<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1996
REGISTRATION NO. 333-15109
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROCOM TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3577 33-0268063
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2181 DUPONT DRIVE, IRVINE, CALIFORNIA 92715
(714) 852-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
FREDERICK JUDD
VICE PRESIDENT, FINANCE AND GENERAL COUNSEL
PROCOM TECHNOLOGY, INC.
2181 DUPONT DRIVE, IRVINE, CALIFORNIA 92715
(714) 852-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
J. JAY HERRON, ESQ. LAIRD H. SIMONS III, ESQ.
KEVIN BAKER, ESQ. EILEEN DUFFY ROBINETT, ESQ.
CHRISTOPHER R. DI MAURO, ESQ. MELISSA H. SAYER, ESQ.
O'MELVENY & MYERS LLP FENWICK & WEST LLP
610 NEWPORT CENTER DRIVE, SUITE 1700 TWO PALO ALTO SQUARE
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94306
(714) 760-9600 (415) 494-0600
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 5, 1996
3,025,000 SHARES
LOGO
COMMON STOCK
Of the 3,025,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Procom Technology, Inc. (the "Company") and 1,025,000 shares
are being sold by the Selling Shareholders. The Company will not receive any
proceeds from the sale of the shares by the Selling Shareholders. See "Principal
and Selling Shareholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $9.00 and $11.00 per share. See "Underwriting" for a
discussion of factors considered in determining the initial public offering
price. The Company's Common Stock has been approved for quotation on the Nasdaq
National Market, subject to notice of issuance, under the symbol "PRCM."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Shareholders
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $780,000.
(3) Certain Selling Shareholders have granted to the Underwriters a 30-day
option to purchase up to 453,750 additional shares of Common Stock solely to
cover over-allotments, if any. If the Underwriters exercise this option in
full, the Price to Public will total $ , the Underwriting Discount
will total $ and the Proceeds to Selling Shareholders will total
$ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the office of
Montgomery Securities on or about , 1996.
------------------------
MONTGOMERY SECURITIESDDAIN BOSWORTH
INCORPORATED
, 1996
<PAGE> 3
PROCOM TECHNOLOGY
INTELLIGENT STORAGE FOR THE ENTERPRISE(TM)
[Photographs of various CD-ROM and computer storage peripherals, some of which
are displayed indicating connectivity to networks and access through the
Internet. The photographs bear the following captions: "Procom Technology's
family of file server disk drive upgrade solutions," "Procom Technology's family
of CD networking systems providing multi-protocol, mixed topology and 30x
performance," "Procom Technology's family of notebook disk drive upgrade
solutions," "Procom Technology's family of high capacity digital linear tape
backup devices" and "Procom Technology's family of LANForce Systems providing
high performance, fault tolerant data storage and retrieval solutions."
Background text reads as follows: "CD-ROM Servers - CD-ROM Arrays - CD Force
Servers - Hyper CD-30x Servers - LAN Force R2000 RAID RAX - Hardware Based Disk
Arrays - LDLT Tape Library - PCDR CD Recorders."]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information, including "Risk Factors" and Consolidated Financial
Statements and notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Procom Technology, Inc. ("Procom" or the "Company") designs, manufactures
and markets enterprise-wide data storage and information access solutions that
are compatible with all major hardware platforms, operating systems and network
protocols. The Company has become a leading provider of CD-ROM servers and
arrays as a result of its extensive distribution channels as well as the
scalability, performance, ease of use and multi-protocol support of its
products. The Company provides end users with disk drive upgrades for servers,
desktop and notebook computers and also provides high performance, fault
tolerant RAID solutions (Redundant Array of Independent Disks) and tape backup
subsystems. The Company utilizes computer resellers, value-added resellers
("VARs") and distributors to sell its products to a wide variety of end users,
including Fortune 500 corporations, governmental agencies and financial and
educational institutions.
Recognizing the growing demand for fast and reliable access to large
volumes of information increasingly stored on CD-ROM media across
enterprise-wide networks, the Company introduced the first of its CD server and
array products in early 1994. These products enable a large number of network
users to simultaneously access computer data stored on multiple CD-ROMs. The
Company has recently introduced its CD FORCE server, which provides plug and
play compatibility with most popular operating systems and network topologies
and improves functionality by relieving the network operating system from the
burden of managing requests for access to information stored on CD-ROMs. The CD
FORCE server incorporates Procom's CD FORCE software, which manages network
connectivity and access to information contained on CD-ROMs. The Company has
continued to improve the capacity and performance of its product offerings,
which include the Company's recently introduced Hyper CD-30x server, which is
capable of providing access to up to 40 gigabytes of information (63 CDs) with
30x data transfer rates. The Company has experienced rapid growth in sales of
its CD servers and arrays to end users such as law and accounting firms,
educational and governmental entities and other companies and organizations that
require frequent access to large amounts of information stored on CD-ROMs.
The Company first developed its expertise in computer data storage products
by providing upgrade storage solutions for desktop computers. Since that time,
the Company has expanded its product offerings to provide upgrade and
replacement disk drive products for notebook computers and servers, which have
become more popular in recent years as client/server computing has proliferated.
The Company's disk drive upgrades allow users to utilize their existing hardware
for longer periods of time, thereby extending the life of their initial
investment. The Company's RAID products provide high performance, fault tolerant
storage of over one terabyte of data for large network information databases.
The key elements of the Company's strategy include the following: (i)
developing additional network storage products incorporating the Company's
proprietary storage management software; (ii) accessing end users in key
vertical markets by leveraging relationships with computer resellers, VARs and
distributors; (iii) expanding relationships with key component suppliers in
order to enable the Company to anticipate and respond to technological
developments; and (iv) delivering timely storage solutions compatible with all
major operating systems and network topologies.
The Company's CD servers and arrays can be configured for Unix, Novell
NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS,
while supporting different topologies such as Ethernet, FDDI, Fast Ethernet and
Token Ring. The Company's high-capacity storage subsystems will support varying
RAID levels to meet virtually any network or operating system storage
requirements. The Company's major customers include Vanstar Corporation, Entex
Information Services Inc., Inacom and Intelligent Electronics, and end users
include Microsoft, Ernst & Young, Federal Express, Prudential Insurance and Bank
One.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common Stock offered by the Company............. 2,000,000 shares
Common Stock offered by the Selling
Shareholders.................................. 1,025,000 shares
Common Stock to be outstanding after the
offering...................................... 11,000,000 shares(1)
Use of proceeds................................. Repayment of outstanding debt
(approximately $3.7 million at October 25,
1996), approximately $300,000 to acquire
capital equipment to increase production
capacity and the remainder for general
corporate purposes, including working
capital.
Proposed Nasdaq National Market symbol.......... PRCM
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
---------------------------------------------------- -------------------------
JULY 31, JULY 30, JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................... $42,898 $41,726 $34,502 $44,660 $73,456 $15,275 $24,915
Gross profit................................. 8,869 9,453 7,315 11,802 21,967 4,142 8,425
Income (loss) before income taxes............ 861 906 (1,130) 1,137 4,649 915 3,310
Net income (loss)............................ 576 609 (773) 723 2,849 559 2,015
Net income (loss) per share(2)............... $ 0.06 $ 0.07 $ (0.08) $ 0.08 $ 0.31 $ 0.06 $ 0.22
Weighted average number of shares(2)......... 9,172 9,172 9,172 9,172 9,172 9,172 9,172
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash....................................................................... $ 58 $ 13,918
Working capital............................................................ 6,569 24,089
Total assets............................................................... 25,325 39,485
Line of credit............................................................. 3,660 --
Long-term obligations...................................................... -- --
Total shareholders' equity................................................. 7,151 24,971
</TABLE>
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(1) Based on shares outstanding as of October 25, 1996. Excludes an aggregate of
271,800 shares of Common Stock issuable upon the exercise of stock options
outstanding as of October 25, 1996 at a weighted average exercise price of
$3.67 per share and an aggregate of 268,200 additional shares of Common
Stock reserved for future issuance under the Company's 1995 Stock Option
Plan.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share.
(3) Adjusted to give effect to the sale of shares offered by the Company hereby
at an assumed initial public offering price of $10.00 per share, after
deducting the estimated underwriting discount and offering expenses, and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Underwriting."
------------------------
The Company was organized as a California corporation in 1987. The
Company's executive offices are located at 2181 Dupont Drive, Irvine, California
92715, and its telephone number is (714) 852-1000.
------------------------
Unless otherwise indicated, the information in this Prospectus (i) assumes
an initial public offering price of $10.00 per share of Common Stock, (ii)
assumes no exercise of the Underwriters' over-allotment option, (iii) reflects
the effect of a 10,000-for-1 stock split, which occurred on September 15, 1995,
and a 3-for-1 stock split which occurred on November 13, 1996 and (iv) assumes
no retroactive change in the par value of the Common Stock. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors."
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
POTENTIAL FLUCTUATIONS IN FUTURE RESULTS OF OPERATIONS
The Company's results of operations have in the past varied significantly
and are likely in the future to vary significantly as a result of a number of
factors, including the mix of products sold, the volume and timing of orders
received during the period, the timing of new product introductions by the
Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability and
pricing of components for the Company's products, changes in distribution
channel mix and product returns or price protection charges from customers. Many
of these factors are beyond the Company's control. Although the Company has
experienced growth in sales in recent periods, there can be no assurance that
the Company will experience growth in the future or be profitable on an
operating basis in any future period. In addition, due to the short product life
cycles that characterize the Company's markets, a significant percentage of the
Company's sales each quarter may result from new products or product
enhancements introduced in that quarter. Since the Company relies on new
products and product enhancements for a significant percentage of sales, failure
to continue to develop and introduce new products and product enhancements or
failure of these products or product enhancements to achieve market acceptance
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also has historically
capitalized on short-term market opportunities for volume purchases of certain
components at favorable prices. For example, in the quarter ended July 26, 1996,
the Company capitalized on a one-time opportunity to sell a significant volume
of high capacity disk drive upgrade products purchased at below market prices in
the prior quarter, which resulted in a price advantage to the Company that
enhanced the Company's sales and results of operations for that quarter. There
can be no assurance that the Company will be able to capitalize on such
opportunities in the future. In addition, the Company's fiscal second quarter
sales have historically remained relatively flat due primarily to heavy reseller
participation in trade shows that detract from reseller selling efforts, end
user budget constraints that restrict end user purchases, and a higher than
average number of holidays during that quarter.
The volume and timing of orders received during a quarter are difficult to
forecast. Customers generally order on an as-needed basis and, accordingly, the
Company historically has operated with a relatively small backlog.
Notwithstanding the difficulty in forecasting future sales and the relatively
small level of backlog at any given time, the Company generally must plan
production, order components and undertake its development, sales and marketing
activities and other commitments months in advance. Accordingly, any shortfall
in sales in a given quarter may disproportionately affect the Company's results
of operations due to relatively fixed short-term expenses. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its results
are not necessarily meaningful and should not be relied upon as indicators of
future performance. Further, it is likely that in some future quarter or
quarters the Company's net sales or results of operations will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock could be materially adversely affected.
Historically, the Company's gross margins have experienced significant
volatility. The Company's gross margins vary significantly by product line, and,
therefore, the Company's overall gross margin varies with the mix of products
sold by the Company. The Company's markets are also characterized by intense
competition and declining average unit selling prices over the course of the
relatively short life cycles of individual products, which have often ranged
from six to twelve months. In addition, the Company's gross margins may be
adversely affected by availability and price increases associated with key
products and components from the Company's suppliers, some of which have been in
short supply, and inventory obsolescence resulting from older generation
products or the unexpected discontinuance of third party components. Finally,
the Company's gross margins may vary with the mix of its distribution channels
and general economic conditions. Accordingly, the Company's margins may decline
in the future from the levels experienced in recent quarters.
5
<PAGE> 7
See "Risk Factors -- Component Shortages; Reliance on Sole or Limited Source
Suppliers" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SUBSTANTIAL COMPETITION
The markets for the Company's products are intensely competitive. In each
of its primary product lines, the Company competes with a large number of disk
drive manufacturers, computer resellers, VARs and distributors. Some of the
Company's vendors also sell competing products to distributors, which then sell
these products to the Company's customers. Many of the Company's current and
potential competitors have significantly greater market presence, name
recognition and financial and technical resources than the Company, and many
have longstanding positions and established brand names in their respective
markets. In addition, certain of the Company's current and potential competitors
possess competitive cost advantages due to a number of factors, including lower
taxes and substantially lower costs of labor associated with international
operations. Finally, manufacturers of disk drives such as Seagate Technology,
Inc., IBM, Quantum Corporation and Western Digital Corporation, and
manufacturers of CD-ROM drives, such as Toshiba America Information Systems,
Inc. ("Toshiba"), NEC Corporation and Plextor Corporation, may in the future
become more direct competitors of the Company to the extent that such
manufacturers elect to expand into the disk drive upgrade market or the CD
server and array market.
The Company's primary competitors in the CD server and array market consist
of (i) CD array manufacturers such as Microtest Inc., Meridian Data, Inc. and
Micro Design, Inc., which also furnish CD-ROM management software with their CD
array products, (ii) a number of hardware aggregators, computer resellers and
VARs that sell CD server products directly to end users and (iii) various CD
server and array manufacturers.
The Company's primary competitors in the disk drive upgrade market are (i)
computer manufacturers that also market and sell storage upgrades, such as IBM,
Compaq Computer Corporation, ("Compaq") and Hewlett-Packard Company
("Hewlett-Packard"), (ii) companies that specialize in reselling replacement or
increased capacity storage disk drives, such as Storage Dimensions Inc. or
Ameriquest Technologies Inc. and (iii) various national distributors of third
party upgrade drives such as Ingram Micro Inc., Merisel Inc. and Tech Data
Corporation.
The Company's primary competitors in the RAID product market are (i)
computer manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally
focus on providing storage upgrades for their products and (ii) companies that
sell storage solutions directly to end users, such as EMC Corporation and
Storage Technology Corporation. These direct sales competitors historically have
focused their efforts on sales of high capacity storage products in the
mainframe and minicomputer environments. In addition, the Company competes with
many smaller enterprises that provide and sell unique solutions to various
computer users.
The Company's success depends to a great extent on its ability to continue
to develop products that incorporate new and rapidly evolving technologies to
provide network users cost-effective data storage and information access
solutions. However, to the extent that disk drive storage or information access
products become more of a commodity, price competition among both computer
manufacturers and suppliers of disk drives and CD-ROM drives may result in the
availability of such storage and access at a low cost. These factors could
create increased competition for the Company's products, which could cause the
Company to experience reduced gross profit margins on its products and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that the principal competitive
factors in the Company's markets are product reliability, price/value
relationship, product features and performance, brand name recognition, trade
periodical reviews, time to market with new features and products, industry
relationships, ease of installation and use, the quality of distribution
channels, product quality, technical support and customer service. See
"Business -- Competition."
6
<PAGE> 8
RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES
The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. These factors typically
result in short product life cycles, which have often ranged from six to twelve
months. For example, the data transfer rate of CD-ROM products has increased
rapidly, resulting in the introduction of four, eight, ten and twelve speed
CD-ROMs. Similar technological advances have been made with regard to disk drive
storage capabilities and other performance standards. Each new product cycle
presents new opportunities for current or prospective competitors of the Company
to gain market share. The Company must continually monitor industry trends in
selecting new technologies and features to incorporate into its products. If the
Company is unable to introduce new products successfully on a timely basis, the
Company's sales could be adversely affected. Any such failure also could impair
the Company's brand name and the Company's ability to command the attention and
loyalty of computer resellers, VARs and distributors in future periods.
Moreover, because short product life cycles are accompanied by long lead times
for many components of the Company's products, the Company may be unable to
reduce or increase production in response to unexpected demand.
The Company's ability to introduce new products in a timely manner is
heavily dependent on its ability to develop or purchase firmware and software
drivers for its CD-ROM and disk drive products. While the Company endeavors to
work with its component suppliers to plan for the timing of introduction of new
components and to develop the associated firmware and software, unforeseen
design issues or other factors that delay introduction of these products could
adversely affect the Company's ability to ship new products. In addition, third
party suppliers may not employ adequate testing and quality assurance
procedures, resulting in the receipt by the Company of defective components.
This could require the Company to find replacement components or wait for the
resolution of the problem, either of which could delay the Company's ability to
bring products to market and have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
also will be adversely affected if new disk drives, CD-ROM drives or other
components that it selects from among those offered by its various vendors do
not perform favorably on a cost or performance basis compared to competing
products. In addition, products and technologies developed by competitors may
render the Company's products and technologies noncompetitive or obsolete.
Finally, advances in network and on-line technology and development of new,
higher-capacity storage media such as Digital Video Disc ("DVD") may result in a
reduction or replacement of CD-ROM as a data storage and information access
medium. If the Company is unable to adapt to these and other technological
advances by developing new products, the Company's financial performance would
be materially adversely affected. See "Business -- Research and Development."
The Company has historically experienced steep declines in sales, prices
and gross profit toward the end of the life cycles of most of its products, the
precise timing of which is difficult to predict. Historically, as the Company
has planned and implemented new products, it has experienced unexpected
reductions in sales and gross profit of older generation products as customers
have anticipated new products. These reductions have in the past given and could
continue to give rise to charges for obsolete or excess inventory, returns of
older generation products by computer resellers, VARs and distributors or
substantial price protection charges. See "-- Customer Concentration;
Distribution Strategy Risks; Inventory Protection." For example, in fiscal 1994,
the Company incurred losses when it discontinued sales of CD-ROM multimedia kits
to mass merchants and distributors. From time to time, the Company has
experienced and may in the future experience inventory obsolescence resulting
from the unexpected discontinuance of third party components, such as disk
drives, included in the Company's products. To the extent the Company is
unsuccessful in managing product transitions, it may have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON CD SERVERS AND ARRAYS
Sales of CD servers and arrays, including individual CD-ROM drives,
recordable CD-ROMs, modules and other related components ("CD servers and
arrays"), accounted for approximately 32%, 49% and 45% of the Company's net
sales for fiscal 1995, fiscal 1996 and the first quarter of fiscal 1997,
respectively. The widespread use of CD-ROM as a data storage and information
access medium is relatively recent, and there can be no assurance that another
technology will not replace CD-ROM as a widely accepted data storage and
7
<PAGE> 9
information access medium, or that there will be widespread acceptance or
continuing growth of CD servers and arrays in general, or of the Company's CD
servers and arrays in particular. In addition, if on-line services (such as
Westlaw and Lexis/Nexis) become more cost-effective and develop user friendly
methods of accessing information, they may have an adverse impact on the use of
CD-ROM as an information storage medium. Furthermore, the successful development
and marketing of DVD would enable end users to store significantly more data
than currently stored on a CD used with the Company's products. Accordingly,
even if the Company were able to adapt its products to incorporate DVD
technology, the number of servers and arrays required by end users may decline
compared to current levels. Finally, even if the CD server and array market
continues to grow, there can be no assurance that the Company will be able to
maintain its market share or its gross margins in that market.
The Company currently incorporates software with many of its CD servers and
arrays, which allows a network to manage effectively direct access to
information contained on CD-ROMs by network users. The Company ships CD servers
and arrays both with CD-ROM network data access management software from third
party vendors and with recently introduced, internally developed CD-ROM network
data access management software. The Company's internally developed software is
not presently available on all major hardware platforms, and of the Company's CD
servers and arrays shipped to date that contain CD-ROM network data access
management software, substantially all included third party software. In
addition, the Company historically has focused its efforts on hardware
development and does not have substantial experience in the development, testing
and marketing of CD-ROM network data access management software. Given the high
percentage of the Company's sales that are derived from CD servers and arrays,
the failure to secure from a third party effective CD-ROM network data access
management software, or the failure of the Company to continue the development
and marketing of its internally developed software, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products and Technology."
COMPONENT SHORTAGES; RELIANCE ON SOLE OR LIMITED SOURCE SUPPLIERS
The Company depends on sole or limited source suppliers for certain key
components used in its products, particularly disk and CD-ROM drives. In recent
years, these components have been in short supply and frequently on allocation
by manufacturers, and the Company's size may place it at a competitive
disadvantage during such periods relative to larger competitors. Although the
Company maintains ongoing efforts to obtain adequate supplies of components,
there can be no assurances that the Company will obtain adequate supplies or
obtain such supplies at cost levels that would not adversely affect the
Company's gross margins. The Company has no guaranteed supply arrangements with
any of its sole or limited source suppliers and customarily purchases sole or
limited source components pursuant to purchase orders placed from time to time
in the ordinary course of business. Moreover, the Company's suppliers may, from
time to time, experience production shortfalls or interruptions that impair the
supply of components to the Company. Component shortages are likely to continue,
and there can be no assurance that such shortages will not adversely affect the
Company's business, financial condition and results of operations. Conversely,
in its attempt to counter actual or perceived component shortages, the Company
may overpurchase certain components, resulting in excess inventory and reducing
the Company's liquidity or, in the event of inventory obsolescence or a decline
in the market value of such inventory, causing inventory write-offs that could
materially adversely affect the Company's business, financial condition and
results of operations. See "-- Rapid Technological Change; Short Product Life
Cycles."
The Company relies on a small number of suppliers to continue to develop,
introduce and manufacture disk drives, CD-ROM drives and other components that
incorporate new technologies and features that compete favorably in
functionality and price with the offerings of other disk drive and CD-ROM
manufacturers, including competitors of the Company. The Company's dependence on
these sole or limited source suppliers, and the risks associated with any delay
or shortfall in supply, are exacerbated by the short life cycles that
characterize the Company's products. Any delay in the introduction by or
availability of disk drives or CD-ROM drives from the Company's suppliers or the
failure of such suppliers to provide functionality and performance on a cost
effective basis could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, it is possible that
the technology of the components the
8
<PAGE> 10
Company uses in manufacturing its products will be rendered undesirable or
obsolete by the components of other suppliers. The Company would then be forced
to establish relationships with new suppliers, which could delay or preclude the
Company from bringing competitive products to market and have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies on a network of independent subcontractors to
supply certain custom components manufactured to the Company's specifications.
This network consists of a number of small firms with limited financial
resources. While the Company utilizes several firms to mitigate the risk of
business interruption, it is possible that several vendors could simultaneously
experience problems with production or financial stability, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
CUSTOMER CONCENTRATION; DISTRIBUTION STRATEGY RISKS; INVENTORY PROTECTION
The Company sells its products primarily to a domestic and international
network of computer resellers, VARs and distributors, and the Company's success
depends on the continued viability and financial stability of its customer base.
During the last two fiscal years, the Company has increased its reliance on
sales to large hardware aggregators, computer resellers and VARs (including
large corporate consultants) while reducing its use of mass merchants. During
fiscal 1996 and the first quarter of fiscal 1997, combined net sales to Vanstar
Corporation, Intelligent Electronics, Inc. and Entex Information Services, Inc.
totalled approximately 23.3% and 25.4%, respectively, of net sales. In addition,
as of October 25, 1996, the Company held accounts receivable from Intelligent
Electronics, Vanstar and Entex totalling approximately $4.0 million. If the
Company were to experience difficulty in collecting these accounts receivable,
due to the failure of any of these customers or otherwise, it could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, a loss of either or both of these customers
could materially and adversely affect the Company's net sales.
The Company must continually develop and maintain relationships with its
key computer resellers, VARs and distributors. Due to the rapid changes in the
computer industry and the methods by which end users purchase computer products,
there can be no assurance that the Company will be successful in developing and
maintaining an effective distribution system. The computer distribution and
computer retail industries historically have been characterized by rapid change,
including periods of widespread financial difficulties and consolidation and the
emergence of alternative distribution channels. The loss of, or reduction in
sales to, the Company's key customers could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's computer resellers, VARs and distributors generally offer products of
several different companies, including products competitive with the Company's
products. Accordingly, there is a risk that these computer resellers, VARs and
distributors may give higher priority to products of other suppliers and may
reduce their efforts to sell the Company's products. Although since fiscal 1994
the Company has relied on computer resellers and VARs as its primary domestic
sales channels, the Company recently entered into an agreement with Tech Data
Corporation, a computer products distributor, to sell the Company's products
nationally. An increased use of distributors to sell the Company's products,
whether domestically or through increased international sales (which are
generally made through distributors), could adversely affect the Company's gross
margins as sales to distributors are typically made at slightly lower average
prices than sales to computer resellers and VARs.
The Company frequently grants limited rights to customers to return
products purchased from the Company, in some cases in exchange for new
purchases, and also provides price protection to its customers. The short
product life cycles of the Company's products and the difficulty in predicting
future sales increase the risk that new product introductions, price reductions
by the Company or its competitors or other factors affecting the markets for the
Company's products could result in significant product returns. In addition, new
product introductions by the Company's suppliers or its competitors, or other
market factors, may require the Company to reduce prices in a manner or at a
time that gives rise to significant price protection charges. The Company
estimates product returns and potential price protection charges based on
historical experience and accrues reserves therefor. However, these accruals may
prove to be insufficient, and unanticipated future returns and price protection
charges could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly in light of the
rapid product obsolescence that often occurs
9
<PAGE> 11
during product transitions. See "-- Rapid Technological Change; Short Product
Life Cycles," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales and Marketing."
INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on a combination of copyright and trade secret
protections and confidentiality agreements to establish and protect its
intellectual property rights. The Company has no patent protection for its
current product lines. There can be no assurance that the Company's measures to
protect its intellectual property rights will deter or prevent unauthorized use
of the Company's technology. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent as
the laws of the United States. The Company's inability to protect its
proprietary rights in the United States or internationally may have a material
adverse effect on the Company's business, financial condition and results of
operations.
Claims by third parties that the Company's current or future products,
procedures or processes infringe upon their intellectual property rights may
have a material adverse effect on the Company. The Company does not normally
perform any formal surveys or studies relating to whether its products or
processes infringe upon the intellectual property rights of others, and it would
be difficult to establish whether a given product or process infringes upon the
intellectual property rights of others. Intellectual property litigation is
complex and expensive, and the outcome of such litigation is difficult to
predict. Any future litigation, regardless of outcome, may result in substantial
expense to the Company and significant diversion of the efforts of the Company's
management and technical personnel. An adverse determination in any such
litigation may subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from such parties, if licenses to such
rights could be obtained, or require the Company to cease using such technology.
There can be no assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to the Company. If forced to cease using such
technology, there can be no assurance that the Company would be able to develop
or obtain alternate technology. Accordingly, an adverse determination in a
judicial or administrative proceeding, changes in patent or copyright laws or
failure of the Company to obtain necessary licenses may prevent the Company from
manufacturing, using or selling certain of its products or processes, which may
have a material adverse effect on the Company's financial condition and results
of operations. In May 1995, Compaq made certain infringement and other claims
against the Company and obtained an injunction prohibiting the Company's use of
a small string of software code contained in certain of the Company's disk drive
products. Although the Company has rewritten the infringing code and settled the
lawsuit, the lawsuit required substantial management time, significant
expenditures for legal fees and costs and a one-time settlement payment and
ongoing royalty payments to Compaq for these products. See "Business --
Intellectual Property."
MANAGEMENT OF CHANGE
In recent years, the Company has expanded the overall size of its business
and scope of its operations, including research and development, marketing,
technical support and sales and distribution. The Company increased its number
of employees from 126 at the beginning of fiscal 1996 to 186 at the end of the
first quarter of fiscal 1997, and has also recently increased the breadth of its
CD server and array product line, enlarged the scope of its international
operations and increased its marketing and product development expenditures. The
expansion of the Company's business and product lines has required significant
investments in infrastructure and systems. Managing this change has presented
numerous challenges, including hiring and retaining key employees, integrating
or changing management information systems and coordinating suppliers. The
Company's future success will depend in large measure on its ability to
implement sufficient operating, manufacturing and financial procedures and
controls successfully, to improve coordination among different operating
functions, to strengthen management information and telecommunications systems
and to continue to hire qualified personnel in all areas. There can be no
assurance that the Company will manage these activities and implement these
additional systems and controls successfully, and any failure to do so could
10
<PAGE> 12
have a material adverse effect upon the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF INTERNATIONAL SALES AND OPERATIONS
The Company's international sales accounted for approximately 14%, 11% and
8% of the Company's net sales for fiscal 1995, fiscal 1996 and the first quarter
of fiscal 1997, respectively. During fiscal 1996, the Company added independent
sales representatives in Canada, France and Germany, and it plans to add
additional foreign sales representatives in the future. The Company's
international sales and operations are subject to a number of risks generally
associated with international operations, including export regulations,
government imposed restrictions on the purchase of technological equipment,
import and export duties and restrictions, the logistical difficulties of
managing multinational operations, potentially adverse tax consequences and
lower gross margins associated with the increased proportion of international
sales made to distributors. While all of the Company's sales are denominated in
U.S. dollars, fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to end users in a particular
country, leading to a reduction of sales in that country. The Company may also
experience competition specific to a given local market. In addition, the
Company's business may be adversely affected by seasonal sales declines in
Europe, which typically occur during the summer months. Because the Company has
operations in different countries, the Company's management must address the
difficulty of merging geographically disparate operations as well as differences
in regulatory environments, cultures and time zones. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
WARRANTY EXPOSURE
The Company's primary warranty efforts consist of accepting defective
products from customers and either repairing them or returning the defective
component to the original manufacturer for repair or replacement during the
applicable warranty period. The Company generally protects itself by extending
to its customers a warranty that corresponds to the warranty provided to the
Company by its suppliers. However, if a supplier were to fail to meet its
warranty obligations, the Company would be forced to assume responsibility for
warranties on all components manufactured by that supplier. Such an event could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel. In particular, the Company relies on the services of its four
founders, Messrs. Razmjoo, Alaghband, Aydin and Shahrestany (the "Founders").
The loss of any of these individuals or other management or technical personnel
may have a material adverse effect on the Company's operations, including the
ability to establish and strengthen strategic relationships, its ability to open
new offices successfully, its ability to adapt its products to changes in
technology and its ability to attract and retain technical personnel and other
employees, the competition for which is intense. The Company maintains
employment agreements with each of the Founders, but does not maintain
key-person life insurance policies on the lives of these individuals. See
"Business -- Employees" and "Management."
FUTURE CAPITAL REQUIREMENTS
The Company's business plan will require significant amounts of working
capital. While the Company has funded its growth historically through working
capital loans and internally generated funds, there can be no assurance that the
proceeds of this offering, together with available cash, bank lines of credit
and cash from operations, will be sufficient to satisfy the Company's
anticipated cash requirements. If additional funds are required, the Company's
operations may need to be significantly curtailed or the Company could be forced
to obtain financing on terms that cause the Company's business, financial
condition and results of operations to be adversely affected.
11
<PAGE> 13
The Company may expand its product lines through the acquisition of
complementary businesses, products and technologies. However, the Company has no
present plans, agreements or commitments to make any such acquisitions.
Acquisitions involve numerous risks, including difficulties in the assimilation
of operations and products, the ability to manage geographically remote units,
the diversion of management's attention from other business concerns, the risks
of entering markets in which the Company has little or no experience or
expertise and the potential loss of key employees of any acquired companies. In
addition, acquisitions may involve the expenditure of significant funds. The
Company's management has no prior experience in managing acquisitions. There can
be no assurance that any acquisition would result in long-term benefits to the
Company or that management would be able to manage effectively the acquired
business. See "Use of Proceeds," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CONCENTRATION OF SHARE OWNERSHIP AND CONTROL OF COMPANY
Upon completion of this offering, the Founders of the Company will
beneficially own approximately 66.1% of the Company's outstanding Common Stock
(62.0% if the Underwriters' over-allotment option is exercised in full).
Accordingly, the Founders will, acting together, have sufficient voting power to
control the outcome of all corporate matters submitted to the vote of
shareholders, including election of most or all directors, proxy contests,
mergers, tender offers, open-market purchase programs and other purchases of the
Company's Common Stock that could give shareholders of the Company the
opportunity to realize a premium over the then prevailing market price for their
shares of Common Stock. See "Principal and Selling Shareholders."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share, after deducting the estimated underwriting discount and
offering expenses, are estimated to be approximately $17,820,000. The Company
has not designated a specific use for a significant portion of such net
proceeds. The Company intends to use a portion of the net proceeds from this
Offering to repay all outstanding short-term debt under its line of credit
(approximately $3.7 million at October 25, 1996), approximately $300,000 to
acquire capital equipment to increase production capacity and the remainder for
general corporate purposes, including working capital. A portion of the net
proceeds also may be used for the acquisition of businesses, products and
technologies that are complementary to those of the Company. Accordingly, the
Company's management will retain broad discretion as to the allocation of the
proceeds of this Offering. The failure of management to apply such funds
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds." The
Offering is being made at this time in order to create a public market for the
Company's Common Stock, to provide liquidity to the Company's existing
stockholders, to provide increased visibility and credibility for the Company in
a marketplace where many of the Company's competitors are publicly held and to
fund increased working capital requirements created by the Company's growth over
the last three fiscal years.
ANTI-TAKEOVER PROTECTIONS
The Company's Articles of Incorporation provide for authorized but unissued
Preferred Stock, the terms of which may be fixed by the Board of Directors, and
eliminate cumulative voting and provide for a classified
12
<PAGE> 14
Board of Directors once the Company is listed on the Nasdaq National Market and
has 800 shareholders of record on the record date for an annual meeting of
shareholders. The Company's Bylaws establish advance notice requirements for
shareholder proposals and director nominations, subject to certain exceptions.
These provisions could have the effect of delaying, deterring or preventing a
change in control of the Company. See "Description of Capital Stock -- Certain
Anti-Takeover Effects."
NO PRIOR MARKET; VOLATILITY OF STOCK PRICE
The initial public offering price will be determined by negotiations among
the Company, the Selling Shareholders and the Representatives of the
Underwriters. Prior to this Offering, there has been no public market for the
Common Stock, and, although the Company has applied for listing of the Common
Stock on the Nasdaq National Market, there can be no assurance that an active
public market for the Common Stock will develop or be sustained after this
Offering.
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's operating
results, general conditions in the data storage and information access markets
served by the Company or in the worldwide economy, an outbreak of hostilities, a
shortfall in sales or net income compared to securities analysts' expectations,
announcements of technological innovations or new data storage and information
access products or enhancements by the Company or its competitors, developments
in patents or other intellectual property rights and developments in the
Company's relationships with its customers, suppliers, computer resellers, VARs
and distributors could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of technology companies and of small
capitalization companies in particular, have experienced extreme price
fluctuations, which have often been unrelated or disproportionate to the
operating performance of the affected companies. There can be no assurance that
the market price of the Company's Common Stock will not experience such
fluctuations. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock in the public market after this Offering could
adversely affect the market price of the Common Stock. Unless purchased by an
affiliate of the Company, the 3,025,000 shares of Common Stock to be sold in
this Offering will be freely transferable without restriction. All of the
Company's existing shareholders, who will hold 7,975,000 shares of Common Stock
after this Offering, have agreed that they will not, without the consent of
Montgomery Securities, sell or otherwise dispose of any equity securities of the
Company for a period of 180 days following the effective date of this Offering.
Upon expiration of the lock-up agreements with Montgomery Securities,
substantially all of such shares will be eligible for resale subject to the
limitations of Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). In general, under Rule 144 as currently in effect, a
person who has beneficially owned shares for at least two years is entitled to
sell in "broker's transactions" or to market makers, within any three-month
period commencing 90 days after the date of this Prospectus, a number of shares
that does not exceed 1% of the number of shares of Common Stock then outstanding
(approximately 110,000 shares immediately after this Offering) or, if greater, a
number based on average weekly trading volume of the Common Stock. Such sales
are also subject to certain notice requirements and to the availability of
current public information about the Company. The Securities and Exchange
Commission has proposed to reduce each of these Rule 144 holding periods by one
year. The Founders, who will hold 7,273,000 shares of Common Stock (6,819,250
shares if the Underwriters' over-allotment option is exercised in full) after
this Offering, are entitled to certain demand and "piggy back" registration
rights with respect to the registration of such shares for offer or sale to the
public. In addition, the Company intends to register with the Securities and
Exchange Commission a total of 540,000 shares of Common Stock reserved for
issuance under the 1995 Stock Option Plan as soon as practicable following the
date of this Prospectus, of which approximately 55,000 shares of Common Stock
subject to vested options will be eligible for resale upon the expiration of
lock-up agreements 180 days following the effective date of this Offering,
unless earlier released for resale by the Company. The Underwriting Agreement
prohibits the Company from releasing such shares for resale until 90 days
following the effective date of the Registration Statement of which this
Prospectus is a part (the "Effective Date"). Any
13
<PAGE> 15
shares subject to lock-up agreements may be released at any time without notice
by Montgomery Securities. Sales of substantial amounts of shares in the public
market may adversely affect the market price of the Company's Common Stock. See
"Shares Eligible For Future Sale."
ABSENCE OF DIVIDENDS
The Company has never declared or paid dividends on its Common Stock and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution of $7.73 in the net tangible book value per share of Common
Stock. Additional dilution will occur when existing optionholders exercise their
options. See "Dilution."
BENEFITS OF OFFERING TO FOUNDERS
The existing shareholders of the Company will receive certain benefits from
the sale of the Common Stock offered hereby. The Offering will establish a
public market for the Common Stock and provide increased liquidity to the
existing shareholders for the shares of Common Stock they will own after the
Offering, subject to certain limitations. See "Shares Eligible For Future Sale."
The Founders will sell 1,000,000 shares of Common Stock in the Offering and will
receive approximately $9.3 million in net proceeds, based upon an initial public
offering price of $10.00 per share and after deducting the estimated
underwriting discount, reflecting a net gain of $9.30 per share over the
original cost of the shares and an aggregate net gain of approximately $9.30
million. Mr. Judd will sell 25,000 shares of Common Stock in the Offering and
will receive approximately $232,500 in net proceeds and have a net gain of
approximately $223,750 based upon the assumed initial public offering price and
after deducting the estimated underwriting discount. If the Underwriters'
over-allotment option is exercised in full, the Founders will sell, in the
aggregate, 1,453,750 shares of Common Stock and will receive approximately $13.5
million in net proceeds based upon the assumed initial public offering price and
after deducting the estimated underwriting discount. See "Principal and Selling
Shareholders." The Company intends to use a portion of the net proceeds of the
Offering to repay short-term debt under the Company's line of credit
(approximately $3.7 million at October 25, 1996), which is guaranteed by the
Founders. See "Use of Proceeds." Additionally, immediately following the
Offering, the Founders will have an average unrealized gain over the original
cost of the shares that will continue to be held by them of $9.91 per share,
based upon the assumed initial public offering price, or an aggregate unrealized
gain of approximately $72.1 million (approximately $67.5 million if the
Underwriters' over-allotment option is exercised in full). See "Dilution" and
"Principal and Selling Shareholders."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 25, 1996 and as adjusted for the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share and the application by the Company of the estimated net
proceeds therefrom (after deducting the estimated underwriting discount and
offering expenses).
<TABLE>
<CAPTION>
OCTOBER 25, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Line of credit......................................................... $3,660 $ --
====== =======
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized;
none issued and outstanding, actual and as adjusted............... -- --
Common stock, no par value; 65,000,000 shares authorized, 9,000,000
shares issued and outstanding actual; 11,000,000 shares issued and
outstanding, as adjusted(1)....................................... 3 17,823
Retained earnings.................................................... 7,148 7,148
------ -------
Total shareholders' equity........................................ 7,151 24,971
------ -------
Total capitalization......................................... $7,151 $24,971
====== =======
</TABLE>
- ---------------
(1) Excludes 271,800 shares of Common Stock issuable upon exercise of options
outstanding as of October 25, 1996 at a weighted average exercise price of
$3.67 and an aggregate of 268,200 additional shares reserved for future
issuance as of such date under the Company's 1995 Stock Option Plan. See
"Management -- Employee Benefit Plans."
15
<PAGE> 17
DILUTION
As of October 25, 1996, the Company had a net tangible book value of
$7,151,000, or $0.79 per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of shares of Common
Stock outstanding as of October 25, 1996. After giving effect to the sale by the
Company of the shares of Common Stock offered by the Company hereby at an
assumed initial public offering price per share of $10.00 and (after deducting
the estimated underwriting discount and offering expenses), the Company's net
tangible book value as of October 25, 1996 would have been $24,971,000 or $2.27
per share of Common Stock. This represents an immediate increase in net tangible
book value of $1.48 per share to existing shareholders and an immediate dilution
of $7.73 per share to new investors purchasing shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $10.00
Net tangible book value per share before the Offering............. $0.79
Increase per share attributable to new investors.................. 1.48
-----
Pro forma net tangible book value per share after the Offering...... 2.27
------
Dilution per share to new investors............................... $ 7.73
======
</TABLE>
The following table sets forth on a pro forma basis, as of October 25,
1996, the relative investments of all existing shareholders and new investors
purchasing shares of Common Stock from the Company in the Offering. The
calculations are based on an assumed initial public offering price of $10.00 per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 9,000,000 81.8% $ 3,000 --% $ --
New investors.................. 2,000,000 18.2 20,000,000 100.0 10.00
---------- ----- ----------- -----
Total........................ 11,000,000 100.0% $20,003,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Shareholders in the Offering will reduce the number of
shares held by existing shareholders to 7,975,000 shares, or 72.5% of the
total shares of Common Stock outstanding (7,521,250 shares, or 68.4% of the
total shares of Common Stock if the Underwriters' over-allotment option is
exercised in full), and will increase the number of shares held by new
investors to 3,025,000 shares, or 27.5% of the total shares of Common Stock
outstanding (3,478,750 shares, or 31.6% of the total shares of Common Stock
if the Underwriters' over-allotment option is exercised in full) after the
Offering.
The foregoing table excludes an aggregate of 271,800 shares of Common Stock
issuable upon the exercise of stock options outstanding as of October 25, 1996
at a weighted average exercise price of $3.67 per share and an aggregate of
268,200 additional shares of Common Stock reserved for future issuance as of
such date under the Company's 1995 Stock Option Plan. To the extent that any
options of the Company are exercised, there will be further dilution to new
investors. See "Management -- Employee Benefit Plans" and "Principal and Selling
Shareholders."
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below
should be read in conjunction with the Consolidated Financial Statements of the
Company, including the notes thereto, and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere herein. The
Company utilizes a fiscal year ending on the Friday nearest July 31. The
selected consolidated financial data as of July 28, 1995 and July 26, 1996 and
for the three years in the period ended July 26, 1996 are derived from the
consolidated financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants, whose report appears elsewhere in the
Prospectus. The selected consolidated financial data as of July 31, 1992, July
30, 1993 and July 29, 1994 and for the two years ended July 30, 1993 are derived
from the audited consolidated financial statements of the Company not included
herein. The selected consolidated financial data presented below as of October
25, 1996 and for the quarters ended October 27, 1995 and October 25, 1996 are
unaudited but have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Historical results
are not necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
---------------------------------------------------- -------------------------
JULY 31, JULY 30, JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25,
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales.............................. $ 42,898 $ 41,726 $ 34,502 $ 44,660 $ 73,456 $15,275 $24,915
Cost of sales.......................... 34,029 32,273 27,187 32,858 51,489 11,133 16,490
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 8,869 9,453 7,315 11,802 21,967 4,142 8,425
Selling, general and administrative
expenses............................. 7,045 7,293 6,902 9,362 15,401 2,875 4,367
Research and development expenses...... 886 1,014 983 1,108 1,635 292 688
Loss on closure of German subsidiary... -- -- 409 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. 938 1,145 (979) 1,332 4,931 975 3,370
Interest expense....................... (91) (195) (151) (195) (282) (60) (60)
Other income (expense), net............ 13 (44) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.... 861 906 (1,130) 1,137 4,649 915 3,310
Provision (benefit) for income taxes... 285 297 (357) 414 1,800 356 1,295
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 576 $ 609 $ (773) $ 723 $ 2,849 559 2,015
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(1)......... $ 0.06 $ 0.07 $ (0.08) $ 0.08 $ 0.31 $ 0.06 $ 0.22
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares(1)... 9,172 9,172 9,172 9,172 9,172 9,172 9,172
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JULY 31, JULY 30, JULY 29, JULY 28, JULY 26, OCTOBER 25,
1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash......................................... $ 24 $ 57 $ 211 $ 212 $ 793 $ 58
Working capital.............................. 1,285 1,911 1,275 1,868 4,632 6,569
Total assets................................. 8,230 9,072 7,638 11,011 21,112 25,325
Line of credit............................... 1,909 2,868 1,679 1,484 4,185 3,660
Long-term obligations........................ 87 58 39 34 -- --
Total shareholders' equity................... 1,729 2,338 1,564 2,287 5,136 7,151
</TABLE>
- ------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
The Company was formed in 1987. Its first product was a 5 1/4 inch floppy
disk drive for the IBM PS/2 personal computer. At the time, IBM was shipping the
PS/2 with only a 3 1/2 inch floppy disk drive, although the software and data of
most computer users were still stored on 5 1/4 inch formats. The Company
subsequently began producing aftermarket disk drive upgrade products for
computer products sold by other manufacturers, and such upgrade products
continue to be an important area of focus of the Company's business. In 1991,
the Company developed and began selling CD-ROM multimedia kits, consisting of a
CD-ROM drive, a sound card, software drivers and various CD-ROM software titles.
The Company initially achieved rapid growth in the sales of multimedia kits to
mass merchants and national distributors. However, in fiscal 1994, the Company
began to experience significant losses on sales of its multimedia kits due to
high return rates, high product support costs and rapid price erosion that
resulted both in decreased margins on initial sales and in losses on unsold
inventory and returned products. Accordingly, in early fiscal 1994, the Company
began to phase out sales of multimedia kits, and in fiscal 1995 it discontinued
sales of these kits. Sales of multimedia kits declined from 31% of net sales in
fiscal 1994 to 5% of net sales in fiscal 1995. Additionally, the Company
incurred a one-time charge to operations of $409,000 in fiscal 1994 related to
the closure of its German sales office. These factors contributed to the
Company's net loss for fiscal 1994.
In fiscal 1994, the Company introduced its CD server and array product line
while continuing to provide a broad line of disk drive upgrade products. In
addition, during fiscal 1994, the Company began utilizing computer resellers and
VARs as its primary sales channel instead of mass merchants and national
distributors and commenced shipment of its first RAID arrays and fault tolerant,
high performance storage servers. During fiscal 1995, the Company experienced
rapid growth in sales of its CD servers and arrays. Sales of hard disk drive
upgrade products, CD servers and arrays, and RAID and tape backup subsystem
products represented 63%, 4% and 2% of net sales in fiscal 1994, and 59%, 32%
and 5% of net sales in fiscal 1995, respectively. During fiscal 1996, sales of
CD servers and arrays increased more rapidly than sales of the Company's other
product lines. As a result, in fiscal 1996, sales of CD servers and arrays
represented 49% of net sales, while sales of hard disk drive upgrade products
and RAID and tape backup subsystem products represented 47% and 4% of net sales,
respectively. See "Business -- Products and Technology."
The Company generally records sales upon product shipment. The Company
presently maintains agreements with many of its computer resellers, VARs and
distributors that allow limited returns (including stock balancing) and price
protection privileges. The Company has in the past experienced high return
rates. During fiscal 1996, customer returns and price protection charges
represented approximately 12% of gross sales. The Company maintains reserves for
anticipated returns (including stock balancing) and price protection privileges.
These reserves are adjusted at each financial reporting date to state fairly the
anticipated returns (including stock balancing) and price protection claims
relating to each reporting period. Generally, the reserves will increase as
sales and corresponding returns increase. In addition, under a product
evaluation program established by the Company, computer resellers, VARs,
distributors and end users generally are able to purchase products on a trial
basis and return the products within a specified period if they are not
satisfied. Evaluation units are not recorded as sales until the customer has
paid for such units.
All of the Company's sales are denominated in U.S. dollars, and
accordingly, the Company does not believe that fluctuations in foreign exchange
rates have had or will have a material adverse effect on the Company's results
of operations or financial condition, except to the extent that such
fluctuations could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to a reduction of sales
in that country.
18
<PAGE> 20
Historically, the Company's gross margins have experienced significant
volatility. The Company's gross margins vary significantly by product line, and,
therefore, the Company's overall gross margin varies with the mix of products
sold by the Company. For example, low capacity disk drive subsystems generally
result in lower gross margins than CD servers and arrays. As sales of CD servers
and arrays have become a larger percentage of the Company's total sales, the
Company has experienced a corresponding increase in its overall gross margins.
From fiscal 1994 to fiscal 1996, sales of CD servers and arrays grew from
approximately 4% to 49% of net sales, contributing to an improvement in the
Company's gross margin from approximately 21.2% to 29.9%. The Company's markets
are also characterized by intense competition and declining average unit selling
prices as products mature over the course of the relatively short life cycle of
individual products, which have often ranged from six to twelve months. In
addition, the Company's gross margins may be adversely affected by availability
and price increases associated with key products and components from the
Company's suppliers, some of which have been in short supply, and inventory
obsolescence resulting from older generation products or the unexpected
discontinuance of third party components. Finally, the Company's margins vary
with the mix of its distribution channels and with general economic conditions.
For any of the foregoing reasons, the Company's overall margin could decline in
the future from the levels experienced in recent quarters. See "Risk
Factors -- Potential Fluctuations in Future Results of Operations,"
"-- Component Shortages; Reliance on Sole or Limited Source Suppliers" and
"-- Rapid Technological Change; Short Product Life Cycles."
RESULTS OF OPERATIONS
The following table sets forth the Company's statement of operations data
as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
-------------------------------- --------------------------
JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25,
1994 1995 1996 1995 1996
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 78.8 73.6 70.1 72.9 66.2
----- ----- ----- ----- -----
Gross profit................................ 21.2 26.4 29.9 27.1 33.8
Selling, general and administrative
expenses.................................... 20.0 20.9 21.0 18.8 17.5
Research and development expenses............. 2.8 2.5 2.2 1.9 2.8
Loss on closure of German subsidiary.......... 1.2 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)..................... (2.8) 3.0 6.7 6.4 13.5
Interest expense.............................. 0.4 0.4 0.4 0.4 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes........... (3.2) 2.6 6.3 6.0 13.3
Provision (benefit) for income taxes.......... (1.0) 1.0 2.4 2.3 5.2
----- ----- ----- ----- -----
Net income (loss)........................... (2.2)% 1.6% 3.9% 3.7% 8.1%
===== ===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 25, 1996 COMPARED TO QUARTER ENDED OCTOBER 27, 1995
Net Sales
Net sales increased 63.1% from $15,275,000 for the quarter ended October
27, 1995 to $24,915,000 for the quarter ended October 25, 1996. This increase
was primarily due to increases in sales of CD servers and arrays and sales of
disk drive upgrade subsystems for desktop and notebook computers and, to a
lesser extent, increases in net sales of RAID high capacity storage devices. For
the quarter ended October 25, 1996, sales of CD servers and arrays, disk drive
upgrade products and RAID storage systems comprised approximately 45%, 48% and
7% of net sales, respectively. International sales increased approximately 23.4%
from $1.7 million, or approximately 11% of net sales, in the quarter ended
October 27, 1995 to $2.0 million, or approximately 8% of net sales, in the
quarter ended October 25, 1996. Sales were affected by an increase in the
allowance for sales returns during the first quarter of each of fiscal 1997 and
1996 of approximately $92,000 and $72,000, respectively, due primarily to
increasing sales volumes and slightly higher overall return rates. For the
quarter
19
<PAGE> 21
ending January 24, 1997, the Company does not anticipate significant growth in
net sales, if any, over the quarter ended October 25, 1996. The Company's fiscal
second quarter sales have historically remained relatively flat due primarily to
heavy reseller participation in trade shows that detract from reseller selling
efforts, end user budget constraints that restrict end user purchases and a
higher than average number of holidays during the fiscal second quarter.
Gross Profit
The Company's gross profit increased from 27.1% of net sales, or
$4,142,000, for the quarter ended October 27, 1995 to 33.8% of net sales, or
$8,425,000, for the quarter ended October 25, 1996. These increases were
primarily the result of higher margins on sales of recently introduced CD
servers and arrays and, to a lesser extent, higher margins on sales of disk
drive upgrade products for notebook computers and RAID storage products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 52.0% from
$2,875,000 for the quarter ended October 27, 1995 to $4,367,000 for the quarter
ended October 25, 1996. These expenses represented 18.8% and 17.5% of net sales
in the quarters ended October 27, 1995 and October 25, 1996, respectively. The
dollar increase in selling, general and administrative expenses for the first
quarter of fiscal 1997 was primarily a result of increased marketing and
promotional costs and increased personnel and related costs necessary to support
the Company's growth in net sales. The decrease in selling, general and
administrative expenses as a percentage of net sales for the first quarter of
fiscal 1997 was due primarily to a decrease in management bonuses from $571,000
for the first quarter of fiscal 1996 to $125,000 for the first quarter of fiscal
1997. Bad debt expense for the first quarter of fiscal 1997 was approximately
$124,000, or .50% of net sales, compared to approximately $67,000, or .44% of
net sales, for the first quarter of fiscal 1996. The Company anticipates that
the dollar amount of its selling, general and administrative expenses will
increase as the Company continues to expand its efforts to penetrate certain
sales channels and regions and continues to strengthen management information
and telecommunications systems.
Research and Development
Research and development expenses increased 135.6% from $292,000 for the
quarter ended October 27, 1995 to $688,000 for the quarter ended October 25,
1996. These expenses represented 1.9% and 2.8% of net sales for the quarters
ended October 25, 1995 and October 27, 1996, respectively. These increases were
primarily due to continued increases in additional hardware developers and
software programmers and increased related support costs to develop additional
products and enhance existing product features. The Company anticipates that the
dollar amount of its research and development expenses will increase, and also
may increase as a percentage of net sales, with the addition of dedicated
engineering resources to develop new product categories, to ensure that the
Company's products are compatible with a wide range of hardware platforms and
network topologies and to further develop MESA, the Company's proprietary
client/server management storage architecture. In addition, the Company intends
to continue to update software drivers to ensure that the Company's CD servers
and arrays function with a variety of hardware platforms and network operating
systems. To date, all of the Company's software development costs have been
expensed as incurred, as the impact of capitalizing software costs under
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" would have been immaterial to
the Company's financial statements.
Income Taxes
The Company's effective tax rates for the quarters ended October 27, 1995
and October 25, 1996 were 38.9% and 39.1% of net income, respectively, which
approximate the federal and state statutory rates with modest reductions for
benefits resulting from the Company's use of its foreign sales corporation
("FSC") and a research and development credit.
20
<PAGE> 22
COMPARISON OF YEARS ENDED JULY 29, 1994, JULY 28, 1995 AND JULY 26, 1996
Net Sales
The following table sets forth the net sales and percentages of net sales
represented by each of the Company's product lines.
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JULY JULY JULY
29, 28, 26,
1994 1995 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NET SALES DATA:
CD servers and arrays......................................... $ 1,568 $14,426 $36,079
Disk drive upgrade products................................... 21,726 26,000 34,789
RAID and tape backup subsystem products....................... 686 2,421 2,588
Multimedia kits............................................... 10,522 1,813 --
------ ------ ------
Total............................................... $34,502 $44,660 $73,456
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JULY JULY JULY
29, 28, 26,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
PERCENTAGE OF NET SALES DATA:
CD servers and arrays......................................... 4% 32% 49%
Disk drive upgrade products................................... 63 59 47
RAID and tape backup system products.......................... 2 4 4
Multimedia kits............................................... 31 5 --
------ ------ ------
Total............................................... 100% 100% 100%
====== ====== ======
</TABLE>
Net sales increased 29.4% from $34.5 million in fiscal 1994 to $44.7
million in fiscal 1995 and increased an additional 64.5% to $73.5 million in
fiscal 1996. Net sales increased from fiscal 1994 to fiscal 1995 primarily as a
result of increased sales of the Company's CD servers and arrays and, to a
lesser extent, increased sales of its disk drive upgrade products and RAID
products, which were partially offset by decreased sales of its CD-ROM
multimedia kits that were discontinued in fiscal 1995. Net sales increased from
fiscal 1995 to fiscal 1996 primarily as a result of increased sales of CD
servers and arrays (including sales of higher performance CD servers) and, to a
lesser extent, increased sales of hard disk drive upgrade products. For fiscal
1996, sales were reduced by approximately $130,000 as the Company increased its
allowance for anticipated sales returns. For fiscal 1995 and 1994, the
allowances for anticipated sales returns were reduced by $52,000 and $50,000,
respectively, as the Company phased out sales of its multimedia kits which had
high return rates.
International sales, primarily to European customers and secondarily to
Middle Eastern, Latin American and Pacific Rim customers, were $6.5 million,
$6.2 million and $8.4 million, and accounted for approximately 19%, 14% and 11%
of net sales for fiscal 1994, 1995 and 1996, respectively. International sales
remained essentially constant for fiscal 1995 compared to fiscal 1994 as
increased sales of hard disk drive upgrade products were offset by decreased
sales of CD-ROM multimedia kits. International sales increased by 35.6% from
fiscal 1995 to fiscal 1996 primarily as a result of increased sales of CD-ROM
servers and arrays. See "Risk Factors -- Risks of International Sales and
Operations."
Gross Profit
The Company's gross profit totalled $7.3 million, $11.8 million and $22.0
million during fiscal 1994, 1995 and 1996, respectively. The Company's gross
margin increased from 21.2% in fiscal 1994 to 26.4% in fiscal 1995, due
primarily to a shift in product mix toward higher margin CD servers and arrays
and a decrease in the losses associated with the discontinuance of sales of the
Company's CD-ROM multi-media kits. During fiscal 1996, gross margin further
increased to approximately 29.9% due primarily to a continuing shift in product
mix toward higher margin CD servers and arrays as well as an increase in gross
margins for the Company's
21
<PAGE> 23
CD servers and arrays, and to a lesser extent from an increase in gross margins
on the Company's hard disk drive upgrade and RAID products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 35.6% from $6.9
million in fiscal 1994 to $9.4 million in fiscal 1995 and further increased
64.5% to $15.4 million in fiscal 1996. These expenses represented 20.0%, 20.9%
and 21.0% of net sales in fiscal 1994, 1995 and 1996, respectively. The increase
from fiscal 1994 to fiscal 1995 was due primarily to an increase in various
marketing and advertising programs to promote sales of the Company's CD servers
and arrays and RAID subsystems in vertical niche markets, as well as increases
in staffing to support the Company's growth. The increase from fiscal 1995 to
fiscal 1996 was due primarily to increased marketing expenses associated with
advertising, direct mail and channel telemarketing, as well as increases in
sales commissions and general and administrative staffing necessary to support
the Company's growth. For fiscal 1994 and 1995, bad debt expense was $241,000
and $322,000, or approximately .69% and .72% of net sales, respectively,
compared to $473,000, or approximately .64% of net sales, for fiscal 1996.
Selling, general and administrative expenses for fiscal 1995 and 1996 included
$0.9 million and $2.9 million, respectively, for bonuses for executive officers.
Research and Development Expenses
Research and development expenses, consisting primarily of personnel
expenses, increased 12.7% from $1.0 million in fiscal 1994 to $1.1 million in
fiscal 1995 and further increased 47.6% to $1.6 million in fiscal 1996. These
expenses represented 2.8%, 2.5% and 2.2% of net sales in fiscal 1994, 1995 and
1996, respectively. The slight dollar increase from fiscal 1994 to fiscal 1995
resulted primarily from the Company's enhanced efforts to develop its CD server
and array product lines and RAID subsystems. This increase was largely offset by
the Company's discontinuation of its development efforts for its CD-ROM
multimedia kit business. The dollar increase from fiscal 1995 to fiscal 1996 was
due primarily to the Company's expanded efforts to develop new CD servers and
RAID products and to develop CD FORCE, a CD-ROM network server incorporating
Procom's proprietary software data access management system.
Loss on Closure of German Subsidiary
The Company incurred a one-time charge to operations of $409,000 related to
the closure of its German sales office during fiscal 1994. The Company formed
its German subsidiary in fiscal 1993 to support its increasing European sales
and marketing efforts primarily related to sales of CD-ROM multimedia kits.
However, the Company closed its German office in April 1994 due to the
subsidiary's lack of profitability resulting from higher average general and
administrative costs, slower realization of sales than anticipated and a lower
gross margin product mix. During fiscal 1995, the Company completed the
liquidation of the subsidiary's assets.
Interest Expense
The Company maintains a working capital line of credit to support its
accounts receivable and inventory levels. Interest expense increased from
$151,000 in fiscal 1994 to $195,000 in fiscal 1995 as the Company's sales, and
resulting accounts receivable and inventory levels, increased. Interest expense
further increased to $282,000 for fiscal 1996 as the Company utilized its
available credit lines to support further increases in accounts receivables and
inventory levels.
Income Taxes
The Company's effective tax rates were (31.6)%, 36.4% and 38.7% for fiscal
1994, 1995 and 1996, respectively. In fiscal 1994, the Company utilized net
operating losses to reduce its state income tax rate below the statutory level.
For fiscal 1995 and 1996, the Company's effective tax rate approximated federal
and state statutory rates, with moderate reductions due to the Company's use of
its FSC. For fiscal 1994 and 1995, the Company received benefits from a research
and development credit, while the fiscal 1996 benefit was
22
<PAGE> 24
significantly reduced due to legislation which temporarily denied the credit.
See Note 4 of Notes to Consolidated Financial Statements.
The Company adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes," on July 28, 1994. The cumulative effect of the
adoption as of July 28, 1994 was immaterial and, as a result, the Company did
not restate any prior financial statements.
QUARTERLY INFORMATION
The following tables set forth certain unaudited financial information in
dollars and as a percentage of net sales for the eight quarters of fiscal 1995
and 1996 and the first quarter of fiscal 1997. The Company believes that all
necessary adjustments, consisting only of normal recurring accruals, have been
included in the amounts stated below to present fairly the selected quarterly
information when read in conjunction with the Consolidated Financial Statements
and the notes thereto included elsewhere herein. The operating results for any
quarter are not necessarily indicative of results for any subsequent period or
for the entire fiscal year.
The Company operates under thirteen week quarters that end on the Friday
closest to the calendar quarter end. As a result, a fiscal quarter may not end
on the same day as the calendar quarter end.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------------------------------
OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, JULY 26, OCTOBER 25,
1994 1995 1995 1995 1995 1996 1996 1996 1996
----------- ----------- --------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..... $9,048 $10,040 $12,121 $13,451 $15,275 $15,801 $17,775 $24,605 $24,915
Cost of
sales....... 6,701 7,213 9,100 9,844 11,133 10,948 12,263 17,145 16,490
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross
profit.... 2,347 2,827 3,021 3,607 4,142 4,853 5,512 7,460 8,425
------ ------- ------- ------- ------- ------- ------- ------- -------
Selling,
general and
adminis-
trative... 1,851 2,255 2,350 2,906 2,875 3,333 3,829 5,364 4,367
Research and
development... 210 226 325 347 292 386 459 498 688
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating
income.... 286 346 346 354 975 1,134 1,224 1,598 3,370
Interest
expense..... 40 58 56 41 60 61 51 110 60
------ ------- ------- ------- ------- ------- ------- ------- -------
Income
before
income
taxes..... 246 288 290 313 915 1,073 1,173 1,488 3,310
Provision for
income
taxes....... 91 105 104 114 356 418 457 569 1,295
------ ------- ------- ------- ------- ------- ------- ------- -------
Net
income.... $ 155 $ 183 $ 186 $ 199 $ 559 $ 655 $ 716 $ 919 $ 2,015
====== ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share....... $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.06 $ 0.07 $ 0.08 $ 0.10 $ 0.22
====== ======= ======= ======= ======= ======= ======= ======= =======
Weighted
average
number of
shares(1)... 9,172 9,172 9,172 9,172 9,172 9,172 9,172 9,172 9,172
====== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share.
23
<PAGE> 25
The following table sets forth certain unaudited quarterly financial
information of the Company for the eight quarters of fiscal 1995 and 1996 and
the first quarter of fiscal 1997 expressed as a percentage of net sales.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------------------------------
OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, JULY 26, OCTOBER 25,
1994 1995 1995 1995 1995 1996 1996 1996 1996
----------- ----------- --------- -------- ----------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of
sales....... 74.1 71.8 75.1 73.2 72.9 69.3 69.0 69.7 66.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross
profit.... 25.9 28.2 24.9 26.8 27.1 30.7 31.0 30.3 33.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Selling,
general and
administrative... 20.4 22.5 19.4 21.6 18.8 21.1 21.5 21.8 17.5
Research and
development... 2.3 2.3 2.7 2.6 1.9 2.4 2.6 2.0 2.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating
income.... 3.2 3.4 2.8 2.6 6.4 7.2 6.9 6.5 13.5
Interest
expense..... 0.5 0.6 0.4 0.3 0.4 0.4 0.3 0.5 0.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Income
before
income
taxes..... 2.7 2.8 2.4 2.3 6.0 6.8 6.6 6.0 13.3
Provision for
income
taxes....... 1.0 1.0 0.9 0.8 2.3 2.6 2.6 2.3 5.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.... 1.7% 1.8% 1.5% 1.5% 3.7% 4.2% 4.0% 3.7% 8.1%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's net sales have increased every quarter for the eight quarters
of fiscal 1995 and 1996 and the first quarter of fiscal 1997. The increased
sales have resulted primarily from increased shipments of CD servers and arrays
and higher capacity disk drive upgrade products. In addition to seasonal factors
that generally contribute to a relatively flat second fiscal quarter, the
Company believes that its net sales for the second quarter of fiscal 1996 were
adversely impacted by inclement weather and the federal government shutdown,
which restricted federal purchasing due to budgetary uncertainty and the absence
of federal purchasing decision-makers. The 38.4% increase in net sales for the
fourth quarter of fiscal 1996 over the third quarter of fiscal 1996 was due
primarily to a significant increase in sales of high capacity storage upgrade
products as the Company capitalized on unique market opportunities and, to a
lesser extent, increased sales of CD servers and arrays.
Gross margin ranged from 24.9% for the third quarter of fiscal 1995 to
33.8% for the first quarter of fiscal 1997. Fluctuations in gross margin
resulted from variations in revenue mix from sales of higher margin CD servers
and arrays and RAID products, and sales of lower margin medium capacity disk
drive storage products. Certain other factors which contribute to decreases in
the Company's gross margins include the lower margins generated by sales of
products near the end of their life cycles and increased international sales,
which generally involve slightly lower average unit sales prices as a result of
the increased use of distributors rather than computer resellers or VARs.
Selling, general and administrative expenses ranged from 17.5% of net sales
in the first quarter of fiscal 1997 to 22.5% of net sales in the second quarter
of fiscal 1995. While selling, general and administrative expenses have
generally increased, fluctuations in these expenses as a percentage of net sales
have resulted primarily from varying levels of net sales, management bonuses and
seasonal variations in marketing, advertising and trade show expenditures.
Research and development expenses ranged from 1.9% of net sales in the
first quarter of fiscal 1996 to 2.8% of net sales in the first quarter of fiscal
1997. Research and development expense levels fluctuated quarterly depending
primarily on the size of the Company's engineering staff, as well as the number
and nature of projects under development during any given quarter.
The Company's results of operations have in the past varied significantly
and are likely in the future to vary significantly as a result of a number of
factors, including the mix of products sold, the volume and timing of orders
received during the period, the timing of new product introductions by the
Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability and
pricing of components for the Company's products, changes in distribution
channel mix and product returns or price protection charges from customers. Many
of these factors are beyond the Company's control. Although the Company has
experienced growth in sales in recent periods, there can be no assurance that
the Company will experience growth in the future or be profitable on an
operating basis in any future period. In addition, due to the short product life
cycles that characterize the Company's markets, a
24
<PAGE> 26
significant percentage of the Company's sales each quarter may result from new
products or product enhancements introduced in that quarter. Since the Company
relies on new products and product enhancements for a significant percentage of
sales, failure to continue to develop and introduce new products and product
enhancements or failure of these products or product enhancements to achieve
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. Historically, as the
Company has planned and implemented new products, it has experienced unexpected
reductions in sales and gross profit of older generation products as customers
have anticipated new products. These reductions have in the past given and could
continue to give rise to charges for obsolete or excess inventory, returns of
older generation products by computer resellers, VARs and distributors or
substantial price protection charges. See "Risk Factors -- Rapid Technological
Change; Short Product Life Cycles" and "-- Customer Concentration; Distribution
Strategy Risks; Inventory Protection." For example, in fiscal 1994, the Company
incurred losses when it discontinued sales of CD-ROM multimedia kits to mass
merchants and distributors. From time to time, the Company has experienced and
may in the future experience inventory obsolescence resulting from the
unexpected discontinuance of third party components, such as disk drives,
included in the Company's products. To the extent the Company is unsuccessful in
managing product transitions, it may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also has historically capitalized on short-term market
opportunities for volume purchases of certain components at favorable prices.
For example, in the quarter ended July 26, 1996, the Company capitalized on a
one-time opportunity to sell a significant volume of high capacity disk drive
upgrade products purchased at below market prices in the prior quarter, which
resulted in a price advantage to the Company that enhanced the Company's sales
and results of operations for that quarter. There can be no assurance that the
Company will be able to capitalize on such opportunities in the future. In
addition, the Company's fiscal second quarter sales have historically remained
relatively flat due primarily to heavy reseller participation in trade shows
that detract from reseller selling efforts, end user budget constraints that
restrict end user purchases, and a higher than average number of holidays during
that quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company was founded with minimal capital and has never raised
additional equity funds. For the past three fiscal years, the Company has
satisfied its operating cash requirements principally through net income,
supplemented by periodic borrowings of funds under its working capital line of
credit and increases in accounts payable and accrued expenses. Net cash provided
by operating activities was $1.4 million and $0.4 million in fiscal 1994 and
fiscal 1995, respectively, and net cash used in operating activities was $1.7
million, $1.1 million and $0.1 million in fiscal 1996 and the first quarter of
each of fiscal 1996 and 1997, respectively. In fiscal 1994, net cash provided by
operating activities was provided primarily by a decrease in accounts receivable
and an increase in accounts payable, partially offset by the Company's net loss
for the year. In fiscal 1995, net cash provided by operating activities resulted
primarily from an increase in accounts payable and accrued expenses, together
with the Company's net income, offset in large part by increases in inventories
and accounts receivable. In fiscal 1996 and the first quarter of each of fiscal
1996 and 1997, net cash used in operating activities resulted primarily from
increases in accounts receivable due to increased sales during each of the
periods and increases in inventories due to both increased sales and the higher
value added components of the Company's products. These increased uses of
capital were offset in part by the Company's net income and increases in
accounts payable and accrued expenses. In fiscal 1994, 1995 and 1996, and in the
first quarter of each of fiscal 1996 and 1997, the Company's investing
activities consisted primarily of purchases of property and equipment. Property
and equipment expenditures totaled $71,000, $179,000, $431,000, $124,000 and
$141,000 for such periods, respectively.
During fiscal 1994 and 1995, the Company used $1.2 million and $0.2
million, respectively, to repay net borrowings under its line of credit, and,
during fiscal 1996, the Company borrowed $2.7 million, net of repayments, to
finance operations and purchase $431,000 of property and equipment. In the first
quarter of fiscal 1996, the Company borrowed $1.0 million net of repayments to
finance operations, and in the first quarter of fiscal 1997, the Company used
$0.5 million to repay net borrowings under its line of credit. As the Company's
net sales have increased, the Company's working capital requirements also have
increased, and consequently, the Company has experienced a trend of increasing
borrowings under and payments on its line
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<PAGE> 27
of credit. In fiscal 1994, 1995 and 1996, and in the first quarter of each of
fiscal 1996 and 1997, the Company's borrowings under its line of credit were
$34.9 million, $43.8 million, $64.8 million, $14.5 million and $22.6 million,
respectively, and its payments on its line of credit were $36.1 million, $44.0
million, $62.1 million, $13.5 million and $23.1 million, respectively.
In November 1994, the Company instituted a revolving line of credit with
Finova Capital ("Finova"). The facility was amended in November 1995 to provide
the Company with up to $6.0 million in working capital loans, based upon the
Company's accounts receivable and inventory levels. The line of credit accrues
certain commitment fees, unused facility fees and interest on outstanding
amounts at the lender's prime rate (8.25% at October 25, 1996) plus 1.5%. Finova
also makes available to the Company various flooring commitments pursuant to
which the Company may finance the purchase of up to $13.0 million in inventory
(less any amounts outstanding in working capital loans) from certain of the
Company's vendors who have credit arrangements with Finova. As of October 25,
1996, there was approximately $3.7 million outstanding under the credit
facility, and $7.5 million outstanding under the flooring arrangements. The
agreement governing the credit facility requires the Company to maintain certain
financial covenants (including the maintenance of working capital of at least
$500,000), minimum levels of tangible net worth and minimum levels of liquidity.
As of October 25, 1996, the Company was in material compliance with the
covenants of the Finova line of credit. The line is secured by substantially all
of the assets of the Company and is guaranteed by the Founders. The initial term
of the line of credit expires on November 29, 1996, but automatically renews for
successive one year periods unless terminated by either party within a specified
period in advance of the automatic renewal date. See Note 5 of Notes to
Consolidated Financial Statements.
As of October 25, 1996, the Company had cash balances of $0.1 million and
$2.3 million of availability under its line of credit. The Company believes that
the cash proceeds from this offering, together with existing cash balances and
available credit under its existing line of credit, will be sufficient to meet
anticipated cash requirements for at least the next twelve months. As of October
25, 1996, the Company had no material commitments for capital expenditures.
However, the Company intends to spend approximately $300,000 to acquire capital
equipment to increase production capacity, to build out new production space and
to retain consultants to evaluate and make recommendations regarding the
efficiency of the Company's manufacturing operations. While the Company has no
present plans, agreements or commitments to make any acquisitions, the Company
may acquire businesses, products and technologies that are complementary to
those of the Company. In the event the Company's plans require more capital than
is presently anticipated, the Company's remaining cash balances may be consumed
and additional sources of liquidity such as debt or equity financings may be
required to meet working capital needs. There can be no assurance that
additional capital beyond the amounts currently forecasted by the Company will
not be required nor that any such required additional capital will be available
on reasonable terms, if at all, at such time or times as required by the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss should be recognized under the statement. The
Company's adoption of the statement will be effective for fiscal 1997. The
Company has studied the implications of the statement, and based on its initial
evaluation, does not expect it to have a material impact on the Company's
financial condition and results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans under the statement. The Company is currently following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company plans to adopt SFAS No. 123 during fiscal 1997 utilizing the
disclosure alternative under the statement.
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<PAGE> 28
BUSINESS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
Procom designs, manufactures and markets enterprise-wide data storage and
information access solutions that are compatible with all major hardware
platforms, network protocols and operating systems. The Company believes it is
currently a leader in the market for CD-ROM servers and arrays due to its
extensive distribution channels as well as the scalability, performance, ease of
use and multi-protocol support of its products. The Company provides end users
with disk drive upgrades for servers, desktop and notebook computers and also
provides high performance, fault tolerant RAID solutions and tape backup
subsystems. The Company utilizes computer resellers, VARs and distributors to
sell its products to a wide variety of end users, including Fortune 500
corporations, governmental agencies and financial and educational institutions.
BACKGROUND
In recent years, there has been a significant migration to client/server
and network computing. Today's networks are much larger and more complex than
early networks, often consisting of multiple servers (application servers, file
servers, database servers and communications servers) and hundreds or even
thousands of desktop clients manufactured by a number of different vendors.
These servers and clients may utilize a number of different operating systems,
including Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows
3.1 and Macintosh OS. The distributed nature of these networks, together with
the increased use of computers throughout organizations to create and store
files, has resulted in an increase in the amount and dispersion of critical data
across the clients and servers on these networks.
As the size of networks and the amount of information used and stored on
those networks have increased, access to such data has become increasingly
important to end users. Users increasingly rely on the information resident on
networks and PCs, such as customer databases, inventory records, sales tracking
reports and research reference materials, for the effective accomplishment of
daily business activities. As a result, end users must have real-time access to
secure and reliable network data, regardless of the location of such data, and
the supporting operating system. These factors have made it complicated to
access information stored on networks.
The increase in the size of networks has been accompanied by concurrent
increases in the size and complexity of computer data and files. Application
software developers continue to introduce software packages that increasingly
incorporate features which require large amounts of storage, such as graphics,
video and sound. For example, a minute of uncompressed full motion video and
sound could require approximately 1,100 megabytes of storage. Similarly, the
size and complexity of images stored and manipulated using document imaging
systems have intensified network storage requirements. Further, the increasing
popularity of the Internet as a means of communication and a medium by which to
access and distribute information has contributed to the demand for increased
storage, as users download a wide variety of complex data from the Internet.
Organizations evaluating alternatives for additional storage capacity must
consider a number of factors, including total cost of ownership, capacity,
access time, security, reliability and the ability to integrate such additional
storage into an existing network. The cost of ownership includes not only the
initial cost of a storage system but also the expenses associated with the
ongoing administration of the network. Administrative costs associated with
network data storage have increased as networks have grown more complex and
systems administrators have been required to monitor storage systems that
support multiple operating systems and multiple applications across numerous
clients.
In response to increased demand for cost-effective storage of different
types of information, a variety of storage media have been developed, including
hard disk, magnetic tape and CD-ROM. Hard disk storage is a popular means of
storing and accessing large amounts of information that is continually changing.
Hard disk storage provides rapid access time but is a relatively expensive
storage medium and is easily erased. Magnetic
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<PAGE> 29
tape is the least expensive storage medium, but has the slowest access times.
Magnetic tape is therefore ideal for backing up large amounts of information
that is only expected to be accessed infrequently.
CD-ROM technology emerged in the early 1980s as a cost-effective method by
which to store and distribute large amounts of information. A single CD can
store approximately 650 megabytes of information, the same amount which could be
contained on over 100,000 pages of paper. In addition, CD-ROMs offer data
reliability and security, as they cannot be altered or erased, are not
susceptible to data loss when computer systems fail and have a life expectancy
of 50 to 100 years. Since CD-ROMs cannot be erased or written over, however,
they are not suitable for storage situations in which information must be
continually updated and altered. However, for organizations that require
periodic distribution of written material, such as law reference books, parts
lists, catalogues or manuals, CD-ROMs are much more cost-effective and practical
than paper-based documents. The proliferation of network computing and the rapid
increase in CD-ROMs as a means of information distribution and storage have
fueled demand for CD-ROM systems that provide network wide access.
RAID storage systems have developed in response to demand for increased
data storage, performance, security, reliability, fault tolerance and
availability, as well as for constant access. RAID is a method for allocating
data across several hard disk drives and allowing a server microprocessor to
access those drives simultaneously, thus increasing system storage and
input/output performance. In addition, lost data on any drive can be recreated
using special RAID algorithms, thus ensuring the immediate availability of RAID
protected data even in the event of a disk drive failure.
The increase in the importance and volume of stored, complex data has
increased demand for secure and reliable methods of storage that allow for
efficient and cost-effective protection and management of such data. These
factors have also increased demand for total storage solutions that can quickly
and efficiently provide access to large volumes of data resident on a variety of
clients and servers running different operating environments, as well as data
generated by a wide range of applications. In addition, users are increasingly
demanding solutions comprised of not only hardware for cost-effective storage of
and access to large amounts of secure and reliable information, but also
software that manages information flow and reduces the high costs of network
storage administration.
PROCOM SOLUTION
The Company provides a wide range of products designed to address the data
storage and information access requirements of client/server computing
environments. The Company's CD servers and arrays, disk drive upgrades and RAID
and tape backup subsystems are easy to install and use and have a relatively low
overall cost of ownership. Procom's CD servers and arrays address the expanding
use of CD-ROM as a distribution medium by providing clients with simultaneous
access to up to 63 CD-ROMs at 30x speed. The Company's disk drive upgrades allow
users to utilize their existing hardware for longer periods of time, thereby
extending the life of their initial investment. The Company's RAID and tape
backup subsystems provide high performance, fault tolerant storage of over a
terabyte of data for large network information databases.
The Company's recently introduced CD FORCE CD-ROM network server
incorporates an embedded operating system that centralizes data access
management services, thereby reducing administrative costs. This embedded
operating system is based on the Company's managed enterprise storage
architecture ("MESA"). MESA's operating system software is designed to provide
non-intrusive plug and play compatibility with most popular network operating
systems, allowing products incorporating the MESA architecture to be installed
by simply connecting one cable to the network. The central processing unit
contained in each MESA-equipped server is designed to allow the server to manage
and process data without burdening the network server. See "-- Products and
Technology -- Products Under Development."
The core elements of the Company's solution include:
Broad Product Line. The Company supplies a wide range of products with a
variety of prices, storage capacities, access times, storage media,
hardware/software combinations and levels of redundancy. The Company's products
are designed to meet a broad spectrum of end user data storage and information
access
28
<PAGE> 30
needs and range from disk drive storage upgrade products to the Company's
recently introduced Hyper CD-30x module, a CD-ROM and hard disk combination,
which the Company believes has the fastest CD-ROM access time and data transfer
rates available. The Company's broad range of products allows its computer
reseller and VAR customers to utilize Procom as a single source to satisfy the
storage requirements of a wide range of end users, thereby reducing the need for
multiple vendors.
Modular and Scalable Design. The Company's products are designed to address
the evolving data storage and information access requirements of enterprise-wide
computing environments. Procom's products are modular and can be linked together
to accommodate a customer's expanding data storage and information access
requirements.
Ease of Installation and Use. The Company's data storage and information
access solutions have been designed for ease of installation, configuration and
use in a variety of client/server networks. Many of the Company's CD servers and
arrays can be added to computer networks by simply attaching them as nodes to
existing network cabling. The Company's recently introduced CD FORCE server
contains a graphical user interface that facilitates end user access to
information contained on CD-ROMs.
Reduced Cost of Ownership. Procom incorporates a number of features into
its products that reduce the costs associated with both the installation of its
products and the down-time of networks and storage systems. The Company's
products include numerous fault tolerant features, such as redundant and
hot-swappable power supplies and fans and hot-swappable disk and CD-ROM drives
that allow users to repair a damaged drive without interrupting the operation of
the network. The Company's CD-ROM and RAID products include features that reduce
administrative costs for network administrators by providing remote management
and notification of actual or potential system or component failures, and its
RAID products also provide automatic reconstruction of data and easy adjustment
of RAID levels. In addition, the operating system software incorporated into the
Company's MESA architecture is designed to further reduce administrative costs
by centralizing network data storage management.
Multi-platform, Multi-protocol Support. Procom's products are compatible
with a wide range of client networks and operating systems, including Unix,
Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh
OS. In addition, the Company's products support multiple network topologies such
as Ethernet, FDDI, Fast Ethernet and Token Ring. This compatibility allows
customers to implement the Company's storage solutions in a broad range of
enterprise-wide computing environments.
BUSINESS STRATEGY
The Company's objective is to provide products that fulfill customers'
evolving needs for data storage and information access products across all major
computers and operating systems. The key elements of the Company's strategy to
achieve this objective are as follows:
Develop Additional Network Storage Products. The Company is focused on
developing server products that will enable networks to provide and manage
additional storage capacity more efficiently. These products will share many of
the design characteristics of the Company's current CD FORCE network server,
integrating a high performance central processing unit, network interface card
and Procom's proprietary embedded operating system software, and will be
designed to allow users on the network to store and access information more
quickly. The Company plans to develop additional storage management software and
to introduce additional servers that will utilize a variety of storage media,
including hard disks (with RAID functionality) and magnetic tape, which can be
attached directly to and will be compatible with a wide variety of network
environments.
Enhance Reseller Relationships. The Company focuses its marketing efforts
on developing an awareness of the Company's data storage and information access
solutions with various computer resellers, VARs and distributors of its
products. These relationships provide the Company with indirect access to and
improved visibility among large corporations and other institutional end users.
The computer resellers, VARs and distributors also function as a sales force for
the Company, allowing the Company to reach a large number of end users without
incurring the significant expenditures associated with a direct sales force, and
provide
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<PAGE> 31
ongoing service for the Company's storage systems. The Company intends to sell a
broader range of its products and services to these existing customers.
Target Vertical Markets. The Company promotes higher levels of sales of its
CD servers and arrays through its channel partners by targeting a portion of its
marketing efforts to specific end users that require enterprise-wide access to
information published on CD-ROM, such as law and accounting firms, educational
organizations, medical service providers and governmental agencies. The Company
employs a similar strategy with regard to the sale of its high capacity RAID
solutions by targeting its marketing efforts to end users with large information
storage and access requirements, such as companies that have recently migrated
from mainframe computer systems to personal computer networks, video-on-demand
providers and companies developing electronic imaging applications. The Company
intends to continue to target these vertical markets in the future.
Expand Strategic Relationships. The Company seeks to expand its
relationships with the primary suppliers of components of its products,
including drive manufacturers such as Seagate Technology, Inc. and Toshiba and
network software operating system developers such as Novell, Inc. and Microsoft
Corporation. These relationships provide the Company with early access to
information regarding future product releases and technological developments
that allow the Company to anticipate and respond to market opportunities. The
Company also collaborates with manufacturers regarding the design of many
components that the Company ultimately incorporates into its data storage and
information access products. In addition, the Company maintains relationships
with content providers, such as legal publishers and video suppliers. These
relationships provide the Company with opportunities to receive free publicity
and promotion within niche end user markets when content providers utilize
Procom data storage and information access systems in conjunction with the
display of their own products at trade shows and other marketing events.
Finally, the Company also maintains informal relationships with certain end
users of its products that enable the Company to learn of and respond to
changing end user needs. The Company intends to expand its relationships with
suppliers and manufacturers, content providers and end users in the future.
Deliver Timely Solutions. The Company believes that its focus on
cost-effective data storage and information access allows it to remain a
technology leader. The Company has focused on responding quickly to and
capitalizing on demands for specialized data storage and information access
products. The Company anticipates that additional market opportunities will
arise as demand for data storage and information access products continues to
increase, and the Company intends to maintain an organizational structure that
will allow it to quickly respond to these opportunities if they develop.
PRODUCTS AND TECHNOLOGY
The Company's principal product lines are CD servers and arrays, disk drive
upgrade products and RAID and tape backup subsystems. These product lines
accounted for approximately 32%, 59% and 5%, respectively, of the Company's net
sales in fiscal 1995, approximately 49%, 47% and 4%, respectively, of the
Company's net sales in fiscal 1996, and approximately 45%, 48% and 7%,
respectively, of the Company's net sales in the first quarter of fiscal 1997.
Many of the Company's products are offered in a variety of storage capacities
and performance levels and, as a result, are sold at varying prices. See "Risk
Factors -- Dependence on CD Servers and Arrays."
CD Servers and Arrays
The Company's CD servers and arrays provide an efficient method by which to
store and share large amounts of information across a network. The Company's CD
servers and arrays are available in a variety of plug and play configurations,
from four to 63 CD drives, and can be configured with either 4x or 8x CD-ROM
drives. In addition, the Company has recently introduced its Hyper CD-30x
module, a CD-ROM and hard disk combination, which allows 30x data transfer
speeds and is based on proprietary technology obtained by the Company pursuant
to a marketing and integration arrangement with a third party. Several CD arrays
also are available as servers, configured at the Company's factory with
specified hardware and software. The Company provides each CD server and array
with optional software drivers for Unix, Novell NetWare,
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<PAGE> 32
IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1, and Macintosh OS. Many of
the Company's CD servers and arrays contain the Company's built-in "Smart SCSI
CD" board, which maps up to seven CD drives to a single SCSI ID, thereby
allowing additional CD servers and arrays to be added to a network. The
Company's recently released CD FORCE Server incorporates the Company's MESA
architecture and is designed to (i) provide plug and play compatibility with
most popular network operating systems, (ii) function without burdening the
network server and (iii) provide cross/multi-platform compatibility. The
Company's internally developed CD-ROM network data access management software is
not presently available on all major hardware platforms, and of the Company's CD
servers and arrays shipped to date that contain network data management
software, substantially all included third-party software. See "Risk
Factors -- Dependence on CD Servers and Arrays." In addition, by working with CD
manufacturers and component suppliers, the Company has developed special
enclosures to provide security for the CDs and prevent their loss, theft or
damage.
Certain information with respect to the Company's primary CD servers and
arrays is set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE
PRODUCT LINE KEY FEATURES RETAIL PRICE
- ---------------------------------------------------------------------------------------------
CDT Array - Allows up to 13GB of information to be distributed $2,100-$13,600
over a network via 7, 14 or 21 CD-ROMs.
- Requires no hardware installation.
- Ethernet or Token Ring network connectivity.
- ---------------------------------------------------------------------------------------------
CDT Server - Allows up to 13GB of information to be distributed $8,300-$26,500
over a network via 14 or 21 CD-ROMs.
- Requires no hardware installation.
- In addition to Ethernet and Token Ring connectivity,
CDT Servers support most popular network connectivity.
- Includes CD-ROM management software for most popular
network platforms.
- Includes embedded Pentium-based server to improve
overall performance.
- ---------------------------------------------------------------------------------------------
CDRAX - Allows up to 40GB of information on CD-ROM to be up to $76,400
distributed over a network.
- Provides simultaneous access to up to 63 CD-ROMs.
- Requires no hardware installation.
- In addition to Ethernet and Token Ring connectivity,
CDRAX supports other popular network connectivity.
- Contains hot swappable CD-ROM drives and redundant
power supplies and fans.
- Includes CD-ROM management software for most popular
network platforms.
- Includes embedded Pentium-based server to improve
overall performance.
- ---------------------------------------------------------------------------------------------
</TABLE>
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The Company has recently introduced the following products:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE RETAIL
PRODUCT LINE KEY FEATURES PRICE
- ---------------------------------------------------------------------------------------------
Hyper CD-30x Module - Provides access time as low as 10.5 ms and $5,300-$86,500
data transfer rate of 4,500KB/sec.
- Includes intelligent SCSI adapter designed
to migrate CD-ROM images onto the embedded
FAST-SCSI hard drive, providing 30x
performance.
- Supports most operating systems.
- Allows up to 41GB of information to be
distributed over a network via 12, 18 and 63
CD-ROMs.
- ---------------------------------------------------------------------------------------------
CD FORCE 14, 21 and 63 - Enables cross-platform CD-ROM access by $10,300-$83,300
embedding Procom's proprietary storage
management software within its CD Servers.
- Provides direct connect features to
heterogeneous networking environments.
- Operates independently of the network
operating system.
- Includes scalable architecture and
multi-protocol access.
- Allows up to 41GB of information to be
distributed over a network via 12, 18 and 63
CD-ROMs.
- Provides advanced security and metering
options.
- Includes embedded Pentium-based server to
improve overall performance.
- Supports Ethernet, Fast Ethernet, FDDI and
Token Ring connectivity.
- Available in 4x, 8x and 30x configurations.
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company also produces CD-ROM publishing and recording packages as part
of its strategy to capitalize on the use of CD-ROM as a popular information
storage medium for a number of industries. Procom's internal and external
CD-Recorders are designed to meet the archiving needs of desktop computer users.
Disk Drive Upgrades
The Company remains committed to supplying products that enhance the
performance and capacity of notebook and desktop computers, as well as network
servers. The addition of a single high-capacity hard disk drive subsystem to a
network server adds several gigabytes of storage capacity and improves overall
speed and performance. A complete installation kit is included with each hard
disk drive for easy integration. Several hard disk drives can be combined to
enable data to be spanned, striped or mirrored in a variety of configurations.
Due to the increase in the popularity of notebook computers, sales of the
Company's ATOM notebook upgrade drive kits constituted 14% of net sales in
fiscal 1996 and 19% of net sales in the first quarter of fiscal 1997.
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<PAGE> 34
Certain information with respect to the Company's hard disk drive storage
upgrade products is set forth below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE
PRODUCT LINE KEY FEATURES RETAIL PRICE
- -----------------------------------------------------------------------------------------------
ATOM - Includes internal 2.5 inch IDE hard drives. $350-$1,100
- Ranges in capacity from 500MB to 2.1GB.
- Equipped with all necessary components required for
installation.
- Compatible with most popular notebook computers.
- -----------------------------------------------------------------------------------------------
SI - High-performance internal FAST SCSI hard drives. $250-$3,650
- Ranges in capacity from 540MB to 9GB.
- Equipped with all necessary components required for
installation.
- Compatible with most popular desktop computers, workstations
and servers.
- -----------------------------------------------------------------------------------------------
MD - High-performance external FAST SCSI hard drives. $400-$5,900
- Ranges in capacity from 540MB to 18GB.
- Equipped with all necessary components required for
installation.
- Compatible with most popular workstations and servers.
- -----------------------------------------------------------------------------------------------
PR-IDE - Includes Internal 3.5 inch IDE hard drives with software. $250-$550
- Ranges in capacity from 500MB to 2.5GB.
- Equipped with all necessary components required for
installation.
- Compatible with most popular desktop computers and
workstations.
- -----------------------------------------------------------------------------------------------
</TABLE>
The Company also offers CD-ROM drives for stand-alone desktop applications
and a variety of other storage peripheral products.
RAID and Tape Backup Subsystems
The Company's RAID products present a solution to the storage and
input/output ("I/O") speed, capacity and reliability challenges presented by
network computing. RAID is a method of distributing data in stripes across
several hard disk drives, allowing the microprocessor to access those drives
simultaneously, thus increasing storage system I/O performance. RAID solutions
generally reduce bottlenecks that occur in non-RAID environments when multiple
users access data simultaneously. In addition, RAID configurations can provide a
high degree of fault tolerance because they continuously calculate and store a
unique parity, using logic to accompany each data stripe. If any drive fails,
the remaining drives in the system may use the parity value to reconstruct the
data on the failed drive, thus ensuring the immediate availability of RAID
protected data even in the event of a disk drive failure.
RAID is available in several levels that differ in the ways they allocate
data for storage and achieve fault tolerance. End users of RAID products select
the appropriate RAID level depending on overall cost and performance for their
particular requirements. Often, the user's actual application will dictate the
appropriate level of data access, fault tolerance and redundancy desired. For
example, applications such as on-line processing of financial transactions
require instantaneous access to multiple disks, while multimedia or video-
on-demand applications generally require single-user access, but at a
significantly higher data transfer rate. The Company offers RAID products for
all commonly used RAID levels for most hardware platforms and network
environments. In addition, the Company also designs and sells tape backup
storage solutions for a variety of computing environments to provide an
additional level of protection for mission-critical data.
33
<PAGE> 35
Certain information with respect to the Company's high capacity fault
tolerant RAID and tape storage systems is set forth below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE
PRODUCT KEY FEATURES RETAIL PRICE
- ----------------------------------------------------------------------------------------------
LANForce - Provides storage capacities up to 56GB. $8,900-$33,800
- Includes redundant components to reduce system
failures.
- Operating system independent.
- Hardware-based RAID solution frees host computer
from RAID management tasks.
- Supports varying levels of RAID.
- Offers optional cache memory to increase I/O
performance.
- ----------------------------------------------------------------------------------------------
RAID RAX - Provides all LANForce features. $34,400-$144,200
- Provides storage capacity from 50GB to over 1
terabyte.
- Available in rack-mounted configuration that
allows flexibility for expansion as storage needs
increase.
- Accommodates both 3.5 inch and 5.25 inch drive
shuttles concurrently.
- Accepts multiple host inputs.
- ----------------------------------------------------------------------------------------------
DLT Tape Drive - Digital linear tape backup up to 280GB. $4,000-$13,500
- Provides cost-effective method of unattended
backup.
- Compatible with most major backup software.
- ----------------------------------------------------------------------------------------------
</TABLE>
Products Under Development
The Company's product development priorities are aimed at meeting the
growing market demand for complete storage solutions that are capable of
addressing the evolving needs and challenges associated with distributed network
computing. Current product development efforts focus on developing and
integrating the Company's own proprietary software as a value-added component of
the Company's complete storage solutions. The Company is continuing to enhance
MESA, to address the growing complexity of network data storage management that
has resulted from increases in heterogeneous network computing environments and
the amount and complexity of data. The MESA client/server storage management
architecture incorporates an embedded operating system designed to centralize
data storage management services, and thereby reduce administrative costs
associated with data storage management. MESA's operating system software
furnishes it with non-intrusive plug and play compatibility with most popular
network operating systems, allowing products incorporating the MESA architecture
to be installed by simply connecting one cable to the network. The
multi-platform support provided by MESA will enable client workstations to use
their own operating systems and still benefit from the functionality of MESA
without any additional software. The central processing unit contained in each
MESA-equipped server is designed to allow the server to manage and process data
without burdening the network server. MESA is being designed to provide a
cost-effective storage management solution that supports heterogenous
client/server computing environments, is scalable to support networks and allows
clients using multiple operating systems to access simultaneously a single
storage system. MESA-equipped products enable systems administrators to manage
CD-ROM storage systems and are being designed to manage other storage systems
either locally or remotely and provide administrators with the ability to
monitor and restrict access by end users within the network. The Company's
recently released CD FORCE server incorporates the Company's MESA architecture
and is designed to centralize data management storage services for information
contained on CD-ROM. See "-- CD Servers and Arrays." No assurances can be given,
however, that the Company will be successful in any of its product development
efforts or that, even if
34
<PAGE> 36
successfully developed, the Company's products will achieve timely market
acceptance. See "Risk Factors -- Rapid Technological Change; Short Product Life
Cycles" and "-- Research and Development."
CUSTOMERS AND APPLICATIONS
The Company sells its products principally to computer resellers, VARs and
distributors, which in turn sell to end users of the Company's products. During
fiscal 1996 and the first quarter of fiscal 1997, combined sales to Vanstar
Corporation, Intelligent Electronics Inc. and Entex Information Services Inc.
totalled approximately 23.3% and 25.4%, respectively, of net sales. The loss of
any of these customers could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Customer Concentration; Distribution Strategy Risks; Inventory
Protection."
End users of the Company's products include Fortune 500 corporations,
government agencies and financial and educational institutions. The following
table lists certain end users of the Company's products.
<TABLE>
<S> <C> <C>
INDUSTRIAL GOVERNMENT LEGAL AND ACCOUNTING
- ---------- ---------- --------------------
United Airlines Executive Office of the President Cravath Swaine & Moore
Exxon US Navy Weil Gotshal & Manges
Mitsubishi Los Angeles City Attorney Ernst & Young LLP
Lockheed Los Angeles County Recorder Price Waterhouse LLP
Gilette U.S. Public Defender Clark Hill PLC
Hoechst Celanese Veterans Administration
EDUCATION TELECOMMUNICATIONS TECHNOLOGY
- --------- ------------------ ----------
George Washington University AT&T EDS
Boston University MCI IBM
UCLA Pacific Bell Microsoft
UC Davis Law School US West Wang
Southwestern Bell Sybase
ENTERTAINMENT
- -------------
20th Century Fox FINANCIAL SERVICES
Buena Vista Home Video ------------------
California State Lottery Bank One
McGraw Hill Prudential
Walt Disney American Express
</TABLE>
35
<PAGE> 37
SALES AND MARKETING
The Company's strategy is to deploy a comprehensive sales, marketing and
support infrastructure to meet the data storage and information access
requirements of users of complex client/server networks, both in the U.S. and
internationally. The Company uses multiple distribution channels to reach end
user customers. In the United States, the Company has agreements with and sells
its products through domestic computer aggregators such as Intelligent
Electronics Inc. and Inacom Corporation, as well as smaller independent VARs and
computer resellers. The Company also sells its products to computer resellers
that function as corporate computer consultants to large corporations,
educational institutions and governmental agencies, and maintains sales
agreements with many of these consultants. These corporate computer consultants
include AmeriData, Inc., Electronic Data Systems Corporation, Entex Information
Services, Vanstar Corporation and others. Often these entities, and many of the
Company's other customers, consult with end users of the Company's products in
business and government, and then incorporate the Company's products into larger
overall enterprise solutions. The Company recently reached an agreement with
Tech Data Corporation, a computer products distributor, to sell the Company's
products nationally. Outside the United States, the Company's products are sold
through approximately 40 major distributors in a number of countries throughout
the world. See "Risk Factors -- Customer Concentration; Distribution Strategy
Risks; Inventory Protection."
The Company has agreements with many of its computer resellers, VARs and
distributors relating to purchases of the Company's products. These agreements
do not provide the Company with any guaranteed levels of purchases. The Company
frequently grants limited rights to customers to return products purchased from
the Company, in some cases in exchange for new purchases, and also provides
price protection to its customers. The short product life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors or other factors affecting the personal computer and upgrade storage
industries could result in significant product returns. In addition, new product
introductions by the Company's suppliers or its competitors or other market
factors may require the Company to reduce prices in a manner or at a time that
gives rise to significant price protection charges. The Company estimates
returns and potential price protection charges based on historical experience
and accrues reserves therefor. However, these accruals may prove insufficient,
and future returns and price protection charges may have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly in light of the rapid product obsolescence that often occurs during
product transitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Historically, the Company enjoyed a relatively short sales cycle due to the
low cost of its disk drive upgrade products. The typical sales cycle, from the
time an end user contacted a reseller to the shipment by the Company of the
desired product, often took less than one week. However, as the Company's
product mix has shifted to increasingly complex and higher priced data storage
and information access solutions, the Company's sales cycle has lengthened
significantly. Because Procom's CD servers and arrays and RAID storage and
access systems often represent a significant expenditure for end users, these
users frequently require the approval of several individuals within their
organization before placing purchase orders. In addition, the complexity of the
Company's storage and RAID storage access solutions often require the Company to
demonstrate its products for end users, further lengthening the sales cycle. In
response to increasing demand from end users, the Company has instituted an
evaluation program that provides for a specified period in which end users may
install and evaluate the Company's products. Evaluation units are not booked as
revenue until the Company has received payment for such units. During fiscal
1996, approximately half of all evaluation units were purchased at the end of
their trial period.
The Company maintains a sales and sales support staff that at October 25,
1996 consisted of 48 people, substantially all of whom were located at the
Company's principal offices in Irvine, California. The Company's sales are made
to computer resellers, VARs and distributors through telemarketing efforts by
sales representatives. The Company has recently hired its first U.S. field sales
representative and is considering the implementation of a field sales force in
various cities throughout the U.S. In addition, the Company has recently added
independent sales representatives in Canada, France and Germany. The field sales
representatives provide, among other things, regional technical support for
customers, perform product demonstrations and, where desirable, accompany
computer resellers and VARs on sales calls with end users. The Company
36
<PAGE> 38
intends to expand the number of its international sales representatives. The
Company also intends to add additional international distributors in targeted
countries and is developing joint marketing relationships with certain
distributors. For fiscal 1995, 1996 and the first quarter of fiscal 1997,
international sales represented approximately 14%, 11% and 8%, respectively, of
the Company's net sales. See "Risk Factors -- Risks of International Sales and
Operations."
The Company's marketing group, as of October 25, 1996, consisted of 12
persons engaged in a number of activities designed to help the Company achieve
better market recognition and ultimately increased sales. This group's
responsibilities include (i) advertising in magazines targeted to specific
markets, (ii) conducting various promotional programs with the Company's
computer resellers, VARs and distributors, including cooperative advertising
arrangements and special programs where employees of the Company's computer
resellers, VARs and distributors can earn cash awards for their efforts in
recommending or selling the Company's products to end users, (iii) coordinating
the Company's participation in various trade shows, including COMDEX and
specific vertical applications shows such as LegalTech and (iv) cooperating with
publishers and authors of industry magazines in the testing and review of the
Company's products since market acceptance of each new generation of products is
influenced significantly by reviews in leading computer industry magazines and
related awards.
CUSTOMER SERVICE AND SUPPORT
The Company employs engineers and technicians who work closely with the
Company's sales personnel to assist computer resellers, VARs and distributors
and end users with pre- and post-sales support matters, as well as to provide
customers with technical support, education, training and consulting services.
The Company's customer service and technical support staff at October 25, 1996
consisted of approximately 12 people located in Irvine, California. Customer
service personnel provide customer service through software driver updates,
upgrade programs and warranty service. Technical support personnel assist end
users and distributors by telephone, facsimile and on-line services, including
24-hour bulletin board services and World Wide Web sites, in the installation,
configuration and use of the Company's products. The Company also relies on its
computer resellers, VARs and distributors to provide technical support and
service. In November 1995, the Company signed an agreement with Siemens Nixdorf
Information Systems, a national provider of computer technical services
("Siemens"), to provide on-site installation and service to end users of its
high capacity CD servers and arrays. By contracting with Siemens, which has many
offices located throughout the U.S., the Company believes it should be able to
offer a rapid response to end user technical problems throughout the country.
The Company expects that its return rates resulting from technical problems will
decrease as Siemens field representatives demonstrate effective installation and
service methods at customer sites. The Company offers warranties on its products
ranging from one to five years. The Company's primary warranty efforts consist
of accepting defective products from customers and either repairing them or
returning the defective component to the original manufacturer for repair or
replacement during the applicable warranty period. The Company generally
protects itself by extending to its customers a warranty that corresponds to the
warranty provided to the Company by its suppliers. However, if a supplier were
to fail to meet its warranty obligations, the Company would be forced to assume
responsibility for warranties on all components manufactured by that supplier.
Such an event could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Warranty
Exposure."
RESEARCH AND DEVELOPMENT
The Company believes that continued investment in research and development
is critical to the Company's ability to continue to introduce, on a timely basis
and at competitive prices, new and enhanced products incorporating the latest
technology and addressing emerging market needs. The Company's research and
development staff consisted of 34 employees as of October 25, 1996, which
includes software and hardware engineers and software quality assurance
technicians. Research and development expenses, primarily consisting of
personnel expenses, were $1.0 million, $1.1 million and $1.6 million in fiscal
1994, 1995 and 1996, respectively, constituting 2.8%, 2.5% and 2.2% of net
sales, respectively and were $0.3 million and $0.7 million in the first quarter
of each of fiscal 1996 and 1997, respectively, constituting 1.9% and 2.8% of net
37
<PAGE> 39
sales for these periods, respectively. The Company anticipates that the dollar
amount of its research and development expenses will increase and that such
expenses also may increase as a percentage of net sales with the addition of
dedicated engineering resources to develop new product categories, to ensure
that the Company's products are compatible with a wide range of hardware
platforms and network topologies, and to develop additional software associated
with the Company's MESA architecture, allowing the Company to develop servers
that support not only CD-ROM, but also hard disk drive and magnetic tape storage
media. The Company's hardware and software engineers are engaged in ongoing
development of new storage subsystems that offer increasing storage capacity and
compatibility with an expanding base of computer networks and operating systems.
See "-- Products and Technology -- Products Under Development." There can be no
assurance that the Company's development efforts will be successful, or that the
Company will be able to introduce competitive new products in a timely manner.
The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. These factors typically
result in short product life cycles, historically ranging from six to twelve
months. For example, the data transfer rate of CD-ROM products has increased
rapidly, resulting in the introduction of four, eight, ten and twelve speed
CD-ROMs. Similar technological advances have been made with regard to disk drive
storage capabilities and other performance standards. Each new product cycle
presents new opportunities for current or prospective competitors of the Company
to gain market share. The Company must continually monitor industry trends in
selecting new technologies and features to incorporate into its products. If the
Company is unable to successfully introduce new products on a timely basis, the
Company's sales could be adversely affected. Any such failure also could impair
the Company's brand name and the Company's ability to command the attention and
loyalty of computer resellers, VARs and distributors in future periods.
Moreover, because short product life cycles are accompanied by long lead times
for many components of the Company's products, the Company may be unable to
reduce or increase production in response to unexpected demand.
The Company's ability to introduce new products in a timely manner is
heavily dependent on its ability to develop or purchase firmware and software
drivers for its CD-ROM and disk drive products. While the Company endeavors to
work with its component suppliers to plan for the timing of introduction of new
components and to develop the associated firmware and software, unforeseen
design issues or other factors that delay introduction of these products could
adversely affect the Company's ability to ship new products. In addition, third
party suppliers may not employ adequate testing and quality assurance
procedures, resulting in the receipt by the Company of defective components.
This could require the Company to find replacement components or wait for the
resolution of the problem, either of which could delay the Company's ability to
bring products to market and have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
also will be adversely affected if new disk drives, CD-ROM drives or other
components that it selects from among those offered by its various vendors do
not perform favorably on a cost or performance basis compared to competing
products. In addition, products and technologies developed by competitors may
render the Company's products and technologies noncompetitive or obsolete.
Finally, advances in network and on-line technology and development of new,
higher-capacity storage media such as DVD may result in a reduction or
replacement of CD-ROM as a data storage and information access medium. If the
Company is unable to adapt to these and other technological advances by
developing new products, the Company's financial performance would be materially
adversely affected. See "Risk Factors -- Substantial Competition" and "-- Rapid
Technological Change; Short Product Life Cycles."
MANUFACTURING
The Company's primary manufacturing activities, located at the Company's
headquarters in Irvine, California, consist of testing, assembling and
integrating components to form data storage and information access subsystems.
The Company has historically operated without a material backlog. The Company
generally purchases the major components of such subsystems (hard disk drives,
CD-ROM drives or tape drives) based on historical requirements and forecasted
needs to provide it with two to three weeks of inventory. Some of the Company's
products require printed circuit boards, the assembly of which the
38
<PAGE> 40
Company often subcontracts to third party vendors. The Company's CD servers and
arrays generally require a special housing of either metal or plastic, and the
Company contracts with third party vendors for the manufacture of those housing
units. The Company performs quality assurance testing on most of its products
and subjects third-party supplied components to testing and evaluation before
including such components in the Company's product offerings. The Company
packages the assembled hard disk drives, CD-ROM drives and tape backup drives
with software, manuals and additional hardware components, which it generally
purchases from third party suppliers. The Company relies on a network of
independent subcontractors to supply certain custom components manufactured to
the Company's specifications. This network consists of a number of small firms
with limited financial resources. While the Company utilizes several firms to
mitigate the risk of business interruption, it is possible that several vendors
could simultaneously experience problems with production or financial stability,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company depends on sole or limited source suppliers for certain key
components used in its products, particularly disk and CD-ROM drives. In recent
years, these components have been in short supply and frequently on allocation
by manufacturers, and the Company's size may place it at a competitive
disadvantage during such periods relative to larger competitors. Although the
Company maintains ongoing efforts to obtain adequate supplies of components,
there can be no assurances that the Company will obtain adequate supplies or
obtain such supplies at cost levels that would not adversely affect the
Company's gross margins. The Company has no guaranteed supply arrangements with
any of its sole or limited source suppliers and customarily purchases sole or
limited source components pursuant to purchase orders placed from time to time
in the ordinary course of business. Moreover, the Company's suppliers may, from
time to time, experience production shortfalls or interruptions that impair the
supply of components to the Company. Component shortages are likely to continue,
and there can be no assurance that such shortages will not adversely affect the
Company's business, financial condition and results of operations. Conversely,
in its attempt to counter actual or perceived component shortages, the Company
may overpurchase certain components, resulting in excess inventory and reducing
the Company's liquidity or, in the event of inventory obsolescence or a decline
in the market value of such inventory, causing inventory write-offs that could
materially adversely affect the Company's business, financial condition and
results of operations.
The Company relies on a small number of suppliers to continue to develop,
introduce and manufacture disk drives, CD-ROM drives and other components that
incorporate new technologies and features that compete favorably in
functionality and price with the offerings of other disk drive and CD-ROM
manufacturers, including competitors of the Company. The Company's dependence on
these sole or limited source suppliers, and the risks associated with any delay
or shortfall in supply, are exacerbated by the short life cycles that
characterize the Company's products. Any delay in the introduction by or
availability of disk drives or CD-ROM drives from the Company's suppliers or the
failure of such suppliers to provide functionality and performance on a cost
effective basis could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, it is possible that
the technology of the components the Company uses in manufacturing its products
will be rendered undesirable or obsolete by the components of other suppliers.
The Company would then be forced to establish relationships with new suppliers,
which could delay or preclude the Company from bringing competitive products to
market and have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Rapid Technological
Change; Short Product Life Cycles" and "-- Component Shortages; Reliance on Sole
or Limited Source Suppliers."
COMPETITION
The markets for the Company's products are intensely competitive. In each
of its primary product lines, the Company competes with a large number of disk
drive manufacturers, computer resellers, VARs and distributors. Some of the
Company's vendors also sell competing products to distributors, which then sell
these products to the Company's customers. Many of the Company's current and
potential competitors have significantly greater market presence, name
recognition and financial and technical resources than the Company, and many
have longstanding positions and established brand names in their respective
markets. In addition, certain of the Company's current and potential competitors
possess competitive cost advantages due
39
<PAGE> 41
to a number of factors, including lower taxes and substantially lower costs of
labor associated with international operations. Finally, manufacturers of disk
drives such as Seagate Technology Inc., IBM, Quantum Corporation and Western
Digital Corporation, and manufacturers of CD-ROM drives, such as Toshiba, NEC
Corporation and Plextor Corporation, may in the future become more direct
competitors of the Company to the extent that such manufacturers elect to expand
into the disk drive upgrade market or the CD server and array market.
The Company's primary competitors in the CD server and array market consist
of (i) CD array manufacturers such as Microtest, Inc., Meridian Data, Inc. and
Micro Design, Inc., which also furnish CD-ROM management software with their CD
array products, (ii) a number of hardware aggregators, computer resellers and
VARs that sell CD server products directly to end users, and (iii) various CD
server and array manufacturers. The Company believes that it competes
effectively in the CD server and array market by maintaining relationships with
computer resellers and VARs that possess key relationships with decision makers
at end users, while at the same time developing brand name identity through end
user marketing and advertisements.
The Company's primary competitors in the disk drive upgrade market are (i)
computer manufacturers that also market and sell storage upgrades, such as IBM,
Compaq and Hewlett-Packard, (ii) companies that specialize in reselling
replacement or increased capacity storage disk drives, such as Storage
Dimensions Inc. or Ameriquest Technologies, Inc., and (iii) various national
distributors of third party upgrade drives such as Ingram Micro Inc., Merisel
Inc. and Tech Data Corporation. The Company believes it competes effectively
against each of these three classes of competitors in the disk drive upgrade
market by offering a broad range of reasonably priced storage upgrade products
to its computer resellers, VARs and distributors throughout the U.S. and
worldwide.
The Company's primary competitors in the RAID product market are (i)
computer manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally
focus on providing storage upgrades for their products and (iii) companies that
sell storage solutions directly to end users, such as EMC Corporation and
Storage Technology Corporation. These direct sales competitors historically have
focused their efforts on sales of high capacity storage products in the
mainframe and minicomputer environments. In addition, the Company competes with
many smaller enterprises that provide and sell unique solutions to various
computer users. The Company believes that its relationships with computer
resellers, VARs and distributors provide it with a competitive advantage over
those manufacturers that have in the past sold high capacity storage systems
directly to end users.
The Company's success depends to a great extent on its ability to continue
to develop products that incorporate new and rapidly evolving technologies to
provide network users cost-effective data storage and information access
solutions. However, to the extent that disk drive storage or information access
products become more of a commodity, price competition among both computer
manufacturers and suppliers of disk drives and CD-ROM drives may result in the
availability of such storage and access at a low cost. These factors could
create increased competition for the Company's products which could cause the
Company to experience reduced gross profit margins on its products and could
have a material adverse effect on the Company's business, financial condition
and result of operations. The Company believes that the principal competitive
factors in the Company's markets are product reliability, price/value
relationship, product features and performance, brand name recognition, trade
periodical reviews, time to market with new features and products, industry
relationships, ease of installation and use, the quality of distribution
channels, product quality, technical support and customer service.
The Company believes that its brand name recognition allows the Company to
remain competitive in the network storage solutions aftermarket and the CD
server and array markets, and that the Company generally competes effectively
with respect to the other competitive factors enumerated above. See "Risk
Factors -- Substantial Competition" and "-- Rapid Technological Change; Short
Product Life Cycles."
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<PAGE> 42
INTELLECTUAL PROPERTY
The Company relies primarily on a combination of copyright and trade secret
protections and confidentiality agreements to establish and protect its
intellectual property rights. The Company has no patent protection for its
current product line. There can be no assurance that the Company's measures to
protect its intellectual property rights will deter or prevent unauthorized use
of the Company's technology. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent as
the laws of the United States. The Company's inability to protect its
proprietary rights in the United States or internationally may have a material
adverse effect on the Company's business, financial condition and results of
operations.
Claims by third parties that the Company's current or future products,
procedures or processes infringe upon their intellectual property rights may
have a material adverse effect on the Company. The Company does not normally
perform any formal surveys or studies relating to whether its products or
processes infringe upon the intellectual property rights of others, and it would
be difficult to establish whether a given product or process infringes upon the
intellectual property rights of others. Intellectual property litigation is
complex and expensive, and the outcome of such litigation is difficult to
predict. Any future litigation, regardless of outcome, may result in substantial
expense to the Company and significant diversion of the efforts of the Company's
management and technical personnel. An adverse determination in any such
litigation may subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from such parties, if licenses to such
rights could be obtained, or require the Company to cease using such technology.
There can be no assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to the Company. If forced to cease using such
technology, there can be no assurance that the Company would be able to develop
or obtain alternate technology. Accordingly, an adverse determination in a
judicial or administrative proceeding, changes in patent or copyright laws or
failure of the Company to obtain necessary licenses may prevent the Company from
manufacturing, using or selling certain of its products or processes, which may
have a material adverse effect on the Company's financial condition and results
of operations. In May 1995, Compaq made certain infringement and other claims
against the Company and obtained an injunction prohibiting the Company's use of
a small string of software code contained in certain of the Company's disk drive
products. Although the Company has rewritten the infringing code and settled the
lawsuit, the lawsuit required substantial management time, significant
expenditures for legal fees and costs and a one-time settlement payment and
ongoing royalty payments to Compaq for these products. See "Risk
Factors -- Intellectual Property Rights."
EMPLOYEES
As of October 25, 1996, the Company had 186 full-time employees, 55 of whom
were engaged in manufacturing (including testing, quality assurance and
materials functions), 34 in engineering and product development, 60 in sales and
marketing, 12 in customer service and technical support, and 25 in finance and
administration. The Company's employees are not represented by any collective
bargaining agreements, and the Company has never experienced a work stoppage.
The Company believes that its employee relations are good. The Company's success
depends to a significant extent upon the continued service of its executive
officers and other key management and technical personnel. See "Risk
Factors -- Dependence on Key Personnel."
FACILITIES
The Company leases approximately 81,000 square feet of space in Irvine,
California for its corporate offices and operations. The property is leased by
the Company under a lease expiring in July 1998. The Company has an option to
extend the lease for an additional four months. The Company believes that its
existing facilities will be adequate to meet its facilities requirements through
July 1998.
41
<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of October 25, 1996
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ --- ----------------------------------------------------------------
<S> <C> <C>
Alex Razmjoo 34 Chairman of the Board, President and Chief Executive Officer
Frank Alaghband 33 Executive Vice President, Operations, and Director
Alex Aydin 34 Executive Vice President, Finance and Administration, and
Director
Nick Shahrestany 33 Executive Vice President, Marketing and Information Technology,
and Director
Frederick Judd 38 Vice President, Finance and General Counsel
Richard W. Ormond 44 Vice President, Marketing and Corporate Relations
Sam Inman(1)(2) 45 Director
Sam Yau(1)(2) 47 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors (the "Board") and are appointed annually,
subject to the terms of their employment agreements. There are no family
relationships between the executive officers or directors of the Company.
Mr. Razmjoo is one of the Company founders and has served as its Chairman
of the Board, President and Chief Executive Officer since 1987. From 1984 to
1987, Mr. Razmjoo served as Director of Engineering of CMS Enhancements, Inc. He
received a B.S. degree in Electrical Engineering in 1985 from the University of
California, Irvine.
Mr. Alaghband is one of the Company founders and has served as its
Executive Vice President, Operations and as a director since 1987. From 1984 to
1987, Mr. Alaghband served as a Systems Engineer in the Computer Systems
Division of McDonnell Douglas. He received a B.S. degree in Electrical
Engineering in 1985 from the University of California, Irvine.
Mr. Aydin is one of the Company founders and has served as the Company's
Executive Vice President, Finance and Administration and as a director since
1987. From December 1984 to August 1987, Mr. Aydin served as a Product
Development Engineer for Toshiba America, Inc. He received dual B.S. degrees in
Electrical Engineering and Biological Sciences in 1984 from the University of
California, Irvine and a M.S. degree in Biomedical Engineering in 1985 from
California State University, Long Beach.
Mr. Shahrestany is one of the Company founders and has served as its
Executive Vice President, Marketing and Information Technology and as a director
since 1987. From 1985 to 1987, Mr. Shahrestany served as Regional Sales Manager
of CMS Enhancements, Inc. He received a B.S. degree in Biological Sciences with
a minor in Electrical Engineering in 1984 from the University of California,
Irvine.
Mr. Judd has served as the Company's Vice President, Finance and General
Counsel since joining the Company in November 1993. Mr. Judd was General Counsel
for CMS Enhancements, Inc. from February 1992 to November 1993. From April 1987
to February 1992, Mr. Judd served as the Chief Financial Officer and Treasurer
of CMS Enhancements, Inc. Mr. Judd received a B.S. degree in Accounting in 1980
from Arizona State University and a J.D. degree in April 1985 from Brigham Young
University. Mr. Judd is a certified public accountant and is licensed to
practice law in California and Arizona.
Mr. Ormond has served as the Company's Vice President, Sales and Marketing
since October 1996. Mr. Ormond was a principal of Regis McKenna, Incorporated, a
management consulting company, from October 1990 to October 1996. Prior to April
1990, Mr. Ormond held various executive positions with
42
<PAGE> 44
MiniScribe Corporation, a computer manufacturer that filed a petition under the
federal bankruptcy laws in January 1990. He received a B.A. in 1974 from the
University of Notre Dame, and an M.B.A. in 1977 from the University of Southern
California.
Mr. Inman has served as a director since October 1996. Mr. Inman has been
the Chief Executive Officer of Centura Software Corp. since January 1996. Mr.
Inman served as President and Chief Operating Officer of Centura Software Corp.
from April 1995 until January 1996. Immediately prior to joining Centura
Software Corp., Mr. Inman served as an independent consultant to a number of
high technology companies from 1994 until April 1995. Mr. Inman served as
President and Chief Operating Officer of Ingram Micro Inc., a worldwide
distributor of microcomputer products, from 1993 to 1994. Prior to assuming this
position, Mr. Inman served as President of IBM's Personal Computer Company for
the Americas from July 1992 to September 1993, President of IBM's National
Distribution Division from March 1991 to July 1992, Director for IBM's
Enterprise Systems Marketing Division from November 1988 to March 1991, and
prior to this he served in various other positions within IBM. Mr. Inman
received a B.S. degree in Mathematics from Purdue University.
Mr. Yau has served as a director since October 1996. Mr. Yau has been a
director and the President and Chief Executive Officer of National Education
Corporation, a provider of proprietary educational programs, since May 1995.
From May 1993 to November 1994, Mr. Yau was the Chief Operating Officer of
Advacare, Inc., a medical management company. From May 1987 to May 1993, Mr. Yau
was the Senior Vice President of Finance and Administration of Archive
Corporation, now part of Seagate Technologies Inc., a computer storage company.
He is a director of Steck Vaughn Publishing Corporation and Milcom International
Inc. Mr. Yau received a B.S. degree in Economics from the University of Hong
Kong and an M.B.A. from the University of Chicago.
BOARD COMMITTEES
The Board formed a Compensation Committee and an Audit Committee in October
1996. Each committee is comprised of Messrs. Yau and Inman, the outside
directors of the Company. Prior to such date, there were no committees of the
Board. The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees and
administers the Company's 1995 Stock Option Plan. The Audit Committee reviews
the results and scope of the audit and other accounting-related services and
evaluates the Company's internal audit and control functions.
DIRECTOR COMPENSATION
Directors who are not compensated as employees of or consultants to the
Company receive a $6,000 annual retainer fee, a fee of $2,000 per board meeting,
a fee of $500 for service on any committee and reimbursement of expenses
incurred in attending Board meetings. In October 1996, Messrs. Yau and Inman
were each granted stock options under the 1995 Stock Option Plan to purchase
9,000 shares of the Company's Common Stock with an exercise price equal to $8.33
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board consists of Messrs. Yau and Inman.
No member of the Compensation Committee or executive officer of the Company has
a relationship that constitutes an interlocking relationship with executive
officers or directors of another entity.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles of Incorporation that
limit the liability of its directors for monetary damages arising from a breach
of their fiduciary duties as directors to the fullest extent permitted by the
California Corporations Code. The Company's Bylaws provide that the Company must
indemnify its directors and officers to the fullest extent permitted by the
California Corporations Code. The Company also has entered into indemnification
agreements with its executive officers and directors and expects to obtain
officer and director liability insurance with respect to certain liabilities.
See "Description of Capital Stock -- Limitation of Liability of Directors and
Indemnification of Directors and Officers."
43
<PAGE> 45
EXECUTIVE COMPENSATION
The following table shows the compensation earned in fiscal 1996 by each of
the Company's executive officers at the end of fiscal 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) COMPENSATION($)(2)
- ------------------------------- -------- -------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Alex Razmjoo................... $193,608 $737,500 $5,101 -- $7,470
Chairman, President and CEO
Frank Alaghband................ 193,608 737,500 9,959 -- 7,470
EVP-Operations
Alex Aydin..................... 193,608 702,500 4,217 -- 7,470
EVP-Finance & Admin.
Nick Shahrestany............... 193,608 712,500 6,580 -- 8,160
EVP-Marketing & Info. Tech.
Frederick Judd................. 84,000 43,371 -- 9,600 --
VP-Finance & General
Counsel
</TABLE>
- ---------------
(1) Reimbursement of various personal expenses included in the executive
officer's taxable income and, in the case of Mr. Alaghband, the portion of
certain car lease payments considered as personal.
(2) Represents life insurance premiums paid by the Company.
The Company granted no stock options and no stock options were exercised
through the end of fiscal 1995. The following table summarizes option grants
during fiscal 1996 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
------------------------------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS GRANTED TO FOR OPTION TERM(2)
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------
NAME GRANTED(#) FISCAL 1996(%) PRICE ($/SH) DATE 5% 10%
- --------------------- ------------------ ------------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Alex Razmjoo......... -- -- -- -- -- --
Frank Alaghband...... -- -- -- -- -- --
Alex Aydin........... -- -- -- -- -- --
Nick Shahrestany..... -- -- -- -- -- --
Frederick Judd....... 9,600(1) 4.1% $ 2.50 9/15/05 $132,384 $225,024
</TABLE>
- ---------------
(1) The option vests in 25% installments on each anniversary of the date of
grant. In November 1993, Mr. Judd was also granted an option by Mr. Aydin to
purchase 90,000 shares of the Company's Common Stock owned by Mr. Aydin. The
exercise price of the option is $0.35 per share, which was the estimated
fair market value of the Company's Common Stock on the date of grant.
(2) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the full 10-year term of the options. The 5% and
10% assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The gains shown are
net of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the date
on which the options are exercised.
44
<PAGE> 46
The following table summarizes the value of options held at July 26, 1996
by the Named Executive Officers. There were no options exercised by the Named
Executive Officers during the fiscal year ended July 26, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
JULY 26, 1996 (#) JULY 26, 1996 ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alex Razmjoo..................................... -- -- -- --
Frank Alaghband.................................. -- -- -- --
Alex Aydin....................................... -- -- -- --
Nick Shahrestany................................. -- -- -- --
Frederick Judd................................... -- 9,600 -- $25,632
</TABLE>
- ---------------
(1) The amounts set forth represent the difference between the estimated fair
market value of $5.17 per share as of July 26, 1996 and the exercise price
of the options, multiplied by the applicable number of shares underlying
the options.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
In September 1995, the Board adopted and the Company's shareholders
approved the 1995 Stock Option Plan, as amended (the "1995 Plan"), and reserved
540,000 shares of Common Stock for issuance thereunder. The 1995 Plan provides
for the grant to employees of the Company of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the grant to employees, directors, and consultants of the
Company of nonstatutory stock options. As of October 25, 1996, options to
purchase an aggregate of 271,800 shares were outstanding under the 1995 Plan
(47,888 of which were vested), and an aggregate of 268,200 additional shares
remained available for additional grants.
The 1995 Plan may be administered by the Board or a committee approved by
the Board. Currently, the 1995 Plan is administered by the Compensation
Committee of the Board, which determines the terms of options granted
thereunder, including the exercise price, number of shares subject to the option
and vesting schedule. Options granted under the 1995 Plan are not transferable
other than by will or the laws of descent or distribution, and each option is
exercisable during the lifetime of the recipient only by such person. Options
that are outstanding under the 1995 Plan will remain outstanding until they are
exercised or they expire in accordance with these terms. The exercise price of
all incentive stock options granted under the 1995 Plan must be at least equal
to the fair market value of a share of Common Stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the 1995 Plan may not exceed ten
years. In the event the shareholders of the Company approve certain mergers or
consolidations, or the sale of substantially all of the business assets of the
Company or certain persons other than beneficial owners of greater than 5% of
the then outstanding voting power become the beneficial owner of more than 50%
of the voting power of the Company, unless prior to such event the Board
determines that there shall be either no acceleration or limited acceleration of
awards, each option outstanding under the 1995 Plan will become immediately
exercisable.
401(k) Plan
Effective August 1992, the Company adopted a tax deferred savings plan (the
"401(k) Plan") that covers all full-time employees over the age of 21 with more
than one year of service. An employee may
45
<PAGE> 47
contribute to the 401(k) Plan from 1% to 15% of his or her pretax compensation
not to exceed in any given year the maximum amount allowable under Internal
Revenue Service regulations. At the discretion of the Board, the Company may
elect to match up to 100% of an employee's contributions to the 401(k) Plan. The
Company is not obligated to make matching contributions, but has done so in the
past on a discretionary basis. The rates of pre-tax contributions may be reduced
with respect to highly compensated employees, as defined in the Code, so that
the 401(k) Plan will comply with Section 401(k) of the Code. Pre-tax
contributions are allocated to each employee's individual account, which is
invested in selected investment alternatives according to the direction of the
employee. An employee's pre-tax contributions are fully vested and
nonforfeitable at all times, while employer contributions to an employee's
account vest over a five-year period. An employee may also borrow from his or
her account. All vested benefits are generally distributed to employees upon
termination of employment. See Note 8 of Notes to Consolidated Financial
Statements.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Razmjoo, Alaghband,
Aydin and Shahrestany. Each employment agreement has a three-year term with an
automatic renewal provision which provides that the agreement will perpetually
maintain a three-year term unless terminated. Pursuant to the agreements, each
officer receives an annual salary of not less than $225,000, which may at the
discretion of the Board be increased in light of performance, inflation or other
factors. Each officer is also entitled to receive an annual bonus based on the
Company's performance, awarded at the discretion of the Board based upon the
attainment of mutually agreed upon performance goals. Performance goals of the
Company for purposes of calculating bonus payments are not specified in the
employment agreements but rather are determined on a yearly basis by mutual
agreement between the Board and the officer. The bonuses received by Messrs.
Razmjoo, Alaghband, Aydin and Shahrestany in fiscal 1996 were based upon a
formula contained in each of their original employment agreements which provided
for a bonus equal to a specified percentage of the Company's earnings before
taxes, not to exceed $750,000. This provision governing the calculation of
bonuses was subsequently amended to provide for bonuses based upon the
attainment of mutually agreed upon performance goals as described above. For
purposes of calculating the bonuses of Messrs. Razmjoo, Alaghband, Aydin and
Shahrestany for fiscal 1997, the Board has not yet established performance goals
for the Company but expects to do so in consultation with the Compensation
Committee after the closing of the Offering. Each officer is entitled to receive
a monthly automobile allowance of $750 and reimbursement of business expenses.
The Company is required to maintain a life insurance policy of $1 million for
the benefit of each officer, and each officer is entitled to participate in the
other benefit programs of the Company available to its executive officers. Each
officer is entitled to an annual tax preparation allowance of $1,000. If the
Company terminates an officer's employment without Cause (as defined in the
employment agreement) or the officer terminates his employment for Good Reason
(as defined in the employment agreement), the Company is obligated to provide
certain benefits to the terminated officer, including paying the officer 35
months base salary, subject to Internal Revenue Code restrictions, a pro rata
bonus for the year of termination and the continuation for up to two years of
all life insurance and medical benefits.
On November 15, 1993, Mr. Judd joined the Company as Vice President,
Finance and General Counsel. Pursuant to the Company's employment agreement with
Mr. Judd, Mr. Judd's base salary is $84,000, and Mr. Judd can qualify for
performance-based bonuses of up to $32,000 per year which may be adjusted in the
future.
46
<PAGE> 48
CERTAIN TRANSACTIONS
The Company made product sales totaling $411,000 and $398,000 to an entity
owned by a relative of Mr. Razmjoo during fiscal 1994 and 1995, respectively. At
July 29, 1994, the Company had accounts receivable from this related party of
$323,000. As a result of an Executive Order issued in May 1995 related to
transactions with Iranian companies, the Company determined that amounts owed by
this entity might not be collectible in the near future and, accordingly, during
fiscal 1995, wrote off the outstanding balances owed to the Company by this
entity of approximately $251,000. As a result, at July 28, 1995, the Company had
no account receivable from this entity.
In fiscal 1995, the Company purchased $38,000 of CD-ROM software products
and $128,000 of software programming services from, and made cash advances
totalling $159,000 to, Softbit, Inc., an entity that is 90 percent owned by the
Founders and of which each of the Founders is a director and officer. At July
28, 1994 and July 28, 1995, the Company had a net receivable of $80,000 and
$181,000, respectively, from this entity. During fiscal 1996, the Company made
cash advances of approximately $93,000 to the entity, sold products valued at
approximately $2,000 to the entity and incurred expenses of approximately
$25,000 on behalf of the entity. At July 26, 1996, the Company had a net
receivable of $301,000 from the entity, and due to the financial position of the
entity, the Company determined that the receivable was uncollectible and wrote
off the entire amount.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals for certain liabilities to which they may be subject
as a result of their affiliation with the Company, to the fullest extent allowed
by law.
The Company has adopted a policy that transactions, other than compensation
matters, between the Company and its executive officers, directors and
affiliates, will be submitted to the Company's non-employee directors for
approval.
47
<PAGE> 49
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 25, 1996, and as adjusted
to give effect to the sale of shares offered hereby, (i) by each person who is
known by the Company to own beneficially 5% or more of the outstanding shares of
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, (iv) all directors and executive officers as a group and (v)
each Selling Shareholder. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING(1)
----------------------- SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENT(2) BEING OFFERED(1) NUMBER PERCENT(2)
- ----------------------------------- --------- ---------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Alex Razmjoo(3)(4)................. 2,250,000 25.0% 250,000 2,000,000 18.2%
2181 Dupont
Irvine, California 92715
Frank Alaghband(3)(4).............. 2,127,000 23.6% 250,000 1,877,000 17.1%
2181 Dupont
Irvine, California 92715
Alex Aydin(3)(4)(5)................ 1,872,000 20.8% 250,000 1,597,000(5) 14.5%
2181 Dupont
Irvine, California 92715
Nick Shahrestany(3)(4)............. 2,049,000 22.8% 250,000 1,799,000 16.4%
2181 Dupont
Irvine, California 92715
Frederick Judd(4)(6)(7)............ 92,400 1.0% 25,000 67,400 *
Samuel Inman(3).................... -- -- -- -- --
Samuel Yau(3)...................... -- -- -- -- --
All directors and executive 8,300,400 92.2% 1,025,000 7,275,400 66.1%
officers as a group (8
persons)(7)......................
</TABLE>
- ---------------
* Less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, Mr. Aydin will
sell an additional 113,430 shares of Common Stock and each of Messrs.
Razmjoo, Alaghband and Shahrestany will sell an additional 113,440 shares of
Common Stock.
(2) Percentage calculation is based upon 9,000,000 shares outstanding as of
October 25, 1996 (or 11,000,000 shares following the Offering, based on the
proposed issuance of 2,000,000 shares by the Company in the Offering).
(3) A director of the Company.
(4) An officer of the Company.
(5) Includes the number of shares being sold by Mr. Aydin in the Offering and
the sale of 25,000 shares by Mr. Judd in the Offering, which shares Mr. Judd
will acquire upon partial exercise of the option described in footnote (6)
below. In addition, the number of shares owned after the Offering reflects
65,000 shares of Common Stock owned by Mr. Aydin that remain subject to the
option.
(6) Includes shares subject to an option granted to Mr. Judd by Mr. Aydin to
acquire 90,000 shares of Common Stock owned by Mr. Aydin, which option is
presently exercisable in full, and of which 25,000 shares will be exercised
and sold in the Offering.
(7) Includes 2,400 shares of Common Stock subject to vested options.
48
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 65,000,000 shares
of Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01
par value.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may from
time to time be declared by the Board out of funds legally available therefor.
Holders of Common Stock are entitled to one vote per share on all matters on
which they are entitled to vote other than the election of directors, in which
event, until the Company becomes a listed corporation as defined below, any
holder may demand cumulative voting. See "-- Certain Anti-Takeover
Effects -- Classified Board of Directors" and "-- No Cumulative Voting." Holders
of Common Stock have no preemptive, conversion, redemption or sinking funds
rights. In the event of a liquidation, dissolution or winding-up of the Company,
holders of Common Stock are entitled to share equally and ratably in the assets
of the Company, if any, remaining after the payment of all debts and liabilities
of the Company and the liquidation preference of any outstanding Preferred
Stock. The outstanding shares of Common Stock are, and the shares of Common
Stock offered by the Company hereby when issued will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to any series of Preferred Stock that the Company may issue in the
future.
PREFERRED STOCK
The Board is authorized to provide for the issuance of Preferred Stock in
one or more series and to fix the designations, preferences, powers and
relative, participating, optional and other rights, qualifications, limitations
and restrictions thereof, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and to fix the number of
shares to be included in any such series. Any Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding-up, or both. In addition, any such
shares of Preferred Stock may have class or series voting rights. Issuances of
Preferred Stock, while providing the Company with flexibility in connection with
general corporate purposes, may, among other things, have an adverse effect on
the rights of holders of Common Stock, may have the effect of delaying,
deterring or preventing a change in control of the Company without further
action by the shareholders, may discourage bids for the Company's Common Stock
at a premium over the market price of the Common Stock, and may adversely affect
the market price and the voting and other rights of the holders of Common Stock.
At present, the Company has no plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
After this Offering, the Founders will be entitled, upon expiration of the
lock-up agreements with the Underwriters, to certain rights with respect to the
registration of their shares under the Securities Act. Under the terms of the
Registration Rights Agreement to which each Founder is a party, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of others, the Founders, as the holders of
7,273,000 (assuming the consummation of this Offering and no exercise of the
Underwriters' over-allotment option) shares of Common Stock, are entitled,
subject to certain limitations and exceptions, to notice of such registration
and are entitled to include shares of their Common Stock therein. In addition,
at any time after the first anniversary of the Company's initial public offering
and the Company becomes eligible to file registration statements on Form S-3
under the Securities Act, each Founder may, no more often than once during any
12-month period, request that the Company file a registration statement on Form
S-3 with respect to shares of his Common Stock, and the Company is required to
use its best efforts to effect such registration, subject to certain conditions
and limitations. In general, all fees, costs and expenses of such registration
will be borne by the Founders.
49
<PAGE> 51
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The California General Corporation Law (the "Law") provides that California
corporations may include provisions in their articles of incorporation relieving
directors of monetary liability for breach of their fiduciary duties as
directors, except for the liability of a director resulting from (i) any
transaction from which the director derives an improper personal benefit, (ii)
acts or omissions involving intentional misconduct or a knowing and culpable
violation of law, (iii) acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iv) acts or
omissions constituting an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (v) acts
or omissions showing a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the Company or its shareholders, (vi) any improper
transaction between a director and the Company in which the director has a
material financial interest or (vii) the making of an illegal distribution to
shareholders or an illegal loan or guaranty. In addition, the Company may not
indemnify directors and officers in circumstances in which indemnification is
expressly prohibited by Section 317 of the Law. The Company's Articles of
Incorporation provide that the Company's directors are not liable to the Company
or its shareholders for monetary damages for breach of their fiduciary duties to
the fullest extent permitted by California law. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive relief
or rescission. The Bylaws of the Company (the "Bylaws") provide that the Company
will indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary under California law, subject to certain limitations for actions
initiated by the director or officer, settlements not approved by the Company,
losses covered by the directors' and officers' liability insurance policy
maintained by the Company and judgments for an accounting of profits pursuant to
Section 16(b) of the Securities Exchange Act of 1934 and similar laws.
The inclusion of the above provisions in the Company's Articles of
Incorporation and Bylaws may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Company and its shareholders. This provision does not affect a
director's responsibilities under certain other laws such as the federal
securities laws or state or federal environmental laws. At present, there is no
litigation or proceeding pending involving a director of the Company pursuant to
which indemnification is being sought, nor is the Company aware of any
threatened litigation that might result in claims for indemnification by any
director.
The Company has entered into indemnification agreements with its directors
and executive officers that require the Company to indemnify such directors and
officers to the fullest extent permitted by applicable provisions of law
provided that any settlement of a third party action against a director or
officer is approved by the Company, and subject to limitations for actions
initiated by the director or officer, penalties paid by insurance and violations
of Section 16(b) of the Securities Exchange Act of 1934, as amended, and similar
laws. The agreements contain provisions that are broader in some respects than
the specific indemnification provisions contained in the California Corporations
Code. The indemnification agreements may require the Company, among other
things, to indemnify its officers and directors against certain liabilities that
may arise by reason of their status or service as directors or executive
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to obtain directors' and
officers' insurance, if available on reasonable terms. The Company expects to
obtain directors' and officers' liability insurance with respect to liabilities
arising out of certain matters, including matters arising under the Securities
Act. The Company believes the foregoing provisions are necessary to attract and
retain qualified persons as directors and executive officers.
50
<PAGE> 52
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Articles of Incorporation and the Company's Bylaws
summarized in the succeeding paragraphs may be deemed to have anti-takeover
effects and may delay, deter or prevent a tender offer or takeover attempt that
a shareholder might consider to be in such shareholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by shareholders.
Classified Board of Directors. The Articles of Incorporation and Bylaws
provide that when the Company becomes a "listed corporation" as defined below,
as long as the size of the Board is at least six but less than nine directors,
the Board will be divided into two classes of directors with each class serving
staggered two-year terms and, if the number of directors is increased to nine or
more, the Board will be divided into three classes serving staggered three-year
terms. The Company will be deemed a "listed corporation" when it has been listed
on the Nasdaq National Market and has at least 800 shareholders on the record
date of an annual meeting of shareholders, as calculated in accordance with the
California Corporations Code. The classification of the Board may discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the incumbency of the directors, as a classified
Board generally makes it more difficult for shareholders to replace a majority
of the directors.
No Cumulative Voting. The Articles of Incorporation and Bylaws provide
that, when the Company becomes a "listed corporation," cumulative voting will be
eliminated. Without cumulative voting, which entitles a holder of Common Stock
to cast a number of votes for each share held by such holder equal to the number
of directors to be elected, the holders of a majority of the shares present or
represented at an annual meeting of shareholders will be able to elect all of
the directors to be elected at that meeting. Consequently, the elimination of
cumulative voting may make a change in control of the Company more difficult by
denying minority shareholders representation on the Board.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Bylaws establish advance notice procedures with regard to
shareholder proposals and the nomination, other than by or at the direction of
the Board or a committee thereof, of candidates for election as directors. The
Company may, subject to compliance with Securities and Exchange Commission rules
and regulations regarding proxy solicitation, reject a shareholder proposal or
nomination that is not made in accordance with such procedures.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation.
LISTING
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market, subject to notice of issuance, under the trading symbol "PRCM."
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities. Upon the closing of this Offering, the Company will have outstanding
11,000,000 shares of Common Stock. Of these shares, the 3,025,000 shares sold in
this Offering will be freely tradeable without restriction under the Securities
Act, unless purchased by "affiliates" of the Company.
The remaining 7,975,000 shares of Common Stock held by existing
shareholders will be "restricted" shares under the Securities Act (the
"Restricted Shares"). Upon the expiration of lock-up agreements between each
shareholder and the Underwriters, which will occur 180 days after the Effective
Date, all 7,975,000 Restricted Shares will become eligible for sale, subject to
the volume limitations described below.
At October 25, 1996, an aggregate of 271,800 shares of Common Stock are
subject to outstanding options. A total of 47,888 shares subject to options are
vested as of the date of this Prospectus and an aggregate of 268,200 additional
shares are reserved for future issuance pursuant to the Company's 1995 Stock
Option Plan. The Company plans to file a Registration Statement on Form S-8 to
register the shares of Common Stock issuable pursuant to the 1995 Stock Option
Plan. Approximately 55,000 shares of Common Stock subject to vested options will
be eligible for resale upon the expiration of lock-up agreements 180 days
following the Effective Date, unless earlier released for resale by the Company.
The Underwriting Agreement prohibits the Company from releasing such shares for
resale until 90 days following the Effective Date. Accordingly, shares of Common
Stock issued under the 1995 Stock Option Plan will be available for sale in the
public market upon vesting of such shares, subject to certain volume limitations
under Rule 144 with respect to affiliates.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the number of shares of
Common Stock then outstanding (approximately 110,000 shares immediately after
this Offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned Restricted Shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations and requirements
described above. The Securities and Exchange Commission has recently proposed to
reduce the Rule 144 holding periods. If enacted, such modification could have an
impact on the timing of when shares of Common Stock become eligible for resale.
All of the Company's shareholders have agreed with Montgomery Securities
that until 180 days after the Effective Date they will not sell, offer to sell,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of, any shares of Common Stock, or any
securities exercisable or exchangeable for or any other rights to purchase or
acquire shares of Common Stock owned directly by such holders or with respect to
which they have power of disposition. The Company has also agreed not to issue,
sell, offer to sell, grant any option to purchase or otherwise dispose of any
equity securities or any securities convertible into, exercisable or
exchangeable for Common Stock or other equity security for a period of 180 days
after the Effective Date without the prior written consent of Montgomery
Securities, subject to certain limited exceptions including grants of options
and sales of shares under the 1995 Plan. The lock-up agreements with Montgomery
Securities may be released at any time as to all or any portion of the shares
subject to such agreements at the sole discretion of Montgomery Securities.
52
<PAGE> 54
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities and Dain Bosworth Incorporated (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Shareholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.....................................................
Dain Bosworth Incorporated................................................
---------
Total........................................................... 3,025,000
========
</TABLE>
The Representatives have advised the Company that the Underwriters
initially propose to offer the Common Stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share, and the Underwriters
may allow, and such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Selling Shareholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 453,750 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this Offering.
All holders of Common Stock prior to this Offering have agreed, subject to
certain limited exceptions, not to sell or offer to sell, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of the shares of Common Stock currently held by them, or any
securities exercisable or exchangeable for or any other rights to purchase or
acquire any shares of Common Stock for a period of 180 days after the Effective
Date without the prior written consent of Montgomery Securities. Montgomery
Securities may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to these lock-up agreements. In
addition, the Company has agreed that for a period of 180 days after the
Effective Date it will not, without the prior written consent of Montgomery
Securities, issue, offer, sell, grant options to purchase or otherwise dispose
of any equity securities or securities convertible into, exercisable or
exchangeable for Common Stock or other equity securities, subject to certain
limited exceptions including grants of options and sales of shares under the
1995 Plan.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Representatives have advised the Company that the Underwriters will not
confirm sales to any accounts over which they exercise discretionary authority
in excess of 5% of the number of shares of Common Stock offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price has been determined
through negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in such negotiations were the
history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past
53
<PAGE> 55
and present operations and financial performance, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of the securities markets at the time of the Offering, the
market prices of and demand for publicly traded common stocks of comparable
companies in recent periods and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and any Selling Shareholders by O'Melveny & Myers LLP,
Newport Beach, California. Certain legal matters will be passed upon for the
Underwriters by Fenwick & West LLP, Palo Alto, California.
EXPERTS
The consolidated balance sheets as of July 28, 1995 and July 26, 1996 and
the consolidated statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended July 26, 1996 included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been included herein in reliance on the report
of Arthur Andersen LLP ("Arthur Andersen"), independent accountants, given on
the authority of that firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Effective July 24, 1995, Arthur Andersen was engaged as the principal
independent accountants for the Company to replace the Company's prior
accounting firm, which was dismissed effective the same date. The decision to
change independent accountants was approved by the Board. In connection with the
audit of fiscal 1994, there were no disagreements with the prior accounting firm
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not resolved
to the satisfaction of the firm would have caused the firm to make reference to
the matter in its report. The audit report of the prior accounting firm on the
consolidated financial statements of the Company as of and for the year ended
July 29, 1994 did not contain any adverse opinion or disclaimer of opinion, nor
was it qualified or modified as to uncertainty, audit scope or accounting
principles. During fiscal 1994 and through July 24, 1995, there were no
reportable events. During the two fiscal years and the subsequent interim period
preceding the engagement of Arthur Andersen, the Company had not consulted with
Arthur Andersen on items that were or should have been subject to SAS 50 or
concerned the subject matter of a disagreement or reportable event with the
prior accounting firm.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedule thereto, "Registration Statement"), of which
this Prospectus forms a part, covering the Common Stock to be sold pursuant to
the Offering. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings and the schedule
contained in the Registration Statement. Such additional information, exhibits,
undertakings and schedule can be inspected at and obtained from the Commission
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at certain
regional offices of the Commission located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 13th Floor, 7 World
Trade Center, New York, New York, 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. For additional
information with respect to the Company, the Common Stock and related matters
and documents, reference is made to the Registration Statement and the exhibits
thereto. Statements contained herein concerning any such document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov.
54
<PAGE> 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Shareholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Procom Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Procom
Technology, Inc. (a California corporation) and subsidiary (the "Company") as of
July 28, 1995 and July 26, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended July 26, 1996. 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 Procom Technology, Inc. and
subsidiary as of July 28, 1995 and July 26, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
July 26, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
December 4, 1996
F-2
<PAGE> 58
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 28, JULY 26, OCTOBER 25,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................ $ 212,000 $ 793,000 $ 58,000
Accounts receivable, less allowance for doubtful
accounts
and sales returns of $179,000, $373,000 and
$575,000, respectively........................... 5,507,000 9,234,000 11,083,000
Inventories, net.................................... 4,296,000 9,760,000 12,559,000
Deferred income taxes............................... 359,000 605,000 790,000
Prepaid expenses.................................... 166,000 204,000 249,000
Other current assets................................ 18,000 12,000 4,000
----------- ----------- -----------
Total current assets........................ 10,558,000 20,608,000 24,743,000
Property and equipment, net........................... 239,000 476,000 553,000
Other assets.......................................... 214,000 28,000 29,000
----------- ----------- -----------
Total assets................................ $11,011,000 $21,112,000 $25,325,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit...................................... $ 1,484,000 $ 4,185,000 $ 3,660,000
Accounts payable.................................... 5,530,000 8,254,000 11,583,000
Accrued expenses and other current liabilities...... 368,000 471,000 592,000
Accrued compensation................................ 1,230,000 2,596,000 958,000
Capital lease obligations........................... 8,000 34,000 32,000
Income taxes payable................................ 70,000 436,000 1,349,000
----------- ----------- -----------
Total current liabilities................... 8,690,000 15,976,000 18,174,000
Capital lease obligations, less current portion....... 34,000 -- --
----------- ----------- -----------
Total liabilities........................... 8,724,000 15,976,000 18,174,000
----------- ----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued and outstanding..... -- -- --
Common stock, no par value; 65,000,000 shares
authorized, 9,000,000 shares issued and
outstanding...................................... 3,000 3,000 3,000
Retained earnings................................... 2,284,000 5,133,000 7,148,000
----------- ----------- -----------
Total shareholders' equity.................. 2,287,000 5,136,000 7,151,000
----------- ----------- -----------
Total liabilities and shareholders' equity............ $11,011,000 $21,112,000 $25,325,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 59
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
--------------------------------------- -------------------------
JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25,
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $34,502,000 $44,660,000 $73,456,000 $15,275,000 $24,915,000
Cost of sales................... 27,187,000 32,858,000 51,489,000 11,133,000 16,490,000
----------- ----------- ----------- ----------- -----------
Gross profit............... 7,315,000 11,802,000 21,967,000 4,142,000 8,425,000
Selling, general and
administrative expenses....... 6,902,000 9,362,000 15,401,000 2,875,000 4,367,000
Research and development
expenses...................... 983,000 1,108,000 1,635,000 292,000 688,000
Loss on closure of German
subsidiary.................... 409,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Operating income (loss).... (979,000) 1,332,000 4,931,000 975,000 3,370,000
Interest expense................ 151,000 195,000 282,000 60,000 60,000
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes...................... (1,130,000) 1,137,000 4,649,000 915,000 3,310,000
Provision (benefit) for income
taxes......................... (357,000) 414,000 1,800,000 356,000 1,295,000
----------- ----------- ----------- ----------- -----------
Net income (loss).......... $ (773,000) $ 723,000 $ 2,849,000 $ 559,000 $ 2,015,000
=========== =========== =========== =========== ===========
Net income (loss) per share..... $ (0.08) $ 0.08 $ 0.31 $ 0.06 $ 0.22
=========== =========== =========== =========== ===========
Weighted average number of
shares........................ 9,171,950 9,171,950 9,171,950 9,171,950 9,171,950
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 60
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at July 30, 1993...................... 9,000,000 $3,000 $2,334,000 $2,337,000
Net income.................................. -- -- (773,000) (773,000)
--------- ------ ---------- ----------
Balance at July 29, 1994...................... 9,000,000 3,000 1,561,000 1,564,000
Net income.................................. -- -- 723,000 723,000
--------- ------ ---------- ----------
Balance at July 28, 1995...................... 9,000,000 3,000 2,284,000 2,287,000
Net income.................................. -- -- 2,849,000 2,849,000
--------- ------ ---------- ----------
Balance at July 26, 1996...................... 9,000,000 3,000 5,133,000 5,136,000
Net income (unaudited)...................... -- -- 2,015,000 2,015,000
--------- ------ ---------- ----------
Balance at October 25, 1996 (unaudited)....... 9,000,000 $3,000 $7,148,000 $7,151,000
========= ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 61
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
------------------------------------------ ---------------------------
JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25,
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $ (773,000) $ 723,000 $ 2,849,000 $ 559,000 $ 2,015,000
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization................ 220,000 235,000 194,000 49,000 64,000
Changes in assets and
liabilities:
Accounts receivable......... 1,535,000 (1,457,000) (3,727,000) (1,243,000) (1,849,000)
Inventories................. 334,000 (2,048,000) (5,464,000) (1,027,000) (2,799,000)
Deferred income taxes....... (67,000) (18,000) (246,000) (78,000) (185,000)
Prepaid expenses............ (2,000) (128,000) (38,000) (26,000) (35,000)
Income tax refund
receivable................ (274,000) 274,000 -- -- --
Other current assets........ (93,000) 129,000 6,000 7,000 (2,000)
Other assets................ 7,000 (180,000) 186,000 (27,000) (1,000)
Accounts payable............ 596,000 1,616,000 2,724,000 697,000 3,329,000
Accrued expenses............ (15,000) 1,175,000 1,469,000 (309,000) (1,517,000)
Income taxes payable........ (24,000) 70,000 366,000 314,000 913,000
----------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) operating
activities............ 1,444,000 391,000 (1,681,000) (1,084,000) (67,000)
----------- ----------- ----------- ------------ -----------
Cash flows from investing activities:
Purchase of property and
equipment........................ (71,000) (179,000) (431,000) (124,000) (141,000)
----------- ----------- ----------- ------------ -----------
Cash flows from financing activities:
Principal payments for capital
lease obligations................ (29,000) (16,000) (8,000) (2,000) (2,000)
Borrowings on line of credit....... 34,919,000 43,771,000 64,825,000 14,527,000 22,575,000
Payments made on line of credit.... (36,108,000) (43,966,000) (62,124,000) (13,529,000) (23,100,000)
----------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) financing
activities............ (1,218,000) (211,000) 2,693,000 996,000 (527,000)
----------- ----------- ----------- ------------ -----------
Increase (decrease) in cash...... 155,000 1,000 581,000 (212,000) (735,000)
Cash at beginning of period.......... 56,000 211,000 212,000 212,000 793,000
----------- ----------- ----------- ------------ -----------
Cash at end of period................ $ 211,000 $ 212,000 $ 793,000 $ 0 $ 58,000
=========== =========== =========== ============ ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest......................... $ 161,000 $ 170,000 $ 248,000 42,000 106,000
Income taxes..................... 3,000 360,000 1,472,000 73,000 500,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 62
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Procom Technology, Inc. (the "Company") was incorporated in California in
1987. The Company designs, manufactures and markets enterprise-wide data storage
and information access solutions that are compatible with all major hardware
platforms, network protocols and operating systems.
Principles of Consolidation
The consolidated financial statements include the accounts of Procom
Technology, Inc. and its wholly-owned subsidiary, Procom Technology FSC, a
foreign sales corporation. All significant intercompany transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Friday of, or nearest to, July 31.
Fiscal 1994, 1995 and 1996 each had 52 weeks.
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.
Accounts Receivable
The allowance for doubtful accounts includes management's estimate of the
amount expected to be lost on specific accounts and for losses on other as yet
unidentified accounts included in accounts receivable. In estimating the
potential losses on specific accounts, management relies on in-house prepared
analyses and review of other available information. The allowance for sales
returns includes management's estimates of the anticipated sales returns
relating to each reporting period. In estimating the allowance for sales
returns, management relies on historical experience. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts assumed in arriving at the allowance for doubtful accounts and sales
returns in the accompanying financial statements.
Inventories
Inventories are valued at the lower of cost (on a first-in, first-out
(FIFO) basis) or market. Allowances for obsolete inventory are based on
management's estimate of the amount considered obsolete based on specific
reviews of inventory items. In estimating the allowance, management relies on
its knowledge of the industry (including technological and design changes) as
well as its current inventory levels. The amounts the Company will ultimately
realize could differ materially in the near term from amounts estimated by
management.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the respective estimated useful lives of the
assets, which range from three to seven years. Leasehold improvements and assets
under capital leases are amortized using the straight-line method over the
lesser of the lease term or the estimated useful life of the assets.
Expenditures for major renewals and betterments are capitalized, while
minor replacements, maintenance and repairs that do not extend the assets' lives
are charged to operations as incurred. Upon sale or disposition,
F-7
<PAGE> 63
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
the cost and related accumulated depreciation are removed from the Company's
accounts and any gain or loss is included in the statement of operations.
Income Taxes
The Company reports certain expenses differently for financial and tax
reporting purposes and, accordingly, provides for the related deferred income
taxes. Income taxes are accounted for under the liability method in accordance
with Statement of Financial Accounting Standards No. 109.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment. All sales
are denominated in U.S. dollars. The Company has established a program that,
under specified conditions, enables distributors and resellers to return
products to the Company for credit against additional purchases or, in the event
the Company reduces its selling prices, to receive credits for the reduction in
selling price. The amount of potential product returns, including returns under
the Company's warranty program, and credits for selling price reductions are
estimated and provided for in the period of the sale. Under an evaluation
program, products may be shipped to customers on a trial basis and returned
within a specified period if the customers are not satisfied. Evaluation units
shipped are not recorded as sales until the customer has paid for such units.
Research and Development Costs
Costs and expenses that can be clearly identified as research and
development, including software development costs, are charged to research and
development expenses as incurred.
Concentration of Credit Risk
Three customers accounted for approximately 30% and 36% of the Company's
total accounts receivable on July 28, 1995 and July 26, 1996, respectively, and
one customer accounted for approximately 14% and 9% of the Company's net sales
for fiscal 1995 and 1996, respectively. The loss of any one of the Company's
significant customers could have an adverse effect on the Company's business.
Impact of Recent Accounting Pronouncements
Effective in fiscal 1997, the Company will be required to adopt Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed of" and SFAS No. 123,
"Accounting for Stock Based Compensation." The Company plans to adopt SFAS No.
123 utilizing the disclosure alternative under the Statement. The impact of the
adoption of these pronouncements is not expected to be material to the Company's
financial position or results of operations.
Net income (loss) per share
Net income (loss) per share has been computed using the weighted average
number of shares of common stock outstanding during the periods. Pursuant to the
requirements of the Securities and Exchange Commission, options granted under
the Company's stock option plan (see Note 10) at prices below the expected
initial public offering price have been included in the Company's net income
(loss) per share calculation as if they had been outstanding for all periods
presented (using the treasury stock method and utilizing an initial public
offering price of $10 per share).
F-8
<PAGE> 64
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Unaudited Information
The accompanying financial data as of October 25, 1996 and for the three
month periods ended October 27, 1995 and October 25, 1996 is unaudited and has
been prepared on substantially the same basis as the annual financial
statements. In the opinion of management, the unaudited information contains all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position and results of operations as of such date and for
such periods.
2. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
JULY 28, JULY 26, OCTOBER 25,
1995 1996 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................. $2,988,000 $6,960,000 $ 9,057,000
Work-in-process............................... 383,000 496,000 1,277,000
Finished goods................................ 925,000 2,304,000 2,225,000
---------- ---------- -----------
$4,296,000 $9,760,000 $12,559,000
========== ========== ===========
</TABLE>
3. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
JULY 28, JULY 26, OCTOBER 25,
1995 1996 1996
---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.............................. $ 381,000 $ 552,000 $ 609,000
Furniture and fixtures.......................... 401,000 466,000 502,000
Office equipment................................ 302,000 490,000 536,000
Vehicles........................................ 82,000 82,000 82,000
Leasehold improvements.......................... 71,000 77,000 77,000
---------- ----------- ----------
1,237,000 1,667,000 1,808,000
Less accumulated depreciation................... (998,000) (1,191,000) (1,255,000)
---------- ----------- ----------
Total................................. $ 239,000 $ 476,000 $ 553,000
========== =========== ==========
</TABLE>
Depreciation and amortization expense for fiscal 1994, 1995 and 1996
totaled $220,000, $235,000 and $194,000, respectively.
F-9
<PAGE> 65
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
4. INCOME TAXES
The components of the provision (benefit) for income taxes for fiscal 1994,
1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
1994 1995 1996
--------- -------- ----------
<S> <C> <C> <C>
Current:
Federal........................................ $(308,000) $379,000 $1,612,000
State.......................................... 18,000 53,000 434,000
--------- -------- ----------
(290,000) 432,000 2,046,000
--------- -------- ----------
Deferred:
Federal........................................ (46,000) (15,000) (223,000)
State.......................................... (21,000) (3,000) (23,000)
--------- -------- ----------
(67,000) (18,000) (246,000)
--------- -------- ----------
Provision (benefit) for income taxes............. $(357,000) $414,000 $1,800,000
========= ======== ==========
</TABLE>
Components of the Company's deferred income tax provision are presented
below:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
State tax payments......................... $(16,000) $ (7,000) $137,000
Depreciation............................... 21,000 35,000 (3,000)
Inventory reserves......................... (5,000) 18,000 36,000
Reserves for bad debts and returns......... 31,000 (41,000) 102,000
Other...................................... 36,000 13,000 (26,000)
-------- -------- --------
Deferred income tax provision.............. $ 67,000 $ 18,000 $246,000
======== ======== ========
</TABLE>
The following table reconciles the federal statutory income tax rate to the
effective tax rate of the provision (benefit) for income taxes.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Federal statutory income tax rate................... (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit.......... (6.3) 6.3 6.1
Foreign sales benefit............................... -- (3.4) (1.1)
Research and development tax credit................. (0.5) (2.0) (0.6)
Unused prior year loss carryforwards and
assessments....................................... 7.8 -- --
Other............................................... 1.4 1.5 0.3
----- ---- ----
Effective tax rate................................ (31.6)% 36.4% 38.7%
===== ==== ====
</TABLE>
F-10
<PAGE> 66
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Deferred tax assets are summarized below:
<TABLE>
<CAPTION>
JULY 28, JULY 26,
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
State tax payments................................... $ 34,000 $171,000
Depreciation......................................... 71,000 68,000
Inventory reserves................................... 85,000 121,000
Reserves for bad debts and returns................... 99,000 201,000
Other................................................ 70,000 44,000
-------- --------
Deferred income taxes............................. $359,000 $605,000
======== ========
</TABLE>
5. LINE OF CREDIT
The Company has established a revolving line of credit with an
institutional lender. The line is based on a percentage of the Company's
eligible accounts receivable and inventory, up to a maximum of $6,000,000 in
working capital loans.
The line of credit accrues certain commitment fees, unused facility fees,
and interest on outstanding amounts at the lender's prime rate (8.25% at July
26, 1996) plus 1.5%. The initial term of the line of credit expires on November
29, 1996, but automatically renews for successive one year periods unless
terminated by either party within a specified period in advance of the automatic
renewal date. The institutional lender also makes available to the Company
various flooring commitments pursuant to which the Company may finance the
purchase of up to $13.0 million in inventory (less any amounts outstanding in
working capital loans) from certain of the Company's vendors who have credit
arrangements with the institutional lender. The combined line of credit contains
restrictive covenants that, among other provisions, require compliance with
certain financial covenants, including the maintenance of working capital of at
least $500,000. The combined line of credit is collateralized by all the assets
of the Company and is guaranteed by the shareholders of the Company. At July 28,
1995 and July 26, 1996, the Company owed $1,484,000 and $4,185,000 under the
line of credit and $2,875,000 and $4,464,000, which is included in accounts
payable, under the flooring agreements, respectively (see Note 6).
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases a facility under a noncancellable operating lease that
expires in fiscal 1998. The facility lease contains an option to extend the
lease under the same terms for four months.
Future minimum lease payments at July 26, 1996, under these leases were as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- --------
<S> <C> <C>
Fiscal year ending:
1997............................................ $35,000 $450,000
1998............................................ -- 412,500
------- --------
Total minimum lease payments.................... 35,000 $862,500
========
Less, amounts representing interest............. 1,000
-------
Present value of future minimum capital lease
obligations................................... $34,000
=======
</TABLE>
Rent expense was $395,000, $425,000 and $398,000 for fiscal 1994, 1995 and
1996, respectively.
F-11
<PAGE> 67
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Flooring Agreements
As is customary in the computer reseller industry, the Company is
contingently liable at July 26, 1996 under the terms of repurchase agreements
with several financial institutions providing inventory financing for dealers of
the Company's products. The contingent liability under these agreements
approximates the amount financed, reduced by the resale value of any products
that may be repurchased, and the risk of loss is spread over several dealers and
financial institutions. Losses under these agreements have been immaterial in
the past.
Litigation
The Company is involved solely in routine litigation arising in the
ordinary course of its business. While the outcome of litigation cannot be
predicted with certainty, the Company believes that none of the pending
litigation will have a material adverse effect on the Company's financial
position or results of operations.
Employment Agreements
The Company has employment agreements with the Company's President and
three Executive Vice Presidents. Each agreement is for a three year term with an
automatic renewal provision which provides that the agreement will perpetually
maintain a three-year term unless terminated. Each agreement contains severance
provisions that require the payment of 35 months of base salary in the event of
the termination of the covered executives. Should all four executives be
terminated, the aggregate commitment arising under the severance provisions
would be approximately $2.6 million and, in addition, the Company would be
obligated to pay a pro rata bonus for the year of termination and the
continuation for up to two years of all life insurance and medical benefits.
7. RELATED PARTY TRANSACTIONS
The Company made product sales totaling $411,000 and $398,000 to an entity
owned by a relative of one of the Company's stockholders during fiscal 1994 and
1995, respectively. At July 29, 1994, the Company had accounts receivable from
this related party of $323,000. As a result of an Executive Order issued by the
President of the United States in May 1995 related to transactions with Iranian
companies, the Company determined that amounts owed by this entity might not be
collectible in the near future and, accordingly, during fiscal 1995, wrote off
the outstanding balances owed the Company by this entity of approximately
$251,000. There were no transactions with this entity in fiscal 1996.
At July 28, 1995, the Company had a net receivable of $181,000, from an
entity 90 percent of which is owned by the Company's four shareholders. During
fiscal 1996, the Company made cash advances of approximately $93,000 to the
entity. In addition, during fiscal 1996, the Company sold products valued at
approximately $2,000 to the entity, and incurred other expenses of approximately
$25,000 on behalf of the entity. At July 26, 1996, the Company had a net
receivable of $301,000 from the entity, and due to the financial position of the
entity, the Company determined that the receivable was uncollectible and wrote
off the entire amount.
8. RETIREMENT PLAN
The Company has a defined contribution plan covering substantially all
full-time employees with more than one year of service. Each participant can
elect to contribute up to 15% of his or her annual compensation. While employer
contributions to the plan are discretionary, during fiscal 1994, 1995 and 1996,
the Company elected to make matching contributions equivalent to between 38% and
50% of the first 4% of the employee's contribution. Total expense for fiscal
1994, 1995 and 1996 was $16,000, $21,000 and $47,000, respectively.
F-12
<PAGE> 68
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. LOSS ON CLOSURE OF GERMAN SUBSIDIARY
During fiscal 1993, the Company formed a subsidiary in West Germany. During
fiscal 1994, the Company made cash advances, and shipped products, to the German
subsidiary totaling $550,000. Due to a lack of profitability, management decided
to terminate this operation in April 1994. The Company has recorded the loss on
closure of this subsidiary in its consolidated financial statements at July 29,
1994. During fiscal 1995, the Company completed the liquidation of the German
subsidiary's assets.
10. STOCK SPLIT AND STOCK OPTION PLAN
In September 1995, the shareholders of the Company approved a stock split,
whereby each shareholder was issued 10,000 shares of common stock for each share
held.
During November 1993, options to purchase 90,000 shares of common stock at
the estimated fair market value on the date of grant were granted by a principal
shareholder to an officer of the Company in connection with the officer's
employment. In addition, during fiscal 1996, the Company instituted the 1995
Stock Option Plan (the "1995 Plan") for its key employees and reserved 540,000
shares for grant under the 1995 Plan. Pursuant to the terms of the 1995 Plan,
options to purchase the Company's common stock may be granted with exercise
prices equal to the fair market value of the stock on the date of grant. Options
granted vest over a period of four years.
The following table sets forth options authorized, granted and outstanding
under the 1995 Plan:
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING AVERAGE
FOR GRANT OPTIONS PRICE
---------- ----------- -----------
<S> <C> <C> <C>
Balances, July 28, 1995................ -- -- --
Institution of the 1995 Plan......... 540,000 -- --
Options granted...................... (235,050) 235,050 $2.50-$4.50
Options cancelled.................... 7,350 (7,350) $2.50
------- -------
Balances, July 26, 1996................ 312,300 227,700 $2.50-$4.50
Activity in Quarter Ended October 25,
1996 (unaudited)
Options granted...................... (51,000) 51,000 $5.16-$8.33
Options cancelled.................... 6,900 (6,900) $2.50
------- -------
Balances, October 25, 1996
(unaudited).......................... 268,200 271,800 $2.50-$8.33
======= =======
</TABLE>
In addition to the September 1995 stock split discussed above, the Company
filed amended and restated articles of incorporation on November 13, 1996,
which, among other things, effected a stock split pursuant to which each
shareholder was issued three shares of common stock for each common share held.
All share and per share amounts have been restated to give retroactive effect to
this stock split as well as the September 1995 stock split.
F-13
<PAGE> 69
PROCOM TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
11. GEOGRAPHIC
Export sales as a percentage of net sales amounted to 19%, 14% and 11% for
fiscal years 1994, 1995 and 1996, respectively. A summary of the Company's net
sales and gross profit by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
-------------------------------- -------------------------
JULY 29, JULY 28, JULY 26, OCTOBER 28, OCTOBER 26,
1994 1995 1996 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales
United States.................. $ 27,953 $ 38,478 $ 65,072 $13,586 $22,761
Foreign........................ 6,549 6,182 8,384 1,689 2,154
-------- -------- -------- ----------- -----------
Total..................... $ 34,502 $ 44,660 $ 73,456 $15,275 $24,915
======= ======= ======= ======== ========
Gross profit
United States.................. $ 6,365 $ 10,812 $ 20,004 $ 3,799 $ 7,802
Foreign........................ 950 990 1,963 343 623
-------- -------- -------- ----------- -----------
Total..................... $ 7,315 $ 11,802 $ 21,967 $ 4,142 $ 8,425
======= ======= ======= ======== ========
</TABLE>
The Company has no material identifiable assets used in connection with the
Company's foreign operations.
12. SUBSEQUENT EVENT
The Company's amended and restated articles of incorporation, which were
filed on November 13, 1996, as discussed above in Note 10, also effected a
change in common stock from no par value to par value of $.01 per share. In the
quarter ending January 24, 1997, $89,700 will be transferred from retained
earnings to common stock to reflect the change in par value.
F-14
<PAGE> 70
[PHOTOGRAPHS OF A CD-ROM AND A CD FORCE SERVER AND GRAPHICS DISPLAYING NETWORK
CONNECTIVITY, GRAPHICAL USER INTERFACES, ACCESS THROUGH THE INTERNET AND MESA
ARCHITECTURE BEARING THE FOLLOWING CAPTIONS: "CD FORCE - THE POWER TO SEAMLESSLY
NETWORK CDS(TM)," "CD -- FORCE SERVERS PROVIDE CROSS-PLATFORM ACCESS TO
CD-ROMS," "ENTERPRISE WIDE CD-ROM NETWORKING SOFTWARE," "WINDOWS -- MACINTOSH
O/S -- IBM OS/2 WARP -- UNIX," "CENTRALIZED AND REMOTE ADMINISTRATOR ACCESS AND
GRAPHICAL USER INTERFACE ("GUI")," "EASY USER ACCESS TO CDS FROM NETWORKS OR
WITH SIMILAR GUIS THROUGH THE INTERNET," "MESA(TM) -- MANAGED ENTERPRISE STORAGE
ARCHITECTURE" AND "PROCOM TECHNOLOGY -- INTELLIGENT STORAGE FOR THE
ENTERPRISE(TM)."]
<PAGE> 71
- ------------------------------------------------------------
- ------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company, the Underwriters or the Selling Shareholders. This Prospectus
does not constitute an offer to sell or solicitation of an offer to buy any of
the securities offered hereby by anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the affairs of the Company since the date hereof or the
information herein is correct as of any time subsequent to the date of this
Prospectus.
---------------------------------
TABLE OF CONTENTS
---------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 5
Capitalization............................ 15
Dilution.................................. 16
Selected Consolidated Financial Data...... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18
Business.................................. 27
Management................................ 42
Certain Transactions...................... 47
Principal and Selling Shareholders........ 48
Description of Capital Stock.............. 49
Shares Eligible for Future Sale........... 52
Underwriting.............................. 53
Legal Matters............................. 54
Experts................................... 54
Change in Accountants..................... 54
Additional Information.................... 54
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
------------------------
Until , 1997 (25 days after the date of 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 delivery requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
3,025,000 SHARES
[PROCOM LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than underwriting
discounts and commissions, payable in connection with the issuance and
distribution of the Common Stock being registered, all of which will be paid by
the Company. All amounts are estimates except the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 11,596
NASD filing fee.................................................. 4,327
Nasdaq National Market listing fee............................... 45,000
Accounting fees and expenses..................................... 120,000
Legal fees and expenses.......................................... 250,000
Blue Sky qualification fees and expenses......................... 7,000
Printing and engraving expenses.................................. 100,000
Transfer agent and registrar fees................................ 3,000
D&O Insurance.................................................... 200,000
Road Show expenses............................................... 30,000
Miscellaneous.................................................... 9,077
--------
Total.................................................. $780,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The California General Corporation Law provides that California
corporations may include provisions in their articles of incorporation relieving
directors of monetary liability for breach of their fiduciary duties as
directors, except for the liability of a director resulting from (i) any
transaction from which the director derives an improper personal benefit, (ii)
acts or omissions involving intentional misconduct or a knowing and culpable
violation of law, (iii) acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iv) acts or
omissions constituting an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders, (v) acts
or omissions showing a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the Company or its shareholders, (vi) any improper
transaction between a director and the Company in which the director has a
material financial interest (Section 310) or (vii) the making of an illegal
distribution to shareholders or an illegal loan or guaranty (Section 316). The
Company's Articles of Incorporation provide that the Company's directors are not
liable to the Company or its shareholders for monetary damages for breach of
their fiduciary duties to the fullest extent permitted by California law. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission. The Bylaws of the Company (the
"Bylaws") provide that the Company will indemnify its directors and officers to
the fullest extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law, subject to
certain limitations for actions initiated by the director or officer,
settlements not approved by the Company, losses covered by the directors' and
officers' liability insurance policy maintained by the Company and judgments for
an accounting of profits pursuant to Section 16(b) of the Securities Exchange
Act of 1934 and similar laws. In addition, the Company may not indemnify
directors and officers in circumstances in which indemnification is expressly
prohibited by Section 317 of the Law.
The Company has entered into indemnification agreements with certain of its
directors and officers that require the Company to indemnify such directors and
officers to the fullest extent permitted by applicable provisions of law,
provided that any settlement of a third party action against a director or
officer is approved
II-1
<PAGE> 73
by the Company, and subject to limitations for actions initiated by the director
or officer, penalties paid by insurance and violations of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and similar laws. The agreements
contain provisions that are broader in some respects than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require the Company, among other things, to
indemnify its officers and directors against certain liabilities that may arise
by reason of their status or service as directors or executive officers (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified and to obtain directors' and officers'
insurance, if available on reasonable terms. The Company expects to obtain
directors' and officers' liability insurance with respect to liabilities arising
out of certain matters, including matters arising under the Securities Act.
The inclusion of the above provisions in the Company's Articles of
Incorporation and Bylaws may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Company and its shareholders. This provision does not affect a
director's responsibilities under certain other laws such as the federal
securities laws or state or federal environmental laws. At present, there is no
litigation or proceeding pending involving a director of the Company pursuant to
which indemnification is being sought, nor is the Company aware of any
threatened litigation that might result in claims for indemnification by any
director.
The Form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the Underwriters of the
Company and its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Act:
From time to time during the three years preceding the date hereof,
the Registrant issued stock options to purchase 286,050 shares of Common
Stock pursuant to the Registrant's 1995 Stock Option Plan (the "1995 Plan")
to officers, directors and employees of the Registrant, of which 18,750
shares have been cancelled and made available for future grant. During the
period referred to above, no options granted pursuant to 1995 Plan were
exercised. Exemption from the registration provisions of the Act is claimed
with respect to the grant of options referred to above in reliance on
Section 2(3) of the Act as transactions by an issuer not involving the sale
of a security and in reliance on the exemption provided for offers of
securities contained in Rule 701 promulgated under the Act.
II-2
<PAGE> 74
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Amended and Restated Articles of Incorporation of the Company
3.2+ Amended and Restated Bylaws of the Company
5.1+ Opinion of O'Melveny & Myers
10.1+ Form of Indemnity Agreement between the Company and each of its executive officers
and directors
10.2+ Procom Technology, Inc. 1995 Stock Option Plan
10.3+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Alex Razmjoo
10.4+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Frank Alaghband
10.5+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Alex Aydin
10.6+ Amended and Restated Executive Employment Agreement, dated as of October 28, 1996,
between the Company and Nick Shahrestany
10.7+ Form of Registration Rights Agreement
10.8+ Lease, dated February 10, 1992, between 2181 Dupont Associates and the Company, as
amended
10.9 Loan and Security Agreement, dated November 18, 1994, by and between the Company and
FINOVA Capital Corporation, as amended
11.1+ Statement re: Computation of Earnings Per Share
16.1+ Letter re Change in Certifying Accountant
21.1+ List of Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.3+ Consent of O'Melveny & Myers (included in Exhibit 5.1)
27.1+ Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed
(b) FINANCIAL STATEMENT SCHEDULE AND REPORT OF INDEPENDENT AUDITOR.
Report of Arthur Andersen LLP
Set forth below is the financial statement schedule included as part of the
Registration Statement:
Schedule II
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the Consolidated Financial
Statements or notes thereto.
II-3
<PAGE> 75
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act 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 Securities 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 hereunder, 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 Securities Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, County of Orange, State of California, on the 4th day of December,
1996.
PROCOM TECHNOLOGY, INC.
By: /s/ Alex Razmjoo
--------------------------------------
Alex Razmjoo
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------- ----------------------------------------- -----------------
<C> <S> <C>
/s/ Alex Razmjoo Chairman of the Board, President and December 4, 1996
- --------------------------------- Chief Executive Officer (Principal
Alex Razmjoo Executive Officer)
/s/ Alex Aydin Executive Vice President, Finance and December 4, 1996
- --------------------------------- Administration (Principal Financial
Alex Aydin Officer)
/s/ Frederick Judd Vice President, Finance and General December 4, 1996
- --------------------------------- Counsel (Principal Accounting Officer)
Frederick Judd
/s/ Frank Alaghband Director December 4, 1996
- ---------------------------------
Frank Alaghband
/s/ Nick Shahrestany Director December 4, 1996
- ---------------------------------
Nick Shahrestany
Director December , 1996
- ---------------------------------
Samuel Inman
Director December , 1996
- ---------------------------------
Samuel Yau
</TABLE>
II-5
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Procom Technology, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Procom Technology, Inc. and subsidiary as
of July 28, 1995 and July 26, 1996 and for each of the three years in the period
ended July 26, 1996, which financial statements are included in this
registration statement, and have issued our report thereon dated November 13,
1996. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) herein
is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. The
information in the schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
November 13, 1996
II-6
<PAGE> 78
SCHEDULE II
PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. C
------------------------
COL. B ADDITIONS COL. E
------------ ------------------------ ---------
COL. A BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE
- --------------------------------------------- BEGINNING OF COSTS AND OTHER ---------- AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------------------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended July 29, 1994:
Allowance for sales returns................ $175,000 $ -- -- $ (50,000) $ 125,000
Allowance for doubtful accounts............ 171,000 241,000 -- (277,000) 135,000
Allowance for excess and obsolete
inventory................................ 110,000 88,000 -- (118,000) 80,000
Year ended July 28, 1995:
Allowance for sales returns................ $125,000 $ -- -- $ (52,000) $ 73,000
Allowance for doubtful accounts............ 135,000 322,000 -- (351,000) 106,000
Allowance for excess and obsolete
inventory................................ 80,000 467,000 -- (477,000) 70,000
Year ended July 26, 1996:
Allowance for sales returns................ $ 73,000 $130,000 -- $ -- $ 203,000
Allowance for doubtful accounts............ 106,000 473,000 -- (409,000) 170,000
Allowance for excess and obsolete
inventory................................ 70,000 284,000 -- (199,000) 155,000
</TABLE>
II-7
<PAGE> 79
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER
NUMBER DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement............................................
3.1+ Amended and Restated Articles of Incorporation of the Company.............
3.2+ Amended and Restated Bylaws of the Company................................
5.1+ Opinion of O'Melveny & Myers..............................................
10.1+ Form of Indemnity Agreement between the Company and each of its executive
officers and directors....................................................
10.2+ Procom Technology, Inc. 1995 Stock Option Plan............................
10.3+ Amended and Restated Executive Employment Agreement, dated as of October
28, 1996, between the Company and Alex Razmjoo............................
10.4+ Amended and Restated Executive Employment Agreement, dated as of October
28, 1996, between the Company and Frank Alaghband.........................
10.5+ Amended and Restated Executive Employment Agreement, dated as of October
28, 1996, between the Company and Alex Aydin..............................
10.6+ Amended and Restated Executive Employment Agreement, dated as of October
28, 1996, between the Company and Nick Shahrestany........................
10.7+ Form of Registration Rights Agreement.....................................
10.8+ Lease, dated February 10, 1992, between 2181 Dupont Associates and the
Company, as amended.......................................................
10.9 Loan and Security Agreement, dated November 18, 1994, by and between the
Company and FINOVA Capital Corporation, as amended........................
11.1+ Statement re: Computation of Earnings Per Share...........................
16.1+ Letter re Change in Certifying Accountant.................................
21.1+ List of Subsidiaries......................................................
23.1 Consent of Arthur Andersen LLP............................................
23.3+ Consent of O'Melveny & Myers (included in Exhibit 5.1)....................
27.1+ Financial Data Schedule...................................................
</TABLE>
- ---------------
+ Previously filed
<PAGE> 1
Exhibit 1.1
3,025,000 Shares*
PROCOM TECHNOLOGY, INC.
Common Stock
UNDERWRITING AGREEMENT
December __, 1996
MONTGOMERY SECURITIES
DAIN BOSWORTH INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1
INTRODUCTORY
Procom Technology, Inc., a California corporation (the "Company"),
proposes to issue and sell 2,000,000 shares of its authorized but unissued
Common Stock, having a par value of $.01 per share (the "Common Stock"), and
certain shareholders of the Company named in Schedule B annexed hereto (the
"Selling Shareholders") propose to sell an aggregate of 1,025,000 shares of the
Company's issued and outstanding Common Stock to the several underwriters named
in Schedule A annexed hereto (the "Underwriters"), for whom you are acting as
Representatives. Said aggregate of 3,025,000 shares are herein called the "Firm
Common Shares." In addition, certain of the Selling Shareholders listed under
"Optional Common Shares" in Schedule B annexed hereto propose to grant to the
Underwriters an option to purchase up to 453,750 additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The Firm
Common Shares and, to the extent such option is exercised, the Optional Common
Shares are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Shareholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
- --------
* Plus an option to purchase from certain of the Selling Shareholders, in the
aggregate, up to 453,750 additional shares to cover over-allotments.
<PAGE> 2
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SELLING SHAREHOLDERS.
Each of the Selling Shareholders (other than Frederick Judd) and the
Company, severally and not jointly, represent and warrant to the several
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-15109) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior to
the effective date of such registration statement an amendment or amendments to
such registration statement, which amendment or amendments have been or will be
similarly prepared. There have been delivered to you three signed copies of such
registration statement and amendments, together with three copies of each
exhibit filed therewith. Conformed copies of such registration statement and
amendments (but without exhibits) and of the related preliminary prospectus have
been delivered to you in such reasonable quantities as you have requested for
each of the Underwriters. The Company will next file with the Commission one of
the following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations
or (iii) a term sheet (the "Term Sheet") as described in and in accordance with
Rules 434 and 424(b) of the Rules and Regulations. As filed, the final
prospectus, if one is used, or the Term Sheet and Preliminary Prospectus, if a
final prospectus is not used, shall include all Rule 430A Information (as
hereinafter defined) and, except to the extent that you shall agree in writing
to a modification, shall be in all substantive respects in the form furnished to
you prior to the date and time that this Agreement was executed and delivered by
the parties hereto or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond
those contained in the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include (i) all Rule 430A Information deemed to be included in
such registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) any
registration statement filed pursuant to 462(b) of the Rules and Regulations
relating to the Common Stock. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean either (i) the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, (ii) if a Term Sheet is
not used and no filing pursuant to Rule 424(b) of the Rules and Regulations is
required, shall mean the form of final prospectus included in the Registration
Statement at the time such registration statement becomes effective or (iii) if
a Term Sheet is used, the Term Sheet in the form in which it is first filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations, together
with the Preliminary Prospectus included in the Registration Statement at the
time it becomes effective. The term "Rule
-2-
<PAGE> 3
430A Information" means information with respect to the Common Shares and the
offering thereof permitted to be omitted from the Registration Statement when it
becomes effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and at the time the
Registration Statement becomes effective, and at all times subsequent thereto up
to and including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto, will
contain all material statements and information required to be included therein
by the Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations, and
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, no representation or
warranty contained in this subsection 2(b) shall be applicable to information
contained in or omitted from any Preliminary Prospectus, the Registration
Statement, the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter, directly or through the Representatives, specifically
for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association, joint venture or other entity other than the
subsidiaries listed in Exhibit 21.1 to the Registration Statement. The Company
and each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their properties and conduct their respective businesses
as described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of all claims, liens, charges and
encumbrances; the Company and each of its subsidiaries are in possession of and
operating in compliance with all authorizations, licenses, permits, consents,
certificates and orders material to the conduct of their respective businesses,
all of which are valid and in full force and effect; the Company and each of its
subsidiaries are duly qualified to do business and in good standing as foreign
corporations in each jurisdiction in which the ownership or leasing of
properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect upon the Company and its subsidiaries taken
as a whole; and no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification.
(d) The Company, subject to the assumptions set forth in the
Prospectus, has an authorized and outstanding Common Stock as set forth under
the heading "Capitalization" in the Prospectus; the issued and outstanding
shares of capital stock have been duly authorized and validly issued, are fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, were not issued in violation of, or subject to, any
preemptive rights or other rights to subscribe for or purchase securities,
conform in all material respects to the description thereof contained in the
Prospectus and, as of the First Closing Date (defined in Section 5(b) below),
such Common Stock (including, without limitation, the Common Shares) will be
duly listed or
-3-
<PAGE> 4
designated on the National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market, subject to notice of issuance. All issued and
outstanding shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued and are fully paid and nonassessable. Except
as disclosed in or contemplated by the Prospectus and the financial statements
of the Company, and the related notes thereto, included in the Prospectus,
neither the Company nor any subsidiary has outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform in all material respects to the description
thereof contained in the Prospectus. No preemptive rights or other rights to
subscribe for or purchase exist with respect to the issuance and sale of the
Common Shares by the Company pursuant to this Agreement. No shareholder of the
Company has any right that has not been waived to require the Company to
register the sale of any shares owned by such shareholder under the Act in the
public offering contemplated by this Agreement. No further approval or authority
of the shareholders or the Board of Directors of the Company will be required
for the transfer and sale of the Common Shares to be sold by the Selling
Shareholders or the issuance and sale of the Common Shares to be sold by the
Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company enforceable in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the articles of incorporation or bylaws, or other organizational
documents, of the Company or any of its subsidiaries, and will not conflict
with, result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties may be bound or affected, any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its subsidiaries or any of their respective properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Blue Sky
laws applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD").
(g) Arthur Andersen LLP has expressed its opinion with respect to the
financial statements and schedule filed with the Commission as a part of the
Registration Statement and
-4-
<PAGE> 5
included in the Prospectus and in the Registration Statement and are independent
accountants as required by the Act and the Rules and Regulations.
(h) The financial statements and schedule of the Company, and the
related notes thereto, included in the Registration Statement and the Prospectus
present fairly, in all material respects, the financial position of the Company
as of the respective dates of such financial statements and schedule, and the
results of operations and changes in financial position of the Company for the
respective periods covered thereby. Such statements, schedule and related notes
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis as certified by the independent accountants named
in subsection 2(g). No other financial statements or schedules are required to
be included in the Registration Statement. The selected financial and
statistical data set forth in the Prospectus under the captions "Prospectus
Summary," "Capitalization," "Dilution," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management," "Certain Transactions," "Principal and Selling
Shareholders" and "Shares Eligible for Future Sale" fairly present, in all
material respects, the information set forth therein on the basis stated in the
Registration Statement.
(i) Neither the Company nor any of its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or other
organizational documents. Except as disclosed in the Prospectus, and except as
to defaults which individually or in the aggregate would not be material to the
Company and its subsidiaries taken as a whole, neither the Company nor any of
its subsidiaries is in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound. The Company is not aware of any
state of facts which constitutes an event of default on the part of the Company
or any such subsidiary as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default.
(j) There is no statute, contract or other document required to be
described in the Registration Statement or contract or other document required
to be filed as an exhibit to the Registration Statement by the Act or by the
Rules and Regulations which has not been described or filed as required. The
statutes, contracts or other documents described in the Registration Statement
and the Prospectus fairly present, in all material respects, the information
required to be provided by the Act and the Rules and Regulations. The contracts
so described in the Prospectus or filed as exhibits to the Registration
Statement are in full force and effect on the date hereof. Except as to breaches
or defaults which in any single case or in the aggregate would not have a
material adverse effect on the Company and its subsidiaries taken as a whole,
neither the Company nor any of its subsidiaries, nor to the best of the
Company's knowledge, any other party is in breach of or default under any of
such contracts. Complete and fully executed copies of such contracts were made
available to counsel for the Underwriters and there exist no agreements or other
documents which modify, change or amend such contracts.
(k) There is no legal or governmental action, suit or proceeding
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or of which property
owned or leased by the Company or any of its subsidiaries is or may be the
subject, or related to environmental or discrimination matters, which action,
suit or proceeding might, individually or in the aggregate with all such
actions, suits or proceedings, prevent or adversely affect the transactions
contemplated by this Agreement or result in a material adverse change in the
condition (financial or otherwise), properties, business, results of operations
or
-5-
<PAGE> 6
prospects of the Company and its subsidiaries taken as a whole; and no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent which might be expected to materially adversely affect such
condition, properties, business, results of operations or prospects. Neither the
Company nor any of its subsidiaries is a party or subject to the provisions of
any material injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements described above (or elsewhere in the Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except (i) those, if any,
reflected in such financial statements (or elsewhere in the Prospectus) or (ii)
those which are not material in amount and do not materially adversely affect
the use made and proposed to be made of such property by the Company and its
subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company and its
subsidiaries taken as a whole. Except as disclosed in the Prospectus, the
Company owns or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could result in a material reduction in the future net income of the
Company and its subsidiaries taken as a whole; (ii) the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, windstorm, earthquake,
accident or other calamity, whether or not covered by insurance; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company and its subsidiaries are not in
default in the payment of principal or interest on any outstanding material debt
obligations; (iv) there has not been any change in the capital stock (other than
upon the sale of the Common Shares hereunder) or indebtedness material to the
Company and its subsidiaries taken as a whole (other than in the ordinary course
of business); and (v) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations
or prospects of the Company and its subsidiaries taken as a whole.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, mask works, copyrights, moral rights, licenses, approvals
and governmental authorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights, mask works, moral
rights, copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or its subsidiaries
taken as a whole; and the Company has no knowledge of any infringement by it or
its subsidiaries of trademark, trade name rights, patent rights, mask works,
copyrights, moral rights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its subsidiaries
regarding trademark, trade name, patent, mask work, copyright, moral right,
license, trade secret or other infringement which could have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries taken as a whole.
-6-
<PAGE> 7
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations, except
where failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business, results of operations or prospects
of the Company and its subsidiaries taken as a whole.
(p) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company or its subsidiaries
which could materially and adversely affect the business, operations or
properties of the Company and its subsidiaries taken as a whole.
(q) Neither the Company nor any of its subsidiaries is or, after
application of the net proceeds of this offering as described under the caption
"Use of Proceeds" in the Prospectus, will become an "investment company" or an
entity "controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
the rules and regulations of the Commission thereunder. The Company intends to
conduct its business in a manner such that it will not become an "investment
company" subject to regulation under the Investment Company Act.
(r) The Company has not distributed nor caused to be distributed, and
will not distribute nor cause to be distributed prior to the First Closing Date,
any offering material in connection with the offering and sale of the Common
Shares other than the Prospectus, the Registration Statement and the other
materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of
such types and in such amounts as are customary for its business, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office or failed to disclose fully any contribution in violation of
law or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(u) The Company maintains a system of internal accounting controls that
it believes is sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific authorization,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
-7-
<PAGE> 8
(w) All material transactions that are required to be disclosed in the
Prospectus under applicable Rules and Regulations between the Company and/or any
of its subsidiaries, on the one hand, and any of their officers, directors and
shareholders holding 5% or more of the Company's capital stock, on the other
hand, have been accurately disclosed in all material respects in the Prospectus.
(x) The Company has obtained agreements from each of its directors,
officers and shareholders holding more than 6,000 shares providing that such
person will not, for a period of 180 days directly or indirectly, sell, transfer
the economic risk of ownership in, make any short sale, pledge, offer to sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities exercisable for or exchangeable with or any other rights to purchase
or acquire any shares of Common Stock, other than (i) as a bona fide gift or
gifts where prior notice is provided to you and the donee or donees agree to be
bound to the agreement or (ii) with the prior written consent of Montgomery
Securities, which consent may be withheld at the sole discretion of Montgomery
Securities. Each such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock held by such persons or entity, unless in
compliance with the foregoing restrictions.
(y) The Company is not aware that (A) any executive, key employee or
significant group of employees of the Company or any subsidiary plans to
terminate employment with the Company or any such subsidiary or (B) any such
executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or expects to have any
liability for any prohibited transaction or funding deficiency or any complete
or partial withdrawal liability with respect to any pension, profit sharing or
other plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any other retirement, pension, profit sharing
plan or other plan, to which the Company or any subsidiary makes or ever has
made a contribution and in which any employee of the Company or any subsidiary
is or has ever been a participant. With respect to such plans, the Company and
each subsidiary are in compliance in all material respects with all applicable
provisions of ERISA.
(z) Other than as contemplated by this Agreement, there is no broker,
finder or other party that is entitled to receive from the Company any brokerage
or finder's fee or other fee or commission as a result of any of the
transactions contemplated by this Agreement.
SECTION 3
REPRESENTATIONS. WARRANTIES AND COVENANTS
OF THE SELLING SHAREHOLDERS
(a) Each of the Selling Shareholders, severally and not jointly,
represents and warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First Closing
Date and the Second Closing Date hereinafter mentioned will have, good and
marketable title to the Common Shares proposed to be sold by such Selling
Shareholder hereunder on such Closing Date and full right, power and authority
to enter into this Agreement and to sell, assign, transfer and deliver such
Common Shares hereunder, free and clear of all voting trust arrangements, liens,
encumbrances, equities, security interests, restrictions and claims whatsoever;
and upon delivery of and payment for such Common Shares hereunder, the
Underwriters will acquire good and marketable title thereto,
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<PAGE> 9
free and clear of all liens, encumbrances, equities, claims, restrictions,
security interests, voting trusts or other defects of title whatsoever.
(ii) Such Selling Shareholder has executed and delivered a
Custody Agreement (hereinafter referred to as the "Custody Agreement") and in
connection herewith such Selling Shareholder further represents, warrants and
agrees that such Selling Shareholder has deposited in custody, under the Custody
Agreement, with the agent named therein (the "Agent") as custodian, certificates
in negotiable form for the Common Shares to be sold hereunder by such Selling
Shareholder, for the purpose of further delivery pursuant to this Agreement.
Such Selling Shareholder agrees that the Common Shares to be sold by such
Selling Shareholder on deposit with the Agent are subject to the interests of
the Company and the Underwriters, that the arrangements made for such custody
are to that extent irrevocable, and that the obligations of such Selling
Shareholder hereunder shall not be terminated, except as provided in this
Agreement or in the Custody Agreement, by any act of such Selling Shareholder,
by operation of law, by the death or incapacity of such Selling Shareholder or
by the occurrence of any other event. If the Selling Shareholder should die or
become incapacitated, or if any other event should occur, before the delivery of
the Common Shares hereunder, the documents evidencing Common Shares then on
deposit with the Agent shall be delivered by the Agent in accordance with the
terms and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Custody Agreement have been duly
executed and delivered by or on behalf of such Selling Shareholder and the form
of such Custody Agreement has been delivered to you.
(iii) The performance of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby and by
the Custody Agreement will not result in a breach or violation by such Selling
Shareholder of any of the terms or provisions of, or constitute a default by
such Selling Shareholder under, any material indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise, license or
other agreement or instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder or any of its properties is bound, any statute,
or any judgment, decree, order, rule or regulation of any court or governmental
agency or body applicable to such Selling Shareholder or any of its properties.
(iv) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Common Shares.
(b) Frederick Judd represents and warrants that, after due inquiry and
investigation, he is not aware that any of the representations and warranties of
the Company and the other Selling Stockholders set forth in Section 2 above is
untrue, inaccurate or incomplete in any material respect.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS
The Representatives, on behalf of the several Underwriters, represent
and warrant to the Company and to the Selling Shareholders that the information
set forth (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of offering and (ii) under
"Underwriting" in the Prospectus was furnished to the Company by and on behalf
of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. Each Representative represents and warrants that
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<PAGE> 10
it has been authorized by each of the other Underwriters as such Underwriter's
Representative to enter into this Agreement on its behalf and to act for it in
the manner herein provided.
SECTION 5
PURCHASE. SALE AND DELIVERY OF COMMON SHARES
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, (i) the
Company agrees to issue and sell to the Underwriters 2,000,000 of the Firm
Common Shares, and (ii) the Selling Shareholders agree, severally and not
jointly, to sell to the Underwriters in the respective amounts set forth in
Schedule B hereto, an aggregate of 1,025,000 of the Firm Common Shares. The
Underwriters agree, severally and not jointly, to purchase from the Company and
the Selling Shareholders, respectively, the number of Firm Common Shares
described below.
(a) The purchase price per share to be paid by the several Underwriters
to the Company and to the Selling Shareholders, respectively, shall be $ _____
per share. The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of full shares which (as nearly as
practicable, as determined by you) bears to 2,000,000 the same proportion as the
number of shares set forth opposite the name of such Underwriter in Schedule A
hereto bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Shareholders shall be to purchase from the Selling
Shareholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,025,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
(b) Delivery of certificates for the Firm Common Shares to be purchased
by the Underwriters and payment therefor shall be made at the offices of
O'Melveny & Myers, 610 Newport Centre Drive, Suite 1700, Newport Beach,
California (or such other place as may be agreed upon by the Company and the
Representatives) at such time and date, not later than the third (or, if the
Firm Common Shares are priced as contemplated by Rule 15c6-1(c) under the
Exchange Act, after 4:30 P.M. Washington DC time, the fourth) full business day
following the first date that any of the Common Shares are released by you for
sale to the public, as you shall designate by at least 48 hours prior notice to
the Company (or at such other time and date, not later than one week after such
third full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
(c) Delivery of certificates for the Firm Common Shares shall be made
by or on behalf of the Company and the Selling Shareholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common Shares
to be sold by the Company and by the Selling Shareholders against payment by
you, for the accounts of the several Underwriters, of the purchase price
therefor by a wire transfer of immediately available funds to an account
designated by the Company and of the Agent in proportion to the number of Firm
Common Shares to be sold by the Company and the Selling Shareholders,
respectively. The certificates for the Firm Common Shares shall be registered in
such names and denominations as you shall have requested at least two full
business days prior to the First Closing Date, and shall be made available for
checking and packaging on the business day preceding the First Closing Date at a
location in New York, New
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<PAGE> 11
York, as may be designated by you. Time shall be of the essence, and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
(d) In addition to the Firm Common Shares and on the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, certain of the Selling Shareholders as
indicated in Schedule B annexed hereto, severally and not jointly, hereby grant
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 453,750 Optional Common Shares at the purchase price per
share to be paid for the Firm Common Shares, for use solely in covering any
over-allotments made by you for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the first
date that any of the Common Shares are released by you for sale to the public,
upon notice by you to the Selling Shareholders setting forth the aggregate
number of Optional Common Shares as to which the Underwriters are exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and place at which such certificates will be
delivered. Such time of delivery (which may not be earlier than the First
Closing Date), being herein referred to as the "Second Closing Date," shall be
determined by you, but if at any time other than the First Closing Date shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. The number of Optional Common Shares to be purchased
by each Underwriter shall be determined by multiplying the number of Optional
Common Shares to be sold by such Selling Shareholders pursuant to such notice of
exercise by a fraction, the numerator of which is the number of Firm Common
Shares to be purchased by such Underwriter as set forth opposite its name in
Schedule A and the denominator of which is 3,025,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by you.
The manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from such Selling Shareholders
as specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such cancellation
to such Selling Shareholders. If the option is canceled or expires unexercised
in whole or in part, the Company will deregister under the Act the number of
Optional Common Shares as to which the option has not been exercised.
(e) You have advised the Company and the Selling Shareholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to deliver a receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
(f) Subject to the terms and conditions hereof, the Underwriters
propose to make a public offering of their respective portions of the Common
Shares as soon after the effective date of the Registration Statement as in the
judgment of the Representatives is advisable and at the public offering price
set forth on the cover page of, and on the terms set forth in, the final
prospectus, if one is used, or on the first page of the Term Sheet, if one is
used.
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<PAGE> 12
SECTION 6
COVENANTS OF THE COMPANY
The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus unless a copy
of the same has been furnished to you a reasonable time prior to such filing and
will not file any such document to which you reasonably object or which is not
in compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus which in your judgment may be necessary or advisable to enable
the several Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares is
required to be delivered under the Act any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include an untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, or if
it is necessary at any time to amend the Prospectus, including any amendments or
supplements, to comply with the Act or the Rules and Regulations, the Company
will promptly advise you thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will correct
such statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become effective
as soon as possible; and, in case any Underwriter is required to deliver a
prospectus after such nine-month period, the Company upon request, but at the
expense of such Underwriter, will promptly prepare such amendment or amendments
to the Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act.
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<PAGE> 13
(d) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you and the Selling Shareholders or mail to your
order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each case
as soon as available and in such quantities as you and the Selling Shareholders
may reasonably request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
will comply with such laws and will continue such qualifications, registrations
and exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification, registration
or exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will furnish
to the Representatives and, upon request of the Representatives, to each of the
other Underwriters: (i) as soon as practicable after the end of each fiscal
year, copies of the Annual Report of the Company containing the balance sheet of
the Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(h) During the period of 180 days after the effective date of the
Registration Statement, without the prior written consent of either Montgomery
Securities or each of the Representatives (which consent may be withheld at the
sole discretion of Montgomery Securities or the Representatives, as the case may
be), the Company will not (other than the grant of additional options, the
issuance of other securities under the Company's 1995 Stock Option Plan or
pursuant to outstanding stock options disclosed in the Prospectus) issue, offer,
sell, grant options to purchase or otherwise dispose of any of the Company's
equity securities or any other securities convertible into, exercisable for or
exchangeable with its Common Stock or other equity security.
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<PAGE> 14
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the Company's
Common Stock in California), will comply with such Blue Sky laws and will
continue such qualifications, registrations and exemptions in effect for a
period of the shorter of (i) five years after the date hereof and (ii) such date
as the Common Stock is no longer registered under the Exchange Act.
(k) The Company will use its best efforts to designate its Common
Stock, including the Common Shares to be issued and sold by the Company and the
Selling Shareholders, for quotation on the Nasdaq National Market.
(l) The Company will take the steps, if any, necessary to create and
enforce lock-up agreements with each option holder of the Company for a period
of 90 days after the effective date of the Registration Statement and will not
waive any such lock-up agreements during such 90-day period without the prior
written consent of Montgomery Securities.
You, on behalf of the Underwriters, may, in your sole discretion, waive
in writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
SECTION 7
PAYMENT OF EXPENSES
Whether or not the transactions contemplated hereunder are consummated
or this Agreement becomes effective or is terminated, the Company and, unless
otherwise paid by the Company, the Selling Shareholders agree to pay all costs,
fees and expenses incurred in connection with the performance of their
obligations hereunder and in connection with the transactions contemplated
hereby, including without limiting the generality of the foregoing, (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's and the Selling
Shareholder's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, reasonable attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the Blue Sky laws or with
obtaining clearance from the NASD and (vii) all other fees, costs and expenses
referred to in Item 13 of the Registration Statement. The Underwriters may deem
the Company to be the primary obligor with respect to all costs, fees and
expenses to be paid by the Company and by the Selling Shareholders. Except as
provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters
shall pay all of their own expenses,
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<PAGE> 15
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the Blue Sky laws, the
obtaining of clearance from the NASD and the Blue Sky memorandum referred to
above, which will be paid by the Company). This Section 7 shall not affect any
agreements relating to the payment of expenses between the Company and the
Selling Shareholders.
The Selling Shareholders will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for such Selling
Shareholders, (ii) any fees and expenses of the Agent and (iii) all expenses and
taxes incident to the sale and delivery of the Common Shares to be sold by such
Selling Shareholders to the Underwriters hereunder.
SECTION 8
CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS
The obligations of the several Underwriters to purchase and pay for the
Firm Common Shares on the First Closing Date and the Optional Common Shares on
the Second Closing Date shall be subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Shareholders herein
set forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Shareholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or in the case of a registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10 P.M.), Washington, D.C. Time, on the date of this Agreement, or at
such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, the Selling Shareholders or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your reasonable satisfaction.
(b) You shall be reasonably satisfied that since the respective dates
as of which information is given in the Registration Statement and Prospectus,
(i) except as set forth in or contemplated by the Registration Statement or the
Prospectus, there shall not have been any change in the capital stock (other
than pursuant to the exercise of outstanding options disclosed in the
Prospectus) of the Company or any of its subsidiaries or any material change in
the indebtedness (other than in the ordinary course of business) of the Company
or any of its subsidiaries, (ii) except as set forth in or contemplated by the
Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the Company or
any of its subsidiaries, which is not in the ordinary course of business or
which could result in a material reduction in the future net income of the
Company and its subsidiaries taken as a whole, (iii) no loss or damage (whether
or not insured) to the property of the Company or any of its subsidiaries shall
have been sustained which materially and adversely affects the condition
(financial or otherwise),
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<PAGE> 16
business, results of operations or prospects of the Company and its subsidiaries
taken as a whole, (iv) no legal or governmental action, suit or proceeding
affecting the Company or any of its subsidiaries which is material to the
Company and its subsidiaries taken as a whole or which affects or may affect the
transactions contemplated by this Agreement shall have been instituted or
threatened and (v) there shall not have been any material change in the
condition (financial or otherwise), business, management, results of operations
or prospects of the Company and its subsidiaries taken as a whole which makes it
impractical or inadvisable in the judgment of the Representatives to proceed
with the public offering or purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance reasonably
satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of O'Melveny & Myers, counsel for the Company
and the Selling Shareholders, addressed to the Underwriters and dated
the First Closing Date, or the Second Closing Date, as the case may be,
to the following effect.
(1) Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business as a foreign
corporation and is in good standing in all other jurisdictions
where the ownership or leasing of properties or the conduct of
its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Company and its
subsidiaries, and has full corporate power and authority to
own its properties and conduct its business as described in
the Registration Statement.
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; all necessary and proper
corporate proceedings have been taken in order to authorize
validly such authorized capital stock; all outstanding shares
of such capital stock (including the Firm Common Shares and
any Optional Common Shares) have been duly and validly issued,
are fully paid and nonassessable, have been issued in
compliance with federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase any securities and
conform to the description thereof contained in the
Prospectus; without limiting the foregoing, there are no
preemptive or other rights to subscribe for or purchase any of
the Common Shares to be sold by the Company hereunder.
(3) All of the issued and outstanding shares of the
capital stock of the Company's subsidiaries have been duly and
validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the Company free
and clear of all liens, encumbrances, equities, claims,
security interests, voting trusts or other defects of title
whatsoever.
(4) The certificates evidencing the Common Shares to
be delivered hereunder are in due and proper form under
California law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon
your order against payment of the agreed consideration
therefor in accordance with the provisions of this Agreement,
the Common Shares represented thereby will
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<PAGE> 17
be duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe
for or purchase securities and will conform in all respects to
the description thereof contained in the Prospectus.
(5) Except as disclosed in the Prospectus, to the
best of such counsel's knowledge, there are no outstanding
options, warrants or other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares
of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(6) The Company's Common Stock (including the Common
Shares) has been duly approved for listing and quotation on
the Nasdaq National Market.
(7) (A) The Registration Statement has become
effective under the Act, and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and Regulations
has been made in the manner and within the time period
required by such Rule 424(b);
(B) The Registration Statement, the
Prospectus and each amendment or supplement thereto (except
for the financial statements and schedule included therein as
to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act
and the Rules and Regulations;
(C) To the best of such counsel's knowledge,
there are no franchises, leases, contracts, agreements or
documents of a character required to be disclosed in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not disclosed
or filed, as required by the Act and the Rules and
Regulations;
(D) The description in the Registration
Statement and Prospectus of the charter and by-laws of the
Company is accurate in all material respects and such
descriptions fairly present the information required to be
shown by the Act or the Rules and Regulations; the statements
set forth in the Prospectus under the captions "Management,"
"Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale," insofar as they represent
summaries of document, contracts, statutes, rules and
regulations, are complete, accurate and fairly present the
information required to be disclosed; and
(E) To the best of such counsel's knowledge,
there are no legal or governmental actions, suits or
proceedings pending or threatened against the Company that are
required under the Act and the Rules and Regulations to be
described in the Prospectus and that are not described as
required.
(8) The Company has full right, power and authority
to enter into this Agreement and to sell and deliver the
Common Shares to be sold by it to the several Underwriters;
this Agreement has been duly and validly authorized by all
necessary
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<PAGE> 18
corporate action by the Company, has been duly and validly
executed and delivered by and on behalf of the Company, and is
a valid and binding agreement of the Company in accordance
with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except as to those provisions relating to
indemnity or contribution for liabilities arising under the
Act as to which no opinion need be expressed; and no approval,
authorization, order, consent, registration, filing,
qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is
required for the execution and delivery of this Agreement by
the Company or the consummation of the transactions
contemplated by this Agreement, except such as have been
obtained and are in full force and effect under the Act and
such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common
Shares by the Underwriters and the clearance of such offering
with the NASD.
(9) The execution and performance of this Agreement
and the consummation of the transactions herein contemplated
will not conflict with, result in the breach of, or
constitute, either by itself or upon notice or the passage of
time or both, a default under, any agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit or
other instrument known to such counsel to which the Company or
any of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of its or their property may be
bound or affected that is material to the Company and its
subsidiaries, or violate any of the provisions of the charter
or bylaws, or other organizational documents, of the Company
or any of its subsidiaries or, so far as is known to such
counsel, violate any statute, judgment, decree, order, rule or
regulation of any court or governmental body having
jurisdiction over the Company or any of its subsidiaries or
any of its or their property.
(10) Neither the Company nor any subsidiary is in
violation of its charter or bylaws, or other organizational
documents, or to the best of such counsel's knowledge, in
breach of, or in default with respect to, any provision of any
agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument known to such counsel to
which the Company or any such subsidiary is a party or by
which it or any of its properties may be bound or affected,
except where such default would not materially adversely
affect the Company and its subsidiaries; and, to the best of
such counsel's knowledge, the Company and its subsidiaries are
in compliance with all laws, rules, regulations, judgments,
decrees, orders and statutes of any court or jurisdiction to
which they are subject, except where noncompliance would not
materially adversely affect the Company and its subsidiaries.
(11) To the best of such counsel's knowledge, the
Company and each of its subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the
Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company or
any of its subsidiaries with respect to the foregoing. The
Company's business as now conducted and as proposed to be
conducted does not and will not infringe or conflict with any
patents, trademarks, service marks, trade names,
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<PAGE> 19
copyrights, trade secrets, licenses or other intellectual
property or franchise right of any person;
(12) To the best of such counsel's knowledge, the
Company and each of its subsidiaries have, and the Company and
each of its subsidiaries as of the Closing Dates will have,
good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned
or proposed to be owned by them which is material to the
business of the Company or any of its subsidiaries, in each
case free and clear of all liens, encumbrances and defects;
and any real property and buildings held under lease by the
Company and its subsidiaries or proposed to be held after
giving effect to the transactions described in the Prospectus
are, or will be as of the Closing Dates, held by them under
valid, subsisting and enforceable leases with such exceptions
as would not have a material adverse effect on the Company and
its subsidiaries considered as a whole;
(13) The Company and each of its subsidiaries are
not, nor will they be immediately after receiving the proceeds
from the sale of the Shares, an "investment company" or an
entity "controlled" by an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
(14) To the best of such counsel's knowledge, no
holders of securities of the Company have rights that have not
been waived to the registration of shares of Common Stock or
other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby.
(15) To the best of such counsel's knowledge, this
Agreement and the Custody Agreement have been duly authorized,
executed and delivered by or on behalf of each of the Selling
Shareholders; the Agent has been duly and validly authorized
to act as the custodian of the Common Shares to be sold by
each such Selling Shareholder; and the performance of this
Agreement and the Shareholders Agreement and the consummation
of the transactions contemplated herein or in the Custody
Agreement by the Selling Shareholders will not result in a
breach of, or constitute a default under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or
instrument to which any of the Selling Shareholders is a party
or by which any of the Selling Shareholders or any of their
properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental body having jurisdiction over any of the
Selling Shareholders or any of their properties; and to the
best of such counsel's knowledge, no approval, authorization,
order or consent of any court, regulatory body, administrative
agency or other governmental body is required for the
execution and delivery of this Agreement or the Custody
Agreement or the consummation by the Selling Shareholders of
the transactions contemplated by this Agreement, except such
as have been obtained and are in full force and effect under
the Act and such as may be required under the rules of the
NASD and applicable Blue Sky laws.
(16) To the best of such counsel's knowledge, the
Selling Shareholders have full right, power and authority to
enter into this Agreement and the Custody Agreement and to
sell, transfer and deliver the Common Shares to be sold on
such Closing Date by such Selling Shareholders hereunder and
good and marketable title
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<PAGE> 20
to such Common Shares so sold, free and clear of all liens,
encumbrances, equities, claims, restrictions, security
interests, voting trusts, or other defects of title
whatsoever, has been transferred to the Underwriters (whom
counsel may assume to be bona fide purchasers) who have
purchased such Common Shares hereunder.
(17) To the best of such counsel's knowledge, this
Agreement and the Custody Agreement are valid and binding
agreements of each of the Selling Shareholders enforceable in
accordance with their terms except as enforceability may be
limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and except with respect to those
provisions relating to indemnities or contributions for
liabilities under the Act, as to which no opinion need be
expressed.
(18) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to
the Underwriters hereunder.
In rendering such opinion, such counsel may rely as to the matters set
forth in paragraphs (15), (16), (17) and (18), on opinions of other
counsel retained by the Selling Shareholders, as to matters of governed
by the laws of states or jurisdictions other than California or federal
laws, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Shareholders and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and that the Underwriters are justified in
relying on such opinions or certificates and copies of said opinions or
certificates are to be attached to the opinion. In addition to the
matters set forth above, counsel rendering the foregoing opinion shall
also include a statement to the effect that, based upon their
participation in the preparation of the Registration Statement and
Prospectus and their review and discussion of the contents thereof,
nothing has come to such counsel's attention during the course of their
representation that would lead such counsel to believe (i) that (except
for the financial statement and schedule as to which such counsel need
not express any statement) the Registration Statement or Prospectus
included therein, at the time the Registration Statement became
effective, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) that
(except for the financial statements and schedule as to which such
counsel need not express any statement) the Registration Statement or
Prospectus and any amendment or supplement thereto effected on or
before the First Closing Date or the Second Closing Date, as the case
may be, does not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(ii) Such opinion or opinions of Fenwick & West LLP, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation of
the Company, the sufficiency of all corporate proceedings and other
legal matters relating to this Agreement, the validity of the Common
Shares, the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company and the Selling
Shareholders shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
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<PAGE> 21
(iii) A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of
the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, to the following effect.
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true, complete
and correct as of the date of this Agreement and as of the
First Closing Date or the Second Closing Date, as the case may
be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date.
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending
the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective
signers, no proceedings for that purpose have been instituted
or are pending or contemplated under the Act.
(3) Each of the respective signers of the certificate
has carefully examined the Registration Statement and the
Prospectus; in his opinion and to the best of his knowledge,
the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all statements
required to be stated therein regarding the Company and its
subsidiaries; and to the best of his knowledge neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading.
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral,
transaction or event has occurred which should have been set
forth in an amendment to the Registration Statement or in a
supplement to or amendment of any prospectus which has not
been disclosed in such a supplement or amendment.
(5) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as disclosed in or contemplated by the
Prospectus, there has not been any material adverse change or
a development involving a material adverse change in the
condition (financial or otherwise), business, properties,
results of operations, management or prospects of the Company
and its subsidiaries taken as a whole; and no legal or
governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries
which is material to the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the
ordinary course of business, or which may adversely affect the
transactions contemplated by this Agreement; since such dates
and except as so disclosed, neither the Company nor any of its
subsidiaries has entered into any verbal or written agreement
or other transaction which is not in the ordinary course of
business or which could result in a material reduction in the
future net income of the Company and its subsidiaries taken as
a whole or incurred any material liability or obligation,
direct, contingent or indirect, made any material change in
its capital stock, made any material change in its short-term
debt or funded debt or repurchased or otherwise acquired any
of the Company's capital stock; and
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<PAGE> 22
the Company has not declared or paid any dividend, or made any
other distribution, upon its outstanding capital stock payable
to shareholders of record on a date prior to the First Closing
Date or Second Closing Date.
(6) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus and except as disclosed in or contemplated by the
Prospectus, the Company and its subsidiaries have not
sustained a material loss or damage by strike, fire, flood,
earthquake, windstorm, accident or other calamity (whether or
not insured).
(iv) On the First Closing Date or the Second Closing Date, as
the case may be, a certificate, dated such Closing Date and addressed
to you, signed by or on behalf of each of the Selling Shareholders to
the effect that the representations and warranties of such Selling
Shareholder in Sections 2 (with respect to each Selling Shareholder
except Frederick Judd) and 3 of this Agreement are true, complete and
correct, as if made at and as of the First Closing Date or the Second
Closing Date, as the case may be, and such Selling Shareholder has
complied with all the agreements and satisfied all the conditions on
his part to be performed or satisfied prior to the First Closing Date
or the Second Closing Date, as the case may be.
(v) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from each of Arthur
Andersen LLP and Coopers & Lybrand L.L.P., independent accountants, the
first one to be dated the day before the date of this Agreement, the
second one to be dated the First Closing Date and the third one (in the
event of a Second Closing) to be dated the Second Closing Date, in form
and substance reasonably satisfactory to you.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Fenwick & West LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you reasonably request. Any
certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Shareholders without liability on
the part of any Underwriter, the Company or the Selling Shareholders except for
the expenses to be paid or reimbursed by the Company and by the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 9
REIMBURSEMENT OF UNDERWRITERS' EXPENSES
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 8, or if the sale to the Underwriters of
the Common Shares at the First Closing is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholders to perform any agreement herein or to comply with any provision
hereof, the
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<PAGE> 23
Company agrees to reimburse you and the other Underwriters upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by you and them
in connection with the proposed purchase and the sale of the Common Shares,
including, but not limited to, reasonable fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 7 and Section 11 shall at
all times be effective and shall apply.
SECTION 10
EFFECTIVENESS OF REGISTRATION STATEMENT
You, the Company and the Selling Shareholders will use their best
efforts to cause the Registration Statement to become effective, to prevent the
issuance of any stop order suspending the effectiveness of the Registration
Statement and, if such stop order be issued, to obtain as soon as possible the
lifting thereof.
SECTION 11
INDEMNIFICATION
(a) The Company and each of the Selling Shareholders, severally and not
jointly, agree to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such Underwriter or such controlling person may become subject, under the Act,
the Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company and such Selling
Shareholder), insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof as contemplated below) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or such Selling
Shareholder, respectively, contained herein or any failure of the Company or
such Selling Shareholder to perform their respective obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling person
for any legal and other expenses as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that neither the Company nor
the Selling Shareholders will be liable in any such case to the extent that any
such loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto in reliance upon and in conformity with
the information furnished to the Company pursuant to Section 4 hereof; provided
further, however, that the indemnification obligations contained in this Section
11 shall not apply to any losses, claims, damages, liabilities or expenses with
respect to any Preliminary Prospectus and shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Common Shares which are the subject
thereof (or to the benefit of any person controlling such Underwriter) if at or
prior to the written confirmation of the sale of such
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<PAGE> 24
Common Shares, a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue statement
or omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or in the Prospectus as amended or supplemented).
In addition to its other obligations under this Section 11(a), the Company and
the Selling Shareholders agree that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or omission,
or any inaccuracy in the representations and warranties of the Company or such
Selling Shareholder, respectively, herein or failure to perform their respective
obligations hereunder, all as described in this Section 11(a), it will reimburse
each Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
or such Selling Shareholder;s obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to any
liability which the Company or the Selling Shareholders may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Shareholders and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages,
liabilities or expenses to which the Company, or any such director, officer,
Selling Shareholder or controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 4 hereof; and will reimburse the
Company, or any such director, officer, Selling Shareholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Shareholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. In addition to its other
obligations under this Section 11(b), each Underwriter severally agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 11(b)
which relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Shareholder) on a quarterly
basis for all reasonable
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<PAGE> 25
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding, not
withstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company (and, to
the extent applicable, each officer, director, controlling person or Selling
Shareholder) for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable, each officer, director,
controlling person or Selling Shareholder) shall promptly return it to the
Underwriters together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the Company (and, to the extent applicable, each officer, director, controlling
person or Selling Shareholder) within 30 days of a request for reimbursement,
shall bear interest at the Prime Rate from the date of such request. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section , notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
to the extent it is not prejudiced as a proximate result of such failure nor
will it relieve any indemnifying party from its contribution obligations or from
any obligations arising otherwise than under the indemnity agreement contained
in this Section. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with all other indemnifying parties
similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the reasonable fees and expenses of counsel shall
be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or
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<PAGE> 26
expenses referred to herein (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company, the Selling Shareholders and the
Underwriters from the offering of the Common Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company, the Selling
Shareholders and the Underwriters in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company, the Selling Shareholders and the Underwriters shall be deemed to be
in the same proportion, in the case of the Company and the Selling Shareholders
as the total price paid to the Company and to the Selling Shareholders,
respectively, for the Common Shares sold by them to the Underwriters (net of
underwriting commissions but before deducting expenses), and in the case of the
Underwriters as the underwriting commissions received by them bears to the total
of such amounts paid to the Company and to the Selling Shareholders and received
by the Underwriters as underwriting commissions. The relative fault of the
Company, the Selling Shareholders and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
or the inaccurate or the alleged inaccurate representation and/or warranty
relates to information supplied by the Company, the Selling Shareholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in subparagraph (c) of this Section 11, any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
subparagraph (c) of this Section 11 with respect to notice of commencement of
any action shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under subparagraph
(c) for purposes of indemnification. The Company, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 11 were determined solely by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 11, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 11 are several in proportion to their respective underwriting
commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a) and 11(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an
-26-
<PAGE> 27
arbitration would be conducted in Orange County, California and would be limited
to the operation of the interim reimbursement provisions contained in Sections
11(a) and 11(b) hereof and would not resolve the ultimate propriety or
enforceability of the obligation to reimburse expenses which is created by the
provisions of such Sections 11(a) and 11(b) hereof.
(f) Notwithstanding any other term or provision of this Agreement, the
liability of any Selling Shareholder for indemnification or other claim under
this Agreement shall not exceed the proceeds received by such Selling
Shareholder from the Underwriters.
SECTION 12
DEFAULT OF UNDERWRITERS
It shall be a condition to this Agreement and the obligation of the
Company and the Selling Shareholders to sell and deliver the Common Shares
hereunder, and of each Underwriter to purchase the Common Shares in the manner
as described herein, that, except as hereinafter in this paragraph provided,
each of the Underwriters shall purchase and pay for all the Common Shares agreed
to be purchased by such Underwriter hereunder upon tender to the Representatives
of all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Common Shares hereunder on
either the First or Second Closing Date and the aggregate number of Common
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase on such Closing Date does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated to purchase on such Closing Date,
the non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of Common
Shares with respect to which such default occurs is more than the above
percentage and arrangements satisfactory to the Representatives and the Company
for the purchase of such Common Shares by other persons are not made within 48
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Shareholders except for the expenses to be paid by the Company and the Selling
Shareholders pursuant to Section 7 hereof and except to the extent provided in
Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section . Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13
EFFECTIVE DATE
This Agreement shall become effective immediately as to Sections 7, 9,
11, 13, 14 and 16 and, as to all other provisions, (i) if at the time of
execution of this Agreement the Registration Statement has not become effective,
at 2:00 P.M., California time, on the first full business day following the
effectiveness of the Registration Statement, or (ii) if at the time of execution
of this Agreement the Registration Statement has been declared effective, at
2:00 P.M., California time, on
-27-
<PAGE> 28
the first full business day following the date of execution of this Agreement;
but this Agreement shall nevertheless become effective at such earlier time
after the Registration Statement becomes effective as you may determine on and
by notice to the Company or by release of any of the Common Shares for sale to
the public. For the purposes of this Section 13, the Common Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Common Shares or upon the release by you
of telegrams (i) advising Underwriters that the Common Shares are released for
public offering, or (ii) offering the Common Shares for sale to securities
dealers, whichever may occur first.
SECTION 14
TERMINATION
Without limiting the right to terminate this Agreement pursuant to any
other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Shareholders or by you by notice to the Company and the Selling
Shareholders at any time prior to the time this Agreement shall become effective
as to all its provisions, and any such termination shall be without liability on
the part of the Company or the Selling Shareholders to any Underwriter (except
for the expenses to be paid or reimbursed by the Company and the Selling
Shareholders pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof) or of any Underwriter to the Company or the
Selling Shareholders (except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the Nasdaq National Market, or trading in
securities generally shall have been suspended on either such exchange or the
Nasdaq National Market, or a general banking moratorium shall have been
established by federal, New York or California authorities, (ii) if an outbreak
of major hostilities or other national or international calamity or any
substantial change in political, financial or economic conditions shall have
occurred or shall have accelerated or escalated to such an extent, as, in the
judgment of the Representatives, to affect adversely the marketability of the
Common Shares, (iii) if any adverse event shall have occurred or shall exist
which makes untrue, incomplete or incorrect in any material respect any
statement or information contained in the Registration Statement or Prospectus
or which is not reflected in the Registration Statement or Prospectus but should
be reflected therein in order to make the statements or information contained
therein not misleading in any material respect, or (iv) if there shall be any
action, suit or proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the reasonable judgment
of the Representatives, may materially and adversely affect the Company's and
its subsidiaries' business or net income taken as a whole and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any termination
pursuant to this subsection (b) shall without liability on the part of any
Underwriter to the Company or the Selling Shareholders or on the part of the
Company or the Selling Shareholders to any Underwriter (except for expenses to
be paid or reimbursed by the Company and the Selling Shareholders pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof.
-28-
<PAGE> 29
SECTION 15
FAILURE OF THE SELLING SHAREHOLDERS TO SELL AND DELIVER
If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholders at the First Closing Date under the terms of this
Agreement, then the Underwriters may at their option, by written notice from you
to the Company and the Selling Shareholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 7, 9 and 11 hereof, the Company or the Selling Shareholders, or (ii)
purchase the shares which the Company and other Selling Shareholders have agreed
to sell and deliver in accordance with the terms hereof. In the event of a
failure by one or more of the Selling Shareholders to sell and deliver as
referred to in this Section , either you or the Company shall have the right to
postpone the Closing Date for a period not exceeding seven business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected.
SECTION 16
REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers, of the Selling Shareholders
and of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 17
NOTICES
All communications hereunder shall be in writing and, if sent to the
Representatives, shall be mailed, delivered or telegraphed and confirmed to you
at 600 Montgomery Street, San Francisco, California 94111, Attention: David
DeRuff, with a copy to Laird H. Simons III, Esq., Fenwick & West LLP, Two Palo
Alto Square, Palo Alto, California 94306; and if sent to the Company or the
Selling Shareholders shall be mailed, delivered or telegraphed and confirmed to
the Company at 2181 Dupont Drive, Irvine, California 92715, Attention: Frederick
Judd, with a copy to Jay Herron, Esq., O'Melveny & Myers, 610 Newport Centre
Drive, Suite 1700, Newport Beach, California 92660. The Company, the Selling
Shareholders or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 18
SUCCESSORS
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 12
hereof, and to the benefit of the officers and directors and controlling persons
referred to in Section 11, and in each case their respective successors,
personal representatives and assigns, and no other person will have any right or
obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
-29-
<PAGE> 30
SECTION 19
REPRESENTATION OF UNDERWRITERS
You will act as Representatives for the several Underwriters in
connection with all dealings hereunder, and any action under or in respect of
this Agreement taken by you jointly or by Montgomery Securities, as
Representatives, will be binding upon all the Underwriters.
SECTION 20
PARTIAL UNENFORCEABILITY
The invalidity or unenforceability of any Section , subsection,
paragraph or provision of this Agreement shall not affect the validity or
enforceability of any other Section , subsection, paragraph or provision hereof.
If any Section , subsection, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be
made such minor changes (and only such minor changes) as are necessary to make
it valid and enforceable.
SECTION 21
APPLICABLE LAW
This Agreement shale be governed by and construed in accordance with
the internal laws (and not the laws pertaining to conflicts of laws) of the
State of California.
SECTION 22
GENERAL
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each one of
which shall be an original, and all of which shall constitute one and the same
document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Shareholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Shareholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Shareholder pursuant to a validly
existing and binding Power of Attorney which authorizes such Attorney-in-fact to
take such action. Any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all the Selling Shareholders.
-30-
<PAGE> 31
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Shareholders and
the several Underwriters including you, all in accordance with its terms.
Very truly yours,
PROCOM TECHNOLOGY, INC.
By:____________________________
Name:__________________________
Title:_________________________
SELLING SHAREHOLDERS
_______________________________
Alex Razmjoo
_______________________________
Frank Alaghband
_______________________________
Alex Aydin
_______________________________
Nick Shahrestany
_______________________________
Frederick Judd
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
San Francisco, California as of the date first above written.
MONTGOMERY SECURITIES
DAIN BOSWORTH INC.
Acting as Representatives of the several Underwriters named in the attached
Schedule A.
By: Montgomery Securities
By:__________________________________
-31-
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM
COMMON SHARES
NAME OF UNDERWRITER TO BE PURCHASED
------------------- ---------------
<S> <C>
Montgomery Securities..........................
Dain Bosworth Inc..............................
---------
TOTAL..................................... 3,025,000
=========
</TABLE>
<PAGE> 33
SCHEDULE B
FIRM COMMON SHARES
<TABLE>
<CAPTION>
NUMBER OF FIRM
COMMON SHARES TO
BE SOLD BY SELLING
NAME OF SELLING SHAREHOLDER SHAREHOLDERS
- --------------------------- ------------------
<S> <C>
Alex Razmjoo......................................................................... 250,000
Frank Alaghband...................................................................... 250,000
Alex Aydin........................................................................... 250,000
Nick Shahrestany..................................................................... 250,000
Frederick Judd....................................................................... 25,000
---------
TOTAL....................................................................... 1,025,000
=========
</TABLE>
OPTIONAL COMMON SHARES
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF OPTIONAL
COMMON SHARES TO
BE SOLD BY SELLING
NAME OF SELLING SHAREHOLDER SHAREHOLDERS
- --------------------------- ------------------
<S> <C>
Alex Razmjoo........................................................................ 113,440
Frank Alaghband..................................................................... 113,440
Alex Aydin.......................................................................... 113,430
Nick Shahrestany.................................................................... 113,440
-------
Frederick Judd...................................................................... --
TOTAL...................................................................... 453,750
=======
</TABLE>
<PAGE> 1
EXHIBIT 10.9
GFC
LOAN AND SECURITY AGREEMENT
BORROWER: PROCOM TECHNOLOGY, INC.
ADDRESS: 2181 DUPONT DRIVE
IRVINE, CALIFORNIA 92715
DATE: NOVEMBER 18, 1994
THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated the date set forth above,
is entered into by and between the borrower named above (jointly and severally,
the "Borrower"), whose address is set forth above and Greyhound Financial
Corporation ("GFC"), whose address is 201 North Figueroa Street, Suite 900, Los
Angeles, California 90012.
1. LOANS
1.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, GFC may, upon Borrower's request, make advances to
Borrower from time to time in an aggregate outstanding principal amount not to
exceed the Total Facility amount (the "Total Facility") set forth on the
schedule hereto (the "Schedule"), subject to deduction of reserves for accrued
interest and such other reserves as GFC reasonably deems proper from time to
time, and less amounts GFC may be obligated to pay in the future on behalf of
Borrower. GFC shall notify Borrower with reasonable promptness of the
establishment any of such reserves. The Schedule is an integral part of this
Agreement and all references to "herein", "herewith" and words of similar
import shall for all purposes be deemed to include the Schedule.
1.2 Loans. Advances under the Total Facility ("Loans") shall be comprised of
the amounts shown on the Schedule.
1.3 Overlines. If at any time or for any reason (i) the outstanding amount of
advances made pursuant hereto exceeds any of the dollar or percentage
limitations contained in the Schedule or (ii) the outstanding amount of
advances under the Floorplan Credit Line exceeds the amount of Floorplanned
Inventory plus the unused amount of the Revolving Credit Line referred to in
the Schedule (any such excess, an "Overline"), then Borrower shall, upon GFC's
demand, immediately pay to GFC, in cash, the full amount of such Overline.
Without limiting Borrower's obligation to repay to GFC on demand the amount of
any Overline, Borrower agrees to pay GFC interest on the outstanding principal
amount of any Overline, on demand, at the rate set forth on the Schedule.
1.4. Floorplan Credit Line. At the request of Borrower and as part of the
Total Facility, GFC may, in its sole discretion, make Floorplan Loans to or for
the account of Borrower for the purpose of financing Qualified Inventory
proposed by Borrower to be financed pursuant to this Section 1.4 (the
"Floorplan Credit Line"). At no time shall the sum of Borrower's Obligations
to GFC in respect of the Floorplan Credit Line exceed the amount specified in
the Schedule. Upon receipt by GFC of an invoice for Floorplanned Inventory
from Borrower or the manufacturer of such Floorplanned Inventory, which invoice
is acceptable to GFC in its discretion reasonably exercised, GFC shall, if it
elects to finance such Floorplanned Inventory, make a Floorplan Loan to
Borrower in an amount not to exceed (subject to the other limitations set forth
in this Agreement) the cost of such Floorplanned Inventory, including freight.
GFC may, in its discretion reasonably exercised, refuse to make a Floorplan Loan
<PAGE> 2
against any invoice. If GFC elects to make a Floorplan Loan, GFC may disburse
the proceeds of such Floorplan Loan, less the amount of any discount agreed to
between GFC and the manufacturer of the Floorplanned Inventory, directly to such
manufacturer on Borrower's behalf in accordance with the payment arrangement
then in effect between GFC and such manufacturer. GFC will charge Borrower's
loan account for the full amount of the Floorplan Loan without regard to any
discount that GFC may be entitled to receive pursuant to any payment arrangement
referred to in the immediately preceding sentence. The Floorplan Credit Line is
an uncommitted line of credit, may be terminated in whole or in part by GFC, in
its discretion reasonably exercised, at any time and, upon such termination, no
further Floorplan Loans shall be available from GFC.
1.5 Loan Account. All advances made hereunder shall be added to and deemed
part of the Obligations when made. GFC may from time to time charge all
Obligations of Borrower to Borrower's loan account with GFC.
2. CONDITIONS PRECEDENT.
2.1 Initial Advance. The obligation of GFC to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction of GFC and its
counsel, of each of the following conditions and any additional conditions
specified in the Schedule on or prior to the date set forth on the Schedule
(the date of fulfillment of all such conditions, the "Closing Date"):
(a) Loan Documents. GFC shall have received each of the following Loan
Documents: (i) Guaranties executed by each of the Guarantors; (ii) such security
agreements, intellectual property assignments and deeds of trust as GFC may
require with respect to this Agreement and any Guaranties, executed by each of
the parties thereto and, if applicable, duly acknowledged for recording or
filing in the appropriate governmental offices; (iii) such Blocked Account or
Dominion Account agreements as it shall determine; and (iv) such other
documents, instruments and agreements in connection herewith as GFC shall
require, executed, certified and/or acknowledged by such parties as GFC shall
designate;
(b) Terminations by Existing Lender. Borrower's existing lender(s) shall have
executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the assets of
Borrower or a subordination agreement in form and substance satisfactory to GFC
in its sole discretion;
(c) Charter Documents. GFC shall have received copies of Borrower's By-laws
and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(d) Good Standing. GFC shall have received a certificate of corporate status
with respect to Borrower, dated within ten (10) days of the Closing Date, by
the Secretary of State of the state of incorporation of Borrower; which
certificate shall indicate that Borrower is in good standing in such state;
(e) Foreign Qualification. GFC shall have received certificates of corporate
status with respect to Borrower and each other Loan Party, each dated within
ten (10) days of the Closing Date, issued by the Secretary of State of each
state in which such party's failure to be duly qualified or licensed would have
a material adverse effect on its financial condition or assets, indicating that
such party is in good standing;
(f) Authorizing Resolutions and Incumbency. GFC shall have received a
certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors authorizing the execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers;
(g) Property Insurance. GFC shall have received the insurance certificates
and certified copies of policies required by Section 4.4 hereof, along with a
BFU438 Lender's Loss Payable Endorsement naming GFC as sole loss payee, all in
form and substance satisfactory to GFC and its counsel;
(h) Title Insurance. GFC shall have received binding commitments to issue
such title insurance with respect to Collateral or security for Guaranties
which is comprised of real property as it shall determine;
(i) Searches; Certificates of Title. GFC shall have received searches
reflecting the filing of its financing statements and fixture filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been
2
<PAGE> 3
duly executed in a manner sufficient to perfect all of the security interests
granted to GFC;
(j) Intentionally Deleted.
(k) Fees. Borrower shall have paid all fees payable by it on the closing date
pursuant to this agreement;
(l) Opinion of Counsel. GFC shall have received an opinion of Borrower's
counsel covering such matters as GFC shall determine in its sole discretion;
(m) Officer Certificate. GFC shall have received a certificate of the
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(n) Solvency Certificate. If requested by GFC, a signed certificate of the
Borrower's duly elected Chief Financial Officer concerning the solvency and
financial condition of Borrower, on GFC's standard form;
(o) Blocked Account. The Blocked Account referred to in Section 7.3 hereof
shall have been established to the satisfaction of GFC in its sole discretion;
(p) Intentionally Omitted.
(q) Environmental Certificate. GFC shall have received an Environmental
Certificate from Borrower, in form and substance satisfactory to GFC in its
discretion, with respect to all locations of Collateral; and
(r) Other Matters. All other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed or recorded and shall be in form and substance satisfactory to GFC and
its counsel.
2.2 Subsequent Advances. The obligation of GFC to make any advance hereunder
(including the initial advance) shall be subject to the further conditions
precedent that, on and as of the date of such advance:
(a) the representations and warranties of Borrower set forth in this Agreement
shall be accurate, before and after giving effect to such advance and to the
application of any proceeds thereof;
(b) no Event of Default and no event which, with notice or passage of time or
both, would constitute an Event of Default has occurred and is continuing, or
would result from such advance or from the application of any proceeds thereof;
(c) no material adverse change has occurred in the Borrower's business,
operations, financial condition, or assets or in the prospect of repayment of
the Obligations; and
(d) GFC shall have received such other approvals, opinions or documents as GFC
shall reasonably request.
3. INTEREST RATE AND OTHER CHARGES.
3.1 Interest; Fees. Borrower shall pay GFC interest on the daily outstanding
balance of Borrower's loan account at the per annum rate set forth on the
Schedule. Borrower shall also pay GFC the fees set forth on the Schedule.
3.2 Default Interest Rate. Upon the occurrence and during the continuation of
an Event of Default, Borrower shall pay GFC interest on the daily outstanding
balance of Borrower's loan account at a rate per annum which is two percent
(2%) in excess of the rate which would otherwise be applicable thereto pursuant
to the Schedule. In addition, in the event that Borrower fails to make any
payment to GFC when due with respect to the Floorplan Credit Line, Borrower
shall pay GFC interest on the daily amount past due at a rate per annum which
is six percent (6%) in excess of the Base Rate referred to in the Schedule.
All such default interest shall be payable upon demand of GFC.
3.3 Examination Fees. Borrower agrees to pay to GFC an examination fee in the
amount set forth on the Schedule in connection with each audit or examination
of Borrower performed by GFC prior to or after the date hereof. Without
limiting the generality of the foregoing, Borrower shall pay to GFC an initial
examination fee in an amount equal to the amount set forth on the Schedule.
Such initial examination fee shall be deemed fully earned at the time of
payment and due and payable upon the closing of this transaction, and shall be
deducted from any good faith deposit paid by Borrower to GFC prior to the date
of this Agreement.
3.4 Excess Interest. The contracted for rate of interest of the loan
contemplated hereby, without limitation, shall consist of the following: (i)
the interest rate set
3
<PAGE> 4
forth on the Schedule, calculated and applied to the principal balance of the
Obligations in accordance with the provisions of this Agreement; (ii) interest
after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective
contracted for rate of interest which is the sum of the above-referenced
elements. The examination fees, attorneys fees, expert witness fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees,
Termination Fees, Minimum Interest Charges, other charges, goods, things in
action or any other sums or things of value paid or payable by Borrower
(collectively, the "Additional Sums"), whether pursuant to this Agreement or
any other documents or instruments in any way pertaining to this lending
transaction, or otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to this lending
transaction, for the purpose of any applicable law that may limit the maximum
amount of interest to be charged with respect to this lending transaction,
shall be payable by Borrower as, and shall be deemed to be, additional interest
and for such purposes only, the agreed upon and "contracted for rate of
interest" of this lending transaction shall be deemed to be increased by the
rate of interest resulting from the inclusion of the Additional Sums.
It is the intent of the parties to comply with the usury laws of the
State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other person or entity now or
hereafter liable for the payment of the Obligations shall be obligated to pay
the amount of such interest to the extent that it is in excess of the Maximum
Interest Rate, (3) any such excess which may have been collected shall be
either applied as a credit against the then unpaid principal amount of the
Obligations or refunded to Borrower, at GFC's option, and (4) the effective
rate of interest shall be automatically reduced to the Maximum Interest Rate.
It is further agreed, without limiting the generality of the foregoing, that to
the extent permitted by the Applicable Usury Law; (x) all calculations of
interest which are made for the purpose of determining whether such rate would
exceed the Maximum Interest Rate shall be made by amortizing, prorating,
allocating and spreading during the period of the full stated term of the loan
evidenced hereby, all interest at any time contracted for, charged or received
from Borrower or otherwise in connection with such loan; and (y) in the event
that the effective rate of interest on the loan should at any time exceed the
Maximum Interest Rate, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law shall
be paid to GFC from time to time, if and when the effective interest rate on
the loan otherwise falls below the Maximum Interest Rate, to the extent that
interest paid to the date of calculation does not exceed the Maximum Interest
Rate, until the entire amount of interest which would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law has
been paid in full. Borrower further agrees that should the Maximum Interest
Rate be increased at any time hereafter because of a change in the Applicable
Usury Law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change in the
Applicable Usury Law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
4. COLLATERAL.
4.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to GFC a
security interest in all of Borrower's now owned or hereafter acquired or
arising Inventory, Equipment, Receivables, and General Intangibles, including,
without limitation, all of Borrower's Deposit Accounts, money, any and all
property now or at any time hereafter in GFC's possession (including claims and
credit balances), and
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all proceeds (including proceeds of any insurance policies, proceeds of
proceeds and claims against third parties), all products and all books and
records related to any of the foregoing (all of the foregoing, together with
all other property in which GFC may be granted a lien or security interest, is
referred to herein, collectively, as the "Collateral").
4.2 Perfection and Protection of Security Interest. Borrower shall, at its
expense, take all actions requested by GFC at any time to perfect, maintain,
protect and enforce GFC's security interest and other rights in the Collateral
and the priority thereof from time to time, including, without limitation, (i)
executing and filing financing or continuation statements and amendments
thereof and executing and delivering such documents and titles in connection
with motor vehicles as GFC shall require, all in form and substance
satisfactory to GFC, (ii) maintaining a perpetual inventory and complete and
accurate stock records, (iii) delivering to GFC warehouse receipts covering any
portion of the Collateral located in warehouses and for which warehouse
receipts are issued, and when requested transferring Inventory to warehouses
designated by GFC, (iv) placing notations on Borrower's books of account to
disclose GFC's security interest therein, and (v) when requested, delivering to
GFC all letters of credit on which Borrower is named beneficiary. GFC may
file, without Borrower's signature, one or more financing statements disclosing
GFC's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral
is at any time in the possession or control of any warehouseman, bailee or any
of Borrower's agents or processors, Borrower shall notify such Person of GFC's
security interest in such Collateral and, upon GFC's request, instruct them to
hold all such Collateral for GFC's account subject to GFC's instructions. From
time to time, Borrower shall, upon GFC's request, execute and deliver
confirmatory written instruments pledging the Collateral to GFC, but Borrower's
failure to do so shall not affect or limit GFC's security interest or other
rights in and to the Collateral. Until the Obligations have been fully
satisfied and GFC's obligation to make further advances hereunder has
terminated, GFC's security interest in the Collateral shall continue in full
force and effect.
4.3 Preservation of Collateral. GFC may, in its sole discretion, at any time
discharge any lien or encumbrance on the Collateral or bond the same, pay any
insurance, maintain guards, pay any service bureau, obtain any record or take
any other action to preserve the Collateral and charge the cost thereof to
Borrower's loan account as an Obligation.
4.4 Insurance. Borrower shall insure the Collateral against loss or damage
by fire, theft, burglary, pilferage, loss in transit and such other hazards as
GFC shall specify, in amounts, form, under policies and by insurers acceptable
to GFC, with a rating by A.M. Best Company, Inc., of at least AA. Each policy
shall include a provision requiring thirty (30) days' prior written notice to
GFC of any cancellation or substantial modification and shall contain a
lender's loss payable indorsement in favor of GFC in form acceptable to GFC.
All premiums shall be paid by Borrower as and when due and accurate and
complete copies of the policies shall be delivered by Borrower to GFC. If
Borrower fails to do so, GFC may (but shall not be required to) procure such
insurance at Borrower's expense.
5. EXAMINATION OF RECORDS; FINANCIAL REPORTING.
5.1 Examinations. GFC shall at all reasonable times have full access to and
the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents,
instruments and agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Borrower shall deliver to GFC any instrument
necessary for GFC to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon GFC's
request, by copies of related purchase orders and invoices. GFC may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower
to deliver such books and records or copies to GFC. GFC may, without expense
to GFC, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing GFC's security interest.
5.2 Reporting Requirements. Borrower shall furnish GFC, upon request, such
information and statements as GFC shall request from time to time regarding
Borrower's business affairs, financial condition and the results of its
operations. Without limiting the generality of the foregoing, Borrower shall
provide GFC with (i) copies of sales invoices, customer statements and credit
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memoranda issued, remittance advices and reports and copies of deposit slips,
daily; (ii) copies of shipping and delivery documents, upon request; (iii) on
or prior to the date set forth on the Schedule, monthly agings and
reconciliations of Receivables, payables reports, inventory reports and
unaudited financial statements (certified by an officer of Borrower acceptable
to GFC) with respect to the prior month prepared on a basis consistent with
such statements prepared in prior months and otherwise in accordance with
generally accepted accounting principles, consistently applied; (iv) audited
annual consolidated and consolidating financial statements, prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the most recent Prepared Financials provided to GFC by
Borrower, including balance sheets, income and cash flow statements,
accompanied by the unqualified report thereon of independent certified public
accountants acceptable to GFC, as soon as available, and in any event, within
ninety (90) days after the end of each of Borrower's fiscal years; and (v) such
certificates relating to the foregoing as GFC may request, including, without
limitation, a monthly certificate from the president and the chief financial
officer of Borrower showing Borrower's compliance with each of the financial
covenants set forth in this Agreement, and stating whether any Event of Default
has occurred or event which, with giving of notice or the passage of time, or
both, would constitute an Event of Default, and if so, the steps being taken to
prevent or cure such Event of Default.
5.3 Guarantor's Financial Statements and Tax Returns. Borrower shall cause
each of the Guarantors to deliver to GFC such Guarantor's annual financial
statement (in form acceptable to GFC) and a copy of such Guarantor's federal
income tax return with respect to the corresponding year, in each case on the
date when such tax return is due or, if earlier, on the date when available.
6. COLLATERAL REPORTING; INVENTORY
6.1 Invoices. Borrower shall not re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify GFC in writing.
6.2 Instruments. In the event any Receivable is or becomes evidenced by a
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to GFC appropriately
endorsed to GFC and, regardless of the form of any presentment, demand, notice
of dishonor, protest or notice of protest with respect thereto, Borrower shall,
to the extent of any Obligations then existing, remain liable thereon until
such instrument is paid in full.
6.3 Physical Inventory. Borrower shall conduct a physical count of the
Inventory at such intervals as GFC requests and promptly supply GFC with a copy
of such accounts accompanied by a report of the value (calculated at the lower
of cost or market value on a first in, first out basis) of the Inventory and
such additional information with respect to the Inventory as GFC may request
from time to time.
6.4 Returns. For so long as no Event of Default has occurred and is continuing
and subject to the provisions of Section 9.2, if any account debtor returns any
Inventory to Borrower in the ordinary course of its business, Borrower shall
promptly determine the reason for such return and promptly issue a credit
memorandum to the account debtor (sending a listing thereof to GFC and, in the
case of credit memorandum in excess of $5,000, copies of such credit memorandum)
in the appropriate amount. In the event any attempted return for credit occurs
after the occurrence of any Event of Default, Borrower shall (i) hold such
returned Inventory in trust for GFC, (ii) segregate all such returned Inventory
from all of Borrower's other property, (iii) conspicuously label such returned
Inventory as GFC's property, and (iv) immediately notify GFC of the return for
credit of any Inventory, specifying the reason for such return, the location and
condition of such returned Inventory, and on GFC's request deliver such returned
Inventory to GFC. Borrower shall not consign any Inventory without the prior
written consent of GFC.
7. PRINCIPAL PAYMENTS; PROCEEDS OF COLLATERAL.
7.1 Principal Payments. Except where evidenced by notes or other instruments
issued or made by Borrower to GFC specifically containing payment provisions
which are in conflict with this Section 7.1 (in which event the conflicting
provisions of said notes or other instruments shall govern and control), that
portion of the Obligations consisting of principal payable on account of
Receivable Loans, Inventory Loans and Floorplan Loans
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shall be payable by Borrower to GFC immediately upon the earliest of (i) the
receipt by GFC or Borrower of any proceeds of any of the Collateral, to the
extent of said proceeds, (ii) the occurrence of an Event of Default in
consequence of which GFC elects to accelerate the maturity and payment of such
loans, (iii) any termination of this Agreement pursuant to Section 16 hereof
and (iv) in the case of any Floorplan Loan, the date that is the number of days
set forth in Exhibit A to this Agreement after the invoice date for the
Floorplanned Inventory purchased with the proceeds of such Floorplan Loan,
which number of days are specified opposite the name of the manufacturer of
such Floorplanned Inventory in such Exhibit A (and GFC shall have the right, in
its sole discretion, to amend or supplement such Exhibit A in whole or in part
by delivery from time to time of a new such Exhibit A to Borrower); provided,
however, that any Overline shall be payable on demand pursuant to the
provisions of Section 1.3 hereof.
7.2 Collections. To the extent Borrower receives any collections of
Receivables, it shall receive all payments as trustee of GFC and immediately
deliver all payments to GFC in their original form as set forth below, duly
endorsed in blank. GFC or its designee may, at any time in its reasonable
discretion and upon the occurrence of an Event of Default, notify account
debtors that the Receivables have been assigned to GFC and of GFC's security
interest therein, and may collect the Receivables directly and charge the
collection costs and expenses to Borrower's loan account. Borrower agrees that,
in computing the charges under this Agreement, all items of payment shall be
deemed applied by GFC on account of the Obligations upon receipt of GFC of good
funds which have been finally credited to GFC's account, whether such funds are
received directly from Borrower or from the Blocked Account bank or the
Dominion Account bank, pursuant to Section 7.3 hereof. GFC is not, however,
required to credit Borrower's account for the amount of any item of payment
which is unsatisfactory to GFC in its discretion reasonably exercised and GFC
may charge Borrower's loan account for the amount of any item of payment which
is returned to GFC unpaid.
7.3 Establishment of a Lockbox Account or Dominion Account. All proceeds of
Collateral shall, at the direction of GFC, be deposited by Borrower into a
lockbox account, or such other "blocked account" as GFC may require (each, a
"Blocked Account") pursuant to an arrangement with such bank as may be selected
by Borrower and be acceptable to GFC. Borrower shall issue to any such bank an
irrevocable letter of instruction directing said bank to transfer such funds so
deposited to GFC, either to any account maintained by GFC at said bank or by
wire transfer to appropriate account(s) of GFC. All funds deposited in a
Blocked Account shall immediately become the sole property of GFC and Borrower
shall obtain the agreement by such bank to waive any offset rights against the
funds so deposited. GFC assumes no responsibility for any Blocked Account
arrangement, including without limitation, any claim of accord and satisfaction
or release with respect to deposits accepted by any bank thereunder.
Alternatively, GFC may establish depository accounts in the name of GFC at a
bank or banks for the deposit of such funds (each, a "Dominion Account") and
Borrower shall deposit all proceeds of Receivables and all cash proceeds of any
sale of Inventory or, to the extent permitted herein, Equipment or cause same
to be deposited, in kind, in such Dominion Accounts of GFC in lieu of
depositing same to Blocked Accounts.
7.4 Payments Without Deductions. Borrower shall pay principal, interest, and
all other amounts payable hereunder, or under any related agreement, without
any deduction whatsoever, including, but not limited to, any deduction for any
setoff or counterclaim.
7.5 Collection Days Upon Repayment. In the event Borrower repays the
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan upon GFC's
receipt thereof.
7.6 Monthly Accounting. GFC shall provide Borrower monthly with an account of
advances, charges, expenses and payments made pursuant to this Agreement. Such
account shall be deemed correct, accurate and binding on Borrower and an account
stated (except for reverses and reapplications of payments made and corrections
of errors discovered by GFC), unless Borrower notifies GFC in writing to the
contrary within ninety (90) days after each account is rendered, describing the
nature of any alleged errors or admissions; and notwithstanding such 90-day
period, in the event GFC at any time determines that it has mistakenly charged
Borrower's account for an amount due to GFC from a third party, or has
mistakenly transferred any of Borrower's property to a third party, then GFC
shall make a commercially reasonable attempt to recover such amounts or
property, as applicable from such third party, and shall credit Borrower's
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account or return such property, as applicable, to the extent any recovery is
realized.
8. POWER OF ATTORNEY.
Borrower appoints GFC and its designees as Borrower's attorney, with the power
to endorse Borrower's name on any checks, notes, acceptances, money orders or
other forms of payment or security that come into GFC's possession; to sign
Borrower's name on any invoice or bill of lading relating to any Receivable, on
drafts against customers, on assignments of Receivables, on notices of
assignment, financing statements and other public records, on verifications of
accounts and on notices to customers or account debtors; to send requests for
verification of Receivables to customers or account debtors. After the
occurrence of any Event of Default GFC shall have the following additional
powers of attorney: to notify the post office authorities to change the address
for delivery of Borrower's mail to an address designated by GFC; to open and
dispose of all mail addressed to Borrower; and to do all other things GFC deems
reasonably necessary or desirable to carry out the terms of this Agreement.
Borrower hereby ratifies and approves all acts of such attorney. Neither GFC
nor any of its designees shall be liable for any acts or omissions nor for any
error of judgment or mistake of fact or law while acting as Borrower's
attorney, except for GFC's gross negligence or willful misconduct. This power,
being coupled with an interest, is irrevocable until the Obligations have been
fully satisfied and GFC's obligation to provide loans hereunder shall have
terminated.
9. RECEIVABLES.
9.1 Eligibility. Borrower represents and warrants that each Receivable covers
and shall cover a bona fide sale or lease and delivery by it of goods or the
rendition by it of services in the ordinary course of its business, and shall
be for a liquidated amount and GFC's security interest shall not be subject to
any offset, deduction, counterclaim, rights of return or cancellation, lien or
other condition. If any representation or warranty herein is breached as to
any Receivable or any Receivable ceases to be an Eligible Receivable for any
reason other than payment thereof, then GFC may, in addition to its other
rights hereunder, designated any and all Receivables owing by that account
debtor as not Eligible Receivables; provided, that GFC shall in any such event
retain its security interest in all Receivables, whether or not Eligible
Receivables, until the Obligations have been fully satisfied and GFC's
obligation to provide loans hereunder has terminated.
9.2 Disputes. Borrower shall notify GFC promptly of all disputes or claims
and settle or adjust such disputes or claims at no expense to GFC, but no
discount, credit or allowance shall be granted to any account debtor and no
returns of merchandise shall be accepted by Borrower without GFC's consent,
except for discounts, credits and allowances made or given in the ordinary
course of Borrower's business, provided if no Event of Default has occurred and
is continuing, Borrower may grant adjustments to the ineligible Receivables.
GFC may, at any time after the occurrence of an Event of Default, settle or
adjust disputes or claims directly with account debtors for amounts and upon
terms which GFC considers advisable in its reasonable credit judgment and, in
all cases, GFC shall credit Borrower's loan account with only the net amounts
received by GFC in payment of any Receivables.
10. EQUIPMENT.
Borrower shall keep and maintain the Equipment in good operating condition and
repair and make all necessary replacements thereto to maintain and preserve the
value and operating efficiency thereof at all times consistent with Borrower's
past practice, ordinary wear and tear excepted. Borrower shall not permit any
item of Equipment to become a fixture (other than a trade fixture) to real
estate or an accession to other property.
11. OTHER LIENS; NO DISPOSITION OF COLLATERAL.
Borrower represents, warrants and covenants that (a) all Collateral is and
shall continue to be owned by it free and clear of all liens, claims and
encumbrances whatsoever (except for GFC's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by GFC in its sole discretion from time to time in writing), and (b) Borrower
shall not, without GFC's prior written approval, sell, encumber or dispose of
or permit the sale, encumbrance or disposal of any Collateral or any interest
of Borrower therein, except for the sale of Inventory in the ordinary course of
Borrower's business. The proceeds of any such sales shall be remitted to GFC
pursuant to this Agreement for application to the Obligations.
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12. GENERAL REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
12.1 Due Organization. It is a corporation duly organized, validly existing
and in good standing under the laws of the State set forth on the Schedule, is
qualified and authorized to do business and is in good standing in all states
in which such qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite power and
authority to conduct its business as presently conducted, to own its property
and to execute and deliver each of the Loan Documents to which it is a party
and perform all of its Obligations thereunder;
12.2 Other Names. Borrower has not, during the preceding five (5) years, been
known by or used any other corporate or fictitious name except as set forth on
the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any person
during such time;
12.3 Due Authorization. The execution, delivery and performance by Borrower
of the Loan Documents to which it is a party have been authorized by all
necessary corporate action and do not and shall not constitute a violation of
any applicable law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
12.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
party is the legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms;
12.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications
and trade names for the present and planned future conduct of its business
without any known conflict with the rights of others, and each is valid and has
been duly registered or filed with the appropriate governmental authorities;
12.6 Capital. Borrower has capital sufficient to conduct its business, is
able to pay its debts as they mature and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
12.7 Material Litigation. Borrower has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of GFC's interests therein;
12.8 Title: Security Interests of GFC. Borrower has good, indefeasible and
merchantable title to the Collateral and, upon the filing of UCC-1 Financing
Statements and the recording of any mortgages or deeds of trust with respect to
real property, in each case in the appropriate offices, this Agreement and such
documents shall create valid and perfected first priority liens in the
Collateral, subject only to Permitted Encumbrances;
12.9 Restrictive Agreement: Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to
any labor dispute. In addition, no labor contract is scheduled to expire
during the Initial Term of this Agreement, except as disclosed to GFC in
writing prior to the date hereof;
12.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
12.11 Consents. Borrower has obtained or caused to be obtained or issued any
required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
12.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
12.13 Financial Condition. The Prepared Financials fairly present Borrower's
financial condition and results of operations and those of such other Persons
described therein as of the date thereof; there are no material
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omissions from the Prepared Financials or other facts or circumstances not
reflected in the Prepared Financials; and there has been no material and
adverse change in such financial condition or operations since the date of the
initial Prepared Financials delivered to GFC hereunder;
12.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan.
No prohibited transaction or Reportable Event has occurred with respect to a
Plan. Neither Borrower nor any ERISA Affiliate has incurred any withdrawal
liability with respect to any Multiemployer Plan. Borrower and each ERISA
Affiliate have made all contributions required to be made by them to any Plan
or Multiemployer Plan when due. There is no accumulated funding deficiency in
any Plan, whether or not waived;
12.15 Taxes. Borrower has filed all tax returns and such other reports as it
is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
12.16 Locations. Borrower's chief executive office and the offices and
locations where it keeps the Collateral (except for Inventory in transit) are at
the locations set forth on the Schedule, except to the extent that such
locations may have been changed after notice to GFC in accordance with Section
13.5 below;
12.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no
present condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
12.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to GFC that there does not then exist any Event of Default and (ii) a
reaffirmation as of the date of said request of all of the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents.
13. AFFIRMATIVE COVENANTS.
Borrower covenants that, so long as any Obligation remains outstanding and this
Agreement is in effect, it shall:
13.1 Expenses. Promptly reimburse GFC for all reasonable costs, fees and
expenses incurred by GFC in connection with the negotiation, preparation,
execution, delivery, administration and enforcement of each of the Loan
Documents, including, but not limited to, the attorneys' and paralegals' fees
of in-house and outside counsel, expert witness fees, lien, title search and
insurance fees, appraisal fees, all charges and expenses incurred in connection
with any and all environmental reports and environmental remediation
activities, and all other costs, expenses, taxes and filing or recording fees
payable in connection with the transactions contemplated by this Agreement,
including without limitation all such costs, fees and expenses as GFC shall
incur or for which GFC shall become obligated in connection with (i) any
inspection or verification of the Collateral, (ii) any proceeding relating to
the Loan Documents or the Collateral, (iii) actions taken with respect to the
Collateral and GFC's security interest therein, including, without limitation,
the defense or prosecution of any action involving GFC and Borrower or any
third party, (iv) enforcement of any of GFC's rights and remedies with respect
to the Obligations or Collateral, and (v) consultation with GFC's attorneys and
participation in any workout, bankruptcy or other insolvency or other
proceeding involving any Loan Party or any Affiliate, whether or not suit is
filed. Borrower shall also pay all GFC's out-of-pocket charges in connection
with bank wire transfers, forwarding of loan proceeds, deposits of checks and
other items of payment, returned checks, establishment and maintenance of
lockboxes and other Blocked Accounts, and all other bank and administrative
matters, in accordance with GFC's schedule of bank and
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administrative fees and charges in effect from time to time;
13.2 Taxes. File all tax returns and pay or make adequate provision for the
payment of all taxes, assessments and other charges on or prior to the date
when due;
13.3 Notice of Litigation. Promptly notify GFC in writing of any litigation,
suit or administrative proceeding which may materially and adversely affect the
Collateral or Borrower's business, assets, operations, prospects or condition,
financial or otherwise, whether or not the claim is covered by insurance;
13.4 ERISA. Notify GFC in writing (i) promptly upon the occurrence of any
event described in Paragraph 4043 of ERISA, other than a termination, partial
termination or merger of a Plan or a transfer of a Plan's assets and (ii) prior
to any termination, partial termination or merger of a Plan or a transfer of a
Plan's assets;
13.5 Change in Location. Notify GFC in writing forty-five (45) days prior to
any change in the location of Borrower's chief executive office or the location
of any Collateral, or Borrower's opening or closing of any other place of
business;
13.6 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
13.7 Labor Disputes. Promptly notify GFC in writing of any labor dispute to
which Borrower is or may become subject and the expiration of any labor
contract to which Borrower is a party or bound;
13.8 Violations of Law. Promptly notify GFC in writing of any violation of
any law, statute, regulation or ordinance of any governmental entity, or of any
agency thereof, applicable to Borrower which may materially and adversely affect
the Collateral or Borrower's business, assets, prospects, operations or
condition, financial or otherwise;
13.9 Defaults. Notify GFC in writing within five (5) business days of
Borrower's default under any note, indenture, loan agreement, mortgage, lease
or other agreement to which Borrower is a party or by which Borrower is bound,
or of any other default under any Indebtedness of Borrower;
13.10 Capital Expenditures. Promptly notify GFC in writing of the making of
any Capital Expenditure materially affecting Borrower's business, assets,
prospects, operations or condition, financial or otherwise;
13.11 Books and Records. Keep adequate records and books of account with
respect to its business activities in which proper entries are made in
accordance with generally accepted accounting principles consistently applied,
reflecting all of its financial transactions;
13.12 Leases; Warehouse Agreements. Provide GFC with (i) copies of all
agreements between Borrower and any landlord or warehouseman which owns any
premises at which any Collateral may, from time to time, be located, and (ii)
without limiting the landlord and mortgage waivers to be provided pursuant to
Section 2.1(j) above, landlord and mortgage waivers in form acceptable to GFC
with respect to all locations where any Collateral is hereafter located;
13.13 Additional Documents. At GFC's request, promptly execute or cause to be
executed and delivered to GFC any and all documents, instruments or agreements
deemed necessary by GFC to facilitate the collection of the Obligations or the
Collateral or otherwise to give effect to or carry out the terms or intent of
this Agreement or any of the other Loan Documents. Without limiting the
generality of the foregoing, if any of the Receivables with a face value in
excess of $10,000.00 arises out of a contract with the United States of America
or any department, agency, subdivision or instrumentality thereof, Borrower
shall promptly notify GFC of such fact in writing and shall execute any
instruments and take any other action required or requested by GFC to comply
with the provisions of the Federal Assignment of Claims Act; and
13.14 Financial Covenants. Comply with the financial covenants set forth on
the Schedule.
13.15 Landlord Waiver. Within ninety days of the date hereof obtain a
landlord waiver from the lessor of the Irvine, California location, in form and
substance acceptable to GFC.
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14. NEGATIVE COVENANTS.
Without GFC's prior written consent, which consent GFC may withhold in its
sole discretion (provided that as to Sections 14.2 and 14.12, GFC may withhold
its consent in its discretion, reasonably exercised), so long as any Obligation
remains outstanding and this Agreement is in effect, Borrower shall not:
14.1 Mergers. Merge or consolidate with or acquire any other Person, or make
any other material change in its capital structure or in its business or
operations which might adversely affect the repayment of the Obligations:
14.2 Loans. Make advances, loans or extensions of credit to, or invest in,
any Person exceeding $250,000 in the aggregate for all Persons;
14.3 Dividends. Declare or pay cash dividends upon any of its stock or
distribute any of its property or redeem, retire, purchase or acquire directly
or indirectly any of its stock;
14.4 Adverse Transactions. Enter into any transaction which materially and
adversely affects the Collateral or its ability to repay the Obligations in
full as and when due;
14.5 Indebtedness of Others. Become directly or contingently liable for the
Indebtedness of any Person, except by endorsement of instruments for deposit;
14.6 Repurchase. Make a sale to any customer on a bill-and-hold, guaranteed
sale, sale and return, sale on approval, consignment, or any other repurchase
or return basis;
14.7 Name. Use any corporate or fictitious name other than its corporate name
as set forth in its Articles or Certificate of Incorporation on the date hereof
or as set forth on the Schedule;
14.8 Prepayment. Prepay any Indebtedness other than trade payables and other
than the Obligations;
14.9 Intentionally Omitted.
14.10 Compensation. Pay total compensation, including salaries, withdrawals,
fees, bonuses, commissions, drawing accounts and other payments, whether
directly or indirectly, in money or otherwise, during any fiscal year to all of
Borrower's executives, officers and directors (or any relative thereof) in an
amount in excess of the amount set forth on the Schedule;
14.11 Intentionally Omitted.
14.12 Affiliate Transactions. Except as set forth below or in Section 14.2
above, sell, transfer, distribute or pay any money or property to any
Affiliate, or invest in (by capital contribution or otherwise) or purchase or
repurchase any stock or Indebtedness, or any property, of any Affiliate, or
become liable on any guaranty of the indebtedness, dividends or other
obligations of any Affiliate. Notwithstanding the foregoing, Borrower may pay
compensation permitted by Section 14.10 to employees who are Affiliates and, if
no Event of Default has occurred, Borrower may engage in transactions with
Affiliates in the normal course of business, in amounts and upon terms which
are fully disclosed to GFC and which are not less favorable to Borrower than
would be obtainable in a comparable arm's length transaction with a Person who
is not an Affiliate;
14.13 Nature of Business. Enter into any new business or make any material
change in any of Borrower's business objectives, purposes or operations;
14.14 GFC's Name. Use the name of GFC in connection with any of Borrower's
business or activities, except in connection with internal business matters or
as required in dealings with governmental agencies and financial institutions
or with trade creditors of Borrower, solely for credit reference purposes; or
14.15 Margin Security. Own, purchase or acquire (or enter into any contract to
purchase or acquire) any "margin security" as defined by any requlation of the
Federal Reserve Board as now in effect or as the same may herafter be in effect.
15. ENVIRONMENTAL MATTERS.
15.1 Definitions. The following definitions apply to the provisions of this
Section 15:
(1) the term "Applicable Law" shall include, but shall not be limited to, each
statute named or referred to in this Section 15.1 and all rules and regulations
thereunder, and any other local, state and/or federal laws, rules, regulations
or ordinances, whether currently in existence or hereafter enacted, which
govern, to the extent applicable to the Property or to Borrower, (i) the
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existence, cleanup and/or remedy of contamination on real property; (ii) the
protection of the environment from soil, air or water pollution, or from
spilled, deposited or otherwise emplaced contamination; (iii) the emission or
discharge of hazardous substances into the environment; (iv) the control of
hazardous wastes; or (v) the use, generation, transport, treatment, removal or
recovery of Hazardous Substances;
(b) The term "Hazardous Substance" shall mean (i) any oil, flammable
substance, explosives, radioactive materials, hazardous wastes or substances,
toxic wastes or substances or any other wastes, materials or pollutants which
either pose a hazard to the Property or to persons on or about the Property or
cause the Property to be in violation of any Applicable Law; (ii) asbestos in
any form which is or could become friable, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing
levels of polychlorinated biphenyls, or radon gas; (iii) any chemical, material
or substance defined as or included in the definition of "hazardous
substances," "waste," "hazardous wastes," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," or "toxic substances" or words
of similar import under any Applicable Law, including, but not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 USC Sections 9601 et seq.; the Resource Conservation and
Recovery Act ("RCRA"), 42 USC Sections 6901 et seq.; the Hazardous Materials
Transportation Act, 49 USC Sections 1801 et seq.; the Federal Water Pollution
Control Act, 33 USC Sections 1251 et seq.; the California Hazardous Waste
Common Law ("HWCL"), Cal. Health & Safety Sections 25100 et seq.; the
Underground Storage of Hazardous Substances Act (Cal. Health & Safety Sections
25280 et seq.; Hazardous Substance Account Act ("HSAA"), Cal. Health & Safety
Code Sections 25300 et seq.; the Porter-Cologne Water Quality Control Act (the
"Porter-Cologne Act"), Cal. Water Code Sections 13000 et seq.; the Safe
Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65); Title 22 of
the California Code of Regulations, Division 4, Chapter 30; (iv) any other
chemical, material or substance, exposure to which is prohibited, limited or
regulated by any governmental authority which may or could pose a hazard to the
health or safety of the occupants of the Property or the owners and/or
occupants of property adjacent to or surrounding the Property, or any other
person coming upon the Property or adjacent property; and (v) any other
chemical, materials or substance which may or could pose a hazard to the
environment; and
(c) the term "Property" shall mean all real property, wherever located, in
which Borrower or any Affiliate of Borrower has any right, title or interest,
whether now existing or hereafter arising, and including, without limitation,
as owner, lessor or lessee.
15.2 Covenants and Representations.
(a) Borrower represents and warrants that, (x) to the best of its knowledge,
at no time have there been, and (y) during the period of Borrower's possession
of any interest in the Property, Borrower has not been involved in, any
activities on the Property involving, directly or indirectly, the use,
generation, treatment, storage or disposal of any Hazardous Substances except
in compliance with Applicable Law (i) under, on or in the land included in the
Property, whether contained in soil, tanks, sumps, ponds, lagoons, barrels,
cans or other containments, structures or equipment, (ii) incorporated in the
buildings, structures or improvements included in the Property, including any
building material containing asbestos, or (iii) used in connection with any
operations on or in the Property.
(b) Without limiting the generality of the foregoing and to the extent not
included within the scope of this Section 15.2, Borrower represents and
warrants that it is in full compliance with Applicable Law and has received no
notice from any person or any governmental agency or other entity of any
violation by Borrower or its Affiliates of any Applicable Law.
(c) Borrower shall be solely responsible for and agrees to indemnify GFC,
protect and defend GFC with counsel reasonably acceptable to GFC, and hold GFC
harmless from and against any claims, actions, administrative proceedings,
judgments, damages, punitive damages, penalties, fines, costs, liabilities
(including sums paid in settlements of claims), interest or losses, attorneys'
fees (including any fees and expenses incurred in enforcing this indemnity),
consultant fees, expert fees, and other out-of-pocket costs or expenses
actually incurred by GFC (collectively, the "Environmental Costs"), that may,
at any time or from time to time, arise directly or indirectly from or in
connection with any of the following for which Borrower or any of its
Affiliates is responsible or is currently aware of or with reasonable diligence
should be aware of; (i) the presence, suspected presence, release or suspected
release of any Hazardous Substance whether into the air, soil, surface
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water or groundwater of or at the Property, or any other violation of
Applicable Law, or (ii) any breach of the foregoing representations and
covenants; except to the extent any of the foregoing result from the actions of
GFC, its employees, agents and representatives. All reasonable Environmental
Costs incurred or advanced by GFC shall be deemed to be made by GFC in good
faith and shall constitute Obligations hereunder.
16. TERM; TERMINATION.
16.1 Term. The initial term of this Agreement shall be as set forth on the
Schedule (the "Initial Term") and shall be automatically renewed for successive
periods of one (1) year (each, a "Renewal Term"), unless earlier terminated as
provided herein.
16.2 Prior Notice. Each party shall have the right to terminate this
Agreement at the end of the Initial Term or at the end of any Renewal Term by
giving the other party written notice not less than sixty (60) days prior to
the effective date of such termination, by registered or certified mail.
16.3 Payment in Full. Upon the effective date of termination, the Obligations
shall become immediately due and payable in full in cash.
16.4 Early Termination; Termination Fee. In addition to the procedure set
forth in Section 16.2, Borrower may terminate this Agreement at any time but
only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by GFC upon the occurrence of an Event of Default, the, and in
any such event, Borrower shall pay to GFC upon the effective date of such
termination a fee (the "Termination Fee") in an amount equal to the amount
shown on the Schedule.
17. DEFAULT.
17.1 Events of Default. Anyone or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the Obligations
at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform, keep, or
observe any term, provision, condition, covenant or agreement contained in any
Loan Document to which Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the value or
priority of GFC's security interest in the Collateral is materially impaired;
(e) Any material portion of Borrower's assets is seized, attached, subjected
to a writ or distress warrant, is levied upon or comes into the possession of
any judicial officer and not released within 5 days thereafter;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation
of such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by Borrower, or
any such proceeding is commenced against Borrower and remains undischarged or
unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment in excess of $25,000 is filed of
record with respect to any of Borrower's assets (subject to GFC's right to
create reserves for amount below the foregoing);
(i) Any judgments are entered against Borrower in an aggregate amount
exceeding $50,000 (subject to GFC's right to create reserves for amounts below
the foregoing);
(j) Any default shall occur under any material agreement between Borrower and
any third party including, without limitation, any default which would result
in a right by such third party to accelerate the maturity of any material
Indebtedness of Borrower to such third party;
(k) Any representation or warranty made or deemed to be made by Borrower, any
Affiliate or any other Loan Party in any Loan Document or any other statement,
document or report made or delivered to GFC in connection therewith shall prove
to have been misleading in any material respect;
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(1) If more than one Guarantor dies, or if any Guarantor terminates or
attempts to terminate its Guaranty or any security therefor or becomes subject
to any bankruptcy or other insolvency proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with respect to
a Plan which could have a material adverse effect on the financial condition of
Borrower; any lien upon the assets of Borrower in connection with any Plan
shall arise; Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its ERISA Affiliates
may be required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived; or
(n) Any transfer of more than ten percent (10%) of the issued and outstanding
shares of common stock or other evidence of ownership of Borrower.
17.2 Remedies. Upon the occurrence of an Event of Default, GFC may, at its
option and in its sole discretion and in addition to all of its other rights
under the Loan Documents, terminate this Agreement and declare all of the
Obligations to be immediately payable in full. GFC shall also have all of its
rights and remedies under applicable law, including, without limitation, the
default rights and remedies of a secured party under the Code. Further, GFC
may, at any time, take possession of the Collateral and keep it on Borrower's
premises, at no cost to GFC, or remove any part of it to such other place(s) as
GFC may desire, or Borrower shall, upon GFC's demand, at Borrower's sole cost,
assemble the Collateral and make it available to GFC at a place reasonably
convenient to GFC. GFC may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as GFC deems advisable, at GFC's discretion, and may, if GFC deems it
reasonable, postpone or adjourn any sale of the Collateral by an announcement
at the time and place of sale or of such postponed or adjourned sale without
giving a new notice of sale. Borrower agrees that GFC has no obligation to
preserve rights to the Collateral or marshall any Collateral for the benefit of
any Person. GFC is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, name, trade secrets, trade
names, trademarks and advertising matter, or any similar property, in
completing production, advertising or selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to GFC's
benefit. Any requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Borrower at its address set forth in the heading to
this Agreement at least five (5) days before sale or other disposition. The
proceeds of sale shall be applied, first, to all attorneys fees and other
expenses of sale, and second, to the Obligations in such order as GFC shall
elect, in its sole discretion. GFC shall promptly return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
17.3 Standards for Determining Commercial Reasonableness. Borrower and GFC
agree that the following conduct by GFC with respect to any disposition of
Collateral shall conclusively be deemed commercially reasonable (but other
conduct by GFC, including, but not limited to, GFC's use in its sole discretion
of other or different times, places and manners of noticing and conducting any
disposition of Collateral shall not be deemed unreasonable): Any public or
private disposition; (i) as to which on no later than the fifth calendar day
prior thereto written notice thereof is mailed or personally delivered to
Borrower and, with respect to any public disposition, no later than the
fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be
conducted (provided that no notice of any public or private disposition need be
given to the Borrower or published if the Collateral is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market); (ii) which is conducted at any place designated by GFC, with or
without the Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without limiting the generality of the
foregoing, Borrower expressly agrees that, with respect to any disposition of
accounts, instruments and general intangibles, it shall be commercially
reasonable for GFC to direct any perspective purchaser thereof to ascertain
directly from Borrower any and all information concerning the same, including,
but not limited to, the terms of payment, aging and delinquency, if any, the
financial condition of any obligor or account debtor thereon or guarantor
thereof, and any collateral therefor.
18. DEFINITIONS.
18.1 Defined Terms. As used in this Agreement, the following terms have the
definitions set forth below:
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"Affiliate" means any Person controlling, controlled by or under common control
with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction
of the management and policies of any Person, whether through ownership of
common or preferred stock or other equity interests, by contract or otherwise.
Without limiting the generality of the foregoing, each of the following shall
be an Affiliate: any officer, director, employee or other agent of Borrower,
any shareholder or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Business Day" means any day on which commercial banks in both Los Angeles,
California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred for
the acquisition of any fixed asset or improvement, replacement, substitution or
addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower that, in accordance
with generally accepted accounting principles, should be capitalized for
financial reporting purposes and reflected as a liability on the balance sheet
of Borrower.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
of Arizona from time to time.
"Collateral" has the meaning set forth in Section 4.1 above.
"Current Liabilities" at any date means the amount at which the current
liabilities of Borrower would be shown on a balance sheet of Borrower as at
such date, prepared in accordance with generally accepted accounting principles.
"Deposit Accounts" has the meaning set forth in Section 9105 of the California
Commercial Code.
"Eligible Inventory" means Inventory which GFC, in its sole judgment, deems
Eligible Inventory, based on such considerations as GFC may from time to time
deem appropriate. Without limiting the generality of the foregoing, no
Inventory shall be Eligible Inventory unless, in GFC's sole judgment, such
Inventory (i) consists of raw materials or finished goods, in good, new and
salable condition which are not obsolete or unmerchantable, and are not
comprised of packaging, materials or supplies; (iii) meets all standards
imposed by any governmental agency or authority; (iv) conforms in all respects
to the warranties and representations set forth herein; (v) is at all times
subject to GFC's duly perfected, first priority security interest; and (vi) is
situated at a location in compliance with Section 12.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services which GFC,
in its sole judgment, shall deem eligible based on such considerations as GFC
may from time to time deem appropriate. Without limiting the foregoing, a
Receivable shall not be deemed to be an Eligible Receivable if (i) the account
debtor has failed to pay the Receivable within a period of ninety (90) days
after invoice date or, if the goods relating thereto are sold on a C.O.D.
basis, thirty (30) days after invoice date, in each case to the extent of any
amount remaining unpaid after such period; (ii) the account debtor has failed
to pay more than twenty-five percent (25%) of all outstanding Receivables owed
by it to Borrower within ninety (90) days after invoice date; (iii) the account
debtor is an Affiliate of Borrower; (iv) the goods relating thereto are placed
on consignment, guaranteed sale, evaluation or other terms pursuant to which
payment by the account debtor may be conditional; (v) the account debtor is not
located in the United States or Canada, unless the Receivable is supported by a
letter of credit or other form of guaranty or security, in each case in form
and substance satisfactory to GFC or insured by FCIA insurance, in form and
substance satisfactory to GFC; (vi) the account debtor is the United States or
any department, agency or instrumentality thereof or, any State, city or
municipality of the United States unless, as to any State, city or
municipality, the sale is evidenced by a purchase order and not a contract;
(vii) Borrower becomes liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower if the liability is in excess of
15% of the outstanding Receivables of the account debtor in question; (viii)
the account debtor's total obligations to Borrower exceed twenty percent (20%)
of all Eligible Receivables, to the extent of such excess; (ix) the account
debtor disputes liability or makes any claim with respect thereto (up to the
amount of such liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of a material
portion of its
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business; (x) the amount thereof consists of late charges or finance charges;
(xi) the amount thereof consists of a credit balance more than ninety (90) days
past due; or (xii) the face amount of any single invoice thereof exceeds
$20,000.00, unless accompanied by evidence of shipment of the goods relating
thereto satisfactory to GFC in its sole discretion.
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated and
whether or not foreign) which is or may hereafter become a member of a group of
which Borrower is a member and which is treated as a single employer under ERISA
Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 17.1 of this
Agreement.
"Floorplan Loans" has the meaning set forth on the Schedule.
"Floorplanned Inventory" means all Qualified Inventory financed by GFC pursuant
to Section 1.4 of this Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all chosen in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against GFC, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower to secure
payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Guarantors" means the persons set forth on the Schedule.
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and
(v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising,
selling or finishing of such goods, merchandise or other personal property, and
all documents of title or other documents representing them.
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"Inventory Loans" has the meaning set forth on the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower and payable to GFC, and any other agreement entered into
in connection with this Agreement, together with all alterations, amendments,
changes, extensions, modifications, refinancings, refundings, renewals,
replacements, restatements, or supplements, of or to any of the foregoing.
"Loan Party" means Borrower, each Guarantor and each other party (other than
GFC) to any Loan Document.
"Minimum Working Capital" at any date means an amount equal to (i) the sum of
the amounts at which Borrower's cash, Receivables, Inventory (calculated at the
lower of cost or market and determined on a first-in, first-out basis) and the
current portion of deferred tax assets would be shown on a balance sheet of
Borrower at such date prepared in accordance with generally accepted accounting
principles, provided that amounts due from Affiliates shall be excluded
therefrom, minus (ii) current liabilities of Borrower at such date.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA Sections
3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or
any ERISA Affiliate.
"Obligations" means all present and future loans, advances, debts, liabilities,
obligations, covenants, duties and indebtedness at any time owing by Borrower
to GFC, whether evidenced by this Agreement, any note or other instrument or
document, whether arising from an extension of credit, opening of a letter of
credit, banker's acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by
assignment and any participation by GFC in Borrower's debts owing to others),
absolute or contingent, due or to become due, including, without limitation,
all interest, charges, expenses, fees, attorney's fees, expert witness fees,
examination fees, letter of credit fees, collateral monitoring fees, closing
fees, facility fees, Termination Fees, Minimum Interest Charges and any other
sums chargeable to Borrower hereunder or under any other agreement with GFC.
"Overlines" has the meaning set forth in Section 1.3 hereof.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Encumbrances" means each of the liens, mortgages and other security
interests set forth on the Schedule and incorporated herein by this reference.
"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or
any agency or political division thereof, or any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for employees
of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date set
forth in the Schedule, and as of each subsequent date on which audited balance
sheets are delivered to GFC from time to time hereunder, and the related
statements of operations, changes in stockholder's equity and changes in cash
flow for the periods ended on such dates.
"Prohibited Transaction" means any transaction described in Section 406 of
ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Qualified Inventory" means Eligible Inventory (calculated at the lower cost or
market value, taking into account any manufacturer's notice to Borrower of
price reductions, and determined on a first-in, first-out basis) that (i) has
been purchased from manufacturers approved by GFC in its sole discretion, (ii)
has been in Borrower's possession for not more than ninety (90) days; (iii) is
not pending return subject to an issued return merchandise authorization; and
(iv) meets such other specifications and requirements (including manufacturer
concentration limits) that may from time to time be established by GFC.
"Receivable Loans" has the meaning set forth on the Schedule.
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<PAGE> 19
"Receivables" means all of Borrower's now owned and hereafter acquired accounts
(whether or not earned by performance), proceeds of any letters of credit
naming Borrower as beneficiary, contract rights, chattel paper, instruments,
documents and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, whether secured or unsecured, all
merchandise returned to or repossessed by Borrower, and all rights of stoppage
in transit and all other rights or remedies of an unpaid vendor, lienor or
secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043 of ERISA
or the regulations thereunder, a withdrawal from a Plan described in Section
4063 of ERISA, or a cessation of operations described in Section 4068(f) of
ERISA.
"Subordinated Debt" means liabilities of Borrower the repayment of which is
subordinated to the payment and performance of the Obligations.
"Tangible Capital Funds" at any date means an amount equal to (i) the sum of
the amounts at which Borrower's cash, Receivables, Inventory (calculated at the
lower of cost or market and determined on a first-in, first-out basis), net
fixed assets and the current portion of deferred tax assets would be shown on a
balance sheet of Borrower at such date prepared in accordance with generally
accepted accounting principles, provided that amounts due from Affiliates shall
be excluded therefrom, minus (ii) Current Liabilities of Borrower at such date
(excluding Subordinated Debt of Borrower).
"Total Facility" has the meaning set forth on the Schedule.
18.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
19. MISCELLANEOUS.
19.1 Recourse to Security; Certain Waivers. All Obligations shall be payable
by Borrower as provided for herein and, in full, at the termination of this
Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof.
19.2 No Waiver by GFC. Neither GFC's failure to exercise any right, remedy or
option under this Agreement, any supplement, the Loan Documents or other
agreement between GFC and Borrower nor any delay by GFC in exercising the same
shall operate as a waiver. No waiver by GFC shall be effective unless in
writing and then only to the extent stated. No waiver by GFC shall affect its
right to require strict performance of this Agreement. GFC's rights and
remedies shall be cumulative and not exclusive.
19.3 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
GFC's and Borrower's respective representatives, successors and assigns.
19.4 Severability. If any provision of this Agreement shall be prohibited or
invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
19.5 Amendments; Assignments. This Agreement may not be modified, altered or
amended, except by an agreement in writing signed by Borrower and GFC; provided
that Exhibit A to this Agreement may be amended in whole or in part by GFC in
its sole discretion as provided in Section 7.1 of this Agreement. Borrower may
not sell, assign or transfer any interest in this Agreement or any other Loan
Document, or any portion thereof, including, without limitation, any of
Borrower's rights, title, interests, remedies, powers and duties hereunder or
thereunder. Borrower hereby consents to GFC's participation, sale, assignment,
transfer or other disposition, at any time or times hereafter, of this
Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, GFC's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
GFC may disclose all documents and information which GFC now or hereafter may
have relating to Borrower or Borrower's business, provided that each such
participant receiving such information shall agree to maintain the
confidentiality thereof pursuant to a confidentiality
19
<PAGE> 20
agreement reasonably acceptable to Borrower and GFC. To the extent that GFC
assigns its rights and obligations hereunder to a third party, GFC shall
thereafter be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third party.
19.6 Integration. This Agreement, together with the Schedule (which is a part
hereof) and the other Loan Documents, reflect the entire understanding of the
parties with respect to the transactions contemplated hereby.
19.7 Governing Law; Waivers. THIS AGREEMENT SHALL BE INTERPRETED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR, AT THE
SOLE OPTION OF GFC, IN ANY OTHER COURT IN WHICH GFC SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND
VENUE. BORROWER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN
SECTION 19.13 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY
RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST
IT.
19.8 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and
acceptance of this Agreement by the parties. No termination of this Agreement
or of any guaranty of the Obligations shall affect or impair the powers,
obligations, duties, rights, representations, warranties or liabilities of the
parties hereto and all shall survive any such termination.
19.9 Evidence of Obligations. Each Obligation may, in GFC's discretion, be
evidenced by notes or other instruments issued or made by Borrower to GFC. If
not so evidenced, such Obligation shall be evidenced solely by entries upon
GFC's books and records.
19.10 Collateral Security. The Obligations shall constitute one loan secured
by the Collateral. GFC may, in its sole discretion, (i) exchange, enforce,
waive or release any of the Collateral, (ii) apply Collateral and direct the
order or manner of sale thereof as it may determine, and (iii) settle,
compromise, collect or otherwise liquidate any Collateral in any manner without
affecting its right to take any other action with respect to any other
Collateral.
19.11 Application of Collateral. GFC shall have the continuing and exclusive
right to apply or reverse and re-apply any and all payments to any portion of
the Obligations. To the extent that Borrower makes a payment or GFC receives
any payment or proceeds of the Collateral for Borrower's benefit which is
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, debtor in possession, receiver or any
other party under any bankruptcy law, common law or equitable cause, then, to
such extent, the Obligations or part thereof intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
GFC.
19.12 Loan Requests. Each oral or written request for a loan by any Person
who purports to be any employee, officer or authorized agent of Borrower shall
be made to GFC on or prior to 5:00 p.m., Pennsylvania time, on the Business Day
immediately preceding the Business Day on which the proceeds thereof are
requested to be paid to Borrower and shall be conclusively presumed to be made
by a Person authorized by Borrower to do so and the crediting of a loan to
Borrower's operating account shall conclusively establish Borrower's obligation
to repay such loan. Unless and until Borrower otherwise directs GFC in writing
or unless otherwise provided in this Agreement, all loans shall be wired to
Borrower's operating account set forth on the Schedule.
19.13 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrower and GFC at their addresses set forth at the beginning
of this Agreement. Notices hereunder shall be deemed received on the earlier
of receipt, whether by mail, personal delivery, facsimile, or otherwise, or
upon deposit in the United States mail, postage prepaid.
19.14 Brokerage Fees. Borrower represents and warrants to GFC that, with
respect to the financing transaction herein contemplated, no Person is entitled
to
20
<PAGE> 21
any brokerage fee or other commission and Borrower agrees to indemnify and hold
GFC harmless against any and all such claims.
19.15 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to
Borrower or which reasonably should be known to Borrower which Borrower has not
disclosed to GFC in writing with respect to the transactions contemplated by
this Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
19.16 Publicity. GFC is hereby authorized to issue appropriate press releases
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
19.17 Captions. The Section titles contained in this Agreement are without
substantive meaning and are not part of this Agreement.
19.18 Injunctive Relief. Borrower recognizes that, in the event Borrower fails
to perform, observe or discharge any of its Obligations under this Agreement,
any remedy at law may prove to be inadequate relief to GFC. Therefore, GFC, if
it so requests, shall be entitled to temporary and permanent injunctive relief
in any such case without the necessity of proving actual damages.
19.19 Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
19.20 Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits hereto.
19.21 Time of Essence. Time is of the essence for the performance by Borrower
of the Obligations set forth in this Agreement.
19.22 Limitation of Actions. Borrower agrees that any claim or cause of action
by Borrower against GFC, or any of GFC's directors, officers, employees,
agents, accountants or attorneys, based upon, arising from, or relating to this
Agreement, or any other present or future agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, whether or not relating hereto or thereto,
occurred, done, omitted or suffered to be done by GFC, or by GFC's directors,
officers, employees, agents, accountants or attorneys, whether sounding in
contract or in tort or otherwise, shall be barred unless asserted by Borrower
by the commencement of an action or proceeding in a court of competent
jurisdiction by the filing of a complaint within one year after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based and service of a summons and complaint on an officer of GFC
or any other person authorized to accept service of process on behalf of GFC,
within 30 days thereafter. Borrower agrees that such one-year period of time
is a reasonable and sufficient time for Borrower to investigate and act upon
any such claim or cause of action. The one-year period provided herein shall
not be waived, tolled, or extended except by a specific written agreement of
GFC. This provision shall survive any termination of this Loan Agreement or
any other agreement.
19.23 Liability. Neither GFC nor any GFC Affiliate shall be liable for any
indirect, special, incidental or consequential damages in connection with any
breach of contract, tort or other wrong relating to this Agreement or the
Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if GFC has been advised of the possibility of such damages.
Neither GFC, nor any GFC Affiliate shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by the Borrower through the ordinary negligence of GFC, or any GFC Affiliate.
"GFC Affiliate" shall mean GFC's directors, officers, employees, agents,
attorneys or other person or entity affiliated with or representing GFC.
19.24 Notice of Breach by GFC. Borrower agrees to give GFC written notice of
(i) any action or inaction by GFC or any attorney of GFC in connection with any
Loan Documents that may be actionable against GFC or any attorney of GFC or
(ii) any defense to the payment of the Obligations for any reason, including,
but not limited to, commission of a tort or violation of any
21
<PAGE> 22
contractual duty or duty implied by law. Borrower agrees that unless such
notice is fully given as promptly as possible (and in any event within thirty
(30) days) after Borrower has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action, inaction or defense.
Borrower shall not assert, and Borrower shall be deemed to have waived, any
claim or defense arising therefrom.
19.25 MUTUAL WAIVER OR RIGHT TO JURY TRIAL. GFC AND BORROWER EACH HEREBY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GFC AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF GFC OR BORROWER OR ANY OR THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GFC
OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE.
Borrower:
PROCOM TECHNOLOGY, INC.
By___________________________________
Title________________________________
By___________________________________
Secretary or Ass't Secretary
GFC:
GREYHOUND FINANCIAL CORPORATION
By___________________________________
Title________________________________
22
<PAGE> 23
GFC
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: PROCOM TECHNOLOGY, INC.
ADDRESS: 2181 DUPONT DRIVE
IRVINE, CALIFORNIA 92715
DATE: NOVEMBER 18, 1994
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and Greyhound Financial Corporation dated the above date,
and all references herein and therein to "this Agreement" shall be deemed to
refer to said Agreement and to this Schedule.
TOTAL FACILITY (SECTION 1.1):
$9,000,000.00 (the "Total Facility")
LOANS (SECTION 1.2):
A. REVOLVING LOANS: a revolving line of credit ("Revolving Credit
Line") consisting of loans against Borrower's Eligible Receivables ("Receivable
Loans") and against Borrower's Eligible Inventory other than Floorplanned
Inventory ("Inventory Loans") in an aggregate outstanding principal amount not
to exceed at any time the lesser of:
(a) Four Million Dollars ($4,000,000.00) (the "Maximum
Revolving Facility Amount"), or
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<PAGE> 24
(b) the sum of
(i) an amount equal to seventy-five percent (75%) of
the net amount of Eligible Receivables; plus
(ii) an amount equal to the sum of: (A) fifty percent
(50%) of the value of Borrower's Eligible Inventory, minus (B) the value
of Borrower's Floorplanned Inventory, in each case calculated at the
lower of cost or market value and determined on a first-in, first-out
basis.
B. FLOORPLAN LOANS: a floorplan line of credit consisting of loans
against Borrower's Floorplanned Inventory ("Floorplan Loans") in an aggregate
outstanding principal amount not to exceed at any time the lesser of:
(a) Five Million Dollars ($5,000,000.00), or
(b) the sum of the amount of (i) Borrower's Qualified
Inventory and (ii) all original credit memoranda held by GFC and received from
manufacturers of Qualified Inventory.
CONDITIONS PRECEDENT (SECTION 2.1):
The obligation of GFC to make the initial advance hereunder is subject
to the fulfillment, to the satisfaction of GFC and its counsel, of the
condition, in addition to the conditions set forth in Sections 2.1 and 2.2
above, that there shall have been no material adverse change in the business,
operations, profits or prospects of Borrower, or in the condition of the assets
of Borrower, between August 31, 1994 and the date hereof. Borrower shall cause
the conditions precedent set forth in Section 2.1 of this Agreement and set
forth above in this Schedule to be satisfied on or before November 18, 1994.
INTERESTS AND FEES (SECTION 3.1):
Interest. Borrower shall pay GFC interest on the daily outstanding
balance of Borrower's loan account at a per annum rate of one and one-half
percent (1.50%) in excess of the highest rate of interest published from time
to time in the "Money Rates" section of The Wall Street Journal under "Prime
Rate" or, if such rate is not so published from time to time, the rate of
interest announced publicly by Citibank, N.A., from time to time as its "base
rate" (or any successor thereto), which, in either case, may not be such
institution's or GFC's lowest rate (the "Base Rate"); provided, however, that
(i) if, during any full calendar quarter during the term of this Agreement (or
other period specified below), volume under the Floorplan Credit Line (as
measured by the total of the face amounts of invoices funded by GFC under the
Floorplan Credit Line during such period) is less than Four Million Dollars
($4,000,000.00) (such amount
S-2
<PAGE> 25
to be prorated for the initial and final calendar quarters of the term, as
applicable) and provided that the failure to meet the minimum of $4,000,000 was
not due to a termination of the Floorplan Credit Line by GFC or GFC's refusal to
make Floorplan Loans (unless due to an Event of Default), the interest rate
applicable to Borrower's loan account for such quarter (or such other period
specified above) shall be retroactively increased to a per annum rate equal to
three and three quarters percent (3.75%) in excess of the Base Rate (with any
adjustment amount to be immediately due upon demand by GFC and (ii) interest
shall not be payable by Borrower with respect to Floorplan Loans reflected in
Borrower's loan account except as provided in Section 3.2 of this Agreement. The
interest rate chargeable hereunder shall be increased or decreased, as the case
may be, without notice of demand of any kind, upon the publishing or
announcement, as the case may be, of any change in the Base Rate. Each change
in the Base Rate shall be effective hereunder on the first day following the
publishing or announcement, as the case may be, of such change, provided, that a
cumulative change of less than one-quarter of one percent (0.25%) shall not be
considered. Interest charges and all other fees and charges herein shall be
computed on the basis of a year of 360 days and actual days elapsed and shall be
payable to GFC in arrears on the first day of each month.
Closing Fee. At the closing of this transaction, Borrower shall pay to
GFC a closing fee in an amount equal to Forty Thousand Dollars ($40,000.00),
which shall be deemed fully earned at the time of payment.
Facility Fee. Borrower shall pay to GFC a facility fee equal to
one-half of one percent (0.50%) per annum on the daily average unused amount of
the Maximum Revolving Facility Amount. The facility fee shall be deemed fully
earned at the time when due and is otherwise due and payable in arrears on the
first day of each month, commencing on the first such day after the date of
this Agreement, on the first day of each subsequent month thereafter and on the
date on which this Agreement is terminated.
Examination Fees. Borrower agrees to pay to GFC an examination fee in
the amount of Four Hundred Dollars ($400.00) per person per day in connection
with each audit or examination of Borrower performed by GFC prior to or after
the date hereof. The initial examination fee payable under this Agreement
shall be deemed fully earned at the time of payment and due and payable upon
the closing of this transaction, and shall be deducted from any good faith
deposit paid by Borrower to GFC prior to the date of this Agreement.
REPORTING REQUIREMENTS (SECTION 5.2):
1. Borrower shall provide GFC with monthly agings aged by invoice date and
reconciliations of Receivables within ten (10) days after the end of each
month.
2. Borrower shall provide GFC with monthly accounts payable agings aged by
invoice date, outstanding or held check registers and inventory certificates
within ten (10) days after the end of each month.
S-3
<PAGE> 26
3. Borrower shall provide GFC with weekly perpetual inventory reports for
the Inventory (as well as separate inventory reports as to Floorplanned
Inventory) valued on a first-in, first-out basis at the lower of cost or market
(in accordance with generally accepted accounting principles) or such other
inventory reports as are reasonably requested by GFC, all by Wednesday of each
week with respect to reports for the immediately preceding week.
4. Borrower shall provide GFC with monthly unaudited financial statements
within thirty (30) days after the end of each month.
5. Borrower shall provide GFC with annual operating budgets (including
income statements, balance sheets and cash flow statements, by month) for the
upcoming fiscal year of Borrower by the end of each fiscal year of Borrower.
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 12.1): California
Fictitious Names/Prior Corporate Names (Section 12.2): None
Borrower Locations (Section 12.16): 2181 Dupont Drive
Irvine, California 92715
Permitted Encumbrances (Section 18.1): None
FINANCIAL COVENANTS (SECTION 13.14):
Borrower shall comply with all of the following covenants. Compliance
shall be determined as of the end of each fiscal quarter of Borrower, except as
otherwise specifically provided below:
Working Capital. Borrower shall maintain Minimum Working Capital of not
less than Five Hundred Thousand Dollars ($500,000.00);
Tangible Capital Funds. Borrower shall maintain Tangible Capital Funds of not
less than One Million Dollars ($1,000,000.00); and
Debt to Tangible Borrower shall maintain a ratio of Indebtedness
Capital Funds. (excluding Subordinated Debt) to Tangible Capital Funds
of not greater than 5.0 to 1.0.
S-4
<PAGE> 27
NEGATIVE COVENANTS (SECTION 14):
Compensation: Borrower may pay salaries during any fiscal year to all of
Borrower's executives, officers and directors (or any relative
thereof) in an amount not to exceed 110% of the amount paid to
all such Persons during the immediately preceding fiscal year of
Borrower; and
Borrower may pay additional compensation ("Compensation")
including, without limitation, withdrawals, fees, bonuses,
commissions, drawing accounts and other payments, whether
directly or indirectly, in money or otherwise during any fiscal
year to all of Borrower's executives, officers and directors (or
any relative thereof), provided no Event of Default has
occurred, and only to the extent that the total fiscal
year-to-date Compensation to such Persons will not exceed 50% of
Borrower's year-to-date net profits as determined by generally
accepted accounting principals. Said additional Compensation
may be paid semiannually, but only after Borrower has issued its
unaudited financials for the first six months of the fiscal year
or its year end financials, as applicable.
TERM (SECTION 16.1):
The initial term of this Agreement shall be two (2) years from the date
hereof (the "Initial Term") and shall be automatically renewed for successive
periods of one (1) year each (each, a "Renewal Term"), unless earlier
terminated as provided in Section 16 or 17 above or elsewhere in this Agreement.
TERMINATION FEE (SECTION 16.4):
The Termination Fee provided in Section 16.4 shall be an amount equal
to the following percentage of (a) the Total Facility, if both the Revolving
Credit Line and the Floorplan Credit Line are terminated, or (b) the Maximum
Revolving Facility Amount, if (with GFC's consent) the Revolving Credit Line is
terminated singly and the Floorplan Credit Line remains in effect:
(i) seven-tenths of one percent (0.7%), if such early termination
occurs on or prior to the first anniversary of this Agreement;
(ii) four-tenths of one percent (0.4%), if such early termination
occurs after the first anniversary of this Agreement.
S-5
<PAGE> 28
ADDITIONAL DEFINITIONS (Section 18.1):
"Prepared Financials" means the balance sheets of Borrower as of August 31,
1994, and as of each subsequent date on which audited
balance sheets are delivered to GFC from time to time
hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow
for the periods ended on such dates.
"Guarantors" means each of Alex Razm'joo, Alex Aydim, Frank
Alaghband, Nick Shahrestang and each such Person's
respective spouse.
DISBURSEMENT (Section 19.12):
Unless and until Borrower otherwise directs GFC in writing, all loans
(other than Floorplan Loans disbursed directly to manufacturers of Floorplanned
Inventory as contemplated in Section 1.4 of this Agreement) shall be wired to
Borrower's following operating account: SANWA BANK ACCOUNT NO. 0896-23013.
Borrower: GFC:
PROCOM TECHNOLOGY, INC. GREYHOUND FINANCIAL CORPORATION
By [SIG] By [SIG]
-------------------------------- --------------------------------
Title EVP Title VP
----------------------------- -----------------------------
By [SIG]
--------------------------------
Secretary or Ass't Secretary
S-6
<PAGE> 29
EXHIBIT A TO
LOAN AND SECURITY AGREEMENT
BORROWER: PROCOM TECHNOLOGY, INC.
ADDRESS: 2181 DUPONT DRIVE
IRVINE, CALIFORNIA 92715
DATE: NOVEMBER 18, 1994
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and Greyhound Financial Corporation dated the above date.
FLOORPLAN LOAN PRINCIPAL PAYMENT DATES: (SECTION 7.1):
Number of Days
After Invoice Date
that Principal is
Manufacturer Repayable by Borrower
------------ ---------------------
NEC 45
Toshiba 45
Conner Peripherals 45
CPC 45
Seagate 45
Sony 60
Fujitsu 60
<PAGE> 30
ADDENDUM
This Addendum references and amends that certain Loan and Security
Agreement dated as of November 18, 1994 (the "Agreement") by and between
Greyhound Financial Corporation ("GFC") and Procom Technology, Inc.
("Borrower").
1. Overlines. Section 1.3 of the Agreement is hereby deleted and
the following is substituted therefor:
1.3 Overlines. If at any time or for any reason (i) the outstanding amount
of advances made pursuant hereto exceeds any of the dollar or percentage
limitations contained in the Schedule or (ii) the outstanding amount of
advances under the Floorplan Credit Line exceeds the amount available under
the "Inventory True-up Schedule" (any such excess, an "Overline"), then
Borrower shall, upon GFC's demand, immediately pay to GFC, in cash, the full
amount of such Overline. The Inventory True-up Schedule shall be
substantially in the form attached hereto as Exhibit A, containing such
information as GFC deems necessary or appropriate, and shall be delivered
weekly by Borrower to Lender. Without limiting Borrower's obligation to repay
to GFC on demand the amount of any Overline, Borrower agrees to pay GFC
interest on the outstanding principal amount of any Overline, on demand, at
the rate set forth on the Schedule.
Exhibit A to this Addendum is hereby incorporated as Exhibit A to the Agreement.
In all other respects, Section 1.3 remains in full force and effect.
Notwithstanding the foregoing, if by December 28, 1994, Elham Razmjoo delivers
her guaranty in the form executed by the other guarantors, the Adjustment on
Exhibit A hereto will be changed from $250,000 to $500,000 as of the date of
GFC's receipt of such guaranty.
<PAGE> 31
2. Definition of Inventory Loans. Subparagraph (b)(ii) of the Revolving
Loans calculation set forth in the Schedule to the Agreement is hereby deleted
and the following is substituted therefor:
(ii) an amount equal to 50% of the sum of (A) the value of Borrower's
Eligible Inventory, calculated at the lower of cost or market value and
determined on a first-in, first-out basis, minus (B) the aggregate
outstanding balance of Floorplan Loans.
3. 60-Day Flooring Invoice Option. GFC and Borrower agree that
Borrower may pay Floor Plan Loans for Seagate purchases floor planned by GFC
("Seagate/GFC Invoices") at any time prior to 50 days after the date of invoice
without an interest charge. Borrower may pay Seagate/GFC Invoices after 50 days,
but before 60 days, after the date of invoice with an interest charge of .34% of
the amount of the unpaid Seagate/GFC Invoice. This rate will be charged as it
accrues. The .34% rate shall be increased or decreased by .1% for every .25%
increase or decrease in the Base Rate from the current rate of 8.5%. On or after
60 days, the unpaid Seagate/GFC Invoices will be subject to the interest rate
set forth in Section 3.2 of the Agreement (6% in excess of the Base Rate).
4. Closing Fee. The Closing Fee of $40,000 as set forth in the
Schedule to the Agreement is hereby changed to $50,000. Notwithstanding the
foregoing, if both Elham Razmjoo and Stephannie Alaghband deliver either their
guaranty or Spousal Waiver in forms presented previously by GFC, and
2
<PAGE> 32
such documents are received by December 28, 1994, the Closing Fee will be
reduced to $40,000 and the $10,000 difference will be returned to Borrower.
5. Current Seagate Account Payable. Borrower agrees to pay its
indebtedness to Seagate and cause Seagate to terminate its security interest in
Borrower's assets within 60 days from the date hereof.
6. Incorporation. The terms and covenants herein are hereby
incorporated in the Agreement.
This Addendum has been executed by the parties hereto as of November 18,
1994.
GREYHOUND FINANCIAL CORPORATION
By ___________________________________
Its __________________________________
PROCOM TECHNOLOGY, INC.
By /s/ [ILLEGIBLE]
------------------------------------
Its Senior Vice President
-----------------------------------
3
<PAGE> 33
EXHIBIT A
Floorplan Inventory True-up Schedule
to Loan and Security Agreement between
Greyhound Financial Corporation and Procom Technology, Inc.
dated as of November 18, 1994 (the "Agreement")
All capitalized terms used in this Exhibit A and not otherwise defined
herein shall have the meanings given them in the Agreement.
AMOUNT
------
I. Value of Eligible Inventory $_________
plus
II. Adjustment $25,000.00
minus
III. Inventory Loan availability
under Revolving Loans $_________
IV. TOTAL AMOUNT OF "TRUE-UP INVENTORY"
(I plus II minus III) $_________
V. AGGREGATE OUTSTANDING BALANCE
OF FLOORPLAN LOANS UNDER AGREEMENT $_________
If the amount set forth in Item V exceeds the amount set forth in Item
IV, Borrower shall pay the difference to Lender in accordance with the terms of
Section 1.3 of the Agreement.
Date:________________________
PROCOM TECHNOLOGY, INC.
By:__________________________
Its:_________________________
4
<PAGE> 34
TRANSACTION REPORT AND LOAN REQUEST
Certificate
TO: GREYHOUND FINANCIAL CORPORATION No. 107
1060 First Avenue ------------
King of Prussia, PA 19406 Date: 11/28/94
------------
The Undersigned hereby certifies the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
COMPUTATION OF ACCOUNTS RECEIVABLE A B
COLLATERAL ACCTS RECEIVABLE (INVENTORY) COMBINED
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Collateral Balance per Previous Report $5,715,161.15 $3,316,046.09 $9,031,207.24
-----------------------------------------------------------------------------------------------------------------------
2. Add: New A/R Assigned Sales Orders / (Purchases) $154,504.53 $41,037.40 $195,541.93
-----------------------------------------------------------------------------------------------------------------------
3. Less: Credit Memos / (Other Inv. Issues) ($28,128.00) ($2,417.47) ($30,545.47)
-----------------------------------------------------------------------------------------------------------------------
4. Less: A/R Collections / (Shipments) ($283,760.17) ($78,582.18) ($362,342.35)
-----------------------------------------------------------------------------------------------------------------------
5. Adjustments - Increase or (Decrease) $0.00
-----------------------------------------------------------------------------------------------------------------------
6. New Balance: A/R / (Inventory) $5,557,777.51 $3,276,083.84 $8,833,861.35
-----------------------------------------------------------------------------------------------------------------------
7. Less: Ineligible: A/R / (Inventory (WHS 3-999)) 148140 ($1,821,119.00) ($898,054.85) ($2,719,173.85)
-----------------------------------------------------------------------------------------------------------------------
8. Less: Floor Plan Liability ($1,250,000.00) ($1,250,000.00)
-----------------------------------------------------------------------------------------------------------------------
9. Total Eligible: Receivables / (Inventory) $3,736,658.51 $1,128,028.99 $4,864,687.50
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
10. Accounts Receivable: Total Eligible Receivables
from Line A9 above @ 75% $2,802,493.88 $2,802,493.88
-----------------------------------------------------------------------------------------------------------------------
11. Accounts Receivable: Total Eligible Inventory
from Line B9 above @ 50% $564,014.50 $564,014.50
-----------------------------------------------------------------------------------------------------------------------
12. Less L.C. Balance $0.00 $0.00
-------------------------------------------------------------------------------- -------------------
13. Net Availability (Line 9 plus Line 10 less Line 11)
not to exceed $4,000,000.00 $3,366,508.38
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
COMPUTATION OF LOAN
-----------------------------------------------------------------------------------------------------------------------
14. Loan Balance per pervious report $1,690.041.81
------------------------------------------------------------ -------------------
15. PAYDOWN (Sanwa wire to GFC) ($732,643.80)
------------------------------------------------------------ -------------------
16. Adjustments - Increase or (Decrease)
------------------------------------------------------------ -------------------
17. Adjusted Loan Balance
(Line 14 plus/(less) Line 16) $957,398.01
------------------------------------------------------------ -------------------
18. Availability Before Loan Request
(Line 13 less Line 17) $2,409,110.37
------------------------------------------------------------ -------------------
19. The undersigned requests a loan in the amount of
------------------------------------------------------------ -------------------
20. New Loan Balance (Line 17 plus Line 19) $957,398.01
-----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above collateral is subject to a security interest in favor of GREYHOUND
FINANCIAL CORP. pursuant to the Accounts Receivable Credit Agreement (the
"Agreement") executed between the Financer and the undersigned.
$_____________________________ has been deposited to your account pursuant to
the request set forth above.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
GREYHOUND FINANCIAL CORP. BORROWER
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Office KING OF PRUSSIA Date PROCOM TECHNOLOGY, INC.
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 35
CONTINUING PERSONAL GUARANTY
FOR VALUE RECEIVED, and in consideration of any loan or other financial
accommodation heretofore or hereafter at any time made or granted to PROCOM
TECHNOLOGY, INC., a California corporation ("Borrower") by GREYHOUND FINANCIAL
CORPORATION ("Lender"), the undersigned, Farrokh Alaghband ("Guarantor"),
hereby agrees as follows:
1. Guaranty of Obligations. Guarantor unconditionally, absolutely
and irrevocably guarantees the full and prompt payment and performance when
due, whether by acceleration or otherwise, and at all times thereafter, of all
obligations of Borrower to Lender, howsoever created, arising or evidenced,
whether direct or indirect, absolute or contingent, or now or hereafter
existing or due or to become due, including, without limitation, under or in
connection with that certain Loan and Security Agreement of even date, between
Borrower and Lender (the "Loan Agreement") and each of the documents,
instruments and agreements executed and delivered in connection therewith, as
each may be modified, amended, supplemented or replaced from time to time (all
such obligations are herein referred to collectively as the "Liabilities", and
all documents evidencing or securing any of the Liabilities are herein referred
to, collectively, as the "Loan Documents"). This Continuing Personal Guaranty
(this "Continuing Guaranty") is a guaranty of payment and performance when due
and not of collection.
In the event of any default by Borrower in making payment of, or
default by Borrower in performance of, any of the Liabilities, Guarantor agrees
on demand by Lender to pay and perform all of the Liabilities as are then or
thereafter become due and owing or are to be performed under the terms of the
Loan Documents. Guarantor further agrees to pay all expenses (including
reasonable attorneys' fees and expenses) paid or incurred by Lender in
endeavoring to collect the Liabilities, or any part thereof, and in enforcing
this Continuing Guaranty.
2. Continuing Nature of Guaranty and Liabilities. This Continuing
Guaranty shall be continuing and shall not be discharged, impaired or affected
by:
a. the insolvency of Guarantor or the payment in full of
all of the Liabilities at any time or from time to time;
b. the power or authority or lack thereof of Borrower to
incur the Liabilities;
c. the validity or invalidity of any of the Loan Documents
or the documents securing the same;
d. the existence or non-existence of Borrower as a legal
entity;
<PAGE> 36
e. any transfer by Borrower of all or any part of
any collateral in which Lender has been granted a lien or security
interest pursuant to the Loan Documents;
f. any statute of limitations affecting the
liability of Guarantor under this Continuing Guaranty or the Loan
Documents or the ability of Lender to enforce this Continuing Guaranty
or any provision of the Loan Documents or the Security Documents; or
g. any right of offset, counterclaim or defense of
Guarantor, including, without limitation, those which have been waived
by Guarantor pursuant to Paragraph 6 hereof.
3. Insolvency of Borrower or Guarantor. Without limiting
the generality of any other provision hereof, Guarantor agrees that, in the
event of the dissolution or insolvency of Borrower or Guarantor or the inability
of Borrower or Guarantor to pay their respective debts as they mature, or an
assignment by Borrower or Guarantor for the benefit of creditors, or the
institution of any proceeding by or against Borrower or Guarantor alleging that
Borrower or Guarantor is insolvent or unable to pay their respective debts as
they mature, Guarantor will pay to Lender forthwith the full amount which would
be payable hereunder by Guarantor if all of the Liabilities were then due and
payable, whether or not such event occurs at a time when any of the Liabilities
are otherwise due and payable.
4. Payment of the Liabilities. Any amounts received by
Lender from whatever source on account of the Liabilities may be applied by
Lender toward the payment of such of the Liabilities, and in such order of
application, as Lender may from time to time elect, and notwithstanding any
payments made by or for the account of Guarantor pursuant to this Continuing
Guaranty.
Guarantor agrees that, if at any time all or any part of any
payment theretofore applied by Lender to any of the Liabilities is or must be
rescinded or returned by Lender for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of Borrower), such
Liabilities shall, for the purposes of this continuing Guaranty and to the
extent that such payment is or must be rescinded or returned, be deemed to have
continued in existence notwithstanding such application by Lender, and this
Continuing Guaranty shall continue to be effective or be reinstated, as the
case may be, as to such Liabilities, all as though such application by Lender
had not been made.
5. Permitted Actions of Lender. Lender may from time to
time, in its sole discretion and without notice to Guarantor, take any or all of
the following actions:
a. retain or obtain a security interest in any
assets of Borrower or any third party to secure any of the Liabilities
or any obligations of Guarantor hereunder;
2
<PAGE> 37
b. retain or obtain the primary or secondary
obligation of any obligor or obligors, in addition to Guarantor, with
respect to any of the Liabilities;
c. extend or renew for one or more periods (whether
or not longer than the original period), alter or exchange any of the
Liabilities;
d. waive, ignore or forbear from taking action or
otherwise exercising any of its default rights or remedies with respect
to any default by Borrower under the Loan Documents;
e. release, waive or compromise any obligation of
Guarantor hereunder or any obligation of any nature of any other obligor
primarily or secondarily obligated with respect to any of the
Liabilities;
f. release its security interest in, or surrender,
release or permit any substitution or exchange for, all or any part of
any collateral now or hereafter securing any of the Liabilities or any
obligation hereunder, or extend or renew for one or more periods
(whether or not longer than the original period) or release, waive,
compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property; and
g. demand payment or performance of any of the
Liabilities from Guarantor at any time or from time to time, whether or
not Lender shall have exercised any of its rights or remedies with
respect to any property securing any of the Liabilities or any
obligation hereunder or proceeded against any other obligor primarily or
secondarily liable for payment or performance of any of the Liabilities.
6. Specific Waivers. Without limiting the generality of
any other provision of this Continuing Guaranty, Guarantor hereby expressly
waives:
a. notice of the acceptance by Lender of this
Continuing Guaranty;
b. notice of the existence, creation, payment,
nonpayment, performance or nonperformance of all or any of the
Liabilities;
c. presentment, demand, notice of dishonor,
protest, notice of protest and all other notices whatsoever with respect
to the payment or performance of the Liabilities or the amount thereof
or any payment or performance by Guarantor hereunder;
d. all diligence in collection or protection of or
realization upon the Liabilities or any thereof, any obligation
hereunder or any security for or guaranty of any of the foregoing;
e. any right to direct or affect the manner or
timing of Lender's enforcement of its rights or remedies;
3
<PAGE> 38
f. all rights and benefits under Section 2809 of the
California Civil Code purporting to reduce Guarantor's obligation in proportion
to the principal obligation hereby guaranteed, and any defense based on or
arising out of any defense the person or entity primarily liable may have to
payment or to performance of any covenants or obligations;
g. all rights and benefits under Section 2845 of the
California Civil Code which, among other things, permits a guarantor or surety
to require any creditor to pursue its debtor, any security which said creditor
may hold, or any other remedy before proceeding against Guarantor;
h. any defense, right of set-off or other claim whatsoever
(other than payment in full and performance in full of all of the Liabilities
after any termination of the Loan Agreement in accordance with the terms of the
Loan Documents) that Borrower or any third party may or might have to the
payment or performance of the Liabilities;
i. any and all defenses which would otherwise arise upon
the occurrence of any event or contingency described in Paragraph 1 hereof or
upon the taking of any action by Lender permitted hereunder;
j. any defense, right of set-off, claim or counterclaim
whatsoever (other than payment and performance in full of all of the Liabilities
after any termination of the Loan Agreement in accordance with the terms of the
Loan Documents), and any and all other rights, benefits, protections and other
defenses which Guarantor may have, now or at any time hereafter, to full payment
or performance of the Liabilities pursuant to the terms of this Continuing
Guaranty, including, without limitation, under California Civil Code Sections
2809, 2810, 2819, 2820, 2821, 2839, 2845, 2847, 2848, 2849, 2850 and 2855, and
California Code of Civil Procedure Sections 580a, 580b, and 580d, and all
successor sections; and
k. all other principles or provisions of law, if any, that
conflict with the terms of this Continuing Guaranty, including, without
limitation, the effect of any circumstances that may or might constitute a legal
or equitable discharge of a guarantor or surety.
7. Irrevocability. Guarantor hereby further waives all rights to
revoke this Continuing Guaranty at any time, and all rights to revoke any
agreement executed by Guarantor at any time to secure the payment and
performance of Guarantor's obligations under this Continuing Guaranty. Without
limiting the generality of this paragraph, Guarantor hereby specifically waives
the provisions of California Civil Code Section 2815, and any successor section,
with respect to this Continuing Guaranty and all security for the obligations of
Guarantor hereunder.
8. Waiver of Subrogation and Certain Other Rights. Guarantor
hereby waives and shall have no right of subrogation, reimbursement,
exoneration, contribution or
4
<PAGE> 39
indemnity against Borrower or any other guarantor for any reason, including but
not limited to, by reason of any payments made or acts performed by Guarantor in
compliance with the obligations of Guarantor hereunder or any actions taken by
Lender pursuant to this Continuing Guaranty or pursuant to the Loan Documents.
Without limiting the generality of the foregoing, Guarantor hereby
waives all rights and benefits under Section 580d of the California Code of
Civil Procedure stating that no deficiency may be recovered on an obligation
secured by a deed of trust on real property if the real property, or any part
thereof, subject to any deed of trust given by Borrower to secure all or any
part of the Liabilities is sold under a power of sale contained therein, and all
defenses based on any loss as a result of any such private sale of Guarantor's
right to recover any such amount from the person or entity primarily liable,
whether by right of subrogation or otherwise. GUARANTOR HEREBY ACKNOWLEDGES
THAT BUT FOR THE FOREGOING WAIVER AND OTHER WAIVERS CONTAINED HEREIN, THE LOSS
OF DEFICIENCY RIGHTS AGAINST BORROWER RESULTING FROM A PRIVATE SALE OF ANY REAL
PROPERTY UNDER SUCH A DEED OF TRUST COULD CREATE A DEFENSE TO PAYMENT BY
GUARANTOR HEREUNDER.
Guarantor agrees that nothing contained in this Continuing Guaranty
shall prevent Lender from suing to collect on the Liabilities or from exercising
concurrently or successively any rights available to it at law and/or in equity
or under any of the Loan Documents, and that the exercise of any of the
aforesaid rights shall not constitute a legal or equitable discharge of
Guarantor. Guarantor hereby authorizes and empowers Lender to exercise, in its
sole discretion, any rights and remedies, or any combination thereof, which may
then be available, since it is the intent and purpose of Guarantor that the
obligations hereunder shall be absolute, independent and unconditional under any
and all circumstances.
Notwithstanding any foreclosure of the lien of any deed of trust or
security agreement with respect to any or all of any real or personal property
secured thereby, whether by the exercise of the power of sale contained therein,
by an action for judicial foreclosure, or by the acceptance of a deed or
possession of any other collateral in lieu of foreclosure, Guarantor shall
remain bound under this Continuing Guaranty. Without limiting the generality of
the foregoing, Guarantor specifically agrees that upon an Event of Default under
and as defined in the Loan Agreement, Lender may elect to nonjudicially or
judicially foreclose against any real or personal property, or any part thereof,
subject to any deed of trust given by Borrower to secure all or any part of the
Liabilities, or exercise any other remedy against Borrower, any security for the
Liabilities or any other guarantor, even if the effect of that action is to
deprive Guarantor of the right to collect reimbursement from the applicable
third party for any sums paid to Lender hereunder.
9. Subordination. Guarantor hereby subordinates any and all
indebtedness of Borrower to Guarantor to the full and prompt payment and
performance of all of the Liabilities. Guarantor agrees that Lender shall be
entitled to receive payment of all Liabilities prior to Guarantor's receipt of
payment of any amount of any indebtedness of Borrower to Guarantor. Any payments
on such indebtedness to Guarantor, if Lender so requests, shall be collected,
enforced and received by Guarantor, in trust, as trustee for
5
<PAGE> 40
Lender and shall be paid over to Lender on account of the Liabilities, but
without reducing or affecting in any manner the liability of Guarantor under the
other provisions of this Guaranty. Lender is authorized and empowered, but not
obligated, in its discretion, (a) in the name of Guarantor, to collect and
enforce, and to submit claims in respect of, any indebtedness of Borrower to
Guarantor and to apply any amounts received thereon to the Liabilities, and (b)
to require Guarantor (i) to collect and enforce, and to submit claims in respect
of, any indebtedness of Borrower to Guarantor, and (ii) to pay any amounts
received on such indebtedness to Lender for application to the Liabilities.
10. Assignment of Lender's Rights. Lender may, from time to time,
without notice to Guarantor, assign or transfer any or all of the Liabilities or
any interest therein and, notwithstanding any such assignment or transfer of the
Liabilities or any subsequent assignment or transfer thereof, the Liabilities
shall be and remain the Liabilities for the purpose of this Continuing Guaranty.
Each and every immediate and successive assignee or transferee of any of the
Liabilities or of any interest therein shall, to the extent of such party's
interest in the Liabilities, be entitled to the benefits of this Continuing
Guaranty to the same extent as if such assignee or transferee were Lender;
provided, however, that unless Lender shall otherwise consent in writing, Lender
shall have an unimpaired right, prior and superior to that of any such assignee
or transferee, to enforce this Continuing Guaranty for its own benefit as to
those of the Liabilities which Lender has not assigned or transferred.
11. Indulgences Not Waivers. No delay in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
Lender of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Continuing Guaranty be binding upon
Lender, except as expressly set forth in a writing duly signed and delivered by
Lender. No action of Lender permitted hereunder shall in any way affect or
impair the rights of Lender or the obligations of Guarantor under this
Continuing Guaranty.
12. Financial Condition of Borrower. Guarantor represents and warrants
that it is fully aware of the financial condition of Borrower, and Guarantor
delivers this Continuing Guaranty based solely upon its own independent
investigation of Borrower's financial condition and in no part upon any
representation or statement of Lender with respect thereto. Guarantor further
represents and warrants that it is in a position to and hereby does assume full
responsibility for obtaining such additional information concerning Borrower's
financial condition as Guarantor may deem material to its obligations hereunder,
and Guarantor is not relying upon, nor expecting Lender to furnish it any
information in Lender's possession concerning Borrower's financial condition or
concerning any circumstances bearing on the existence or creation, or the risk
of nonpayment or nonperformance of the Liabilities.
Guarantor hereby waives any duty on the part of Lender to disclose to
Guarantor any facts it may now or hereafter know about Borrower, regardless of
whether Lender has reason to believe that any such facts materially increase the
risk beyond that
6
<PAGE> 41
which Guarantor intends to assume or has reason to believe that such facts are
unknown to Guarantor.
Guarantor hereby knowingly accepts the full range of risk
encompassed within a contract of "Continuing Guaranty" which includes, without
limitation, the possibility that Borrower will contract for additional
indebtedness for which Guarantor may be liable hereunder after Borrower's
financial condition or ability to pay its lawful debts when they fall due has
deteriorated.
13. Representations and Warranties. Guarantor represents
and warrants to Lender that each of the following statements is accurate and
complete as of the date of this Continuing Guaranty:
a. this Continuing Guaranty has been duly executed
and delivered by Guarantor and constitutes a legal, valid and binding
obligation of Guarantor, enforceable against Guarantor in accordance
with its terms, except as limited by bankruptcy, insolvency or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally;
b. the execution, delivery and performance of this
Continuing Guaranty do not (i) violate any provisions of law or any
order of any court or other agency of government (each, a "Requirement
of Law"), (ii) contravene any provision of any material contract or
agreement to which Guarantor is a party or by which Guarantor or
Guarantor's assets are bound (each, a "Contractual Obligation"), or
(iii) result in the creation or imposition of any lien, charge or
encumbrance of any nature upon any property, asset or revenue of
Guarantor except pursuant to or as set forth in the Security Documents;
c. all consents, approvals, orders and
authorizations of, and registrations, declarations and filings with, any
governmental agency or authority or other person or entity (including,
without limitation, the shareholders or partners of any entity), if any,
which are required to be obtained in connection with the execution and
delivery of this continuing Guaranty or the performance of Guarantor's
obligations hereunder have been obtained, and each is in full force and
effect;
d. Guarantor has paid all taxes and other charges
imposed by any governmental agency or authority due and payable by
Guarantor other than those which are being challenged in good faith by
appropriate proceedings except pursuant to or as set forth in the
Security Documents;
e. Guarantor is not in violation of any Requirement
of Law or Contractual Obligation other than any violation the
consequences of which could not have a material averse effect on
Guarantor's ability to perform its obligations hereunder (a "Material
Adverse Effect"); and
7
<PAGE> 42
f. no action, proceeding, investigation or
litigation is pending or overtly threatened against Guarantor by any
person or entity which, if adversely determined, could have a Material
Adverse Effect.
14. Guarantor Financial Information. Guarantor will
provide Lender in writing such financial and other information with respect to
his assets and liabilities as Lender shall reasonably request from time to
time, in form satisfactory to Lender.
15. Binding Upon Successors; Death of Guarantor. This
Continuing Guaranty shall be binding upon Guarantor and Guarantor's successors
and assigns and shall inure to the benefit of Lender and its successors and
assigns. This Continuing Guaranty shall not terminate or be revoked upon the
death of Guarantor, notwithstanding any knowledge by Lender of Guarantor's
death.
All references herein to Borrower shall be deemed to include
its successors and assigns, and all references herein to Guarantor shall be
deemed to include Guarantor and Guarantor's successors and assigns or, upon the
death of Guarantor, the duly appointed representative, executor or
administrator of Guarantor's estate.
In addition and notwithstanding anything to the contrary
contained in this Continuing Guaranty or in any other document, instrument or
agreement between or among any of Lender, Borrower, Guarantor or any third
party, the obligations of Guarantor with respect to the Liabilities shall be
joint and several with any other person or entity that now or hereafter executes
a guaranty of any of the Liabilities separate from this Continuing Guaranty.
16. Notices. All notices required or permitted to be given
hereunder shall be in writing and shall be either personally delivered, faxed
to the fax numbers provided herein or sent by United States certified or
registered mail, return receipt requested, addressed to Guarantor or Lender at
their respective addresses stated below or at such other address as either
party hereafter notifies the other party as herein provided. Notices shall be
deemed received on the earlier of (i) the date noted on the return receipt as
delivered if mail delivery of the notice is successful or the date inscribed on
a confirmation of successful transmission, if sent by facsimile; (ii) the last
date of attempted delivery, as noted by the United States Postal Service on the
envelope containing the notice, if mail delivery is unsuccessful; or (iii) the
date of the actual delivery if personally delivered.
17. Governing Law; Additional Waivers. This Continuing
Guaranty has been delivered and shall be governed by and construed in
accordance with the internal laws (as opposed to the conflicts of law
provisions) of the State of Arizona, provided that Guarantor agrees that each
of the waivers and agreements of Guarantor herein which refer to provisions of
the California Civil Code and the California Code of Civil Procedure shall be
effective and enforceable to the extent permitted under applicable law, and to
the extent that any court of competent jurisdiction shall apply the laws of the
State of California to determine the relative rights or remedies of Lender and
Guarantor hereunder, such waivers and agreements by Guarantor shall be governed
by the laws of the State of California.
8
<PAGE> 43
GUARANTOR HEREBY
(i) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO ENFORCE
OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS CONTINUING
GUARANTY, AND ACKNOWLEDGES THAT LENDER ALSO WAIVES SUCH RIGHT;
(ii) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED IN MARICOPA COUNTY, ARIZONA, OVER ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO
THIS CONTINUING GUARANTY;
(iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT GUARANTOR MAY
EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING;
(iv) agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in any other
jurisdictions by suit on the judgment or in any other manner provided by
law; and
(v) agrees not to institute any legal action or proceeding
against Lender or any of Lender's directors, officers, employees, agents
or property concerning any matter arising out of or relating to this
Continuing Guaranty in any court other than one located in Maricopa
County, Arizona.
Nothing herein shall affect or impair Lender's right to serve
legal process in any manner permitted by law or Lender's right to bring any
action or proceeding against Guarantor or its property in the courts of any
other jurisdiction. Wherever possible each provision of this Continuing
Guaranty shall be interpreted as to be effective and valid under applicable
law, but if any provision of this Continuing Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective only to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Continuing Guaranty.
18. KNOWING AND EXPLICIT WAIVERS. GUARANTOR REPRESENTS AND
WARRANTS THAT GUARANTOR IS FULLY AWARE OF THE SPECIFIC PROVISIONS OF DIVISION
THREE, PART 4, TITLE 13 OF THE CALIFORNIA CIVIL CODE, INCLUDING SECTIONS 2787
THROUGH 2855, AND OF SECTIONS 580A, 580B AND 580D OF THE CALIFORNIA CODE OF
CIVIL PROCEDURE, AND THAT GUARANTOR'S WAIVERS HEREIN OF ALL RIGHTS, BENEFITS,
PROTECTIONS AND DEFENSES THAT MAY BE AVAILABLE THEREUNDER AND ALL OTHER WAIVERS
HEREIN ARE EXPLICIT, KNOWING WAIVERS.
9
<PAGE> 44
GUARANTOR ACKNOWLEDGES THAT GUARANTOR HAS EITHER OBTAINED THE ADVICE OF
COUNSEL OR HAS HAD THE OPPORTUNITY TO OBTAIN SUCH ADVICE IN CONNECTION WITH THE
TERMS AND PROVISIONS OF THIS CONTINUING GUARANTY. GUARANTOR FURTHER ACKNOWLEDGES
THAT BY EXECUTING THIS CONTINUING GUARANTY, GUARANTOR IS WAIVING CERTAIN RIGHTS
AS OTHERWISE SET FORTH HEREIN TO WHICH GUARANTOR MAY OTHERWISE BE ENTITLED BY
LAW.
THIS CONTINUING GUARANTY CONTAINS THE COMPLETE UNDERSTANDING OF THE
PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREIN. GUARANTOR ACKNOWLEDGES
THAT GUARANTOR IS NOT RELYING UPON ANY STATEMENTS OR REPRESENTATIONS OF LENDER
NOT CONTAINED IN THIS CONTINUING GUARANTY AND THAT SUCH STATEMENTS OR
REPRESENTATIONS, IF ANY, ARE OF NO FORCE OR EFFECT AND ARE FULLY SUPERSEDED BY
THIS CONTINUING GUARANTY.
This Continuing Guaranty may only be modified by a writing executed by
Guarantor and Lender.
IN WITNESS WHEREOF, Guarantor has executed this Continuing Guaranty this
18th day of November, 1994.
"Guarantor"
/s/ FARROKH ALAGHBAND
-------------------------------
Farrokh Alaghband
Guarantor's address
for notices:
2807 Harborview Dr.
--------------------------------
Corona Del Mar, CA 92625
--------------------------------
Lender's address for notices:
Greyhound Financial Corporation
201 N. Figueroa St., Ste. 900
Los Angeles, CA 90012
Facsimile: (213) 580-5678
10
<PAGE> 45
AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is made as of this 8th day of
November 1995 between FINOVA Capital Corporation, successor in interest to
Greyhound Financial Corporation ("FINOVA") and Procom Technology, Inc.
("Procom") in reference to the following stipulated facts:
A. FINOVA and Procom have previously entered into the certain Loan
and Security Agreement dated November 18, 1994 ("Loan Agreement"), regarding
FINOVA's financial accomodations to Procom.
B. Procom has requested certain modifications to the Loan
Agreement. FINOVA is willing to make certain modifications but only on the
terms and conditions set forth below.
Now therefore, the parties agree as follow:
1. Capitalized terms herein, unless otherwise defined herein, shall
have the meaning set forth in the Loan Agreement.
2. The Total Facility, as set forth on page S-1 of the Loan Agreement,
is hereby changed from $9,000,000 to $13,000,000.
3. Paragraph A.(a) on page S-1 on the Loan Agreement is hereby
modified by replacing "Four Million Dollars ($4,000,000)" with "Six Million
Dollars ($6,000,000)."
4. Paragraph B.(a) on page S-2 of the Loan Agreement is hereby
modified by replacing "Five Million Dollars ($5,000,000)" with "Seven Million
Dollars ($7,000,000)."
5. The paragraph titled "Interest" on page S-2 is hereby modified by
deleting the reference therein to "Four Million Dollars ($4,000,000)" in the two
places set forth in that paragraph and replacing it with "Six Million Dollars
($6,000,000)." The paragraph is further modified by adding the following:
"If, during any full calendar quarter during the term of this
Agreement, volume under the Floorplan Credit Line (as measured by the total of
the face amounts of invoices funded by FINOVA under the Floorplan Credit Line
during such period) is equal to or greater than the amount set forth below, the
interest rate of 1.5% in excess of the Base Rate shall be retroactively reduced
to a per annum rate (over a 360 day year) to the corresponding rate set forth
below.
<TABLE>
<CAPTION>
QUARTERLY
FLOORPLAN VOLUME RATE OVER BASE RATE
- ---------------- -------------------
<S> <C>
$7,000,000 1.0%
$8,500,000 0.5%
$10,500,000 0.0% (Interest charged at Prime)
</TABLE>
<PAGE> 46
6. In addition to all other fees and expenses, Borrower agrees to pay
on the date hereof an amendment fee of $20,000 plus all of FINOVA's
out-of-pocket legal expenses and costs not to exceed $1,000 incurred in
connection with the negotiation, documentation and closing of this Amendment.
The $20,000 Amendment fee shall be paid as follows: $10,000 shall be charged to
borrower's Revolving Credit Line on the date hereof. The remaining $10,000
will be charged on May 1, 1996.
7. Except as otherwise provided by the terms of this Amendment, the
Loan Agreement remains in full force and effect.
8. This Amendment may be executed in counterparts, each of which when
taken together shall be one and the same document.
9. This Amendment shall be governed by the laws of the State of
Arizona.
PROCOM TECHNOLOGY, INC.
By [SIG]
-----------------------------
Its [SIG]
----------------------------
FINOVA Capital Corporation
By
-----------------------------
Its
----------------------------
The undersigned guarantors hereby consent
and agree to the foregoing and confirm and
acknowledge that their respective Guaranties remain
in full force and effect in accordance with their terms.
/s/ ALEX AYDIN
- -------------------------------------------
Alex Aydin
/s/ ALIREZA RAZMJOO
- -------------------------------------------
Alireza Razmjoo
/s/ NEWSHA SHAHRESTANY
- -------------------------------------------
Newsha Shahrestany
/s/ FARROKH ALAGHBAND
- -------------------------------------------
Farrokh Alaghband
<PAGE> 47
[PROCOM TECHNOLOGY LETTERHEAD]
September 18, 1996
Mr. Murray August
FINOVA Capital
1060 First Ave. Ste. 100
King of Prussia, PA 19406
RE: Notification of Officer Compensation,
Year Ended July 26, 1996
Dear Murray:
Pursuant to your recent request, I provide for your review a report of the
amounts paid to the four executive officers of the Company for bonuses for the
year ended July 26, 1996.
Our Loan Agreement allows for the payment of bonuses of up to 50% of the
Company's pretax income, twice a year, after the issuance of financial
statements. I have enclosed for your review copies of the financial statements
for the year ended July 26, 1996. These financials reflect pretax income of
$5.056 million, but included are actual or accrued bonus payments of $2.890
million, for adjusted prebonus income of $7.946 million. One half that amount
would be $3.973 million, and the bonuses of $2.850 would be in compliance with
our agreement. The accrued bonuses will be paid within the next month or so.
I have also attached for your review a computation showing our compliance with
the various financial covenants at July 26, 1996.
Our auditors have asked me to have you confirm receipt of our August 11, 1996
letter asking for your understanding of the previous compensation
arrangements. Please acknowledge receipt by initialling below, and faxing a
copy to me at (714) 261-5481, and to Brenda at Arthur Andersen at (714)
757-3163.
Thank you, and fee free to call me with any questions.
Sincerely,
/s/ FRED JUDD
Frederick Judd
Vice President Finance
Fred- Finova has received and acknowledges this letter and the August 11, 1996
letter re: compensation. Any technical violations are waived by Finova
(without waiving the right of Finova to declare any similar or other violation
a default of the Loan Agreement).
FINOVA By /s/ MURRAY D. AUGUST Title ACCOUNT EXECUTIVE
--------------------------- -------------------------
Date 9/20/96
-------------------------
<PAGE> 48
[FINOVA LETTERHEAD]
October 29, 1996
Procom Technology, Inc.
Mr. Fred Judd
Vice President, Director of Finance
2181 Dupont Drive
Irvine, CA 92715
Dear Fred:
Please accept this letter as FINOVA's consent to allow Procom Technology Inc.
("Procom") to alter its capital structure as prevented in the Negative Covenant
14.1 Mergers (page 12) of The Loan & Security Agreement. We understand this
change to include a 3:1 stock split and subsequent sale of 3 million shares of
stock in the $9-to-$11 per share range.
Everyone at FINOVA is proud of Procom's accomplishments and success. We view
this momentous event as a significant milestone for Procom and look forward to
sharing with you more such events. We wish you continued success.
Sincerely,
FINOVA Capital Corporation
/s/ MURRAY D. AUGUST
Murray D. August
Account Executive
<PAGE> 49
[FINOVA LETTERHEAD]
November 14, 1996
Procom Technology, Inc.
Mr. Fred Judd
Vice President
2181 Dupont Drive
Irvine, CA 92715
Dear Fred:
This letter confirms that Procom Technology, Inc. ("Procom") may purchase up to
$13 million, reduced by any amount outstanding under the Revolving Line of
Credit, in inventory from FINOVA approved vendors.
FINOVA has reviewed the Certain Transactions and to the extent necessary waives
any violation that any transaction listed may have caused in the Loan &
Security agreement between Procom and FINOVA.
FINOVA acknowledges the officer bonuses of $2.89 million were earned by the
officers for the year ended 7/26/96 and that the amount and payment of these
bonuses is not a violation of any term of the loan agreement.
Thank you very much for giving FINOVA the opportunity to handle your account.
Sincerely,
FINOVA Capital Corporation
/s/ MURRAY D. AUGUST
Murray D. August
Account Executive
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
December 4, 1996
