
D. The individuals eligible to participate in the Automatic Option
Grant Program shall be (i) those individuals who are first elected
or appointed non-employee Board
<PAGE> 6
members on or after the Automatic Option Grant Program Effective
Date and (ii) those individuals who continue to serve as
non-employee Board members after one or more Annual Shareholders
Meetings held after the Automatic Option Grant Program Effective
Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be
eligible to receive an initial option grant under the Automatic
Option Grant Program on the Automatic Option Grant Program Effective
Date or (if later) at the time he or she first becomes a
non-employee Board member, but such individual shall be eligible to
receive periodic option grants under the Automatic Option Grant
Program upon his or her continued service as a non-employee Board
member following one or more Annual Shareholders Meetings.
5. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by
the Corporation on the open market. The maximum number of shares of
Common Stock which may be issued over the term of the Plan shall
initially not exceed one million shares.
<PAGE> 7
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of
each calendar year during the term of the Plan, beginning with the
2000 calendar year, by an amount equal to one percent (1%) of the
shares of Common Stock outstanding on December 31 of the immediately
preceding calendar year. No Incentive Options may be granted on the
basis of the additional shares of Common Stock resulting from such
annual increases.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock
issuances for more than 100,000 shares of Common Stock in the
aggregate per calendar year, beginning with the 2000 calendar year.
D. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i)
the options expire or terminate for any reason prior to exercise in
full or (ii) the options are canceled in accordance with the
cancellation-re-grant provisions of Article Two. All shares issued
under the Plan, whether or not those shares are subsequently
repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number
of shares of Common Stock available for subsequent issuance under
the Plan. In addition, should the exercise price of an option under
the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock
issuance under the Plan, then the number of shares of Common Stock
available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of
<PAGE> 8
Common Stock issued to the holder of such option or stock issuance.
E. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the maximum number
and/or class of securities issuable under the Plan, (ii) the maximum
number and/or class of securities for which the share reserve is to
increase automatically each year, (iii) the number and/or class of
securities for which automatic option grants are to be made
subsequently per Eligible Director under the Automatic Option Grant
Program, and (iv) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in
order to prevent the dilution or enlargement of benefits thereunder.
The adjustments determined by the Plan Administrator shall be final,
binding and conclusive. In no event shall any such adjustments be
made in connection with the conversion of one or more outstanding
shares of the Corporation's preferred stock into shares of Common
Stock.
<PAGE> 9
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
1. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price
1. The exercise price per share shall be fixed by the Plan Administrator
but shall not be less than eighty-five percent (85%) of the Fair Market
Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article Six
and the documents evidencing the option, be payable in cash, check or
promissory note made payable to the Corporation, but only to the extent
approved by the Plan Administrator. Should the Corporation's outstanding
Common Stock be registered under Section 12(g) of the 1934 Act at the
time the option is exercised, then the exercise price may also be paid
as follows:
(i) in shares of Common Stock held for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares, through a
special sale and remittance procedure pursuant to which the Optionee
shall concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and
<PAGE> 10
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable Federal, state and
local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares
as shall be determined by the Plan Administrator and set forth in
the documents evidencing the option. However, no option shall have a
term in excess of ten (10) years measured from the option grant
date.
<PAGE> 11
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any options held
by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's cessation of
Service for any reason shall remain exercisable for such period of time
thereafter as shall be determined by the Plan Administrator and set
forth in the documents evidencing the option, but no such option shall
be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the optionee at the time
of death may be exercised subsequently by the personal representative of
the Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the option may not
be exercised in the aggregate for more than the number of vested shares
for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and
cease to be outstanding.
(v) In the event of an Involuntary Termination following a Corporate
Transaction, the provisions of Section III of this Article Two shall
govern the period for which the outstanding
<PAGE> 12
options are to remain exercisable following the Optionee's cessation of
Service and shall supersede any provisions to the contrary in this
section.
2. The Plan Administrator shall have the discretion, exercisable either at
the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain exercisable
following the Optionee's cessation of Service from the period otherwise
in effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the
expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable post-Service
exercise period, not only with respect to the number of vested shares of
Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under
the option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option
until such person shall have exercised the option, paid the exercise
price and become a holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion
to grant options that are exercisable for unvested shares of Common
Stock under the Plan. Should the Optionee cease Service while
holding such unvested shares, the Corporation shall have the right
to repurchase, at the exercise price paid per share, any or all of
those unvested shares. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the
purchased shares)
<PAGE> 13
shall be established by the Plan Administrator and set forth in the
agreement evidencing such repurchase right.
F. First Refusal Rights. Until such time as the Corporation's
outstanding shares of Common Stock are first registered under
Section 12(g) of the 1934 Act, the Corporation shall have the right
of first refusal with respect to any proposed sale or other
disposition by the Optionee (or any successor in interest by reason
of purchase, gift or other transfer) of any shares of Common Stock
issued under this Discretionary Option Grant Program. Such right of
first refusal shall be exercisable in accordance with the terms and
conditions established by the Plan Administrator and set forth in
the agreement evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the
laws of descent and distribution following the Optionee's death.
However, a Non-Statutory Option may, in connection with the
Optionee's estate plan, be assigned in whole or in part during the
Optionee's lifetime to one or more members of Optionee's immediate
family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned
portion shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem
appropriate.
<PAGE> 14
2. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee under
the Plan (or any other option plan of the Corporation or any Parent
or Subsidiary) may for the first time become exercisable as
Incentive Options during any one (1) calendar year shall not exceed
the sum of One Million Dollars ($1,000,000). To the extent the
Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such
options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the exercise price per share
shall not be less than one hundred ten percent (110%) of the Fair
Market Value per share of Common Stock on the option grant date, and
the option term shall not exceed five (5) years measured from the
option grant date.
<PAGE> 15
3. CORPORATE TRANSACTION/CHANGE OF CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of
Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common
Stock. However, an outstanding option shall not so accelerate if and
to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation
(or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the
Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option
or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the
option grant. The determination of option comparability under clause
(i) above shall be made by the Plan Administrator, and its
determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of
any Corporate Transaction, except to the extent: (i) those
repurchase rights are to be assigned to the successor corporation
(or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right
is issued.
<PAGE> 16
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent
thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of
securities which would have been issuable to the Optionee in
consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and
class of securities available for issuance under the Plan following
the consummation of such Corporate Transaction, (ii) the exercise
price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain
the same and (iii) the maximum number of securities and/or class of
securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock
issuances under the Plan per calendar year.
E. Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time, shall
automatically accelerate (and any of the Corporation's outstanding
repurchase rights which do not otherwise terminate at the time of
the Corporate Transaction shall automatically terminate and the
shares of Common Stock subject to those terminated rights shall
immediately vest in full) in the event the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such
Corporate Transaction. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the
<PAGE> 17
expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
F. The Plan Administrator shall have the discretion to grant options
with terms different from those in effect under this Section III in
connection with a Corporate Transaction.
G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option
remains outstanding, to (i) provide for the automatic acceleration
of one or more outstanding options (and the automatic termination of
one or more outstanding repurchase rights with the immediate vesting
of the shares of Common Stock subject to those rights) upon the
occurrence of a Change in Control or (ii) condition any such option
acceleration (and the termination of any outstanding repurchase
rights) upon the subsequent Involuntary Termination of the
Optionee's Service within a specified period following the effective
date of such Change in Control. Any options accelerated in
connection with a Change in Control shall remain fully exercisable
until the expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable
as an Incentive Option only to the extent the applicable One Million
Dollars ($1,000,000) limitation is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated portion of such
option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
The outstanding options shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
<PAGE> 18
4. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Discretionary Option Grant Program
and to grant in substitution new options covering the same or different number
of shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
5. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant
to selected Optionees tandem stock appreciation rights and/or
limited stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable upon such
terms as the Plan Administrator may establish, to elect between the
exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which
the Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares.
(ii) No such option surrender shall be effective unless it is approved by the
Plan Administrator. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
<PAGE> 19
(iii) If the surrender of an option is rejected by the Plan Administrator,
then the Optionee shall retain whatever rights the Optionee had under
the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
notice or (b) the last day on which the option is otherwise exercisable
in accordance with the terms of the documents evidencing such option,
but in no event may such rights be exercised more than ten (10) years
after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more executive officers may be granted limited stock appreciation
rights with respect to their outstanding options after the Section 12(g)
Registration Date.
(ii) Upon the occurrence of a Hostile Take-Over, each such individual holding
one or more options with such a limited stock appreciation right in
effect for at least six (6) months shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile
Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of Common
Stock. In return for the surrendered option, the Optionee shall receive
a cash distribution from the Corporation in an amount equal to the
excess of (a) the Take-Over Price of the shares of Common Stock which
are at the time vested under each surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days
following the option surrender date.
(iii) Neither the approval of the Plan Administrator nor the consent of the
Board shall be required in connection with such option surrender and
cash distribution.
<PAGE> 20
(iv) The balance of the option (if any) shall continue in full force and
effect in accordance with the documents evidencing such option.
<PAGE> 21
ARTICLE THREE
STOCK ISSUANCE PROGRAM
1. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement, which
complies with the terms specified below.
A. Purchase Price
1. The purchase price per share shall be fixed by the Plan Administrator,
but shall not be less than eighty-five percent (85%) of the Fair Market
Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Four, shares of Common
Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or Subsidiary).
B. Vesting Provisions
1. Shares of Common Stock issued under the Stock Issuance Program may, in
the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified
performance objectives. The elements of the vesting schedule applicable
to any unvested shares of Common Stock issued under the Stock Issuance
Program, namely:
<PAGE> 22
(i) the Service period to be completed by the Participant or the performance
objectives to be attained,
(ii) the number of installments in which the shares are to vest,
(iii) the interval or intervals (if any) which are to lapse between
installments, and
(iv) the effect which death, Permanent Disability or other event designated
by the Plan Administrator is to have upon the vesting schedule, shall be
determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
Any new, substituted or additional securities or other property
(including money paid other than as regular cash dividend) which the Participant
may have the right to receive with respect to the Participant's unvested shares
of Common Stock by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant's unvested shares of Common Stock and (ii) such
escrow arrangements as the Plan administrator shall deem appropriate.
The Participant shall have full shareholder rights with respect to any
shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
Should the Participant cease to remain in Service while holding one or
more unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be obtained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further shareholder rights with respect
<PAGE> 23
to those shares. To the extent the surrendered shares were previously issued to
the Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
2. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All outstanding cancellation rights under the Stock Issuance Program
shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i)
those cancellation rights are assigned to the successor corporation
(or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.
B. Any cancellation rights that are assigned in the Corporate
Transaction shall automatically terminate, and the shares of Common
Stock subject to those terminated rights shall immediately vest in
full, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within eighteen
<PAGE> 24
(18) months following the effective date of such Corporate
Transaction.
C. The Plan Administrator shall have the discretion to provide for
cancellation rights with terms different from those in effect under
this Section II in connection with a Corporate Transaction.
The Plan Administrator shall have the discretion, exercisable either at
the time the unvested shares are issued or at any time while the Corporation's
cancellation right remains outstanding, to (i) provide for the automatic
termination of one or more outstanding cancellation rights and the immediate
vesting of the shares of Common Stock subject to those rights upon the
occurrence of a Change in Control or (ii) condition any such accelerated vesting
upon the subsequent Involuntary Termination of the Participant's Service within
a specified period following the effective date of such Change in Control.
3. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
<PAGE> 25
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
1. OPTION TERMS
A. Grant Dates
Option grants shall be made on the dates specified below:
1. Each individual serving as a non-employee Board member on the Automatic
Option Grant Program Effective Date shall automatically be granted at
that time a Non-Statutory Option to purchase 10,000 shares of Common
Stock, provided that individual has not previously been in the employ of
the Corporation or any Parent or Subsidiary and has not previously
received a stock option grant from the Corporation.
2. Each individual who is first elected or appointed as a non-employee
Board member at any time after the Automatic Option Grant Program
Effective Date shall automatically be granted, on the Automatic Option
Grant Program Effective Date or on the date of such initial election or
appointment (as the case may be), a Non-Statutory Option to purchase
10,000 shares of Common Stock, provided such individual has not
previously been in the employ of the Corporation (or any Parent or
Subsidiary).
3. On the date of each Annual Shareholders Meeting held after the Automatic
Option Grant Program Effective Date, each individual who is to continue
to serve as an Eligible Director after such meeting, shall automatically
be granted, a Non-Statutory Option to purchase an additional 10,000
shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There shall be no
limit on the number of such 10,000 share option grants any one Eligible
Director may receive over his or her period of Board service.
B. Exercise Price
<PAGE> 26
The exercise price per share shall be equal to one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the option grant date.
The exercise price shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
C. Option Term
Each option shall have a term of ten (10) years measured from the option grant
date.
D. Exercise and Vesting of Options
Each option shall be immediately exercisable for any or all of the option
shares. However, any shares purchased under the option shall be subject to
repurchase by the Corporation, at the exercise price paid per share, upon the
Optionee's cessation of Board service prior to vesting in those shares. Each
initial grant shall vest, and the Corporation's repurchase right shall lapse, in
a series of four (4) successive and equal annual installments over the
Optionee's period of continued service as a Board member, with the first such
installment to vest upon the Optionee's completion of one (1) year of Board
service measured from the option grant date. Each annual grant shall vest, and
the Corporation's repurchase right shall lapse, upon the Optionee's completion
of one (1) year of Board service measured from the option grant date.
E. Effect of Termination of Board Service
The following provisions shall govern the exercise of any options held by the
Optionee at the time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the personal
representative of the Optionee's estate or the person
<PAGE> 27
or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall
have a twelve (12)-month period following the date of such cessation of
Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares of
Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by reason of death
or Permanent Disability, then all shares at the time subject to the
option shall immediately vest so that such option may, during the twelve
(12)-month exercise period following such cessation of Board service, be
exercised for all or any portion of those shares as fully-vested shares
of Common Stock.
(iv) In no event shall the option remain exercisable after the expiration of
the option term. Upon the expiration of the twelve (12)-month exercise
period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to
be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such
option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable for all of the
shares of Common Stock at the time subject to such
<PAGE> 28
option and may be exercised for all or any portion of those shares
as fully-vested shares of Common Stock. Immediately following the
consummation of the Corporate Transaction, each automatic option
grant shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in
Control, become fully exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for
all or any portion of such shares as fully-vested shares of Common
Stock. Each such option shall remain exercisable for such
fully-vested option shares until the expiration or sooner
termination of the option term or the surrender of the option in
connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation
each automatic option held by him or her for a period of at least
six (6) months. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess
of (i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in
connection with such option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted,
<PAGE> 29
immediately after such Corporate Transaction, to apply to the number
and class of securities which would have been issuable to the
Optionee in consummation of such Corporate Transaction had the
option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the
exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities
shall remain the same.
The grant of options under the Automatic Option Grant Program shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
The provisions of this Automatic Option Grant Program, together with the option
grants outstanding thereunder, may not be amended at intervals more frequently
than once every six (6) months, other than to the extent necessary to comply
with applicable Federal income tax laws and regulations.
3. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
<PAGE> 30
ARTICLE FIVE
CALL RIGHT
1. PURPOSE
The purpose of this Article Five is to provide the Corporation with a
vehicle for liquidating the outstanding options under the Plan and any shares of
Common Stock actually issued under the Plan in the event a Liquidity Transaction
does not occur prior to January 1, 2000. Accordingly, in the absence of a
Liquidity Transaction before such date, the Corporation may repurchase all the
outstanding options under the Plan during a limited window period beginning
January 1, 2000.
2. TERMS AND CONDITIONS
A. Should a Liquidity Transaction not be effected prior to January 1,
2000, then the Corporation shall have the right (the "Call Right"),
to repurchase all outstanding options under the Plan upon the
following terms and conditions:
o The Call Right may be exercised by the Corporation at any time during
the period beginning January 1, 2000 and ending January 31, 2000. The
Call Right shall, during the exercise period, be exercisable by written
notice delivered to each holder of an outstanding option under the Plan
and each holder of shares of Common Stock issued pursuant to the Plan.
In no event may the Call Right be exercised for less than the total
number of outstanding options and shares of Common Stock issued under
the Plan.
o The purchase price payable by the Corporation for each option
repurchased pursuant to the Call Right shall be equal to the number of
shares of Common Stock at the time subject to such option, whether
vested or unvested, multiplied by the excess of (A) the Appraised Value
Per Share of Common Stock as of December 31, 1998 over (B) the exercise
price payable per share under such option. However, no amount shall be
payable
<PAGE> 31
by the Corporation for any option which ceases to remain outstanding (by
reason of the Optionee's cessation of Service) prior to the date the
Corporation exercises the Call Right with respect to that option.
o Within fifteen (15) days following receipt of the Corporation's exercise
notice, the option holder shall deliver to the Corporation the executed
stock option agreement evidencing each outstanding option held by such
individual. The purchase price for each option shall be paid in one
lump-sum cash payment within fifteen (15) days after the Corporation's
receipt of the executed stock option agreement for that option. At the
time such payment is made to the option holder, such individual shall
cease to have any right, title or interest in and to the repurchased
option and the option shares purchasable thereunder, and such individual
shall no longer have any equity or other proprietary interest in the
Corporation by reason of any options issued under the Plan.
B. Repurchase of Common Stock. Shares of Common Stock issued under the
Plan, whether pursuant to the exercise of options granted under the
Discretionary Option Grant Program or direct stock issuances made
under the Stock Issuance Program and whether vested or unvested,
may, in the Plan Administrator's discretion, be held in escrow by
the Corporation or may be issued directly to the Optionee or
Participant with restrictive legends on the certificates for those
shares indicating that such shares remain subject to the Call Right
until the consummation of a Liquidity Transaction. The purchase
price payable by the Corporation shall be equal to the number of
shares of Common Stock repurchased by the Corporation pursuant to
the Call Right multiplied by the Appraised Value Per Share of Common
Stock as of the date the Call Right is exercised. However, any
unvested shares of Common Stock which the Corporation is entitled to
repurchase, at the original price per share paid by the Optionee or
the Participant, by reason of the Optionee's or Participant's
cessation of Service prior
<PAGE> 32
to the date the Corporation exercises the Call Right under this
Article Five shall remain purchasable by the Corporation at such
original price per share, and the Corporation shall not repurchase
those shares pursuant to the Call Right provisions of this Article
Five.
Within fifteen (15) days following receipt of the Corporations exercise
notice, the Optionee or Participant shall deliver to the Corporation the stock
certificates for the shares of Common Stock for which the Call Right is being
exercised, with each such certificate to be duly endorsed for transfer by the
holder of record. Payment of the purchase price for the repurchased shares shall
be paid in one lump-sum cash payment within fifteen (15) days after the
Corporation's receipt of such duly-endorsed stock certificates. At the time such
payment is made to the Optionee or Participant, such individual shall cease to
have any right, title or interest in and to the repurchased shares and
accordingly shall no longer have any equity or other proprietary interest in the
Corporation attributable to those shares.
3. TERMINATION OF CALL RIGHT
The Call Right shall terminate and cease to be exercisable immediately
upon the occurrence of a Liquidity Transaction. The Call Right shall also
terminate at the close of business on January 31, 2000, unless the Corporation
shall have previously provided the requisite exercise notice of the Call Right
to each option holder under the Plan.
<PAGE> 33
ARTICLE SIX
MISCELLANEOUS
1. FINANCING
A. The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant
Program or the purchase price for shares issued under the Stock
Issuance Program by delivering a promissory note payable in one or
more installments. The terms of any such promissory note (including
the interest rate and the terms of repayment) shall be established
by the Plan Administrator in its sole discretion. Promissory notes
may be authorized with or without security or collateral. In all
events, the maximum credit available to the Optionee or Participant
may not exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any
Federal, state and local income and employment tax liability
incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.
2. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or stock appreciation rights or upon the
issuance or vesting of such shares under the Plan shall be subject
to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested
<PAGE> 34
shares of Common Stock under the Plan (other than the options
granted or the shares issued under the Automatic Option Grant
Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of
their shares. Such right may be provided to any such holder in
either or both of the following formats:
(i) Stock Withholding: The election to have the Corporation withhold, from
the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
(ii) Stock Delivery: The election to deliver to the Corporation, at the time
the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the
Taxes) with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
3. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date. Options
may be granted under the Discretionary Option Grant Program at any
time on or after the Plan Effective Date. Initial options under the
automatic Option Grant Program shall be made to the Eligible
Directors on the Automatic Option Grant Program Effective Date.
However, no options granted under the Plan may be exercised, and no
shares shall be issued under the Plan, until the Plan is approved by
the Corporation's shareholders. If such shareholder approval is not
obtained within twelve (12) months after the Plan Effective Date,
then all options previously granted under this Plan shall terminate
and cease to be
<PAGE> 35
outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall terminate upon the earliest of (i) January 31, 2010,
(ii) the date on which all shares available for issuance under the
Plan shall have been issued pursuant to the exercise of the options
or the issuance of shares (whether vested or unvested) under the
Plan or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination,
all outstanding options and unvested stock issuances shall continue
to have force and effect in accordance with the provisions of the
documents evidencing such options or issuances.
4. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, (i) no
such amendment or modification shall adversely affect any rights and
obligations with respect to options, stock appreciation rights or
unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification, and (ii) any amendment made to the Automatic Option
Grant Program (or any options outstanding thereunder) shall be in
compliance with the limitations of that program. In addition, the
Board shall not, without the approval of the Corporation's
shareholders, (i) materially increase the maximum number of shares
issuable under the Plan, or the number of shares for which options
may be granted under the Automatic Option Grant Program, except for
permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) materially modify the eligibility
requirements for Plan participation or (iii) materially increase the
benefits accruing to Plan participants.
<PAGE> 36
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in
excess of the number of shares then available for issuance under the
Plan, provided any excess shares actually issued under those
programs are held in escrow until there is obtained shareholder
approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If
such shareholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i)
any unexercised options granted on the basis of such excess shares
shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under
the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were
held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
5. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
6. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option or stock
appreciation right under the Plan and the issuance of any shares of Common Stock
(i) upon the exercise of any option or stock appreciation right or (ii) under
the Stock Issuance Program shall be subject to the Corporation's procurement of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options and stock appreciation rights granted under it and
the shares of Common Stock issued pursuant to it. No shares of Common Stock or
other assets shall
<PAGE> 37
be issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities laws
and any applicable listing requirements of any stock exchange (or the Nasdaq
National Market, if applicable) on which Common Stock is then listed for
trading.
7. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
<PAGE> 38
APPENDIX
The following definitions shall be in effect under the Plan:
A. Appraised Value Per Share shall mean the fair market value per share of
Common Stock, as determined as of December 31, 2000 through independent
appraisal on the basis of the going-concern value of the Corporation at
that time, without discount for the limited marketability or minority
interest represented by such share of Common Stock.
B. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
C. Automatic Option Grant Program Effective Date shall mean the date on
which the Underwriting Agreement is executed and the initial public
offering price of the Common Stock is established.
D. Board shall mean the Corporation's Board of Directors.
E. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or related group
of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with,
the Corporation), of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's shareholders which the Board does not
recommend such shareholders to accept, or
(ii) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more
<PAGE> 39
contested elections for Board membership, to be comprised of individuals
who either (A) have been Board members continuously since the beginning
of such period or (B) have been elected or nominated for election as
Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time
such election or nomination was approved by the Board..
F. Code shall mean the Internal Revenue Code of 1986, as amended.
G. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of
the Corporation's assets in complete liquidation or dissolution of the
Corporation.
H. Corporation shall mean uMember.com, Inc., a California corporation, and
any corporate successor to all or substantially all of the assets or
voting stock of uMember.com, Inc., which shall by appropriate action
adopt the Plan.
I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.
J. Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
<PAGE> 40
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and
the manner and method of performance.
L. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National Market,
then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange, then
the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(iii) For purposes of option grants made on the date of execution of the
Underwriting Agreement, the Fair Market Value shall be deemed to be
equal to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
<PAGE> 41
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
N. Hostile Take-Over shall mean a change in ownership of the Corporation
effected through the following transaction:
(i) the acquisition, directly or indirectly, by any person or related group
of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with,
the Corporation) of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's shareholders which the Board does not
recommend such shareholders to accept, and
(ii) more than fifty percent (50%) of the securities so acquired are accepted
from persons other than Section 16 Insiders.
O. Incentive Option shall mean an option that satisfies the requirements of
Code Section 422.
P. Involuntary Termination shall mean the termination of the Service of any
individual that occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the Corporation
for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her
level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and participation
in corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided
<PAGE> 42
and only if such change, reduction or relocation is effected by the
Corporation without the individual's consent.
Q. Liquidity Transaction shall mean either of the following transactions:
o the completion of a firm commitment underwritten public offering of
Common Stock, pursuant to an effective registration statement under the
1933 Act, which yields aggregate net proceeds to the Corporation of not
less than Seven Million Five Hundred Thousand Dollars ($7,500,000), or
o a Corporate Transaction or any other acquisition of the Corporation
effected through a direct sale, exchange or transfer by the
Corporation's stockholders of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities.
R. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or
disclosure by such person of confidential information or trade secrets
of the Corporation (or any Parent or Subsidiary), or any other
intentional misconduct by such person adversely affecting the business
or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of any Optionee, Participant or other person in the Service of
the Corporation (or any Parent or Subsidiary).
S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
T. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
<PAGE> 43
U. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
W. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
X. Permanent Disability or Permanently Disabled shall mean the inability of
the Optionee or the Participant to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration
of twelve (12) months or more. However, solely for the purposes of the
Automatic Option Grant Program, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to
perform his or her usual duties as a Board member by reason of any
medically determinable physical or mental impairment expected to result
in death or to be of continuous duration of twelve (12) months or more.
Y. Plan shall mean the Corporation's 1999 Stock Option/Stock Issuance Plan,
as set forth in this document.
Z. Plan Administrator shall mean the particular entity, whether the Primary
Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs
with respect to one or more classes of eligible persons, to the extent
such entity is carrying out its administrative functions under those
programs with respect to the persons under its jurisdiction.
<PAGE> 44
AA. Plan Effective Date shall mean the date on which the Plan is adopted by
the Board.
AB. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders.
AC. Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other
than Section 16 Insiders.
AD. Section 16 Insider shall mean an officer or director of the Corporation
subject to the short-swing profit liabilities of Section 16 of the 1934
Act.
AE. Section 12(g) Registration Date shall mean the first date on which the
Common Stock is registered under Section 12(g) of the 1934 Act.
AF. Service shall mean the provision of services to the Corporation (or any
Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically
provided in the documents evidencing the option grant.
AG. Stock Exchange shall mean either the American Stock Exchange or the New
York Stock Exchange.
AH. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AI. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
<PAGE> 45
AJ. Subsidiary shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AK. Take-Over Price shall mean the greater of (i) the Fair Market Value per
share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is
an Incentive Option, the Take-Over Price shall not exceed the clause (i)
price per share.
AL. Taxes shall mean the Federal, state and local income and employment tax
liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
AM. 10% Shareholder shall mean the owner of stock (as determined under Code
Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Parent or Subsidiary).
AN. Underwriting Agreement shall mean the agreement between the Corporation
and the underwriter or underwriters managing the initial public offering
of the Common Stock.
<PAGE> 46
NOTICE OF EXERCISE
I hereby notify uMember.com, Inc. (the "Corporation") that I elect to purchase
shares of the corporation's Common Stock (the "Purchased Shares") at the option
exercise price of _______ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1999 Stock
Option/Stock Issuance Plan on ____________.
Concurrently with the delivery of this Exercise Notice to the Corporation, I
shall hereby pay to the Corporation the Exercise Price for the Purchased Shares
in accordance wit the provisions of my agreement with the Corporation (or other
documents) evidencing the Option and shall deliver whatever additional documents
may be required by such agreement as a condition for exercise. Alternatively, I
may utilize the special broker-dealer sale and remittance procedure specified in
my agreement to effect payment of the Exercise Price.
Date: ______________________
Optionee: _________________________________
Address: _________________________________
_________________________________
Print name in exact manner it is to appear on the stock certificate:
________________________
Address to which certificate is to be sent, if different from address above:
_________________________________
_________________________________
_________________________________
Social Security Number: __________________________
<PAGE> 47
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of
the corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean uMember.com, Inc., a California corporation.
G. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides
or otherwise conveys, pursuant to applicable State domestic relations
laws (including community property laws), marital property rights to any
spouse or former spouse of the Optionee.
H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and
the manner and method of performance.
I. Exercise Date shall mean the date on which the option shall have beer
exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.
<PAGE> 48
K. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.
L. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the NASDAQ National Market,
then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the NASDAQ National Market
or any successor system. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange, then
the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(iii) For purposes of option grants made on the date of execution of the
Underwriting Agreement, the Fair Market Value shall be deemed to be
equal to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
M. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.
<PAGE> 49
N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying
the Agreement, pursuant to which Optionee has been informed of the basic
terms of the option evidenced hereby.
O. Incentive Option shall mean an option, which satisfies the requirements
of Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's
Service, which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation (or Parent or Subsidiary employing
Optionee) which materially reduces Optionee's level of responsibility,
(B) a reduction in Optionee's level of compensation (including base
salary, fringe benefits and participation in corporate -performance
based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Optionee's place of employment by more than fifty
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee's consent.
Q. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by
Optionee adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary may
consider as grounds for the dismissal or discharge of Optionee or any
other individual in the Service of the Corporation (or any Parent or
Subsidiary).
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Notice of Exercise shall mean the notice of exercise in the form of
Exhibit I.
<PAGE> 50
T. Option Shares shall mean the number of shares of Common Stock subject to
the option as specified in the Grant Notice.
U. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination , stock possessing fifty percent
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
W. Permanent Disability shall mean the inability of Optionee to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or
has lasted or can be expected to last for continuous period of twelve
(12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Option/Stock lssuance Plan.
Y. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.
Z. Purchase Agreement shall mean the stock purchase agreement (in form an
substance satisfactory to the Corporation) which grants the Corporation
the right to repurchase at the Exercise Price, any and all unvested
Option Shares held by Optionee at the time c Optionee's cessation of
Service and which precludes the sale, transfer or other disposition any
purchased Option Shares while subject to such repurchase right.
AA. Qualified Domestic Relations Order shall mean a Domestic Relations Order
which substantially complies with the requirements of Code Section
414(p). The Plan Administrator shall have the sole discretion to
determine whether a Domestic Relations Order a Qualified Domestic
Relations Order.
AB. Service shall mean Optionee's performance of services for the
Corporation (C any Parent or Subsidiary) in
<PAGE> 51
the capacity of an Employee, a non-employee member of the boar of
directors or a consultant or independent advisor.
AC. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.
AD. Subsidiary shall mean any corporation (other than the Corporation) in a
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination stock possessing fifty percent or
more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
AE. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, as such vesting schedule is subject to acceleration in the event
of a Corporate Transaction.
<PAGE> 52
UMEMBER.COM, INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purposes of retaining the
services of selected Employees, non-employee members of the Board or the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any
Parent or Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a Parent
o Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned
to then in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of the
Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option tern specified in Paragraph 2 at the
Exercise Price.
2. Option Term. This option shall have a term of ten (10) years measured
from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance
with Paragraph 5, 6 or 17.
3. Limited Transferability. This option shall be neither transferable no
assignable by Optionee other than by will or by the laws of descent and
distribution following Optionees death and may be exercised, during
Optionee's lifetime, only by Optionee. However if this option is
designated a Non-Statutory Option in the Grant Notice, then this option
may also be assigned in whole or in part during Optionee's
<PAGE> 53
lifetime in accordance with the terms of Qualified Domestic Relations
Order. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to
such Qualified Domestic Relations Order. The terms applicable to the
assigned portion shall be the same a~ those in effect for this option
immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem
appropriate.
(a) This option shall be immediately exercisable for any or all of the
Option Shares, whether or not the Option Shares are vested in
accordance with the Vesting Schedule, and shall remain so
exercisable until the Expiration Date or sooner termination of the
option term under Paragraph 4, 5 or 16. Any unvested Option Shares
purchased under this option shall be subject to repurchase by the
Corporation, at the Exercise Price paid per share, upon Optionee's
cessation of Service prior to vesting in those Option Shares.
(b) Optionee shall, in accordance with the Vesting Schedule, vest in the
Option Shares in one or more installments over his cessation of
Service. Vesting in the Option Shares may be accelerated pursuant to
the provisions of Paragraph 4 or 5. In no event, however, shall any
additional Option Shares vest following Optionee's cessation of
Service.
4. Cessation of Service. The option term specified in Paragraph 2 shall
terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become
applicable:
(i) Should Optionee cease to remain in Service for any reason (other than
death, Permanent Disability, or Misconduct) while this option is
outstanding, then Optionee shall have a period of three (3) months
(commencing with the date of such cessation of Service) during which to
exercise this option,
<PAGE> 54
but in no event shall this option be exercisable at any time after the
Expiration Date.
(ii) Should Optionee die while this option is outstanding, then the personal
representative of Optionee's estate or the person or persons to whom the
option is transferred pursuant to Optionee's will or in accordance with
the laws of descent and distribution shall have the right to exercise
this option. Such right shall lapse and this option shall cease to be
outstanding upon the earlier of (A) the expiration of the twelve (12)
month period measured from the date of Optionee's death or (B) the
Expiration Date.
(iii) Should Optionee cease Service by reason of Permanent Disability while
this option is outstanding, then Optionee shall have a period of twelve
(12) months (commencing with the date of such cessation of Service)
during which to exercise this option. In no event shall this option be
exercisable at any time after the Expiration Date.
(iv) During the limited post-Service exercise period, this! option may not be
exercised in the aggregate for more than the number of Option Shares in
which Optionee is, at the time of Optionee's cessation of Service,
vested in accordance with the Vesting Schedule. Upon the expiration of
such limited exercise period or (if earlier) upon the Expiration Date,
this option shall terminate and cease to be outstanding for any vested
Option Shares for which the option has not been exercised To the extent
Optionee is not vested in the Option Shares at the time of Optionee's
cessation of Service, this option shall immediately terminate and cease
to be outstanding with respect to those shares.
(v) Should Optionee's Service be terminated for Misconduct then this option
shall terminate immediately and cease to remain outstanding.
(vi) In the event of a Corporate Transaction, the provisions c Paragraph 6
shall govern the period for which this option is to remain exercisable
following Optionees cessation of Service
<PAGE> 55
and shall supersede any provisions to the contrary in this paragraph.
5. Special Acceleration of Option.
(a) All the Option Shares subject to this option at the time of a
Corporate Transaction but not otherwise vested shall automatically
vest and the Corporation's repurchase rights with respect to those
Option Shares shall immediately terminate so that this option shall,
immediately prior to the effective date of the Corporate
Transaction, become exercisable for all of the Option Shares as
fully vested shares of Common Stock and may be exercised for any or
all of those Option Shares. No such accelerated vesting of the
Option Shares, however, shall occur if and to the extent: (i) this
option is, in connection with the Corporate Transaction, either to
be assumed by the successor corporation (or parent thereof) or to be
replaced with a comparable option to purchase shares of the capital
stock of the successor corporation (or parent thereof), and the
corporation's repurchase rights with respect to the unvested Option
Shares are to be assigned to such successor corporation (or parent
thereof) or (ii) this option is to be replaced with a cash incentive
program of the successor corporation which preserves the spread
existing on the unvested Option Shares at the time of the Corporate
Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides
for subsequent payout in accordance with the Vesting Schedule.
(b) Immediately following the Corporate Transaction, this option shall
terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with
the Corporate Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be
<PAGE> 56
appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately
prior to such Corporate Transaction, and appropriate adjustments
shall also be made to the Exercise Price, provided the aggregate
Exercise Price shall remain the same.
(d) Should there occur an Involuntary Termination of Optionee's Service
within eighteen (18) months following a Corporate Transaction in
which this option is assumed or replaced and the corporation's
repurchase rights with respect to the unvested Option Shares are
assigned, then all the Option Shares at the time subject to this
option but not otherwise vested shall automatically vest and the
corporation's repurchase rights with respect to those Option Shares
shall terminate so that this option shall immediately become
exercisable for all those Option Shares as fully-vested shares of
Common Stock and may be exercised for any or all of those vested
Option Shares at any time prior to the earlier of (i) the Expiration
Date or (ii) the expiration of the one (1)-year period measured from
the date of such Involuntary Termination.
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its
business or assets.
6. Adjustment in Option Shares. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporations receipt of
consideration, appropriate adjustments shall be made to (i) the total
number and/or class of securities subject to this option and (ii) the
Exercise Price in order to reflect such change and thereby preclude a
dilution or enlargement of benefits hereunder.
<PAGE> 57
7. Shareholder Rights. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such persons
have exercised the option, paid the Exercise Price and become a holder
of record of the purchased shares.
8. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or any part of
the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must
take the following actions:
(i) To the extent the option is exercised for vested Option Shares, execute
and deliver to the Corporation a Notice of Exercise for the Option
Shares for which the option is exercised. To the extent this option is
exercised for unvested Option Shares, execute and deliver to the
Corporation a Purchase Agreement for those shares.
(ii) Pay the aggregate Exercise Price for the purchased shares in one or more
of the following forms:
(a) cash or check made payable to the Corporation;
(b) a promissory note payable Corporation, but only to the extent
authorized by Administrator in accordance with Paragraph 13,1934
paid to the Plan. Should the Common Stock be registered under
Section 12(g) of the Act at the time this option is exercised, then
the Exercise Price may also be as follows:
(c) in shares of Common Stock held by Optionee (or any other person or
persons exercising the option) for the requisite period necessary to
avoid a charge to the corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date; or
<PAGE> 58
(d) to the extent the option is exercised for vested Option Shares,
through a special sale and remittance procedure pursuant to which
Optionee (or any other person or persons exercising the option)
shall concurrently provide irrevocable written instructions (I) to a
Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate Exercise Price payable for the purchased shares
plus all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
exercise and (II) to the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent the sale and remittance procedure is utilized
in connection with the option exercise, payment of the Exercise
Price must accompany the Notice of Exercise (or the Purchase
Agreement) delivered to the Corporation in connection with the
option exercise.
(iii) Furnish to the Corporation appropriate documentation that the person or
persons exercising the option (if other than Optionee) have the right to
exercise this option.
(iv) Make appropriate arrangements with the corporation (or Parent of
Subsidiary employing or retaining Optionee) for the satisfaction of all
Federal, state and local income and employment tax withholding
requirements applicable to the option exercise.
(a) As soon as practical alter the Exercise Date, the Corporation shall
issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option
Shares, with the appropriate legends affixed thereto. To the extent
any such Option Shares are unvested, the certificates for those
Option Shares shall be endorsed with an appropriate legend
<PAGE> 59
evidencing the Corporation's repurchase rights and may be held in
escrow with the Corporation until such shares vest.
(b) In no event may this option be exercised for any fractional shares.
10. Repurchase Rights. All option shares acquired upon the exercise of this
option shall be subject to certain rights of the corporation and its
assigns to repurchase those shares in accordance with the terms
specified in the purchase agreement.
11. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of the Option Shares
upon such exercise shall be subject to compliance by the Corporation
and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange
(or the NASDAQ National Market, if applicable) on which the Common
Stock may be listed for trading at the time of such exercise and
issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock
pursuant to this option shall relieve the Corporation of any
liability with respect to the non-issuance or sale of the Common
Stock as to which such approval shall not have been obtained. The
Corporation, however, shall use its best efforts to obtain all such
approvals.
12. Successors and Assigns. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionees assigns and the legal representatives,
heirs and legatees of Optionees estate.
13. Notices. Any notice required to be given or delivered to the Corporation
under the terms of this Agreement shall be in writing and addressed to
the Corporation at its principal
<PAGE> 60
corporate offices. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the address
indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit
in the U.S. mail, postage prepaid and properly addressed to the party to
be notified.
14. Financing. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise
Price for the purchased Option Shares by delivering a promissory note.
The terms of any such promissory note (including the interest rate, the
requirements for collateral and the terms of repayment) shall be
established by the Plan Administrator in its sole discretion. (1)
15. Construction. This Agreement and me option evidenced hereby are made and
granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan
Administrator with respect to any question or issue arising under the
Plan or this Agreement shall be conclusive and binding on all persons
having an interest in this option.
16. Governing Law. The interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
17. Shareholder Approval.
(a) The grant of this option is subject to approval of the Plan by the
Corporation's shareholders within twelve (12) months after the
adoption of the Plan by the Board. Notwithstanding any provision of
this Agreement to the contrary. this option may not be exercised in
whole or in Dart until such shareholder approval is obtained. In the
event that such shareholder approval is not obtained then
- ------------
(1) Authorization of payment of the Exercise Price by a promissory note may,
under currently proposed Treasury Regulations, result in the loss of
incentive stock option treatment under the Federal tax laws.
<PAGE> 61
this option shall terminate in its entirety and Optionee shall have
no further rights to acquire any Option Shares hereunder.
(b) If the Option Shares covered by this Agreement exceed, as of the
Grant Date, the number of shares of Common Stock which may without
stockholder approval be issued under the Plan, then this option
shall be void with respect to such excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of
shares of Common Stock issuable under the Plan is obtained in
accordance with the provisions of the Plan.
18. Additional Terms Applicable to an Incentive Option. In the event this
option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
(i) This option shall cease to qualify for favorable tax treatment as an
Incentive Option if (and to the extent) this option is exercised for one
or more Option Shares: (A) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or
Permanent Disability or (B) more than twelve (12) months after the date
Optionee ceases to be an Employee by reason of Permanent Disability.
(ii) This option shall not become exercisable in the calendar year in which
granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option
would otherwise first become exercisable in such calendar year would,
when added to the aggregate value (determined as of the respective date
or dates of grant) of the Common Stock and any other securities for
which one or more other Incentive Options granted to Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable during
the same calendar year, exceed One Hundred Thousand Dollars ($100,000)
in the aggregate. To the extent the exercisability of this option is
deferred by reason of the foregoing limitation, the deferred portion
shall
<PAGE> 62
become exercisable in the first calendar year or years thereafter in
which the One Hundred Thousand Dollar ($100,000) limitation of this
immediately prior to the effective date of a Corporate Transaction in
which this option is not to be assumed or the Optionee's Involuntary
Termination in connection with Corporate Transaction, whereupon the
option shall become immediately exercisable as a Non-Statutory Option
for the deferred portion of the Option Shares.
(iii) Should Optionee hold in addition to this option one o more other options
to purchase Common Stock which become exercisable for the first time in
the same calendar year as time option, then the foregoing limitations,
then the foregoing limitations on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which
such options are granted.
<PAGE> 63
EXHIBIT 1
NOTICE OF EXERCISE
I hereby notify uMember.com, Inc. (the "Corporation") that I elect to purchase
shares of the corporation's Common Stock (the "Purchased Shares") at the option
exercise price of _______ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1999 Stock
Option/Stock Issuance Plan on ____________.
Concurrently with the delivery of this Exercise Notice to the Corporation, I
shall hereby pay to the Corporation the Exercise Price for the Purchased Shares
in accordance wit the provisions of my agreement with the Corporation (or other
documents) evidencing the Option and shall deliver whatever additional documents
may be required by such agreement as a condition for exercise. Alternatively, I
may utilize the special broker-dealer sale and remittance procedure specified in
my agreement to effect payment of the Exercise Price.
Date: ______________________
Optionee: _________________________________
Address: _________________________________
_________________________________
Print name in exact manner it is to appear on the stock certificate:
_________________________________
Address to which certificate is to be sent, if different from address above:
_________________________________
_________________________________
_________________________________
Social Security Number: __________________________
<PAGE> 64
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of
the corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean uMember.com, Inc., a California corporation.
G. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides
or otherwise conveys, pursuant to applicable State domestic relations
laws (including community property laws), marital property rights to any
spouse or former spouse of the Optionee.
H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and
the manner and method of performance.
I. Exercise Date shall mean the date on which the option shall have beer
exercised in accordance with Paragraph 9 of the Agreement.
<PAGE> 65
J. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.
K. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice. L. Fair Market Value per share of Common
Stock on any relevant date shall be determined in accordance with the
following provisions:
(i) If the Common Stock is at the time traded on the NASDAQ National Market,
then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the NASDAQ National Market
or any successor system. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time listed on any Stock Exchange, then
the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(iii) For purposes of option grants made on the date of execution of the
Underwriting Agreement, the Fair Market Value shall be deemed to be
equal to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
(iv) For purposes of option grants made prior to the date of execution of the
Underwriting Agreement, the Fair Market Value shall be determined by the
Plan Administrator after
<PAGE> 66
taking into account such factors as the Plan Administrator shall deem
appropriate.
M. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.
N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying
the Agreement, pursuant to which Optionee has been informed of the basic
terms of the option evidenced hereby.
O. Incentive Option shall mean an option, which satisfies the requirements
of Code Section 422.
P. Involuntary Termination shall mean the termination of Optionee's
Service, which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation (or Parent or Subsidiary employing
Optionee) which materially reduces Optionee's level of responsibility,
(B) a reduction in Optionee's level of compensation (including base
salary, fringe benefits and participation in corporate -performance
based bonus or incentive programs) by more than fifteen percent (15%) or
(C) a relocation of Optionee's place of employment by more than fifty
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee's consent.
Q. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by
Optionee adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary may
consider as grounds for the dismissal or discharge of Optionee or any
<PAGE> 67
other individual in the Service of the Corporation (or any Parent or
Subsidiary).
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Notice of Exercise shall mean the notice of exercise in the form of
Exhibit I.
T. Option Shares shall mean the number of shares of Common Stock subject to
the option as specified in the Grant Notice.
U. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination , stock possessing fifty percent
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
W. Permanent Disability shall mean the inability of Optionee to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or
has lasted or can be expected to last for continuous period of twelve
(12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Option/Stock lssuance Plan.
Y. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.
Z. Purchase Agreement shall mean the stock purchase agreement (in form an
substance satisfactory to the Corporation) which grants the Corporation
the right to repurchase at the Exercise Price, any and all unvested
Option Shares held by Optionee at the time of Optionee's cessation of
Service and which precludes the sale, transfer or other disposition any
purchased Option Shares while subject to such repurchase right.
AA. Qualified Domestic Relations Order shall mean a Domestic Relations Order
which substantially complies with the
<PAGE> 68
requirements of Code Section 414(p). The Plan Administrator shall have
the sole discretion to determine whether a Domestic Relations Order a
Qualified Domestic Relations Order.
AB. Service shall mean Optionee's performance of services for the
Corporation (of any Parent or Subsidiary) in the capacity of an
Employee, a non-employee member of the boar of directors or a consultant
or independent advisor.
AC. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.
AD. Subsidiary shall mean any corporation (other than the Corporation) in a
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination stock possessing fifty percent or
more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
AE. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, as such vesting schedule is subject to acceleration in the event
of a Corporate Transaction.
<PAGE> 69
UMEMBER.COM
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this _____ day of _______, by and between
uMember.com, Inc., a California corporation and _____________, Optionee under
the Corporation's 1999 Stock Option/Stock Issuance Plan.
All capitalized terms in this Agreement shall have the meaning assigned to them
in this Agreement or in the attached Appendix.
A. EXERCISE OF OPTION
1. Exercise. Optionee hereby purchases ____________ unvested shares of
Common Stock (the "Purchased Shares") pursuant to that certain option
(the "Option") granted Optionee on (the "Grant Date") to purchase up to
________ shares of Common Stock under the Plan at the exercise price of
$__________ per share (the "Exercise Price").
2. Payment. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased
Shares in accordance with the provisions of the Option Agreement and
shall deliver whatever additional documents may be required by the
Option Agreement as a condition for exercise, together with a
duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.
3. Delivery of Certificates. The certificates representing the Purchased
Shares shall be held in escrow in accordance with the provisions of this
Agreement.
4. Shareholder Rights. Until such time as the Corporation exercises the
Repurchase Right, Optionee (or any successor in interest) shall have all
the rights of a shareholder (including voting, dividend and Liquidation
rights) with respect to the Purchased Shares, subject, however, to the
transfer restrictions of Articles B and C.
<PAGE> 70
B. SECURITIES LAW COMPLIANCE
1. Restricted Securities. The Purchased Shares have not been registered
under the 1933 Act and are being issued to Optionee in reliance upon the
exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Optionee
hereby confirms that Optionee has been informed that the Purchased
Shares are restricted securities under the 1933 Act and may not be
resold or transferred unless the Purchased Shares are first registered
under the Federal securities laws or unless an exemption from such
registration is available. Accordingly, Optionee hereby acknowledges
that Optionee is prepared to hold the Purchased Shares for an indefinite
period and that Optionee is aware that SEC Rule 144 issued under the
1933 Act which exempts certain resales of unrestricted securities is not
presently available to exempt the resale of the Purchased Shares from
the registration requirements of the 1933 Act.
2. Disposition of Purchased Shares. Optionee shall make no disposition of
the Purchased Shares (other than a Permitted Transfer) unless and until
there is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a written summary of
the terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of this Agreement
applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with written assurances, in
form and substance satisfactory to the Corporation, that (a) the
proposed disposition does not require registration of the Purchased
Shares under the 1933 Act or (b) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or any
<PAGE> 71
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
(iv) Optionee shall have provided the Corporation with written assurances, in
form and substance satisfactory to the Corporation, that the proposed
disposition will not result in the contravention of any transfer
restrictions applicable to the Purchased Shares pursuant to the
provisions of the Rules of the California Corporations Commissioner.
The Corporation shall not be required (i) to transfer on its books any
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased Shares
shall be endorsed with one or more of the following restrictive legends:
(i) "The shares represented by this certificate have not been registered
under the Securities Act of 1933. The shares may not be sold or offered
for sale in the absence of (a) an effective registration statement for
the shares under such Act, (b) a "no action" letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such
Act is not required with respect to such sale or offer."
(ii) "The shares represented by this certificate are subject to certain
repurchase rights and rights of first refusal granted to the Corporation
and accordingly may not be sold, assigned, transferred, encumbered, or
in any manner disposed of except in conformity with the terms of a
written agreement dated between the Corporation and the registered
holder of the shares (or the predecessor in interest to the shares). A
<PAGE> 72
copy of such agreement is maintained at the Corporation's principal
corporate offices."
C. TRANSFER RESTRICTIONS
1. Restriction on Transfer. Except for any Permitted Transfer, Optionee
shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not
be transferred, assigned, encumbered or otherwise disposed of in
contravention of the First Right of the Market Stand-Off.
2. Transferee Obligations. Each person (other than the Corporation) to whom
the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer,
acknowledge in writing to the Corporation that such person is bound by
the provisions of this Agreement and that the transferred shares are
subject to (i) the Repurchase Right, (ii) the First Refusal Right and
(iii) the Market Stand-Off, to the same extent such shares would be so
subject if retained by Optionee.
3. Market Stand-Off.
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the
Corporation's initial public offering, Owner shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for
the purchase of or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent
of the Corporation or its underwriters. Such restriction (the
"Market Stand-Off") shall be in effect for such period of time from
and after the effective date of the final prospectus for the
offering as may be requested by the Corporation or such
underwriters. In no event, however, shall such period exceed one
hundred eighty (180) days and
<PAGE> 73
the Market Stand-Off shall in all events terminate two (2) years
after the effective date of the Corporation's initial public
offering.
(b) Owner shall be subject to the Market Stand-Off provided and only if
the officers and directors of the Corporation are also subject to
similar restrictions.
(c) Any new, substituted or additional securities which are by reason of
any Recapitalization or Reorganization distributed with respect to
the Purchased Shares shall be immediately subject to the Market
Stand-Off to the same extent the Purchased Shares are at such time
covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation may impose
stop-transfer instructions with respect to the Purchased Shares
until the end of the applicable stand-off period.
D. REPURCHASE RIGHT
1. Grant. The Corporation is hereby granted the right (the "Repurchase
Right"), exercisable at any time during the ninety (90) day period
following the date Optionee ceases for any reason to remain in Service
or (if later) during the ninety (90) day period following the execution
date of this Agreement, to repurchase at the Exercise Price all or any
portion of the Purchased Shares in which Optionee is not, at the time of
his or her cessation of Service, vested in accordance with the Vesting
Schedule (such shares to be hereinafter referred to as the "Unvested
Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested
Shares prior to the expiration of the ninety (90) day exercise period.
The notice shall indicate the number of Unvested Shares to repurchased
and the date on which the repurchase is to be effected, such date to be
not more than thirty (30) days after the date of such notice. The
<PAGE> 74
certificates representing the Unvested Shares to be repurchased shall be
delivered to the Corporation prior to the close of business on the date
specified for the repurchase. Concurrently with the receipt of such
stock certificates, the Corporation shall pay to Owner, in cash or cash
equivalents (including the cancellation of any purchase-money
indebtedness), an amount equal to the Exercise Price previously paid for
the Unvested Shares which are to be repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all
Purchased Shares in which Optionee vests in accordance with the Vesting
Schedule.
4. Aggregate Vesting Limitation. If the Option is exercised in more than
one increment so that Optionee is a party to one or more other Stock
Purchase Agreements (the "Prior Purchase Agreements") which are executed
prior to the date of this Agreement, then the total number of Purchased
Shares as to which Optionee shall be deemed to have a fully-vested
interest under this Agreement and all Prior Purchase Agreements shall
not exceed in the aggregate the number of Purchased Shares in which
Optionee would otherwise at the time be vested, in accordance with the
Vesting Schedule, had all the Purchased Shares (including those acquired
under the Prior Purchase Agreements) been acquired exclusively under
this Agreement.
5. Recapitalization. Any new, substituted or additional securities or other
property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the Repurchase
Right, but only to the extent the Purchased Shares are at the time
covered by such right. Appropriate adjustments to reflect such
distribution shall be made to the number and/or class of Purchased
Shares subject to this Agreement and to the price per share to be paid
upon the exercise of the Repurchase Right
<PAGE> 75
in order to reflect the effect of any such Recapitalization upon the
Corporation's capital structure; provided, however, that the aggregate
exercise price shall remain the same.
6. Corporate Transaction.
(a) Immediately prior to the consummation of any Corporate Transaction,
the Repurchase Right shall automatically lapse in its entirety,
except to the extent the Repurchase Right is to be assigned to the
successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(b) To the extent the Repurchase Right remains in effect following a
Corporate Transaction, such right shall apply to the new capital
stock or other property (including any cash payments) received in
exchange for the Purchased Shares in consummation of the Corporate
Transaction, but only to the extent the Purchased Shares are at the
time covered by such right. Appropriate adjustments shall be made to
the price per share payable upon exercise of the Repurchase Right to
reflect the effect of the Corporate Transaction upon the
Corporation's capital structure; provided, however, that the
aggregate exercise price shall remain the same.
(c) The Repurchase Right shall automatically lapse in its entirety, and
all the Purchased Shares shall immediately vest in full, upon an
Involuntary Termination of Optionee's Service within eighteen (18)
months following the effective date of a Corporate Transaction in
which the Repurchase Right has been assigned.
E. ESCROW
1. Deposit. Upon issuance, the certificates for the Purchased Shares shall
be deposited in escrow with the Corporation to be held in accordance
with the provisions of this Article E. Each deposited certificate shall
be accompanied by a duly-executed Assignment Separate from Certificate
in the form of Exhibit I. The deposited certificates, together with any
other assets or
<PAGE> 76
securities from time to time deposited with the Corporation pursuant to
the requirements of this Agreement, shall remain in escrow until such
time or times as the certificates (or other assets and securities) are
to be released or otherwise surrendered for cancellation in accordance
with Paragraph E.3. Upon delivery of the certificates (or other assets
and securities) to the Corporation, Owner shall be issued a receipt
acknowledging the number of Purchased Shares (or other assets and
securities) delivered in escrow.
2. Recapitalization/Reorganization. Any new, substituted or additional
securities or other property which is by reason of any Recapitalization
or Reorganization distributed with respect to the Purchased Shares shall
be immediately delivered to the Corporation to be held in escrow under
this Article E, but only to the extent the Purchased Shares are at the
time subject to the escrow requirements hereunder. However, all regular
cash dividends on the Purchased Shares (or other securities at the time
held in escrow) shall be paid directly to Owner and shall not be held in
escrow.
3. Release/Surrender. The Purchased Shares, together with any other assets
or securities held in escrow hereunder, shall be subject to the
following terms relating to their release from escrow or their surrender
to the Corporation for repurchase and cancellation:
(i) Should the Corporation elect to exercise the Repurchase Right with
respect to any Unvested Shares, then the escrowed certificates for those
Unvested Shares (together with any other assets or securities
attributable thereto) shall be surrendered to the Corporation
concurrently with the payment to Owner of an amount equal to the
aggregate Exercise Price paid for those Unvested Shares, and Owner shall
cease to have any further rights or claims with respect to such Unvested
Shares (or other assets or securities attributable thereto).
(ii) Should the Corporation elect not to exercise the Repurchase Right with
respect to any Unvested Shares held at the time in escrow hereunder,
then the escrowed certificates for those
<PAGE> 77
shares (together with any other assets or securities attributable
thereto) shall be released to Owner.
(iii) As the Purchased Shares (or any other assets or securities attributable
thereto) vest in accordance with the Vesting Schedule the certificates
for those vested shares (as well as all other vested assets and
securities) shall be released from escrow upon Owner's request.
(iv) Upon any earlier termination of the Repurchase Right in connection with
a Corporate Transaction or Involuntary Termination, any Purchased Shares
(or other assets or securities) at the time held in escrow hereunder
shall promptly be released to Owner.
F. RIGHT OF FIRST REFUSAL
1. Grant. The Corporation is hereby granted the right of first refusal (the
"First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in
accordance with the Vesting Schedule. For purposes of this Article F,
the term "transfer" shall include any sale assignment, pledge,
encumbrance or other disposition of the Purchased Shares intended to be
made by Owner, but shall not include any Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of Purchased
Shares in which Optionee has vested desires to accept a bona fide
third-party offer for the transfer of any or all of such shares (the
Purchased Shares subject to such offer to be hereinafter referred to as
the "Target Shares"), Owner shall promptly (i) deliver to the
Corporation written notice (the "Disposition Notice") of the terms of
the offer, including the purchase price and the identity of the
third-party offeror, and (ii) provide satisfactory proof that the
disposition of the Target Shares to such third-party offeror would not
be in contravention of the provisions set forth in Articles B and C.
<PAGE> 78
3. Exercise of the First Refusal Right. The Corporation shall, for a period
of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to
the Disposition Notice upon the same terms as those specified therein or
upon such other terms (not materially different from those specified in
the Disposition Notice) to which Owner consents. Such right shall be
exercisable by delivery of written notice (the "Exercise Notice") to
Owner prior to the expiration of the twenty-five (25)-day exercise
period. If such right is exercised with respect to all the Target
Shares, then the Corporation shall effect the repurchase of such shares,
including payment of the purchase price, not more than five (5) business
days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the
Corporation.
Should the purchase price specified in the Disposition Notice be payable
in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form
of cash equal in amount to the value of such property. If Owner and the
Corporation cannot agree on such cash value within ten (10) days after
the Corporation's receipt of the Disposition Notice, the valuation shall
be made by an appraiser of recognized standing selected by Owner and the
Corporation or, if they cannot agree on an appraiser within twenty (20)
days after the Corporation's receipt of the Disposition Notice, each
shall select an appraiser of recognized standing and the two (2)
appraisers shall designate a third appraiser of recognized standing,
whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth (5th) business
day following delivery of the Exercise Notice or (ii) the fifth (5th)
business day after such valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the Exercise
Notice is not given to Owner prior to the expiration of the twenty-five
(25) day exercise period, Owner shall have
<PAGE> 79
a period of thirty (30) days thereafter in which to sell or otherwise
dispose of the Target Shares to the third-party offeror identified in
the Disposition Notice upon terms (including the purchase price) no more
favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition
must not be effected in contravention of the provisions of Articles B
and C. The third-party offeror shall acquire the Target Shares free and
clear of the Repurchase Right and the First Right of Refusal, but the
acquired shares shall remain subject to the provisions of Article B and
Paragraph C.3. In the event Owner does not effect such sale or
disposition of the Target Shares within the specified thirty (30) day
period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right
lapses.
5. Partial Exercise of the First Refusal Right. In the event the
Corporation makes a timely exercise of the First Refusal Right with
respect to a portion, but not all, of the Target Shares specified in the
Disposition Notice, Owner shall have the option, exercisable by written
notice to the Corporation delivered within five (5) business days after
Owner's receipt of the Exercise Notice, to effect the sale of the Target
Shares pursuant to either of the following alternatives:
(i) sale or other disposition of all the Target Shares to the third-party
offeror identified in the Disposition Notice, but in full compliance
with the requirements of Paragraph F.4, as if the Corporation did not
exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares which the
Corporation has elected to purchase, such sale to be effected in
substantial conformity with the provisions of Paragraph F.3. The First
Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.
<PAGE> 80
Failure of Owner to deliver timely notification to the Corporation shall
be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
(a) Any new, substituted or additional securities or other property
which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be immediately subject to the First
Refusal Right, but only to the extent the Purchased Shares are at
the time covered by such right.
(b) In the event of a Reorganization, the First Refusal Right shall
remain in full force and effect and shall apply to the new capital
stock or other property received in exchange for the Purchased
Shares in consummation of the Reorganization, but only to the extent
the Purchased Shares are at the time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to occur of
(i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is
made by the Board that a public market exists for the outstanding shares
of Common Stock or (iii) a firm commitment underwritten public offering,
pursuant to an effective registration statement under the 1933 Act,
covering the offer and sale of the Common Stock in the aggregate amount
of at least ten million dollars ($10,000,000). However, the Market
Stand-Off shall continue to remain in full force and effect following
the lapse of the First Refusal Right.
G. MARITAL DISSOLUTION OR LEGAL SEPARATION
1. Grant. In connection with the dissolution of Optionee's marriage or
legal separation of Optionee and Optionee's spouse, the Corporation
shall have the right (the "Special Purchase Right") to purchase from
Optionee's spouse, in accordance with the provisions of Paragraph G.3,
all or any
<PAGE> 81
portion of the Purchased Shares which would otherwise be awarded to such
spouse in settlement of any community property or other marital property
rights such spouse may have in such shares.
2. Notice of Decree or Agreement. Optionee shall promptly provide the
Corporation with written notice (the "Dissolution Notice") of (i) the
entry of any judicial decree or order resolving the property rights of
Optionee and Optionee's spouse in connection with their marital
dissolution or legal separation or (ii) the execution of any contract or
agreement relating to the distribution or division of such property
rights. The Dissolution Notice shall be accompanied by a copy of the
actual decree or order of dissolution or contract or agreement between
Optionee and Optionee's spouse which provides for the award to the
spouse of one or more Purchased Shares in settlement of any community
property or other marital property rights such spouse may have in such
shares.
3. Exercise of the Special Purchase Right. The Special Purchase Right shall
be exercisable by delivery of written notice (the "Purchase Notice") to
Optionee and Optionee's spouse within forty-five (45) days after the
Corporation's receipt of the Dissolution Notice. The Purchase Notice
shall indicate the number of shares to be purchased by the Corporation,
the date such purchase is to be effected (such date to be not less than
five (5) business days, nor more than fifteen (15) business days, after
the date of the Purchase Notice) and the Fair Market Value to be paid
for such Purchased Shares. Optionee (or Optionee's spouse, to the extent
such spouse has physical possession of the Purchased Shares) shall,
prior to the close of business on the date specified for the purchase,
deliver to the Corporation the certificates representing the shares to
be purchased. The Corporation shall, concurrently with the receipt of
the stock certificates, pay to Optionee's spouse (in cash or cash
equivalents) an amount equal to the Fair Market Value specified for such
shares in the Purchase Notice.
If Optionee's spouse does not agree with the Fair Market Value specified
for the shares in the Purchase Notice, then the
<PAGE> 82
spouse shall promptly notify the Corporation in writing of such
disagreement and the fair market value of such shares shall thereupon be
determined by an appraiser of recognized standing selected by the
Corporation and the spouse. If they cannot agree on an appraiser within
fifteen (15) days after the date of the Purchase Notice, each shall
select an appraiser of recognized standing, and the two (2) appraisers
shall designate a third appraiser of recognized standing whose appraisal
shall be determinative of such value. The cost of the appraisal shall be
shared equally by the Corporation and Optionee's spouse. The closing
shall then be held on the fifteenth (15th) business day following the
completion of such appraisal; provided, however, that if the appraised
value is more than twenty-five percent (25%) greater than the Fair
Market Value specified for the shares in the Purchase Notice, the
Corporation shall have the right, exercisable prior to the expiration of
such fifteen (15) business-day period, to rescind the exercise of the
Special Purchase Right and thereby revoke its election to purchase the
shares awarded to the spouse. In the event the Corporation so revokes
its election, the Corporation shall bear the entire cost of the
appraisal.
4. Lapse. The Special Purchase Right shall lapse upon the earlier to occur
of (i) the lapse of the First Refusal Right or (ii) the expiration of
the exercise period specified in Paragraph G.3, to the extent the
Special Purchase Right is not timely exercised in accordance with such
paragraph.
H. SPECIAL TAX ELECTION
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II.
OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX
CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES
<PAGE> 83
AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
HIS OR HER BEHALF.
I. GENERAL PROVISIONS
1. Assignment. The Corporation may assign the Repurchase Right to any
person or entity selected by the Board, including (without limitation)
one or more shareholders of the Corporation.
2. No Employment or Service Contract. Nothing in this Agreement or in the
Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
3. Notices. Any notice required to be given under this Agreement shall be
in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and
properly addressed to the party entitled to such notice at the address
indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days advance
written notice under this paragraph to all other parties to this
Agreement.
4. No Waiver. The failure of the Corporation in any instance to exercise
the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of
this Agreement or any other agreement between the Corporation and
Optionee. No waiver of any breach or condition of this Agreement shall
be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
<PAGE> 84
5. Cancellation of Shares. If the Corporation shall make available, at the
time and place and in the amount and form provided in this Agreement,
the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after
such time, the person from whom such shares are to be repurchased shall
no longer have any rights as a holder of such shares (other than the
right to receive payment of such consideration in accordance with this
Agreement). Such shares shall be deemed purchased in accordance with the
applicable provisions hereof and the Corporation shall be deemed the
owner and holder of such shares, whether or not the certificates
therefor have been delivered as required by this Agreement.
6. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without resort that
State's conflict conflict-of laws rules.
7. Successors and Assigns. The provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Optionee, Optionee's permitted assigns and the
legal representatives, heirs and legatees Optionee's estate, whether or
not any such person shall have become a party to this Agreement and have
agreed in writing to join herein and be bound by the terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first indicated above.
UMEMBER.COM, INC.
By: ______________________________________
Title: ___________________________________
Address: 10350 Santa Monica Blvd.
Suite 130
West Los Angeles, CA 90025
<PAGE> 85
OPTIONEE
Address: ______________________________
______________________________
<PAGE> 86
EXHIBIT 1
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED hereby sell(s), assign(s) and transfer(s) unto uMember.com,
Inc. (the "Corporation") (____) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. herewith and does hereby irrevocably constitute and appoint
Attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.
Dated: ____________________________________
___________________________________________
Signature
<PAGE> 87
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE> 88
EXHIBIT II
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
1. Federal Income Tax Consequences and Section 83(b) Election For Exercise
of Non-Statutory Option. If the Purchased Shares are acquired pursuant
to the exercise of a Non-Statutory Option, as specified in the Grant
Notice, then under Code Section 83, the excess o the fair market value
of the Purchased Shares on the date any forfeiture restrictions
applicable to such shares lapse over the Exercise Price paid for such
shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right o the
Corporation to repurchase the Purchased Shares pursuant to the
Repurchase Right However, Optionee may elect under Code Section 83(b) to
be taxed at the time the Purchased Shares are acquired, rather than when
and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue
Service within thirty (30) days after the date of the Agreement. Even if
the fair market value of the Purchased Shares on the date of the
Agreement equals the Exercise Price paid (and thus no tax i~ payable),
the election must be made to avoid adverse tax consequences in the
future. The form for making this election is attached as part of this
exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)
DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE
AS THE FORFEITURE RESTRICTIONS LAPSE.
2. Federal Income Tax Consequences and Conditional Section 83(b) Election
For Exercise of Incentive Option. If the Purchased Shares are acquired
pursuant to the exercise of an Incentive Option, as specified in the
Grant Notice, then the following tax principles shall be applicable to
the Purchased Shares:
(i) For regular tax purposes, no taxable income will be recognized at the
time the Option is exercised.
<PAGE> 89
(ii) The excess of (A) the fair market value of the Purchased Shares or the
date the Option is exercised or (if later) on the date any forfeiture
restriction applicable to the Purchased Shares lapse over (B) the
Exercise Price paid for the Purchased Shares will be includible in
Optionee's taxable income for alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the Purchased Shares,
then Optionee will recognize ordinary income in the year of such
disposition equal in amount to the excess of (A) the fair market value
of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the
Purchased Shares lapse over the Exercise Price paid for the Purchased
Shares. Any additional gain recognized upon the disqualifying
disposition will be either short-term or long-term capital gain
depending upon the period for which the Purchase Shares are held prior
to the disposition.
(iv) For purposes of the foregoing, the term "forfeiture restrictions" will
include the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased Shares within
(2) years after the Grant Date or within one (1) year after the exercise
date of the Option.
(v) In the absence of final Treasury Regulations relating I Incentive
Options, it is not certain whether Optionee may, in connection with the
exercise of the Option for any Purchased Shares at the time subject to
forfeiture restrictions, file a protective election under Code Section
83(b) which would limit (A) Optionee's alternative minimum taxable
income upon exercise and (B) Optionee's ordinary income upon a
disqualifying disposition the excess of the fair market value of the
Purchased Shares on the date the Option is exercise
- -----------------
(1) Generally a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse,
a transfer into joint ownership with right of survivorship if Optionee
remains one of the joint owners, a pledge, a transfer by bequest or
inheritance or certain tax free exchanges permitted under the Code.
<PAGE> 90
over the Exercise Price paid for the Purchased Shares. Accordingly, such
election if proper filed will only be allowed to the extent the final
Treasury Regulations permit such a protective election. Page 2 of the
attached form for making the election should be filed with any election
made in connection with the exercise of an Incentive Option.
<PAGE> 91
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
Pursuant to Treas. Reg. Section 1.83.2.
(1) The taxpayer who performed the services is:
Name: ____________________________________________
Address: _________________________________________
Taxpayer Identification No.: _____________________
(2) The property with respect to which the election is being made is
___________ shares of the common stock of Wareforce Incorporated.
(3) The property was issued on ___________.
(4) The taxable year in which the election is being made is the calendar
year _______.
(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original
purchase price if for any reason taxpayers employment with the
issuer is terminated. The issuer's repurchase right lapses in a
series of installments over a five (5)-year period ending on
___________.
(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its
terms will never lapse) is $_________ per share.
(7) The amount paid for such property is $_________ per share.
<PAGE> 92
(8) A copy of this statement was furnished to Wareforce Incorporated for
whom taxpayer rendered the services underlying the transfer of
property.
(9) This statement is executed on ___________.
________________________________ ________________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and State tax returns for the current tax year and an additional
copy for his or her records.
The property described in the above Section 83(b) election is comprised
of shares of common stock acquired pursuant to the exercise of an incentive
stock option under Section 42 of the Internal Revenue Code (the "Code").
Accordingly, it is the intent of the Taxpayer to utilize this election to
achieve the following tax results:
The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value o such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this election,
such alternative minimum taxable income would be measured by the spread between
the fair market value of the purchased shares and the purchase price, which
exists on the various lapse dates in effect for the forfeiture restriction
<PAGE> 93
applicable to such shares. The election is to be effective to the full extent
permitted under the Code.
Section 421(a)(l) of the Code expressly excludes from income any excess
of the fair market value of the purchased shares over the amount paid for such
shares. Accordingly, this election is also intended to be effective in the event
there is a "disqualifying disposition" of the shares, within the meaning of
Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess c the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
<PAGE> 94
IN WITNESS WHEREOF, Wareforce Incorporated has caused this Addendum to be
executed by its duly authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
WAREFORCE INCORPORATED
By: ________________________________________
Title: _____________________________________
____________________________________________
OPTIONEE
EFFECTIVE DATE: ____________________________
<PAGE> 95
ADDENDUM
TO
STOCK PURCHASE AGREEMENT
The following provisions are hereby incorporated into, and hereby made a
part of, that certain Stock Purchase Agreement dated _____________ (the
"Purchase Agreement") by and between Wareforce Incorporated (the "Corporation")
and _____________________ ("Optionee") evidencing the purchase by Optionee of
certain shares of the Common Stock of the Corporation (the "Purchased Shares"),
pursuant to an option granted to Optionee under the terms of the Corporation's
1996 Stock Option/Stock Issuance Plan (the "Plan"), and such provisions shall be
effective as of the Effective Date specified below. All capitalized terms in
this Addendum, to the extent not specifically defined herein, shall have the
meanings assigned to them in the Purchase Agreement.
CALL RIGHT
1. Terms. The Purchased Shares shall be subject to the special right (the
"Call Right") of the Corporation to repurchase such Shares in accordance
with the following terms and conditions:
o The Call Right may be exercised by the Corporation at any time during
the period beginning January 1, 2000 and ending January 31, 2000.
However, in no event may the Call Right be exercised for less than the
total number of outstanding options and shares of Common Stock issued
under the Plan.
o The Purchased Shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Call Right lapses or may be
issued directly to Optionee with restrictive legends on the certificates
evidencing the Purchased Shares indicating that such shares remain
subject to the Call Right.
o The Purchase Price payable by the Corporation for the Purchased Shares
(the "Purchase Price") shall be equal to the total number of the
Purchased Shares to be repurchased from
<PAGE> 96
the Owner multiplied by the Appraised Value Per Share of Common Stock on
the date the Corporation exercises the Call Right.
o The Call Right shall be exercisable by written notice to each Owner of
the Purchased Shares. The exercise notice shall specify the amount of
the Purchase Price. The Call Right as so exercised shall cover all of
Owner's right, title and interest in and to the Purchased Shares.
o Within fifteen (15) days following receipt of the Corporation's exercise
notice, Owner shall deliver to the Corporation his or her executed copy
of the Purchase Agreement, together with the stock certificates and any
other documentation evidencing the Purchased Shares or Owner's interest
in such Purchased Shares. The Purchase Price shall be paid to Owner in
one lump sum cash payment within fifteen (15) days after the
Corporation's receipt of Owner's executed Purchase Agreement and any
related documentation evidencing Owner's interest in the Purchased
Shares.
o At the time such payment is made to Owner, Owner shall cease to have any
right, title or interent in and to the Purchased Shares, and such Owner
shall no longer have any equity or other proprietary interest in the
Corporation pursuant to the Purchased Shares.
2. Termination of Call Right. The Call Right shall terminate and cease to
be exercisable immediately upon the consummation of a Liquidity
Transaction.
3. Definitions. For purposes of this Addendum, the following definitions
shall be in effect:
Appraised Value Per Share: the fair market value per share of Common Stock
through independent appraisal based upon the going-concern value of the
Corporation at that time.
Liquidity Transaction: either of the following transactions:
<PAGE> 97
(i) the completion of a firm commitment underwritten public offering of
Common Stock, pursuant to an effective registration statement under the
1933 Act, which yields aggregate net proceeds to the Corporation of not
less than Seven Million Five Hundred Thousand Dollars ($7,500,000), or
(ii) a Corporate Transaction or any other acquisition of the Corporation
effected through a direct sale, exchange or transfer by the
Corporation's stockholders of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities.
<PAGE> 98
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved Transactions:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all o
the Corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean Wareforce One, Inc., a Nevada corporation.
G. Disposition Notice shall have the meaning assigned to such term in
Paragraph F.2.
H. Exercise Notice shall have the meaning assigned to such term in
Paragraph F.3.
I. Exercise Price shall have the meaning assigned to such term in Paragraph
A.1.
J. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article F.
K. Grant Date shall have the meaning assigned to such term in Paragraph
A.1.
L. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.
M. Incentive Option shall mean an option, which satisfies the requirements
of Code Section 422.
<PAGE> 99
N. Involuntary Termination shall mean the termination of Optionee's Service
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation which materially reduces Optionee's level
of responsibility (B) a reduction in Optionee's level of compensation
(including base salary, fringE benefits and participation in
corporate-performance based bonus or incentive programs by more than
fifteen percent (15%) or (C) a relocation of Optionee's place o
employment by more than fifty (50) miles, provided and only if such
change, reduction o relocation is effected by the Corporation without
Optionee's consent.
O. Market Stand-Off shall mean the market stand-off restriction specified
in Paragraph C.3.
P. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by
Optionee adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary may
consider as grounds for the dismissal or discharge of Optionee or any
other person in the Service of the Corporation (or any Parent or
Subsidiary).
Q. 1933 Act shall mean the Securities Act of 1933, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option shall have the meaning assigned to such term in Paragraph A.1.
T. Option Agreement shall mean all agreements and other documents
evidencing the Option.
<PAGE> 100
U. Optionee shall mean the person to whom the Option is granted under the
Plan,
V. Owner shall mean Optionee and all subsequent holders of the Purchased
Share who derive their chain of ownership through a Permitted Transfer
from Optionee.
W. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
X. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii a transfer of title to the
Purchased Shares effected pursuant to Optionee's will or the laws o
intestate succession following Optionee's death or (iii) a transfer to
the Corporation in pledge as security for any purchase-money
indebtedness incurred by Optionee in connection with the acquisition of
the Purchased Shares.
Y. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan.
Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.
AA. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph C.4.
AB. Purchased Shares shall have the meaning assigned to such term in
Paragraph Al.
AC. Recapitalization shall mean any stock split, stock dividend,
recapitalization combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration.
AD. Reorganization shall mean any of the following transactions:
<PAGE> 101
(i) a merger or consolidation in which the Corporation is not the surviving
entity,
(ii) all of the Corporation's assets, a sale, transfer or other disposition
of all or substantially,
(iii) a reverse merger in which the Corporation is the surviving entity but in
which the Corporation's outstanding voting securities are transferred in
whole or in par to a person or persons different from the persons
holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which the
Corporation is incorporated or to create a holding company structure.
AE. Repurchase Right shall mean the right granted to the Corporation in
accordance with Article C.
AF. SEC shall mean the Securities and Exchange Commission.
AG. Service shall mean Optionee's performance of services for the
Corporation (or an Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of this employer entity as to both
the work to be performed and the manner and method c performance, a
non-employee member of the board of directors or a consultant or
independent advisor.
AH. Subsidiary shall mean any Corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one c the other corporations in such chain.
AI. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, subject to the acceleration provisions upon an Involuntary
Termination following a Corporate Transaction.
<PAGE> 102
AJ. Unvested Shares shall have the meaning assigned to such term in
Paragraph C.1.
<PAGE> 103
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
1. Federal Income Tax Consequences and Section 83(b) Election For Exercise
of Non-Statutory Option. If the Purchased Shares are acquired pursuant
to the exercise of a Non-Statutory Option, as specified in the Grant
Notice, then under Code Section 83, the excess o the fair market value
of the Purchased Shares on the date any forfeiture restrictions
applicable to such shares lapse over the Exercise Price paid for such
shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right o the
Corporation to repurchase the Purchased Shares pursuant to the
Repurchase Right However, Optionee may elect under Code Section 83(b) to
be taxed at the time the Purchased Shares are acquired, rather than when
and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue
Service within thirty (30) days after the date of the Agreement. Even if
the fair market value of the Purchased Shares on the date of the
Agreement equals the Exercise Price paid (and thus no tax is payable),
the election must be made to avoid adverse tax consequences in the
future. The form for making this election is attached as part of this
exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)
DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE
AS THE FORFEITURE RESTRICTIONS LAPSE.
2. Federal Income Tax Consequences and Conditional Section 83(b) Election
For Exercise of Incentive Option. If the Purchased Shares are acquired
pursuant to the exercise of an Incentive Option, as specified in the
Grant Notice, then the following tax principles shall be applicable to
the Purchased Shares:
(i) For regular tax purposes, no taxable income will be recognized at the
time the Option is exercised.
(ii) The excess of (A) the fair market value of the Purchased Shares or the
date the Option is exercised or (if later) on the date any forfeiture
restriction applicable to the
<PAGE> 104
Purchased Shares lapse over (B) the Exercise Price paid for the
Purchased Shares will be includible in Optionee's taxable income for
alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of the Purchased Shares,
then Optionee will recognize ordinary income in the year of such
disposition equal in amount to the excess of (A) the fair market value
of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the
Purchased Shares lapse over the Exercise Price paid for the Purchased
Shares. Any additional gain recognized upon the disqualifying
disposition will be either short-term or long-term capital gain
depending upon the period for which the Purchase Shares are held prior
to the disposition.
(iv) For purposes of the foregoing, the term "forfeiture restrictions" will
include the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. The term "disqualifying disposition"
means any sale or other disposition(1) of the Purchased Shares within
(2) years after the Grant Date or within one (1) year after the exercise
date of the Option.
(v) In the absence of final Treasury Regulations relating I Incentive
Options, it is not certain whether Optionee may, in connection with the
exercise of the Option for any Purchased Shares at the time subject to
forfeiture restrictions, file a protective election under Code Section
83(b) which would limit (A) Optionee's alternative minimum taxable
income upon exercise and (B) Optionee's ordinary income upon a
disqualifying disposition the excess of the fair market value of the
Purchased Shares on the date the Option is exercise over the Exercise
Price paid for the Purchased Shares. Accordingly, such election if
proper filed will only be allowed to the extent the final Treasury
Regulations permit
- -----------------
(1) Generally a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale,
exchange or gift, but does not include a transfer to the Optionee's spouse,
a transfer into joint ownership with right of survivorship if Optionee
remains one of the joint owners, a pledge, a transfer by bequest or
inheritance or certain tax free exchanges permitted under the Code.
<PAGE> 105
such a protective election. Page 2 of the attached form for making the
election should be filed with any election made in connection with the
exercise of an Incentive Option.
<PAGE> 106
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal Revenue Code,
Pursuant to Treas. Reg. Section 1.83.2.
(1) The taxpayer who performed the services is:
Name: ____________________________________________
Address: _________________________________________
Taxpayer Identification No.: _____________________
(2) The property with respect to which the election is being made is
___________ shares of the common stock of Wareforce Incorporated.
(3) The property was issued on ______________________.
(4) The taxable year in which the election is being made is the calendar
year _______.
(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original
purchase price if for any reason taxpayers employment with the
issuer is terminated. The issuer's repurchase right lapses in a
series of installments over a five (5)-year period ending on
___________.
(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its
terms will never lapse) is $_________ per share.
(7) The amount paid for such property is $_________ per share.
(8) A copy of this statement was furnished to Wareforce Incorporated for
whom taxpayer rendered the services underlying the transfer of
property.
<PAGE> 107
(9) This statement is executed on ______________________________.
__________________________________ __________________________________
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and State tax returns for the current tax year and an additional
copy for his or her records.
The property described in the above Section 83(b) election is comprised
of shares of common stock acquired pursuant to the exercise of an incentive
stock option under Section 42 of the Internal Revenue Code (the "Code").
Accordingly, it is the intent of the Taxpayer to utilize this election to
achieve the following tax results:
The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value o such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this election,
such alternative minimum taxable income would be measured by the spread between
the fair market value of the purchased shares and the purchase price, which
exists on the various lapse dates in effect for the forfeiture restriction
applicable to such shares. The election is to be effective to the full extent
permitted under the Code.
<PAGE> 108
Section 421(a)(l) of the Code expressly excludes from income any excess
of the fair market value of the purchased shares over the amount paid for such
shares. Accordingly, this election is also intended to be effective in the event
there is a "disqualifying disposition" of the shares, within the meaning of
Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess c the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
<PAGE> 109
IN WITNESS WHEREOF, Wareforce Incorporated has caused this Addendum to be
executed by its duly authorized officer, and Optionee has executed this
Addendum, all as of the Effective Date specified below.
WAREFORCE INCORPORATED
By: ________________________________________
Title: _____________________________________
____________________________________________
OPTIONEE
EFFECTIVE DATE: ____________________________
<PAGE> 110
ADDENDUM
TO
STOCK PURCHASE AGREEMENT
The following provisions are hereby incorporated into, and hereby made a
part of, that certain Stock Purchase Agreement dated __________________ (the
"Purchase Agreement") by and between Wareforce Incorporated (the "Corporation")
and _____________________ ("Optionee") evidencing the purchase by Optionee of
certain shares of the Common Stock of the Corporation (the "Purchased Shares"),
pursuant to an option granted to Optionee under the terms of the Corporation's
1996 Stock Option/Stock Issuance Plan (the "Plan"), and such provisions shall be
effective as of the Effective Date specified below. All capitalized terms in
this Addendum, to the extent not specifically defined herein, shall have the
meanings assigned to them in the Purchase Agreement.
CALL RIGHT
1. Terms. The Purchased Shares shall be subject to the special right (the
"Call Right") of the Corporation to repurchase such Shares in accordance
with the following terms and conditions:
o The Call Right may be exercised by the Corporation at any time during
the period beginning January 1,2000 and ending January 31, 2000.
However, in no event may the Call Right be exercised for less than the
total number of outstanding options and shares of Common Stock issued
under the Plan.
o The Purchased Shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Call Right lapses or may be
issued directly to Optionee with restrictive legends on the certificates
evidencing the Purchased Shares indicating that such shares remain
subject to the Call Right.
o The Purchase Price payable by the Corporation for the Purchased Shares
(the "Purchase Price") shall be equal to the total number of the
Purchased Shares to be repurchased from
<PAGE> 111
the Owner multiplied by the Appraised Value Per Share of Common Stock on
the date the Corporation exercises the Call Right.
o The Call Right shall be exercisable by written notice to each Owner of
the Purchased Shares. The exercise notice shall specify the amount of
the Purchase Price. The Call Right as so exercised shall cover all of
Owner's right, title and interest in and to the Purchased Shares.
o Within fifteen (15) days following receipt of the Corporation's exercise
notice, Owner shall deliver to the Corporation his or her executed copy
of the Purchase Agreement, together with the stock certificates and any
other documentation evidencing the Purchased Shares or Owner's interest
in such Purchased Shares. The Purchase Price shall be paid to Owner in
one lump sum cash payment within fifteen (15) days after the
Corporation's receipt of Owner's executed Purchase Agreement and any
related documentation evidencing Owner's interest in the Purchased
Shares.
o At the time such payment is made to Owner, Owner shall cease to have any
right, title or interent in and to the Puchased Shares, and such Owner
shall no longer have any equity or other proprietary interest in the
Corporation pursuant to the Purchased Shares.
2. Termination of Call Right. The Call Right shall terminate and cease to
be exercisable immediately upon the consummation of a Liquidity
Transaction.
3. Definitions. For purposes of this Addendum, the following definitions
shall be in effect:
Appraised Value Per Share: the fair market value per share of Common Stock
through independent appraisal based upon the going-concern value of the
Corporation at that time.
Liquidity Transaction: either of the following transactions:
<PAGE> 112
(i) the completion of a firm commitment underwritten public offering of
Common Stock, pursuant to an effective registration statement under the
1933 Act, which yields aggregate net proceeds to the Corporation of not
less than Seven Million Five Hundred Thousand Dollars ($7,500,000), or
(ii) a Corporate Transaction or any other acquisition of the Corporation
effected through a direct sale, exchange or transfer by the
Corporation's stockholders of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities.
<PAGE> 113
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following
shareholder-approved Transactions:
(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially all of
the Corporation's assets in complete liquidation or dissolution of the
Corporation.
F. Corporation shall mean Wareforce One, Inc., a Nevada corporation.
G. Disposition Notice shall have the meaning assigned to such term in
Paragraph F.2.
H. Exercise Notice shall have the meaning assigned to such term in
Paragraph F.3.
I. Exercise Price shall have the meaning assigned to such term in Paragraph
A.1.
J. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article F.
K. Grant Date shall have the meaning assigned to such term in Paragraph
A.1.
L. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.
M. Incentive Option shall mean an option, which satisfies the requirements
of Code Section 422.
<PAGE> 114
N. Involuntary Termination shall mean the termination of Optionee's Service
which occurs by reason of:
(i) Optionee's involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in Optionee's
position with the Corporation which materially reduces Optionee's level
of responsibility (B) a reduction in Optionee's level of compensation
(including base salary, fringE benefits and participation in
corporate-performance based bonus or incentive programs by more than
fifteen percent (15%) or (C) a relocation of Optionee's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without
Optionee's consent.
O. Market Stand-Off shall mean the market stand-off restriction specified
in Paragraph C.3.
P. Misconduct shall mean the commission of any act of fraud, embezzlement o
dishonesty by Optionee, any unauthorized use or disclosure by Optionee
of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee
adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which
the Corporation (or any Parent or Subsidiary may consider as grounds for
the dismissal or discharge of Optionee or any other person in the
Service of the Corporation (or any Parent or Subsidiary).
Q. 1933 Act shall mean the Securities Act of 1933, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option shall have the meaning assigned to such term in Paragraph A.1.
T. Option Agreement shall mean all agreements and other documents
evidencing the Option.
<PAGE> 115
U. Optionee shall mean the person to whom the Option is granted under the
Plan,
V. Owner shall mean Optionee and all subsequent holders of the Purchased
Share who derive their chain of ownership through a Permitted Transfer
from Optionee.
W. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
X. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased
Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii a transfer of title to the
Purchased Shares effected pursuant to Optionee's will or the laws of
intestate succession following Optionee's death or (iii) a transfer to
the Corporation in pledge as security for any purchase-money
indebtedness incurred by Optionee in connection with the acquisition of
the Purchased Shares.
Y. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan.
Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.
AA. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph C.4.
AB. Purchased Shares shall have the meaning assigned to such term in
Paragraph Al.
AC. Recapitalization shall mean any stock split, stock dividend,
recapitalization combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration.
<PAGE> 116
AD. Reorganization shall mean any of the following transactions:
(i) a merger or consolidation in which the Corporation is not the surviving
entity,
(ii) all of the Corporation's assets, a sale, transfer or other disposition
of all or substantially,
(iii) a reverse merger in which the Corporation is the surviving entity but in
which the Corporation's outstanding voting securities are transferred in
whole or in par to a person or persons different from the persons
holding those securities immediately prior to the merger, or
(iv) any transaction effected primarily to change the state in which the
Corporation is incorporated or to create a holding company structure.
AE. Repurchase Right shall mean the right granted to the Corporation in
accordance with Article C.
AF. SEC shall mean the Securities and Exchange Commission.
AG. Service shall mean Optionee's performance of services for the
Corporation (or an Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of this employer entity as to both
the work to be performed and the manner and method of performance, a
non-employee member of the board of directors or a consultant or
independent advisor.
AH. Subsidiary shall mean any Corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AI. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, subject to the acceleration provisions upon an Involuntary
Termination following a Corporate Transaction.
<PAGE> 117
AJ. Unvested Shares shall have the meaning assigned to such term in
Paragraph C.1.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
Wareforce Incorporated a California corporation (Wareforce also operates under
the trade name Kennsco Technical Services and owns 100% of Los Angeles
Micromart, Inc. Los Angeles Micromart is a dormant corporation which formerly
did business as Personal Support Computer ("PSC"))
C.Y. Investment Inc. a California corporation
D/b/a Impres Technology
D/b/a Advanced Optical Distribution ("AOD")
