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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------- TO---------------.
COMMISSION FILE NUMBER 0-22015
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ARTECON, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 77-032-4887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6305 El Camino Real
Carlsbad, CA 92009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 931-5500
Securities registered pursuant to
Section 12(b) of the Act:
NONE
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of May 15, 1998 was $22,308,886 based upon the last sales price
reported for such date on the Nasdaq National Market. The foregoing excludes the
Common Stock held by executive officers, directors and shareholders whose
beneficial ownership exceeds 5% of the Common Stock outstanding at May 15, 1998.
Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.
As of May 15, 1998, registrant had outstanding 21,416,323 shares of
Common Stock.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's Registration Statement on
Form S-1 (Registration No. 333-20045), as amended, the Registrant's Registration
Statement on Form S-4 (Registration No. 333-47593), the Registrant's
Registration Statement on Form S-8 (No. 333-56281) and the Registrant's
Registration Statement on Form S-8 (No. 333-29129) are incorporated herein by
reference with Part IV of this Report.
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ARTECON, INC.
INDEX TO ANNUAL REPORT IN FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
PART I
ITEM 1. Business.......................................................... 3
ITEM 2. Properties........................................................21
ITEM 3. Legal Proceedings.................................................22
ITEM 4. Submission of Matters to a Vote of
Security Holders..................................................22
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................23
ITEM 6. Selected Financial Data...........................................23
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................24
ITEM 7A Quantitative and Qualitative Disclosures
About Market Risk.................................................30
ITEM 8 Financial Statements and Supplementary Data.......................30
ITEM 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............................30
PART III
ITEM 10. Directors and Executive Officers of
the Registrant....................................................30
ITEM 11 Executive Compensation............................................33
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management.............................................37
ITEM 13. Certain Relationships and
Related Transactions..............................................38
PART IV
ITEM 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K...........................................40
</TABLE>
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PART I
ITEM 1. BUSINESS
BUSINESS
The discussion in this Annual Report on Form 10-K contains
forward-looking statements which involve risks and uncertainties. Actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Annual Report on Form
10-K.
Artecon, Inc. ("Artecon" or the "Company") designs, manufactures,
markets and supports a broad range of scalable, fully integrated data storage
products for the open-systems computing environment. The Company has established
itself as a leader in the design, manufacture and sale of third-party mass
storage and enhancement products in the Sun Microsystems ("Sun"), UNIX and
PC-LAN markets, offering both host-attached and network-attached storage
solutions for a broad range of customers. Artecon's enterprise storage product
line includes scalable RAID systems which allow users to grow modularly from a
single mass storage device to over ten terabytes ("10TB") of rack-mounted,
fault-tolerant mass storage, thereby meeting the capacity and performance needs
of a wide range of customers while protecting and maintaining the customer's
investment. The Company's telecommunications infrastructure storage products
represent what the Company believes is the industry's only fully NEBS-certified,
multi-terabyte solution for high-end, application-specific needs of
telecommunications and government customers using commercial off-the-shelf
("COTS") workstation technology. Artecon also markets rack-mount solutions for
COTS workstations and servers and provides systems integration and a variety of
other service and support programs.
On March 31, 1998, the Company (then known as Storage Dimensions,
Inc.) entered into a merger transaction with Artecon, Inc., a California
corporation ("Artecon California"), in a stock-for-stock transaction accounted
for as a purchase of the Company by Artecon California but in which the Company
was the surviving entity (the "Storage Dimensions Merger"). In connection with
the Storage Dimensions Merger, the Company changed its name from Storage
Dimensions, Inc. to Artecon, Inc. The financial results included in this Annual
Report are those of Artecon California (including the results of operations of
the business of Falcon Systems, Inc. following the Falcon Acquisition (as
defined below) in August 1997). As a result of the Merger, the Company is one of
the world's largest third-party storage companies serving the combined PC-LAN
and UNIX open systems network computer markets.
In August 1997, Artecon California acquired substantially all of the
assets and liabilities of Falcon Systems, Inc. ("Falcon"), a network-attached
storage server integrator and storage peripherals reseller, in a transaction
accounted for as a purchase of Falcon by Artecon California (the "Falcon
Acquisition"). The Falcon Acquisition has enabled the Company to achieve several
important strategic objectives, including the acquisition of the AerREAL(TM)
real-time specialized file server software and other complementary products to
better serve the Company's existing customers, the expansion of the Company's
customer base in the UNIX, Windows NT and Windows 95 markets and a significant
expansion of the Company's revenue base.
In June 1998, Artecon California was merged with and into the
Company.
INDUSTRY BACKGROUND
The rapid proliferation of new data-intensive applications, such as
video, the Internet, intranets, multimedia, data warehousing and data mining,
and the migration of mission-critical applications away from mainframe computers
have fueled the demand for open-systems data storage. Disk storage systems, tape
backup systems and software-based management tools designed to operate on
multiple platforms are becoming a strategic part of the MIS environment. MIS
purchase decisions are becoming increasingly focused on data storage and,
increasingly, capital expenditures for storage systems are equal to or greater
than those made on computer processing hardware. Storage architectures based on
protocols such as
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UltraSCSI and Fibre Channel and topologies such as Storage Area Network are
driving a much greater focus on data center purchasing towards storage.
Currently, the industry is split into solutions based on host-attached storage
and solutions based on network-attached storage.
UNIX and Windows NT. Open-systems platforms today employ either UNIX
variants, such as Solaris (Sun), HPUX (HP), AIX (IBM) and IRIX (SGI), or Windows
NT from Microsoft. Together, these operating systems are installed on the vast
majority of computers used in the enterprise. UNIX platforms currently have the
largest installed user base in terms of numbers of units, with the Windows NT
user base expanding. International Data Corporation ("IDC"), an independent
market research firm, estimates that the worldwide market for RAID storage
systems in UNIX environments will grow at a compounded annual growth rate of
19.3%, increasing from $6.3 billion in 1996 to $12.9 billion in 2000. In
addition, IDC estimates that the worldwide market for Redundant Arrays of
Independent Disks ("RAID") storage systems in Windows NT environments will grow
at a compounded annual growth rate of 34.1%, increasing from $1.3 billion in
1996 to $4.3 billion in 2000.
Many companies use a combination of both types of systems, often
employing Windows NT-based Intel machines for front office work (e.g.,
accounting, office support, administration) and UNIX-based RISC workstations for
back office functions such as engineering and manufacturing. More recently,
Windows NT workstations have been developed by companies such as Compaq and
Hewlett Packard ("HP"), among others, to challenge the dominance of UNIX
workstations in the engineering, scientific and other technical arenas. This has
resulted in a gradual but steady transition from the UNIX-installed base towards
Windows NT, further exacerbating the need for open-systems storage solutions
that support both operating systems on platforms from a variety of vendors.
Host-Attached Storage. The open-systems market's current
host-attached storage options include disk arrays, RAID storage systems and tape
backup systems. Each of these is generally attached to the host by the Small
Computer Systems Interface ("SCSI"). UltraSCSI, an enhanced SCSI interface
introduced in 1996 which is designed to transfer data at higher rates with
enhanced reliability and lower error rates, has been the dominant commercially
available interface currently used in most disk array and RAID storage systems.
Fibre Channel, an emerging high-speed serial interface that has recently become
commercially available, is regarded by many industry participants as the storage
industry's next-generation interface. Fibre Channel enables the transfer of data
between computers and peripherals at substantially increased rates, over greatly
increased cabling lengths and among a greater number of host/device connections.
A number of industry leaders, including Microsoft Corporation, Seagate, Quantum,
IBM, Sun, Adaptec and Emulex, have indicated support for Fibre Channel
technology and have announced that they are producing or plan to produce
products that incorporate it.
Network-Attached Storage. The requirements of the data-intensive
network environment have contributed to the growing importance of the network
file service function, which involves reading and writing files to and from
shared data storage over the network. Until recently, the file service function
had been performed exclusively by larger, general purpose computer systems which
also executed other tasks such as print serving, application processing and
communications functions. As networks evolved, network managers increasingly
dedicated general-purpose systems specifically to the file service task in order
to enhance performance, simplify administration and reduce vulnerability to
other application related failures. These dedicated systems became known as
"file servers."
Systems vendors have offered a variety of specially configured and
add-on solutions for general-purpose systems deployed as file servers. Selected
vendors have also introduced highly specialized, hardware-intensive systems
designed to exclusively perform the file service task. These approaches, such as
the use of hardware accelerators and the introduction of specialized hardware
architectures, have been optimized for throughput. However, they are generally
not designed to address the specific problem of response time, which is critical
in data-intensive network environments. In addition, because these approaches
lack the flexibility to easily integrate additional network, file system and/or
disk interfaces or protocols associated with today's heterogeneous networks
(such as mixed UNIX and NT networks), these approaches do not directly address
the reliability and access issues associated with data storage on a network.
Consequently, network-attached storage systems have lacked cost-effective,
flexible solutions to address data-
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access performance, data administration and data availability and reliability
issues in the data-intensive network environment.
The Internet and the World Wide Web (WWW). The virtual explosion of
the Internet and subsequently corporate-wide intranets has had a profound impact
on the computer industry in general and on the demand for storage solutions in
particular. The Internet and intranet environments involve intensive processing
or computation of, and frequent user access to, large volumes of data and
consequently require a mission critical level of high-availability mass storage.
Moreover, the data intensity of these environments is expected to continue to
increase substantially due to the development of new applications and services
and the more prevalent use of stored digital graphics, voice and video,
requiring dramatically more data capacity and performance than equivalent
alphanumeric information.
Telecommunications Industry. The enactment by Congress of the
Telecommunications Deregulation Act in 1996, the opening up of additional radio
frequency spectrum for wireless communications by the Federal Communications
Commission and other significant recent developments have spurred dramatic
changes in the worldwide telecommunications industry. The development and
build-out of expanded markets and new modes of communication that have been
enabled by these changes, including digital cellular systems, personal
communications systems ("PCS"), satellite-based communications systems, Internet
and cable systems, will require enormous capital expenditures for new
infrastructure. Artecon believes that a significant element of the required
infrastructure will consist of high performance mass storage systems that must
be specially adapted and certified for use in the telecommunications industry.
Telecommunications companies are seeking COTS-based solutions that can be
adapted and deployed in their embedded architectures due to ever-increasing cost
pressures and time-to-market constraints. These solutions are typically based on
UNIX and/or Windows NT systems and employ highly redundant RAID storage systems.
THE ARTECON SOLUTION
The Company develops and markets a comprehensive range of scalable,
fully integrated data storage products and services for the open-systems
computing environment. Artecon's products are both host-attached and
network-attached, are based on a common architecture allowing scalability from
the first desktop mass storage unit purchased to multi-terabyte data center
installations and are compatible with a variety of UNIX and Window NT platforms.
The Company's family of products and services is intended to provide users with
the following benefits:
- High Performance with Mission-Critical High Availability.
Recognizing the increased demand for faster response times, greater
capacities, higher availability of data and minimum system downtime,
the Company has focused on developing high-end, high-performance
storage products using SCSI, Ultra SCSI and Fibre Channel interfaces.
Redundant system components such as dual power inlets and multiple
fans are intended to eliminate any single point of failure to ensure
maximum system uptime.
- Scalability. The Company's products are designed using a flexible,
modular architecture allowing the Company to size and configure
storage systems to the application-specific requirements of
individual customers. In addition, this architecture allows Artecon
to resize and reconfigure these systems to adapt to the changing
needs of customers, while allowing them to retain capital value in
their underlying systems. By allowing users to grow modularly from a
single mass storage device to over 10 TB of rack-mounted,
fault-tolerant RAID mass storage, Artecon's hot-plug removable mass
storage subsystems address the capacity and performance needs of
customers while protecting customer investment.
- Multi-Platform Support. As an independent provider of storage
products, the Company is well positioned to provide storage systems
specifically designed to be compatible with a variety of UNIX and
Windows NT platforms. This cross-platform capability allows end users
to standardize on a single storage system that can readily be
reconfigured and redeployed at minimal cost as operating systems or
other open-system components change.
- High-Performance Backup. To satisfy market demand for reliable,
high-quality backup products and systems, the Company offers a broad
variety of
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backup products, including tape library systems, backup software,
training and documentation. Artecon has specialized expertise in the
design and implementation of effective, well-integrated backup
solutions designed to satisfy customers' individual needs, from
departmental server systems to enterprise network systems.
- All-Encompassing Solutions. The Company delivers all-encompassing
solutions including design consulting, systems integration,
installation, training, comprehensive service and technical support
and software-based management tools. Artecon employs a full staff of
direct sales personnel and applications engineers to assist customers
in making appropriate and effective storage system purchases and in
addressing, analyzing and solving complex, pre-deployment storage
problems. This value-added approach is designed to foster customer
loyalty and allow the Company to identify emerging customer
requirements for future data storage products.
ARTECON'S STRATEGY
The Company's objective is to continue its growth and enhance its
position as a leading independent provider of host-attached and network-attached
storage solutions to the open-systems marketplace. To achieve this objective,
Artecon plans to build upon its record of successfully introducing and
commercializing new products and technologies that address the evolving data
storage needs of its broad customer base. Key elements of this strategy are:
- Complement Major Platform Vendors. The Company intends to continue
to complement the major platform vendors, including Sun, Hewlett
Packard ("HP"), Silicon Graphics ("SGI"), IBM and others, by
engineering, manufacturing and marketing value-added products that
address a broad spectrum of customer needs while enhancing and
extending the platform vendor's own product lines. For example,
through Artecon's Telecommunications Products Division, Artecon has
extended Sun and other COTS workstation products into the -48VDC
telecommunications market.
- Provide Complete Solutions and Product Migration Path. The
Company's products are designed to address a wide range of customer
needs. By utilizing common core technology throughout its product
line, Artecon enables customers to migrate from product to product
across multiple platforms to address the changing needs of growing
companies. By providing comprehensive solutions, the Company is able
to work more closely with customers, offer additional modules or
products and provide additional services as an ongoing course of
business.
- Continued Emphasis on Sun Microsystems Market. The Company intends
to maintain its status as a leading third-party provider of mass
storage and enhancement products for use in conjunction with Sun (or
SGI) computer systems, both by continuing its focus on the primary
Sun distribution network and by continuing its active participation
as a strategic telecommunications partner of Sun. Artecon's Sun
distribution channels include SunExpress, Merisel, Access Graphics,
Ingram Micro, GTSI, Sun Federal and C. Itoh.
- Expanded Market Penetration. While maintaining its status as a
leading provider for the Sun market, the Company intends to continue
to provide industry-leading mass storage and enhancement products for
use in the Windows NT market and other UNIX markets. The Company has
a number of products designed for use on Windows NT platforms
including its Superflex RAIDPRO line of disk storage products. In
addition, the Company recently introduced its Redundant Data Path
(RDP) software for Windows NT platforms which provides the capability
to support two independent data paths with failover capability.
- Focus on Specialized Storage Needs of Data-Intensive Markets. The
Company intends to continue to target users of UNIX and Windows NT
computing environments who require high-performance,
high-availability and fault-tolerant storage solutions, such as end
users in data-intensive industries, particularly the
telecommunications and Internet/intranet, financial services and
multimedia markets. Artecon, as an independent provider of storage
systems, believes that it is well positioned to address the
multi-
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platform, multi-protocol computing requirements of these targeted
high-end users.
- Continue to Leverage Direct Sales Capabilities While Maintaining
and Expanding Reseller Channels. The Company believes that a properly
managed, diverse distribution channel strategy should result in the
greatest penetration of the market. Accordingly, Artecon utilizes
both a direct sales force and extensive reseller distribution
channels to penetrate major accounts while leveraging the reseller
channel into vertical markets. Direct customer contact provides the
Company with valuable market feedback and the ability to provide
high-quality technical support and enhance customer loyalty. At the
same time, however, the Company recognizes that its success to date
has been due in part to its strong relationships with its resale
partners, both domestically and overseas, and believes that
maintaining and expanding these distribution channels will provide
the Company with a significant competitive advantage.
PRODUCTS AND SERVICES
The Company's products and services are offered through two operating
divisions: the Enterprise Storage Division and the TeleCom Division. In order to
address the unique and highly specialized needs of the telecommunications and
Internet/intranet marketplace, the Company formed its TeleCom Division in June
1996. Artecon's Enterprise Storage Division is responsible for the other markets
targeted by Artecon, including finance (for example, commodities brokers and
trading analysts), multimedia (such as entertainment providers, cable companies,
news services and the companies building infrastructure to serve them),
government, advanced-technology and industrial markets. Within these two
divisions of the Company, Artecon's data storage solutions fall into four
general categories: enterprise storage, workstation and server rack solutions,
telecommunications infrastructure enabling technologies and systems integration
capability.
ENTERPRISE STORAGE DIVISION
The Company provides enterprise storage solutions to its customers
through its Lynx product line. By allowing users to grow modularly from a single
mass storage device to over 10TB of rack-mounted, fault-tolerant RAID mass
storage, the Company's Lynx hot-swap removable mass storage subsystems address
the capacity and performance needs of customers while maintaining and protecting
customer investment. The Lynx unit is the fundamental building block of all
Artecon storage solutions and has several unique and differentiating features,
including interlocking stackability, cableless design, ruggedized hot-swap drive
sleds, front-removable power supplies and auto termination. To date, over 70,000
Lynx storage units have been installed.
The Lynx line of storage solutions include LynxNSS network-attached
storage servers designed to meet the file storage and access needs of networked
environments and LynxArray and LynxStak RAID systems which offer host-attached
RAID protection and performance enhancement for creating highly available,
mission-critical storage systems. The Company believes that the performance,
flexibility, true scalability, hot-swap removable components and compact form
factor provide significant benefits to its customers. Major customers for the
Lynx include GTE Government Systems, Salomon Brothers/Smith Barney, Swiss Bank,
PSINet, and the US Army, Marines and Navy.
The Company's LynxStak(TM) product is an interlocking modular desktop
RAID solution that easily scales from 4GB to 126GB as required. A single
LynxStak unit may be expanded with up to 14 drives, one at a time in the field
by the end user customer. A single LynxStak RAID controller may be joined with a
second in the field as requirements grow more demanding to ensure
no-single-point-of-failure operation. The LynxStak system uses the same
high-performing hot-swap drives and RAID controller as Artecon's LynxArray,
giving the customer a high degree of investment protection. The LynxStak RAID
system supports any 3.5" or half-height 5.25" devices. Hot-plug removable
options for controllers, drives, and power supplies are available. Major
customers for LynxStak include Geoquest/Schlumberger, Nike, Sharp Electronics,
and Philips.
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Artecon's LynxArray(TM) family of products provides a tower or
rackmount RAID solution. The LynxArray family (LR3000, LR-5000, LR-7000) uses
the same architecture as capacity scales from 27GB to over 10TB so that customer
investment is protected. LynxArray uses an Intel-based RAID controller that
operates at a speed of 4600 I/Os per second. UltraWide SCSI channels from host
computer through controllers to drives allow 40MB per second burst and 33MB per
second sustained transfer rates. The LynxArray supports up 162GB of
hot-swappable disk capacity and two hot-swap failover RAID controllers in only
7" (4u EIA) of vertical space to optimize precious rack space. Inline support
for tape drives makes backup possible within the RAID subsystem. Hot swap
removable options for failover controllers, any 3.5" or half-height 5.25"
devices, redundant power supplies and fans are all available for more fail-safe,
potentially nonstop operation. Major customers for LynxArray include
WorldCom/UUNet, Philips, ING Group, Digital Sound Corporation, U.S. Navy, NTT
(Japan), Lockheed Martin, Qualcomm, EDS and the British MOD.
The LynxNSS(TM) is a family of specialized network-attached storage
servers dedicated to providing rapid file access for networks requiring 27
gigabytes (27GB) to over 2 terabytes of storage. LynxNSS supports multiple file
transfer protocols to facilitate file sharing in heterogeneous computer
environments while network connectivity is furnished by a variety of network
interfaces including 10/100BASE-T Ethernet, FDDI, CDDI and quarter- and
full-speed Fibre Channel. The Company believes that LynxNSS, which features
multi-processor hardware, specialized file server software, high-speed network
technologies and hardware-based RAID, offers better price/performance ratios
than both general-purpose servers and other specialized servers.
LynxNSS also employs the Company's AerREAL(TM) real-time specialized
file server software and multi-processor architecture to enhance performance,
while AerREAL's Journaling Automation System helps ensure data integrity and
hotswap components permit replacement without interrupting file service. The
LynxNSS allows mixed RAID levels so that different RAID levels can be chosen for
each application for best performance. Fully redundant failover configurations
are available for continuous mission-critical operation. Major customers of
LynxNSS include Lockheed Martin, California Department of Water, Oracle, and
AT&T.
The Company also develops and markets a broad and integrated family
of disk and tape storage systems that are designed to satisfy the
high-performance, fault-tolerance and high-availability requirements of its
customers while at the same time reducing life-cycle cost of ownership.
SuperFlex RAIDPRO disk storage products are designed and engineered to
incorporate leading edge features and capabilities relative to the storage
products offered by computer and server manufacturers, to minimize system
downtime and to support easy integration with a broad range of server platforms
and operating systems. While these products are generally developed for use with
Windows NT and NetWare operating systems, certain of such products are also
compatible with other operating systems, including Sun Solaris, IBM AIX and IBM
OS/2 operating systems.
To complement its disk products, the Company engineered a family of
high-speed, high-reliability MEGAFLEX tape backup systems that are designed to
address the challenges of backing up increasing amounts of data in
ever-shortening time periods. These tape products are developed and tested to be
easily integrated and fully compatible with the Company's disk storage systems.
In addition, tape backup products are offered as stand-alone products to back up
data maintained on other manufacturers' disk storage systems. To facilitate easy
network administration, the Company developed VantagePoint, a network storage
management software program that allows remote monitoring and oversight of
multiple storage systems on the network from a single central console. The
Company believes that its disk and tape storage products are differentiated from
competitive products based on functionality, performance, ease of use and lower
life-cycle cost of ownership.
The Company will continue to enhance its existing extensive
proprietary object-oriented software library. This library is designed to enable
Artecon to quickly integrate new hardware technologies to bring new products to
market in a rapid and cost-effective manner. This software library supports a
range of operating systems with a minimum of additional software investment. For
example, the advanced SuperFlex 4000 and 5000 products incorporate proprietary
RAIDFlex disk array management software, which was specifically engineered to
facilitate cross-platform support and to require only a minimal portion of the
underlying code to be rewritten to adapt it to a new operating system.
Similarly, the Company can adapt RAIDFlex software to manage a new generation
RAID controller by
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modifying only the section of the code that deals with controller-specific
algorithms and instruction sets. There is an U.S. patent application pending
associated with the object-oriented, layered architecture of its RAIDFlex array
management software.
The Company's disk and tape storage products utilize proprietary
software to incorporate leading edge hardware features and capabilities relative
to the storage products offered by computer and server manufacturers, with
design features specifically engineered to minimize system downtime and to
support easy integration and administration. For example, in May 1996, SuperFlex
3000 was introduced with DGR. The DGR feature provides the ability to both
expand and reconfigure a RAID array without taking the system off-line,
therefore significantly reducing the time, effort and cost of managing RAID
storage in typical corporate network environments. SuperFlex with DGR won LAN
Times' "Best of LAN Times" (1997) and PC Week's "Analyst's Choice" (1996)
awards.
The Company's disk and tape storage products have won numerous other
awards, including: Network Magazine 1998 "Product of the Year" - Superflex 5200.
INFOWorld's "Hot Products" (1997); LAN Times' "Best of LAN Times" (1996);
Computer Technology Review's "Editor's Choice" (1995); LAN Magazine's "Disk
Array Product of the Year" (1995); and Networld+Interop's "Best of Show" (1995).
WORKSTATION AND SERVER RACK SOLUTIONS
The Company's Sphinx(TM) workstation and server rack solutions enable
users to rackmount COTS desktop workstations from Sun and SGI into powerful,
application-specific servers. Sphinx products protect against shock and
vibration events, maintain the thermal integrity of the workstation/server,
enhance system physical security while providing a very compact expansion
capability. Artecon believes it offers a superior solution than the typical rack
shelf used for rackmounting workstations and servers. Sphinx also allows hot
swap removable devices to be added so that a variety of powerful and expandable
configurations can be constructed, including high-end clustered compute servers,
high availability failover servers, network servers and database servers.
The Sphinx has a patented design intended to ensure that the
workstation or server remains unmodified so manufacturer's warranty, service,
upgradability and pricing are left intact. Other features include locking side
rails with mounting brackets, patented tuck-away, side-mounted lug handles, a
locking front panel for extra security, and flexibility to add up to an
additional four hot swap removable disks or CD, MO, and tape devices with a high
degree of space efficiency. Single or dual SCSI I/O connections provide fast,
redundant access to all devices. Power on/off, serial and keyboard ports are
located on the front of the chassis, and users have unobstructed access to the
backplane of the workstation or server for easy service.
The Company's Sphinx customers range from manufacturing floor and
computer center applications, to government agencies with requirements for
shipboard, aircraft and ground vehicle deployment of desktop workstations. Major
customers for the Company's Sphinx include Sun Microsystems, Oracle, Adobe, the
U.S. Air Force, Navy and Army, Westinghouse and JPL.
TELECOM DIVISION
The Company's TeleCom Division designs, manufactures, markets and
supports fully integrated, industry-compliant storage products, services and
solutions for the telecommunications ("telco") and Internet/intranet markets by
utilizing commercially available workstation, server and other
application-specific products for enhanced price/performance characteristics and
reduced time to market. Most of the products and services manufactured and
marketed by Artecon's Enterprise Storage Division can be utilized by
telecommunications and Internet service providers.
Requirements unique to the telecommunications industry include -48VDC
power (native to the Central Office environment) and compliance with Bellcore's
Network Equipment-Building System ("NEBS") areas of standardization, which
include electromagnetic compatibility, thermal robustness, fire resistance,
earthquake and office vibration resistance, transportation and handling,
acoustics and illumination and airborne contaminants. Telco embedded
infrastructure projects are exceptionally demanding in terms of high
availability and redundancy due to the
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<PAGE> 10
uptime requirements of the world's telephone and communications support
equipment. NEBS testing requires a certified unit to be able to withstand an
earthquake, a lightning strike, a fire, severe airborne particulate
contamination, extreme temperature ranges and other catastrophic events. To
date, the Company believes it is the only open-systems storage company whose
RAID products are fully certified to Bellcore NEBS standards. In addition, the
Company's commercial enterprise storage products are built to the same demanding
standards, yielding very reliable systems for the commercial market.
Telco Storage Solutions. Most of the Company's enterprise storage
products, including LynxArray and LynxNSS, can be utilized by telecommunications
and Internet service providers. Artecon's LynxArray EXTREME products are already
in use by telecommunications and ISP providers such as Motorola, Qualcomm, AT&T,
Lucent Technologies, MCI, Sprint, Southwestern Bell, WorldCom/UUNet, Digital
Sound Corporation, Intervoice, and Intellivoice.
Workstation and Server Rack Solutions. The Company's Sphinx EXTREME
product line is fully NEBS-certified and has been instrumental in bringing Sun
and SGI workstation products into the telecommunications and typical Internet
service provider deployed (rack-mount) environment. Artecon's TeleCom Division
Sphinx customers include a wide range of telecommunications infrastructure and
Internet/intranet service providers building new Internet, wireless and PCS
services based on COTS workstations, including AT&T, Sprint, MCI, Qualcomm,
Motorola, Bell Atlantic/Nynex, and WorldCom/UUNet.
Power Products. The Company believes that its PowerSphinx(TM) EXTREME
is the industry's first 1.75" DC/DC power converter which allows unmodified COTS
workstations and other products to run in the - -48VDC environment of the
telecommunications Central Office. PowerSphinx EXTREME enables workstation and
networking products typically used in 110-240VAC environments to run unmodified
in the -48VDC context. Artecon believes this feature may significantly
accelerate its customers' time to market for new infrastructure while reducing
costs due to the ability to employ standard (as opposed to custom) workstation,
networking and other products.
PowerSphinx EXTREME is designed for use with 110-240VAC devices such
as workstations, switches, routers and hubs so that they may operate in the
- -48VDC telecommunications environment, thereby expanding the limits of available
product choices to engineers and integrators building telecommunications
systems. The Company believes that the compact 1.75" EIA rack height is an
improved and preferable alternative to typically large (often as much as 21" or
12u EIA) power inverters. PowerSphinx EXTREME has two hot-swappable,
load-sharing power modules to assure uninterrupted operation, combined with dual
- -48VDC inlet power connections to help virtually eliminate any single point of
failure. Other features include 1600 watts of total power output, hot-plug
removable power trays and fans, alarm system and dual LED displays. The
PowerSphinx EXTREME is fully certified to Bellcore NEBS standards and is in use
by such telco customers as Qualcomm, MCI, Korea Telecom, Dutch PTT, Motorola,
GTE, and Sprint.
Telecommunications Services. Most of the regional Bell operating
companies , InterExchange servers , long-distance haulers and switch
manufacturers lack the resources, time, expertise and inclination to invest in
internal integration of open systems and therefore look to a supplier who can
not only provide product but also single-source solutions. As a consequence, the
Company believes that its systems integration services are well suited to the
telecommunications market. Artecon has established product and integration
contracts with Motorola, Qualcomm and MCI.
The Company's systems integration services produce expandable systems
with maximum capabilities and space efficiency to suit each client's unique
situation. Artecon utilizes commercially available workstation, server,
networking and other application-specific products along with its own EXTREME
product line to produce highly customized solutions. By leveraging its unique
products, the Company believes it can often create the most cost-efficient and
in many cases, the only viable solution for a telco or Internet customer's
unique requirements. The Company's open-systems; COTS approach can accelerate
customers' time to market and provide customers with superior price/performance.
Unlike most systems integrators, Artecon does not require customers to purchase
computer systems from Artecon, and because the workstations or servers stay
unmodified, all manufacturer warranties and support agreements remain in effect.
With the Company's extensive
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<PAGE> 11
experience as systems integrator, innovative engineering, excellence in
manufacturing and comprehensive support, Artecon believes it can provide its
customers with powerful storage solutions.
PRODUCTS IN DEVELOPMENT
The Company has several products under development. Disk storage
products under development include a Fibre Channel storage system offering dual
redundant hardware RAID controllers with failover and scalability to over a
Terabyte. This consolidated storage system will connect via a Storage Area
Network comprised of Fibre Channel cabling and hubs to multiple servers,
offering very high bandwidth, high-availability, scalability, and longer
distance. The Company is also developing RAID systems that will support Ultra2
SCSI (a further enhanced version of Ultra SCSI) disk drives, providing sustained
data throughput of 80 MegaBytes per second.
In the area of software development for its server-attached disk
storage products, the Company has recently completed development of its
Redundant Data Path (RDP) software for NT, that provides the capability to
support two independent data paths with failover capability
CUSTOMERS
The Company targets both the horizontal markets defined by the
primary workstation vendors, such as Sun, SGI, HP and IBM, and, increasingly,
the vertical markets of the data-intensive telecommunications, finance and
multimedia industries. Artecon's customers include OEMs, systems integrators,
value added resellers (VARs), distributors and end users and span market
segments ranging from computer manufacturers to government agencies. The
following customers of Artecon California accounted for approximately that
percentage of Artecon California's total revenues set forth below during the
periods indicated: Sales to one customer did not exceed 10% of total revenue for
the fiscal year ended March 31, 1998; Tracor Enterprise Solution (25.4%) for the
fiscal year ended March 31, 1997; and GTE Government Systems (10.0%) for the
fiscal year ended March 31, 1996. No other customer accounted for more than 10%
of Artecon California's total revenues during the fiscal years ended March 31,
1998, 1997 and 1996. The following customers accounted for approximately that
percentage of Storage Dimensions' total revenue for the periods indicated: Sun
Financial Group (10%) for the fiscal year ended December 31, 1997, and Xerox
Corporation (13%) for the fiscal year ending December 31, 1996.
The following table lists end users of Artecon's products and/or
services, by industry, that Artecon believes (based on direct sales data and
data supplied by independent resellers and distributors) to have purchased at
least $500,000 of Artecon's products:
<TABLE>
<S> <C> <C>
TELECOMMUNICATIONS/ISP
Qualcomm WorldCom/UUNet Sprint
AOL MCI Nortel
Motorola PSINet NTT (Japan)
FINANCE
Swiss Bank ING Group
Salomon Brothers
MULTIMEDIA
DSC
GOVERNMENT/GOVERNMENT RELATED
Lockheed Martin U.S. Navy TRW
U.S. Army Rockwell JPL
Hughes GTSI U.S. Air Force
Northup Grumman EDS French Army
GTE Government Systems British MOD
MANUFACTURING
Eastman Kodak Boeing
Schlumberger
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C>
HIGH TECHNOLOGY
Oracle SGI
Sun Microsystems Unisys
Intel Hotmail
</TABLE>
SALES AND MARKETING
The Company utilizes both a direct sales force and reseller
distribution channels in the U.S. in order to provide broad market penetration
for its products. As of May 31, 1998, the Company's U.S. field sales
organization consisted of 63 sales professionals located in 17 geographical
markets, including, Silicon Valley, Sacramento, and Irvine California; Denver,
Colorado; Danbury, Connecticut; Tampa, Florida; Atlanta, Georgia; Barrington,
Illinois; Newburyport and Woburn, Massachusetts; New York City, New York; St.
Louis, Missouri; Las Vegas, Nevada; Bridewater, New Jersey; Coppell, Texas;
Vienna, Virginia; and Seattle, Washington. Artecon's international marketing
strategy has similarly been to utilize both a direct sales force and reseller
distribution channels for sales outside of the United States. Artecon
California's sales to customers located outside the United States represented
approximately 11.7%, 14.0%, and 25.2% of Artecon California's net revenues for
the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Direct sales
organizations of Artecon's subsidiaries in Japan (Tokyo, Osaka, Nagoya), the
Netherlands (Encschede), France (Paris) and the United Kingdom (London)
consisted of seven sales professionals.
The Company also employs a leveraged sales model that utilizes
distribution channels tailored to the needs of each user type. Artecon has
developed pricing structures and field sales commission plans that are designed
to minimize sales channel conflicts. The Company believes that this two-pronged
sales strategy provides a meaningful competitive advantage over competitors who
only provide products directly to end-user customers.
CUSTOMER SERVICE AND SUPPORT
The Company believes that its ability to provide comprehensive and
responsive support is an important element in penetrating new customer accounts
and in securing repeat business from existing customers. Artecon is committed to
providing superior customer service and support aimed at simplifying
installation, reducing field failures, minimizing system downtime and
streamlining administration.
Service revenues have not comprised a significant portion of the
Company's revenues to date. In certain geographical regions, and for an annual
or quarterly fee, Artecon maintains a staff of on-call technical personnel who
are available to visit the customer's site within a few hours of receiving a
request for service. In other geographical regions, Artecon indirectly provides
the same level of support by using third-party service companies. In all cases,
the Company's technical support engineers are available by phone on a
seven-day-per-week, 24-hour-per-day basis.
The Company provides standard warranties with all products sold which
are set forth in various documents and agreements, which are delivered to
customers with each product. As a general policy, Artecon ships replacement
hardware components to customers in advance of receiving returns of defective
components under a standard warranty, which generally runs three years. Artecon
occasionally issues credit in lieu of replacing a piece of equipment. A customer
may also contract for an extended warranty or on site maintenance support from
Artecon on all products.
RESEARCH AND DEVELOPMENT
To date, the Company has made substantial investments in research and
development, particularly in the areas of RAID, robotic backup, FC-AL, GUI
software development, and specialized file server software. Artecon's
engineering design team employs electrical engineering, mechanical engineering,
systems engineers and computer science professionals and places great importance
on the exchange of information with Artecon's sales and marketing and customer
support departments and with its distributors to develop new products and
product
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<PAGE> 13
enhancements that anticipate and address technological changes and evolving
industry standards and customer needs.
The Company generally designs its products to have a modular
architecture that can be readily modified to respond to technological
developments and paradigm shifts in the open systems computing environment. This
flexibility allows the Company to focus research and development resources on
specific product innovations and advancements. The modular architecture of the
products meets customer needs with solutions tailored to their applications and
products that can be adapted to changes in technology and in their computing
environments.
The Company's engineering design teams work cross-functionally with
marketing managers, applications, technical and production engineers and
customers to develop products and product enhancements. Artecon employs a full
staff of applications engineers to assist customers in making appropriate and
effective storage system purchases and in addressing, analyzing and solving
complex pre-deployment storage problems. The Company's technical support
engineering team and production engineering team also contribute to the quality,
manufacturability and usability of products from design to deployment. This
value-added capability fosters customer loyalty and allows Artecon to identify
emerging customer requirements for future data storage products.
Artecon California's expenses for research and development for fiscal
years 1996, 1997, and 1998 were $1.4 million, $2.3 million, and $3.1 million,
respectively. As of April 30, 1998, Artecon had 36 regular full-time and three
contract employees engaged in research and development activities, of which four
were specifically focused on research and development of products and services
directed at the telecommunications and Internet/intranet markets. Additionally,
Storage Dimensions' expenses for research and development for calendar years
1995, 1996, and 1997 were $5.4 million, $5.9 million and $6.3 million,
respectively.
The data storage system market is characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and increased storage capacities and the emergence of
new industry standards could render Artecon's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new products with increasing storage capabilities on a
timely basis that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers. There can be no assurance that Artecon will be successful in
developing and marketing any new products that respond to technological changes
or evolving industry standards, that Artecon will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of new products, or that its new products will adequately meet the
requirements of the marketplace and achieve market acceptance. In addition,
storage system products like those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released. There
can be no assurance that, despite testing by Artecon and by current and
potential customers, errors will not be found in new products after commencement
of commercial shipments, resulting in a loss or delay in market acceptance,
which could have a material adverse effect on the Company's business, operating
results or financial condition.
MANUFACTURING
The Company operates 43,000 square feet of manufacturing space
consisting of 30 separate product lines at its Carlsbad, California facilities.
Artecon's products are manufactured according to ECO specification in an
assembly-line production process. State-of-the-art equipment and software
include MRP, Just-In-Time ordering, TQM and in-house FedEx tracking. The Company
strives to develop close relationships with its suppliers, exchanging critical
information and implementing joint corrective action programs to maximize the
quality of its components, to reduce costs and inventory investments and to
create flexibility for rapid capacity expansion when required. Artecon believes
that its current facilities and capital equipment will be adequate to meet its
manufacturing needs in the foreseeable future.
The Company subcontracts some of its manufacturing, such as plastic
molding, metal bending, PCB fabrication and assembly, to qualified partners in
the U.S.
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<PAGE> 14
and Asia. Artecon owns the design and tools/molds associated with the
manufacture of these parts. The Company has designed and owns over 50 tools used
to produce various components of its Lynx, LynxStak, and LynxArray products. In
addition, Artecon relies upon a limited number of suppliers of several key
components utilized in the assembly of Artecon's products, including Seagate,
IBM, Quantum, Infortrend, Intel, CMD, Mylex and Sony. Artecon's reliance on its
manufacturing subcontractors and suppliers involves several risks, including: an
inadequate supply of required components; price increases; late deliveries; and
poor component quality. Although to date the Company has been able to obtain its
requirements of components, there can be no assurance that the Company will be
able to obtain its full requirements of such components in the future or that
prices of such components will not increase. In addition, there can be no
assurance that problems with respect to yield and quality of such components and
timeliness of deliveries will not occur. Disruption or termination of the supply
of these components could delay shipments of Artecon's products and could have a
material adverse effect on Artecon's business, operating results or financial
condition. Such delays could also damage relationships with current and
prospective customers. The Company has experienced delays in the shipments of
its products in the past, principally due to an inability of vendors to deliver
an adequate supply of components, resulting in delay or loss of product sales.
Although these delays in the past have not had a material adverse effect upon
Artecon's business, operating results or financial condition, there can be no
assurance that in the future any such delays would not have such a material
adverse effect.
COMPETITION
The market for the Company's products is extremely competitive.
Artecon has a number of competitors in various markets, including HP, Sun, IBM,
SGI, Compaq, DEC, DG Clariion, MTI, and EMC Corporation, many of which have
substantially greater name recognition, engineering, manufacturing and marketing
capabilities, and greater financial and personnel resources than Artecon. In
particular, a number of the Company's customers are also competitors, including
Sun and SGI. Artecon expects to experience increased competition from
established and emerging computer storage hardware and management software
companies, particularly HP, Sun, IBM, Compaq, DEC, and EMC Corporation.
In addition, increased competitive pressure could lead to intensified
price-based competition, which could have a material adverse effect on Artecon's
results of operations. There also has been, and may continue to be, a
willingness on the part of certain large competitors to reduce prices in order
to preserve or gain market share. The Company believes that pricing pressures
are likely to continue as competitors develop more competitive product
offerings.
The principal elements of competition in Artecon's markets include
rapid introduction of new technology, product quality and reliability, price and
performance characteristics, service and support and responsiveness to
customers. The Company believes that, in general, it competes favorably with
respect to these factors. However, there can be no assurance that Artecon will
be able to compete successfully or that competition will not have a material
adverse effect on Artecon's business, results of operations or financial
condition.
INTELLECTUAL PROPERTY
The Company's success depends significantly upon its proprietary
technology. Artecon relies on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements and
technical measures to protect its proprietary rights in its products.
As of March 31, 1998, the Company had been awarded a total of seven
U.S. patents covering certain elements of its products. There can be no
assurance that any additional patents will be issued, that Artecon will develop
proprietary products or technologies that are patentable, that any patent issued
in the future will provide Artecon with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have a
material adverse effect on Artecon's ability to do business. The Company seeks
to protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Artecon has
registered numerous trademarks and will continue to evaluate the registration of
additional trademarks as appropriate. The Company generally enters into
confidentiality
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<PAGE> 15
agreements with its employees and consultants and with key vendors and
suppliers. All released documentation of products, including drawings,
requirements specifications, source code, BOMs, costs and other materials, are
kept in a secure, centralized document control area.
The Company expects that companies in the storage system market will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's target markets grows. Although Artecon believes
that its products and trade designations do not infringe on the proprietary
rights of third parties, there can be no assurance that third parties will not
assert infringement claims against Artecon in the future. If such a claim is
made, Artecon will evaluate the claim as it relates to its products and, if
appropriate, may seek a license to use the protected technology. There can be no
assurance that the Company would be able to obtain a license to use such
technology or that such a license could be obtained on terms that would not have
a material adverse effect on Artecon. If the Company or its suppliers are unable
to license protected technology, the Company could be prohibited from
incorporating or marketing products incorporating that technology. Artecon could
also incur substantial costs to redesign its products or to defend any legal
action taken against it. Should Artecon's products be found to infringe
protected technology, Artecon could be required to pay damages to the infringed
party or be enjoined from manufacturing and selling such products.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Artecon's products or to
obtain and use information that Artecon regards as proprietary. In addition, the
laws of some foreign countries do not protect proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance that
Artecon's means of protecting its proprietary rights will be adequate or that
Artecon's competitors will not independently develop similar technology,
duplicate Artecon's products or design around patents issued to Artecon or other
intellectual property rights of Artecon.
EMPLOYEES
As of April 30, 1998, the Company had approximately 287 full-time
employees worldwide, including 111 in marketing, sales and service support, 109
in manufacturing and quality assurance, 36 in engineering and research and
development and 31 in general administration and finance.
None of the Company's employees is represented by a labor union.
Artecon has experienced no work stoppages and considers its relations with its
employees to be good.
The Company's future performance depends in significant part upon the
continued service of its key technical and senior management personnel. Artecon
provides incentives such as salary and benefits to attract and retain qualified
employees. The loss of the services of one or more of Artecon's officers or
other key employees could have a material adverse effect on Artecon's business,
operating results or financial condition. Artecon's future success also depends
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that Artecon can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to those risks identified elsewhere in this Annual Report
on Form 10-K, the Company's business and results of operations are subject to
other risks, including the following risk factors:
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. While Storage Dimensions generated net income in 1996, it incurred
losses in 1993, 1994, 1995 and 1997. Except for fiscal year ended March 31, 1998
in which it incurred a loss, Artecon California generated net income in fiscal
years 1997, 1996, 1995 and 1994. The 1998 fiscal year includes expenses incurred
as a result of the Falcon Acquisition and the Storage Dimensions Merger. See
Results of Operations under Item 7 "Management's Discussion and Analysis of
Financial
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<PAGE> 16
Condition and Results of Operations" There can be no assurance that the Company
will be profitable on a quarterly or annual basis.
The Company's quarterly operating results have in the past varied and
may in the future vary significantly depending on a number of factors,
including: the level of competition; the size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the Company or its
competitors; the impact of price protection measures and return privileges
granted by the Company to its distributors and VARs; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis; hardware component costs and availability, particularly with
respect to hardware components obtained from sole sources; hardware supply
constraints; the company's success in expanding its sales and marketing
programs; technological changes in the network storage system market, in
particular the PC-LAN and UNIX storage system markets; the mix of sales among
the Company's sales channels; levels of expenditures on research and
development; changes in the Company's strategy; personnel changes; and general
economic trends and other factors.
Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the PC-LAN
and UNIX storage system markets are rapidly evolving and the Company's sales
cycles vary substantially from customer to customer. The Company's customers
generally have the right to cancel orders at any time and a limited right to
return products for a refund. The cancellation of orders already placed and the
return of products could have a material adverse effect on operating results in
any quarter. Due to the typical timing of customer orders, the Company often
ships products representing a significant portion of its net sales for a quarter
during the last month of that quarter. Any significant deferral of these sales
could have a material adverse effect on the results of operations in any
particular quarter. To the extent that the Company completes significant sales
earlier than expected, operating results for subsequent quarters may be
adversely affected. The Company's expense levels will be based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected. There can be no
assurance that the Company will experience sales growth with respect to its
enterprise and OEM products in future periods.
Since the closing of the Storage Dimensions Merger, the Company's
combined business consists of that of Artecon California, the former Storage
Dimensions, Inc. and Falcon. Due to the foregoing, period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as an indicator of future performance. It is possible that in future
quarters the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
RELIANCE ON KEY CUSTOMERS AND INDIRECT DISTRIBUTION CHANNELS. The
Company sells its products through a direct sales force and through multi-tiered
distribution channels. The following customers of Artecon California accounted
for approximately that percentage of Artecon's total revenues set forth below
during the periods indicated: Sales to one customer did not exceed 10% of total
revenue for the fiscal year ended March 31, 1998; Tracor Enterprise Solution
(25.4%) for the fiscal year ended March 31, 1997; and GTE Government Systems
(10.0%) for the fiscal year ended March 31, 1996. No other customer accounted
for more than 10% of Artecon's total revenues during the fiscal years ended
March 31, 1998, 1997 and 1996. Additionally, Storage Dimensions' top ten
customers accounted for approximately 42% of total net sales in 1997, with Sun
Financial Group accounting for 10% of total net sales. In 1996, Storage
Dimensions' top ten customers, accounted for approximately 50% of total net
sales, and Tech Data and Xerox accounted for approximately 8% and 13%,
respectively of total net sales. The Company expects that a high percentage of
the Company's sales for the foreseeable future will be through indirect channels
and to a limited number of customers. There can be no assurance that orders from
existing customers will continue at
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<PAGE> 17
their historical levels, or that the Company will be able to obtain orders from
new customers. The Company generally has not entered into long-term volume
purchase contracts with its customers, and customers generally have certain
rights to extend or to delay the shipment of their orders. The Company provides
price protection to distributors such that, if the Company reduces the price of
its products, distributors are entitled to a credit for the difference between
the new, reduced price and the price previously paid for products held in the
distributor's inventory at the time of the price reduction. As a result, price
reductions could have an immediate material adverse effect on the Company's
results of operations, depending upon distributor inventory levels at the time
of the price reduction. During the fiscal years ended March 31, 1995, 1996 and
1997, Storage Dimensions issued approximately $550,000, $840,000, and $485,000,
respectively, of credits in connection with such price protection. The Company's
distributors and VARs may also carry competing product lines and could reduce or
discontinue sales of the Company's products, which could have a material adverse
effect on the Company's operating results. Although the Company believes that it
provides adequate allowances for product returns, there can be no assurance that
actual returns will not exceed recorded allowances which could have a material
adverse effect on the Company's operating results. In addition, there can be no
assurance that existing end-user customers will not purchase their storage
equipment from the manufacturer that provides their network computing systems
and, as a result, reduce or eliminate purchases from the Company. The loss of
one or more of the Company's current customers, particularly a principal
customer, or cancellation or rescheduling of orders already placed, could
materially and adversely affect the Company's business, operating results or
financial condition.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE. The storage
system market is characterized by rapid technological change, changing customer
needs, frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and increased storage
capacities by the Company's competitors and the emergence of new industry
standards could render the Company's products obsolete and unmarketable. The
Company's future success will depend upon its ability to develop and to
introduce new products with increasing storage capabilities (including new
software releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing any other
products that respond to technological changes or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products, or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce new products, in particular those for use with
Windows NT and UNIX systems, in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected.
Storage system products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing, errors will not
be found in new products after commencement of commercial shipments, resulting
in a loss of or delay in market acceptance, which could have a material adverse
effect on the Company's business, operating results or financial condition. The
Company's standard warranty provides that if the system does not function to
published specifications the Company will repair or replace the defective
component without charge. Although to date the Company's suppliers of hardware
components have generally covered the warranty costs associated with such
components, there can be no assurance that such manufacturers will continue to
be willing or able to cover such costs, and their failure to do so would result
in such costs being borne by the Company. There can be no assurance that the
Company's warranty costs will not be significant in the future. Significant
warranty costs, particularly those that exceed reserves, could have a material
adverse effect on the Company's business, operating results or financial
condition.
The Company's agreements with customers typically contain provisions
intended to limit exposure to potential product liability claims. It is possible
that the limitation of liability provisions contained in the Company's
agreements may not be effective. Although the Company has not received any
product liability
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<PAGE> 18
claims to date, the sale and support of products by the Company and the
incorporation of products from other companies may entail the risk of such
claims. A successful product liability claim against the Company could have a
material adverse effect on the Company's business, operating results or
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance will
depend in significant part upon the continued service of its senior management
and key sales and technical personnel. The Company expects to provide incentives
such as salary, benefits and option grants (which are typically subject to
vesting over four years) to attract and retain qualified employees. In recent
periods, the Company has experienced difficulties retaining existing and
attracting and training new, skilled personnel. Any inability to attract, train
and retain skilled sales personnel in future periods or the loss of the services
of one or more of the Company's officers or other key employees could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company's future success will also depend on its
ability to attract and retain highly qualified technical and management
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical and management employees
or that it can attract, assimilate or retain other highly qualified technical
and management personnel in the future.
COMPETITION. The storage system market is intensely competitive. The
Company has a number of competitors in various markets, including HP, Sun, IBM,
SGI, Compaq Corporation ("Compaq"), DEC Storage Works ("DEC"), DG Clariion, MTI
Technology ("MTI") and EMC Corporation, many of which have substantially greater
name recognition, engineering, manufacturing and marketing capabilities, and
greater financial and personnel resources than the Company. In particular, a
number of the Company's customers are also competitors, including Sun and SGI.
Artecon expects to experience increased competition from established and
emerging computer storage hardware and management software companies,
particularly HP, Sun, IBM, Compaq, DEC, and EMC Corporation. Many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, to devote greater resources
to the development, promotion and sale of products than can the Company, or to
deliver competitive products at a lower end-user price. The Company also expects
that competition will increase as a result of industry consolidations. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition.
The Company believes that the principal competitive factors affecting
its markets include: fault-tolerant reliability, performance, ease of use,
scalability, configurability, price and customer service and support. There can
be no assurance that the Company will be able to successfully incorporate these
factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS OF HIGH QUALITY COMPONENTS.
The Company relies upon a limited number of suppliers of several key components
utilized in the assembly of the Company's products, including Seagate
Technology, Inc. ("Seagate"), Quantum Corporation ("Quantum"), IBM, Infortrend,
Intel, , Mylex, Sony and American Megatrends, Inc. The Company's reliance on its
suppliers involves several risks, including: an inadequate supply of required
components; price increases; late deliveries; and poor component quality. These
risks are particularly significant with respect to suppliers of disk drives
because, in order to meet product performance requirements, the Company must
obtain disk drives with extremely high quality and capacity. In addition, there
is currently a significant market demand for disk drives, tape drives and RAID
controllers, and from time to time the Company may experience component
shortages, selective supply allocations and increased prices of such components.
Although to date the Company
18
<PAGE> 19
has not experienced shortages of such components, there can be no assurance that
the Company will be able to obtain its full requirements of such components in
the future or that prices of such components will not increase. In addition,
there can be no assurance that problems with respect to yield and quality of
such components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business, operating results or financial condition. Such delays could also
damage relationships with current and prospective customers.
In the past, due to the Company's quality requirements, the Company
has experienced delays in the shipments of its new products principally due to
an inability to qualify component parts from disk drive manufacturers and other
suppliers, resulting in delay or loss of product sales. The Company has
currently qualified disk drives manufactured by Seagate, tape drives from
Quantum, and RAID controllers from Mylex Corporation and American Megatrends.
Although these delays in the past have not had a material adverse effect upon
the Company's business, operating results or financial condition, there can be
no assurance that in the future any such delays will not have such a material
adverse effect on the Company.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. Artecon California's
international sales represented approximately 11.7%, 14.0% and 25.2% of the
Company's total revenues for the fiscal years ended March 31, 1998, 1997 and
1996, respectively. The Company currently has sales offices in Japan, France,
England and the Netherlands. The Company believes that the continued growth and
profitability of the Company will require expansion of international operations,
particularly in Europe and Japan. Accordingly, the Company intends to expand its
international operations and enter additional international markets, which will
require significant management attention and financial resources. In addition,
the Company's international operations are subject to a variety of risks
associated with conducting business internationally, including fluctuations in
currency exchange rates, longer payment cycles, difficulties in staffing and
managing international operations, problems in collecting accounts receivable,
seasonal reductions in business activity during the summer months in Europe and
certain other parts of the world, increases in tariffs, duties, price controls
or other restrictions on foreign currencies, and trade barriers imposed by
foreign countries, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company has only limited experience in developing localized versions of its
products and marketing and distributing its products internationally. There can
be no assurance that the Company will be able to successfully localize, market,
sell and deliver its products internationally. The inability of the Company to
expand its international operations successfully and in a timely manner could
have a material adverse effect on the Company's business, operating results and
financial condition.
A significant portion of the Company's business is presently
conducted in currencies other than the U.S. dollar. Foreign currency transaction
gains and losses arising from normal business operations are credited to or
charged against earnings in the period incurred. As a result, fluctuations in
the value of the currencies in which the Company conducts its business relative
to the U.S. dollar will continue to cause the currency transaction gains and
losses which Artecon has experienced in the past and continues to experience.
Due to the substantial volatility of currency exchange rates, among other
factors, the Company cannot predict the effect of exchange rate fluctuations
upon future operating results. There can be no assurance that the Company will
not experience currency losses in the future. The Company has not previously
undertaken hedging transactions to cover its currency exposure but may hedge a
portion of its currency exposure in the future as management deems appropriate.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company currently relies on
a combination of patent, copyright and trademark laws, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights and seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company has registered numerous trademarks and will continue to
evaluate the registration of additional trademarks as appropriate. The Company
generally enters into confidentiality agreements with its employees and with key
19
<PAGE> 20
vendors and suppliers. As of March 31, 1998, Artecon, California had been issued
a total of seven U.S. patents covering certain elements of its products. There
can be no assurance that issued patents will provide a meaningful competitive
barrier or that any pending patents at either company will ever be issued, that
the Company will develop proprietary products or technologies that are
patentable, that any patent issued in the future will provide the Company with
any competitive advantages or will not be challenged by third parties, or that
the patents of others will not have a material adverse effect on the Company's
ability to do business. The Company believes that the rapidly changing
technology in the computer storage industry makes future success dependent more
on the technical competence and creative skills of its personnel than on any
patents it may be able to obtain.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that companies in
the storage system market will increasingly be subject to infringement claims as
the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business, operating results or
financial condition. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. For example, in February 1998, Artecon filed a suit against certain
former employees alleging, among other things, trade secret misappropriation.
See "Item 3--Legal Proceedings." In addition, the laws of some foreign countries
do not protect proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around patents issued to the Company or other intellectual property
rights of the Company.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The cost of making the Company's
products Year 2000 compliant is not expected to be material.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by the Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the Company. Conversely, Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for products. Additionally, Year 2000
issues could cause a significant number of companies, including current
customers, to reevaluate their current information system needs, and as a result
consider switching to other systems or suppliers. Any of the foregoing could
result in a material adverse effect on the Company's business, operating results
and financial condition.
INFLUENCE OF EXISTING STOCKHOLDERS. As of May 15, 1998, the Company's
executive officers, directors and their affiliates beneficially owned
approximately 71% of the Company's outstanding shares of Common Stock, giving
effect to the conversion of the outstanding Series A Preferred Stock of the
Company which was issued in connection with the Storage Dimensions Merger into
the maximum number of shares of Common Stock. As a result, these stockholders,
if acting together, would be able to influence matters requiring approval by the
stockholders of the Company, including the election of a majority of the
directors. The
20
<PAGE> 21
voting power of these stockholders under certain circumstances could have
the effect of delaying or preventing a change in control of the Company. The
Company has entered into agreements with its executive officers and directors
indemnifying them against losses they may incur in legal proceedings arising
from their service to the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and is expected to continue to be, volatile. This
volatility may result from a number of factors, including fluctuations in the
Company's quarterly revenues and net income, announcements of products by the
Company or its competitors, and conditions in the network storage system market.
Also, the stock market has experienced and continues to experience extreme price
and volume fluctuations which have affected the market prices of securities,
particularly those of technology companies, and which often have been unrelated
to the operating performance of the companies. These broad market fluctuations,
as well as general economic and political conditions, may adversely affect the
market price of the Company's Common Stock in future periods.
EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE ANTI-TAKEOVER LAW.
Certain provisions of the Company's Certificate of Incorporation, as amended,
and Bylaws, as amended, the Delaware General Corporation Law (the "DGCL") and
the Company's indemnification agreements with certain officers and directors of
the Company may be deemed to have an anti-takeover effect. Such provisions may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider to be in that stockholder's best interests, including attempts
that might result in a premium over the market price for the shares held by such
stockholder.
The Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock, having the number of
shares (up to 10,000,000), designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations as determined by the
Board without stockholder approval. The Company's Certificate of Incorporation,
as amended, and Bylaws, as amended, contain a number of provisions that could
impede a takeover or change in control of the Company, including but not limited
to the elimination of stockholders' ability to take action by written consent
and a fair price requirement. In addition, the Company's Certificate of
Incorporation provides for a classified Board of Directors and eliminates the
ability of stockholders to remove a director from office without cause except,
until the third annual meeting of the stockholders following the Merger, by the
affirmative vote of at least 80% of the outstanding voting stock of the Company
and by the affirmative vote of at least 66 2/3% of the outstanding voting stock
of the Company thereafter.
In addition, the Company is subject to the anti-takeover provisions
of Section 203 of the DGCL. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder.
Each of the foregoing provisions gives the Board, acting without
stockholder approval, the ability to prevent, or render more difficult or
costly, the completion of a takeover transaction that stockholders might view as
being in their best interests.
ITEM 2. PROPERTIES
FACILITIES
Artecon's principal administrative, sales, marketing, manufacturing and
research and development facility is located in approximately 70,000 square feet
of space in Carlsbad, California, including approximately 43,000 square feet of
manufacturing space. This facility is leased through 1999. Artecon leases other
sales offices throughout the U.S., as well as operations sites in Japan, France,
England, and the Netherlands. Artecon believes that its existing facilities are
adequate for its current needs.
Additionally, Artecon is currently leasing 80,000 square feet of
space in Milpitas, California that was the Company's principal administrative,
sales,
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<PAGE> 22
marketing, and research and development facility prior to the Merger.
This lease expires December 31, 1998. A smaller facility will be leased in
October 1998 for use as a sales office. The existing lease will not be renewed.
ITEM 3. LEGAL PROCEEDINGS
On February 3, 1998, Artecon California filed a civil complaint in Santa
Clara County Superior Court including, without limitation, claims of breach of
contract, misappropriation of trade secrets and unfair competition against
StorNet, Inc. and certain individuals (Civil Case No. CV 771742). On April 24,
1998 a settlement agreement was entered into with StorNet and those individuals.
Under the terms of this confidential settlement, StorNet has agreed to pay
certain settlement funds to Artecon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders of Storage Dimensions, Inc. was
held on March 31, 1998 (the "Special Meeting"). The Company had 8,022,430 shares
of Common Stock outstanding as of February 23, 1998, the record date for the
Special Meeting. At the Special Meeting, holders of a total of 4,980,046 shares
of Common Stock were present in person or represented by proxy.
At the Special Meeting the following proposals, all as more fully
described in the Prospectus/Joint Proxy Statement relating to such meeting, were
ratified: (1) a proposal to approve and adopt an Agreement and Plan of Merger
and Reorganization, dated as of December 22, 1997, among the Registrant, Storage
Acquisition Corp. ("Merger Sub"), and Artecon, Inc., a California corporation
("Artecon California"), approve the merger of Merger Sub with and into Artecon
California, and approve an amendment to the Company's Certificate of
Incorporation to change its name to "Artecon, Inc." and designate a new class of
Series A Preferred Stock; (2) a proposal to approve and amendment to the
Company's Certificate of Incorporation to provide for a classified Board of
Directors; (3) a proposal to approve an amendment to the Company's Certificate
of Incorporation to provide that a director may not be removed from office
without cause except, until the third annual meeting following the Merger, by
the affirmative vote of at least 80% of the outstanding voting stock of the
Company and by the affirmative vote of at least 66-2/3% of the outstanding
voting stock of the Company thereafter; (4) a proposal to approve an amendment
to the Company's 1996 Stock Option Plan to increase the number of shares that
may be issued thereunder from 1,000,000 to 3,000,000; and (5) a proposal to
approve an amendment to the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares that may be issued thereunder from 200,000 to
400,000
The following sets forth information regarding the results of the voting at the
Special Meeting:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Proposal 1: Approval of Merger Agreement, Merger and Related
Matters 4,977,812 150 2,084
Proposal 2: Approval of Amendment to Certificate of
Incorporation to provide for classified Board of Directors
4,837,497 139,632 2,917
Proposal 3: Approval of Amendment to Certificate of
Incorporation Regarding Removal of Directors
4,765,764 211,365 2,917
Proposal 4: Approval of Amendment to 1996 Stock Option Plan
4,943,579 34,383 2,084
Proposal 5: Approval of Amendment to 1996 Employee Stock
Purchase Plan 4,943,579 34,383 2,084
</TABLE>
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<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective April 1, 1998 the Company's Common Stock was listed on the
Nasdaq National Market under the ticker symbol "ARTE." Prior to such time, the
Company's Common Stock had traded on the Nasdaq National Market under the symbol
"STDM" since the Company's initial public offering in March 1997.
The approximate number of holders of record of the Company's Common
Stock as of May 15, 1998 was 2,000.
The last sales price for the Company's Common Stock, as reported by
Nasdaq on May 15, 1998 was $3.59.
The following table sets forth, for the fiscal quarters indicated,
the reported high and low sales prices of the Company's Common Stock as reported
on the Nasdaq National Market
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter $14.50 $5.38
Second Quarter 8.38 4.50
Third Quarter 6.38 3.50
Fourth Quarter 4.38 2.63
FISCAL YEAR ENDED MARCH 31, 1997
Fourth Quarter (from March 11, 1997) $7.25 $6.50
</TABLE>
The Company has never paid any cash dividends on its Common Stock in
the past, and currently intends to retain future earnings, if any, to fund the
development and growth of its business. The Company does not anticipate paying
any cash dividends in the foreseeable future.
During the period covered by this Annual Report on Form 10-K, the
Company did not issue or sell any equity securities that were not registered
under the Securities Act of 1934, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company and related
notes thereto included elsewhere in this Annual Report on Form 10-K. Except
where otherwise noted, the selected historical consolidated financial
information in this Item 6 relates solely to Artecon California (including
financial information for the Falcon business following the Falcon Acquisition
in August 1997). See note 1 to Consolidated Financial Statements of Artecon,
Inc. for the two years in the period ended March 31, 1998 for certain additional
pro forma combined financial information relating to Artecon California, Storage
Dimensions, Inc. and Falcon.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
23
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1998 (2) 1997 1996 1995 1994
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues................. $ 66,340 $ 55,317 $ 47,172 $ 47,774 $ 39,472
Gross margin................. 14,220 12,535 12,455 9,477 8,621
Operating expenses
Selling, general and
administrative.......... 13,928 8,990 8,924 7,887 6,253
Research and
development............. 3,102 2,317 1,405 1,134 949
Acquired in-process
research and
development............. 18,200
Operating income (loss)...... (21,010) 1,228 2,248 588 1,418
Net income (loss)............ (19,288) 641 1,590 453
1,225
Basic net income (loss) per
Share...................... $ (3.30) $ 0.12 $ 0.30 $ 0.09 $ .23
Weighted average shares used
to calculate basic net
income (loss) per share(1). 5,841 5,202 5,218 5,225 5,225
Diluted net income (loss)
per share.................. $ (3.30) $ 0.08 $ 0.19 $ 0.05 $ .14
Weighted average shares used
to calculate diluted net
income (loss) per share(1). 5,841 8,410 8,532 8,645 8,708
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents... $ 7,992 $ 746 $ 793 $ 299 $ 39
Working capital............. 16,819 6,810 6,772 4,935 4,393
Total assets................ 57,345 15,194 13,583 13,984 11,086
Total long-term debt........ 10,484 2,921 2,941 2,500 2,408
Total shareholders'
equity.................... 19,679 5,097 4,720 3,553 3,302
</TABLE>
(1) See Note 9 of Notes to Consolidated Financial Statements of Artecon, Inc.
for the two years in the period ended March 31, 1998 for an explanation of
shares used in computing basic and diluted net income (loss) per share.
(2) The financial information set forth above includes financial information for
Falcon since August 21, 1997, the effective date of the Falcon Acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Business,"
as well as those discussed elsewhere in this Annual Report on Form 10-K.
OVERVIEW
The Company designs, manufactures, markets and supports a broad range
of scalable, fully integrated data storage products for the open-systems
computing environment. The Company has established itself as a leader in the
design,
24
<PAGE> 25
manufacture and sale of third-party mass storage and enhancement products in the
Sun Microsystems ("Sun"), UNIX and PC-LAN markets, offering both host-attached
and network-attached storage solutions for a broad range of customers. The
Company offers a wide range of products and services in four principal areas:
enterprise storage, workstation and server rack solutions, telecommunications
and disk and tape storage systems.
On March 31, 1998, the Company (then known as Storage Dimensions,
Inc.) entered into a merger transaction with Artecon California , in a
stock-for-stock transaction that was accounted for as a purchase (the "Storage
Dimensions Merger"). The Storage Dimensions Merger created one of the world's
largest third-party storage companies (the "Storage Dimensions Merger") serving
the combined PC-LAN and UNIX open systems network computing market. For
financial reporting purposes, the Storage Dimensions Merger was accounted for as
an acquisition of Storage Dimensions by Artecon California, and, as such, the
historical financial results of the Company included in this Annual Report are
those of Artecon California.
In August 1997, Artecon California acquired substantially all of the
assets and liabilities of Falcon. The Falcon Acquisition has enabled the Company
to achieve several important strategic objectives, including the acquisition of
Falcon's AerREAL(TM) real-time specialized file server software and other
complementary products to better serve Artecon's existing customers, the
expansion of Artecon's customer base in the UNIX, Windows NT and Windows 95
markets and a significant expansion of the Company's revenue base. The
acquisition was accounted for as a purchase.
In June 1998, Artecon California was merged with and into the
Company.
Except where otherwise noted, the financial and other matters in this
Item 7 relate solely to Artecon California (including the results of operations
for the Falcon business following the closing of the Falcon Acquisition in
August 1997). See Note 1 to Consolidated Financial Statements for certain
additional pro forma combined financial information relating to Artecon
California, Storage Dimensions, Inc. and Falcon.
The Company markets and distributes its products services through its
direct sales force employed in 17 domestic sales and support offices and 6
overseas sales offices located in Japan, France, England and the Netherlands. In
addition, Artecon utilizes an extensive domestic and foreign reseller
distribution channel to market and distribute its products and services. The
Company believes that such a diverse channel strategy results in the greatest
penetration of the market and enables it to effectively and efficiently
penetrate major accounts while at the same time leveraging its distribution
network into vertical markets. Artecon believes that the direct customer contact
resulting from the use of its own internal sales force provides it with
invaluable market feedback and the ability to tailor its products and
high-quality technical support services to enhance customer satisfaction and
loyalty. The Company generates revenue from the sales of products and services.
Revenue from product sales is recognized upon shipment. Revenue generated from
service contracts is recognized ratably over the term of the contract. Operating
expenses consist primarily of rent, payroll, commissions, other selling and
administrative expenses and research and development costs and are recognized in
the period incurred.
The following table sets forth certain items from Artecon
California's consolidated statement of operations as a percentage of net sales
for the periods indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenues .......... 100.0% 100.0% 100.0% 100.0%
Gross Margin .......... 21.4 22.7 26.5 19.8
Operating expenses
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and
Administrative ...... 21.0 16.3 18.9 16.5
Research and
Development ......... 4.7 4.2 3.0 2.4
Acquired in-process
Research and
Development ......... 27.4 -- -- --
Operating income (loss).. (31.7) 2.2 4.8 1.2
Net income (loss) ....... (29.1)% 1.2% 3.4% 0.9%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 29, 1997
Net Revenues. Net revenues reflect the invoiced amounts for products
shipped less reserves for estimated returns. Net revenues for the year ended
March 31, 1998("FY 1998") were $66.3 million compared to $55.3 million for the
year ended March 29, 1997 ("FY 1997"), an increase of approximately 19.9%. Such
increase in net revenues was primarily attributable to the Falcon Acquisition in
August 1997. Net revenues attributable to sales of Falcon products by Artecon
from August 21, 1997, the date of the Falcon Acquisition, to March 31, 1998 were
approximately $12.6 million. Net revenues for FY 1998 attributable to sales of
Artecon products (excluding Falcon products) were $53.7 million, compared to
$55.3 million for FY 1997. The decline in Artecon-only sales was primarily
attributable to a decline in orders from a significant customer from $14.1
million in fiscal 1997 to $0.3 million in fiscal 1998. Future sales to this
customer are not expected to be significant.
Gross Margin. Gross margin for FY 1998 was $14.2 million, or 21.4% of net
revenues, compared to a gross margin of $12.5 million, or 22.7% of net revenues,
for FY 1997. The decrease in gross margin as a percent of net revenues from FY
1997 to FY 1998 was due primarily to a $5.0 million write off of inventory in
fiscal 1998. The gross margin derived from sales of Falcon products during FY
1998 was approximately $3.3 million, or 26.2% of Falcon net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses are comprised primarily of salaries and commissions,
marketing costs and overhead costs associated with Artecon's finance and support
staff. Selling, general and administrative expenses increased to $13.9 million,
or 21.0% of net revenues for FY 1998, from $9.0 million, or 16.3% of net
revenues, for FY 1997. The increase in selling, general and administrative
expenses for FY 1998 was attributable primarily to the increase in the Company's
sales and marketing force resulting from the Falcon Acquisition.
Research and Development Expenses. Research and development expenses are
comprised primarily of prototype expenses, salaries for employees directly
engaged in research and other costs associated with product development.
Research and development expenses increased to $3.1 million, or 4.7% of net
revenues, for FY 1998 compared to $2.3 million, or 4.2% of net revenues for FY
1997. The increase in research and development expenses is attributable to the
Company's continued development of new products.
Acquired in-process research and development costs. During fiscal 1998,
Artecon California determined that certain hardware and software products
acquired from Falcon had not established technological feasibility and had no
future alternative use. Accordingly, in fiscal 1998, Artecon California
recognized a $3.7 million charge to earnings for write-off of these in-process
research and development costs. In fiscal 1998 Artecon California recognized an
additional charge against earnings of $14.5 million for in-process research and
development costs relating to the Storage Dimensions Merger.
Total Other Expense. Total other expense is comprised of interest, taxes
and other expenses, if any, relating to such periods presented. Total other
expense for FY 1998 was $1.1 million compared to total other expense of $0.2
million for FY 1997. The increase in total other expense was attributable
primarily to
26
<PAGE> 27
interest payments made on the promissory note issued in connection with the
Falcon Acquisition and increased borrowings under the Company's credit line.
YEAR ENDED MARCH 29, 1997 COMPARED TO YEAR ENDED MARCH 30, 1996
Net Revenues. The Company's net revenues for FY 1997 were $55.3 million
compared to $47.2 million for the year ended March 30, 1996 ("FY 1996"). The
increase in net revenues of approximately 17.2% was primarily due to increased
sales made to one significant customer. Although net revenues increased from FY
1996 to FY 1997, net revenues generated from sales of products overseas
decreased from $11.9 million during FY 1996 to $7.7 million during FY 1997. The
decrease in net revenues generated from overseas sales was due, in part, to the
Company's decision to shift its overseas market focus from a strategy of selling
to a significant number of countries worldwide, to focusing on a limited number
of key target markets, specifically Europe (primarily the United Kingdom, France
and the Netherlands) and Japan, regions where the Company's management believes
there is greater potential for growth in market share. Management expects to
continue this focus in the future, emphasizing higher margin, more sophisticated
products sold increasingly through Company owned or controlled overseas
operating units.
Gross Margin. Gross margin for FY 1997 was $12.5 million, or 22.6% of net
revenues, compared to a gross margin of $12.5 million, or 26.5% of net revenues,
or FY 1996. The decrease in gross margin from FY 1996 to FY 1997 was primarily
attributable to a combination of foreign currency translations on Artecon's
sales of products overseas and the decrease in overseas sales of products, which
typically have a higher profit margin than domestic sales of products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.0 million, or 16.3% of net revenues, for
FY 1997 from $8.9 million, or 18.9% of net revenues, for FY 1996. The increase
in selling, general and administrative expenses of approximately $100,000 for FY
1997 compared to FY 1996 was due to increased sales of the Company's products,
primarily attributable to an increase in the number of the Company's sales
personnel.
Research and Development Expenses. Research and development expenses
increased to $2.3 million, or 4.2% of net revenues, for FY 1997, compared to
$1.4 million, or 3% of net revenues, for FY 1996. The increase of approximately
$900,000, or 64.3%, in research and development expenses was due to Artecon's
continued development of new products.
Total Other Expense. Total other expense decreased from $898,000 for FY
1996 to $247,000 for FY 1997. The decrease in total other expense of
approximately 72.5% was due in large part to a loss during FY 1996 of $336,000
related to foreign currency transactions. In addition, during FY 1996, the
Company terminated a significant portion of the operations of its French-based
subsidiary, resulting in an unusual charge of $256,000. Artecon is exposed to
foreign currency exchange risk in each of its key overseas markets. Exposure
relates primarily to exchange rate fluctuations between the U.S. Dollar and the
Japanese Yen, British Pound, French Franc and Dutch Guilder. Overseas
operations' sales are made and operating expenses incurred in the local
currency. Product purchases are made in U.S. Dollars. The Company has
historically not actively managed its foreign currency exchange risk, except as
it relates to Japan. The Japanese operation has obtained local currency
financing and, from time to time, takes out forward contracts related to
anticipated purchases of U.S. product.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $8.0 million in cash and cash
equivalents (including cash held by Storage Dimensions, Inc. as of the closing
of the Storage Dimensions Merger) as compared to $0.8 million at March 29, 1997,
an
27
<PAGE> 28
increase of $7.2 million. This increase was primarily due to the cash acquired
in connection with the Storage Dimensions Merger.
Since inception, the Company has financed its operations primarily through
a combination of cash generated from operations, bank borrowings, and through
sales of its capital stock. Artecon had approximately $18.4 million of accounts
receivable as of March 31, 1998 (including Storage Dimensions, Inc. accounts
receivable).
Until May 1998, Artecon California had a credit facility with a United
States bank which permitted borrowings of up to $12,500,000 based upon a
percentage of accounts receivable and inventory. Under the terms of such credit
facility, Artecon was permitted to choose between borrowing at the bank's prime
rate, as it may vary from time to time, or choose a rate that was fixed for an
agreed-upon period of from 30 to 180 days with interest due quarterly at the
LIBOR rate in effect at the commencement of the agreed-upon fixed period, plus
2.0%. The line of credit required that Artecon comply with certain covenants,
including minimum tangible net worth requirements. Certain minimum amounts
applied to advances under the line of credit and such amounts were required to
be borrowed for a minimum of 30 days. The line of credit was secured by all of
the assets of Artecon. The revolving credit facility would have expired by its
terms on September 1, 1999. Interest was payable monthly, with principal payable
at the end of the term. The total outstanding balance under the line of credit
as of March 31, 1998 was $7.6 million. In May 1998, all outstanding borrowings
under this facility, including accrued interest, were repaid in full and the
line of credit terminated.
In May 1998, the Company entered into a revolving credit facility with
LaSalle National Bank (the "Line of Credit") which permits borrowings of up to
$15,000,000. Under the terms of the Line of Credit, borrowings are
collateralized by substantially all of the Company's assets and mature in May
2001 unless otherwise renewed. Borrowings under the Line of Credit bear interest
either at the bank's prime rate, or at the LIBOR rate plus 1.75%. Monthly
payments consist of interest only, with the principal due at maturity. As of May
31, 1998, the total outstanding balance under the Line of Credit was $8.5
million.
The Company's Japanese subsidiary has three lines of credit with a Japanese
bank for borrowings of up to an aggregate of 75 million Yen (approximately
US$565,000 at March 31, 1998) at interest rates ranging from 1.62% to 2.4%.
Interest is due monthly, with principal due and payable on various dates through
February 27, 1999. Borrowings are secured by the inventories of the Japanese
subsidiary. As of March 31, 1998, the total amount outstanding under the three
credit lines was $40 million Yen (approximately US$300,000).
Artecon had a long-term equipment loan secured by certain computers used in
its operations. As of March 31, 1998, the total amount outstanding on the
equipment loan was $190,000. Monthly installments included $11,000 principal and
interest. In May 1998, this loan including accrued interest, was paid in full.
Artecon had a term loan payable to a United States Bank. This loan bore
interest at 8.5% per annum and was collateralized by substantially all the
assets of Artecon. This loan would have matured in September 2002 with monthly
installments of principal of $17,000 and interest through maturity. The total
balance outstanding as of March 31, 1998 was approximately $883,000. In May
1998, this term loan including accrued interest, was paid in full.
Storage Dimensions had an $11 million revolving line of credit with a
commercial lender that was assumed in the Storage Dimensions Merger and would
have expired in May 1998. Borrowings under this facility bore interest at prime
rate plus .75% and were secured by all of the Company's assets. As of March 31,
1998, the total outstanding balance under this facility was $35,000. In May
1998, all outstanding borrowings under this facility, including accrued
interest, were repaid in full and the line of credit terminated.
28
<PAGE> 29
The Falcon Acquisition purchase price of $3,500,000 included $1,000,000 in
cash and a promissory note in the original principal amount of $1,250,000 (the
"Artecon Note"). Subsequent to the issuance of the Artecon Note, Artecon
California and Falcon amended the Artecon Note to decrease the principal amount
due thereunder to $750,000. Concurrently with the Falcon Acquisition, Falcon
transferred certain technology assets (the "Falcon Technology") to Founding
Partners, a California general partnership ("Founding Partners"), in exchange
for a promissory note in the principal amount of $1,750,000 (the "Founding
Partners Note"). Dana Kammersgard, James Lambert and W.R. Sauey, each of whom is
an executive officer and/or director of the Company, are the general partners of
Founding Partners. Founding Partners is considered to be a Special Purpose
Entity and, accordingly, has been consolidated with the Company for financial
reporting purposes. The purchase price was allocated among the acquired assets
to $10,232,000 for other assets acquired, $638,000 to goodwill and other
intangible assets, $14,138,000 for liabilities assumed and to in-process
research and development expenses of $3,700,000, which had no future alternative
use, based on management assumptions. Under the terms of the Artecon Note, as
adjusted, and the Founding Partners Note (collectively, the "Notes"), the
Company and Founding Partners, respectively, are required to make monthly
payments to Falcon of $15,935 and $37,182, respectively, through August 2002.
Each of the Notes bears interest at the rate of 10% per annum. As of March 31,
1998, the approximate total amount of principal and interest outstanding under
the Artecon Note was $680,000, and the total approximate amount of principal and
interest outstanding under the Founding Partners Note was $1,588,000.
In connection with the Falcon Acquisition and the transfer of the Falcon
Technology, Artecon California and Founding Partners entered into a Technology
License Agreement, dated August 21, 1997, pursuant to which Founding Partners
granted to Artecon an exclusive, perpetual license of the Falcon Technology in
exchange for monthly payments of $39,000 payable through August 2002.
As of March 31, 1998, the Company's future commitments under its operating
leases totaled approximately $3.9 million.
Capital spending for FY 1997 and for FY 1998 was $260,000 and $668,000,
respectively.
The Company's sales and operating results have in the past fluctuated from
quarter to quarter and may vary in the future depending on a number of factors,
including: the size and timing of significant purchase orders; the timing of
hardware shipments by third-party vendors necessary to recognize revenues; the
Company's ability to continue to design, develop and market new products and
services; market acceptance of new products; the Company's success in increasing
its domestic and foreign sales force; the size and number of new accounts;
technological changes in the storage systems market; the growth of the
telecommunications and Internet/ intranet industry; reduction in demand for the
Company's products as a result of new product introductions by competitors;
levels of expenditure on research and development; the amount of additional
capital needed by Artecon and the timing of such need; product quality problems;
fluctuations in foreign currency exchange rates; and general economic trends and
other factors. Sales and operating results for past periods are not necessarily
indicative of future periods and a period-to-period comparison of its sales or
results of operations are not necessarily meaningful and should not be relied
upon as an indicator of future performance.
Artecon's management believes that its cash resources from operations and
amounts available under the Line of Credit are sufficient to meet its current
capital commitments and operating requirements of its existing business for at
least the next twelve months. However, there can be no assurance that the
Company will not need to obtain additional capital before such time. The actual
amount and timing of working capital and capital equipment expenditures that
Artecon may incur in future periods may vary significantly and will depend upon
numerous
29
<PAGE> 30
factors, including the amount and timing of the receipt of resources from
continued operations, the increase in manufacturing capabilities, the timing and
extent of the introduction of new products and services, and growth in personnel
and operations.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. While it is difficult to quantify the
total cost to the Company of Year 2000 compliance activities, the Company's best
estimate of expenditures is between $100,000 and $250,000. However there can be
no guarantee that Year 2000 issues will not have a material adverse impact on
the Company's business, results of operations or financial conditions.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by the Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the Company. Conversely, Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for products. Additionally, Year 2000
issues could cause a significant number of companies, including current
customers, to reevaluate their current information system needs, and as a result
consider switching to other systems or suppliers. Any of the foregoing could
result in a material adverse effect on the Company's business, operating results
and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from pages
F-1 through F-36 of this Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of Artecon and their ages as of April
30, 1998, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James L. Lambert......... 44 President, Chief Executive Officer and Director
Dana W. Kammersgard...... 42 Secretary, Senior Vice President, Sales and
Marketing
Tesfaye Hailemichael..... 48 Chief Financial Officer and Treasurer
Norman Farquhar.......... 52 Director
William J. Filip......... 53 Director
Brian D. Fitzgerald...... 53 Director
Dr. Chong Sup Park....... 50 Director
Jason C. Sauey........... 36 Director
W.R. Sauey............... 70 Chairman of the Board
</TABLE>
30
<PAGE> 31
James L. Lambert, a founder of Artecon California, has served as President,
Chief Executive Officer and director of the Company since March 1998 and, prior
to such time, had served as President, Chief Executive Officer and a director of
Artecon California since its inception in 1984. Prior to co-founding Artecon,
from 1979 to 1984, Mr. Lambert served in various positions at CALMA, a division
of General Electric Company, a publicly traded company, most recently, from 1981
to 1984, as Vice President of Research and Development. Mr. Lambert currently
serves as a director of Snow Valley, Inc., a privately-held resort enterprise
affiliated with the Nordic Group. Mr. Lambert holds a B.S. and an M.S. in Civil
and Environmental Engineering from the University of Wisconsin, Madison.
Dana W. Kammersgard, a founder of Artecon California, has served as the
Company's Secretary and Senior Vice President, Sales and Marketing since March
1998. Mr. Kammersgard served as a director of Artecon California from its
inception in 1984 and as its Vice President, Sales and Marketing from March 1997
until March 1998. Between 1984 and March 1997, served in various positions at
Artecon California in engineering and customer support. Prior to co-founding
Artecon California, Mr. Kammersgard was the Director of Software Development at
CALMA, a division of General Electric Company, a publicly traded utility
company. Mr. Kammersgard holds a B.A. in Chemistry from the University of
California, San Diego.
Tesfaye Hailemichael has served as Chief Financial Officer and Treasurer of
the Company since March 1998,joined Artecon California in 1990 as its Corporate
Controller, served as Artecon California's Vice President, Finance from 1992
until July 1997 and served as Chief Financial Officer of Artecon California from
July 1997 until March 1998. Prior to joining Artecon, from 1987 to 1990, Mr.
Hailemichael was Vice President and Chief Financial Officer of Omnitec Medical
Corporation, a privately-held medical device company. Mr. Hailemichael is
currently a member of the Institute of Management Accountants and the Chief
Financial Officer Roundtable. Mr. Hailemichael holds a B.S. in Accounting from
Bowie State College and a M.A. in Accounting from Catholic University of
America.
Norman R. Farquhar has served as a director of the Company since April
1998. Mr. Farquhar has served as Executive Vice President and Chief Financial
Officer of DataWorks Corporation, a supplier of information systems to
manufacturing companies ("DataWorks"), since February 1996 and as a director of
DataWorks since August 1995. From April 1993 to December 1995, Mr. Farquhar
served as Senior Vice President, Chief Financial Officer and Secretary of
Wonderware Corporation, a manufacturer of software for the industrial automation
industry. From December 1991 to April 1993, he was Vice President of Finance and
Chief Financial Officer of MTI Technology Corporation, a developer of
system-managed storage solutions. From November 1987 to December 1991, he was
Senior Vice President and Chief Financial Officer of Amperif Corporation, a
manufacturer of cache-based data storage subsystems. Mr. Farquhar is also a
member of the Board of Directors of Alteer Corporation, a medical software
company. Mr. Farquhar holds a B.S. from California State, Fullerton, and an MBA
from California State, Long Beach.
William J. Filip has served as director of the Company since April 1998.
From 1966 to 1996 he held a variety of positions with IBM, including Assistant
General Manager of the Personal Systems Group, IBM Director of Plans and
Strategies and Vice President of Marketing. Most recently, he served as General
Manager of IBM's RS/6000 Division where he was responsible for development,
manufacturing and worldwide marketing for IBM's RS/6000 family of workstations,
servers and supercomputers. Mr. Filip also served as a member of IBM's Worldwide
Management Committee, a member of the board of directors of IBM Credit
Corporation, and a member of the Conference Board Council of Strategy Planning
Executives. Mr. Filip graduated from the University of Illinois with a Bachelors
degree in Physics, and attended the Executive Program at the University of
Virginia, Darden School.
Brian D. Fitzgerald has served as a director of the Company since 1992 and
was its Chairman of the Board from 1992 until March 1998. In 1982, Mr.
Fitzgerald formed Capital Partners and Capital Partners I, L.P. and has since
served as President of Capital Partners and a General Partner to Capital
Partners I, L.P.
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<PAGE> 32
Capital Partners acts as a diversified investment holding and operating
company. Mr. Fitzgerald co-formed Capital Partners II, L.P. in 1990. Capital
Partners I, Capital Partners II and related entities hold majority ownership
positions and various officer and director positions in seven other businesses
in diversified industries. From 1977 to 1982, Mr. Fitzgerald was a General
Partner of Industrial Capital Group, a diversified investment holding and
operating company, and from 1974 to 1977 served as strategic planning manager
and corporate staff consultant at General Electric Company, a publicly traded
company. Mr. Fitzgerald was formerly a director of Bryant Universal Roofing,
Inc., a private corporation that filed for bankruptcy in 1996 under Chapter 11
of the U.S. Bankruptcy Code. Mr. Fitzgerald is also the Chairman of the Board of
Security Capital Corporation, a public company, a position he has held since
1990, and is an officer and director of a number of privately-held companies.
Mr. Fitzgerald holds an A.B. degree from Princeton University and an M.B.A. from
the Harvard Graduate School of Business.
Chong Sup Park has served as a director of the Company 1996. Since 1996,
Dr. Park has also served as the President of Hyundai Electronics America, an
electronics company and the Chairman of Maxtor Corporation, a disk drive
manufacturer. Dr. Park was the President of Maxtor Corporation from 1995 to
1996, the President of Axil Computer Inc., a workstation manufacturing company,
from 1993 to 1995, the Executive Vice President at Ernst & Young Consulting,
Inc., a public accounting firm, from 1992 to 1993, and the Senior Vice President
of Hyundai Electronics Company Limited from 1990 to 1992. Dr. Park holds a B.A.
in Management from Yonsei University, an M.A. in Management from Seoul National
University, an M.B.A. from the University of Chicago and a Doctorate in
Management from Nova SouthEastern University.
Jason C. Sauey has served as a director of the Company since March 1998
and, prior to such time, had served as a director of Artecon California since
1988. Since 1992, Jason Sauey has served as President of Flambeau Products
Corporation and since 1994 has served as President of Flambeau Airmold
Corporation, both privately-held plastics manufacturing companies affiliated
with the Nordic Group. Jason Sauey holds a B.B.A. from the University of
Wisconsin, Madison and an M.B.A. from the University of Chicago.
W.R. Sauey, a founder of Artecon California, has served as Chairman of the
Board of the Company since March 1998 and prior to such time, had served as
Chairman of the Board of Artecon since its inception in 1984. From 1984 to 1997,
Mr. Sauey also served as Treasurer of Artecon California. Mr. Sauey founded and
serves as Chairman of the Board for a number of manufacturing companies in the
Nordic Group of Companies, a group of privately-held independent companies for
which Mr. Sauey is the principal shareholder (the "Nordic Group"). Mr. Sauey is
a director of Work Recovery, Inc., a publicly traded workmen's compensation
products manufacturer, is an advisory board member of Liberty Mutual Insurance
Company, a publicly traded insurance company, and also serves as a Trustee to
the State of Wisconsin Investment Board. Mr. Sauey holds an M.B.A. from the
University of Chicago.
Messrs. Farquhar and Filip are serving as Class I directors, whose term
will expire at the first Annual Meeting following the Storage Dimensions Merger.
Mr. Jason Sauey and Dr. Park are serving as Class II directors, whose term will
expire at the second Annual Meeting following the Storage Dimensions Merger.
Messrs. W.R. Sauey, Lambert and Fitzgerald are serving as Class III directors,
whose term will expire at the third Annual Meeting following the Storage
Dimensions Merger. Officers serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors or executive
officers of the Company, except that W.R. Sauey, Chairman of the Board of
Directors, is (i) the father-in-law of James Lambert, the President, Chief
Executive Officer and a director and (ii) the father of Jason Sauey, a director.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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<PAGE> 33
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with.
BOARD COMMITTEES
The Company has an Audit Committee and a Compensation Committee. The Audit
Committee consists of Messrs. Farquhar(Chairman), Fitzgerald and W.R. Sauey. The
Audit Committee recommends to the Board of Directors the engagement of Artecon's
independent accountants, reviews with such accountants the plan, scope and
results of their examination of the consolidated financial statements and
determines the independence of such accountants. The Compensation Committee
consists of Dr. Park (Chairman), and Messrs. Filip and Jason Sauey. The
Compensation Committee reviews and makes recommendations to the Board of
Directors regarding all forms of compensation to be provided to the executive
officers, directors and consultants to Artecon's and also administers Artecon's
equity-based employee benefits plans.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ended March 31, 1998 and
1997, compensation awarded or paid to, or earned by, (i) the individuals who
served as the Company's Chief Executive Officer during the fiscal year ended
March 31, 1998 (Messrs. Lambert and Eeg), (ii) the Company's other executive
officers who were serving as executive officers as of March 31, 1998 and earned
at least $100,000 during the fiscal year ended March 31, 1998, and (iii) two
former executive officers (Messrs. Bylin and Bowles) who were not serving as
executive officers as of March 31, 1998 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
Annual Compensation Compensation
Other Securities All Other
Year Annual Underlying Compensation
Name and Principal Position (1) Salary ($) Bonus ($) Compensation Option (#) ($)(2)
- --------------------------- --- ---------- --------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
James L. Lambert 1998 $138,462 $14,938 291,250 (3) - $ 906
President and Chief
Executive Officer
1997 103,708 6,959 - - 906
-
Dana W. Kammersgard 1998 124,139 27,782 145,625 (4) -
Vice President, Sales
And Marketing
1997 102,307 10,315 - -
-
Tesfaye Hailemichael 1998 127,426 2,308 62,154 (5) -
Vice President, and Chief
Financial Officer
1997 96,923 7,059 - -
-
David A. Eeg 1998 291,303 44,793 100,000 8,923
Former President and Chief
Executive Officer
1997 282,068 16,753 - 8,315
-
Robert E. Bylin 1998 164,690 33,871 50,000 4,961
Former Vice President, Finance
And Chief Financial Officer 1997 156,132 13,360 - 3,872
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Annual Compensation Compensation
Other Securities All Other
Year Annual Underlying Compensation
Name and Principal Position (1) Salary ($) Bonus ($) Compensation Option (#) ($)(2)
- --------------------------- --- ---------- --------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Bowles, Jr. 1998 242,662 34,818 100,000 8,693
Former Executive Vice President,
Marketing and Customer Service 1997 220,237 13,615 - 7,398
</TABLE>
(1) Represents annual compensation for the fiscal years ended March 31, 1998
and 1997 for the Company's current executive officers (Messrs. Lambert,
Hailemichael and Kammersgard) and for the calendar years ended December 31,
1997 and 1996 for the Company's former executive officers (Messrs. Eeg,
Bylin and Bowles).
(2) Includes car allowance, life insurance, and long-term disability insurance
for Messrs. Eeg, Bylin, and Bowles and term life insurance premium paid on
behalf of Mr. Lambert.
(3) Represents the dollar value of shares of Artecon California common stock
purchased pursuant to an option exercise, calculated by multiplying the
difference between the fair market value of such stock on the date of grant
($1.20 per share) and the exercise price ($0.035 per share) by the number
of shares of Artecon California common stock purchased (250,000 shares).
(4) Represents the dollar value of shares of Artecon California common stock
purchased pursuant to an option exercise, calculated by multiplying the
difference between the fair market value of such stock on the date of grant
($1.20 per share) and the exercise price ($0.035 per share) by the number
of shares of Artecon California common stock purchased (125,000 shares).
(5) Represents (i) the dollar value of shares of Artecon California common
stock issued in exchange for the surrender of stock participation rights
previously granted, calculated by multiplying the difference between the
fair market value of such stock on the date of issuance ($1.20 per share)
and the purchase prices ($0.38 to $0.59 per share) by the number of shares
of Artecon California common stock issued (55,000 shares), and (ii) $21,754
in payroll taxed paid by the Company.
Employment Agreements
Between 1994 and 1997, Artecon California issued to Tesfaye Hailemichael,
the Company's Chief Financial Officer and Treasurer, an aggregate of 55,000
Performance Appreciation Plan Participation Units ("PPUs") under Artecon's
Participative Performance Appreciation Plan. On June 30, 1997, Mr. Hailemichael
and Artecon entered into an agreement whereby each PPU held by Mr. Hailemichael
was converted into one share of Common Stock of Artecon California. All of such
shares were converted into Common Stock of the Company pursuant to the Merger.
In connection with the Merger, the Company and each of David Eeg, the
Company's former President and Chief Executive Officer, and Robert Bylin, the
Company's former Chief Financial Officer, amended the employment agreements of
such persons to provide certain severance benefits upon termination of their
relationship with the Company.
Under the terms of Mr. Eeg's employment agreement, as amended, upon
termination of his status as a full time employee or consultant of the Company
at either his option or the option of the Company, Mr. Eeg is entitled to
receive severance payments equal to 66 weeks of his regular salary, which shall
be paid over such period. In addition, Mr. Eeg's stock options granted under the
Company's stock option plans were amended to provide that such options may be
exercised for a period of two years from the date of termination of his status
as a full-time employee or consultant of the Company. Mr. Eeg's status as a
full-time employee or consultant of the Company terminated as of April 29, 1998.
Subject to the terms of his employment agreement, as amended, Mr. Eeg will be
paid an aggregate of approximately $356,000 in severance payments in equal
bi-weekly installments over the 66 weeks following his termination date.
Under the terms of Mr. Bylin's employment agreement, as amended, upon
termination of his status as a full time employee or consultant of the Company
at either his option or the option of the Company, Mr. Bylin is entitled to
receive severance payments equal to 47 weeks of his regular salary, which shall
be paid over such period. In addition, Mr. Bylin's stock options granted under
the Company's stock option plans were amended to provide that such stock options
may be exercised for a period of one year from the date of termination of his
status as a full-time
34
<PAGE> 35
employee or consultant of the Company under certain circumstances. Mr. Bylin's
status as a full-time employee or consultant of the Company terminated as of
April 10, 1998. Subject to the terms of his employment agreement, as amended,
Mr. Bylin will be paid an aggregate of approximately $145,000 in payments in
equal bi-weekly installments over the 47 weeks following his termination date.
In addition, pursuant to their respective employment agreements, as
amended, Mr. Eeg and Mr. Bylin have agreed not to compete with the Company
during the time severance payments are being made to them by the Company.
Gene E. Bowles, Jr., the Company's former Executive Vice President,
Marketing and Customer Service, terminated his employment with the Company in
January 1998. Under the terms of his employment agreement, Mr. Bowles will be
paid an aggregate of approximately $241,000 in severance payments in equal
bi-weekly installments over the 52 weeks following his termination date.
Option Grants in Last Fiscal Year
The Company grants options to its executive officers under its 1996 Stock
Option Plan, as amended (the "1996 Plan").The current executive officers
(Messrs. Lambert, Kammersgard, and Hailemichael) were not granted stock options
during the fiscal year ended March 31, 1998. The following table sets forth for
each of the former executive officers certain information concerning stock
options granted during the year ended December 31, 1997.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates
Number of Percent of Total of Stock Price Appreciation
Underlying Options Granted Exercise for Option Term (3)
Options To Employees in Price Expiration -----------------------------
Name Granted (1) 1997 Per Share Date 5% 10%
---- ----------- ---- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
David A. Eeg 100,000 9.9% $ 7.00 3/3/07 $ 441,000 $1,113,000
Robert E. Bylin 50,000 4.9 7.00 3/3/07 220,500 556,500
Gene E. Bowles 100,000 9.9 7.00 3/3/07 441,000 1,113,000
</TABLE>
(1) Options granted had a ten year term, and vested at the rate of 1/8 of the
shares six months from the vesting start date and the balance monthly over
the succeeding 42 months.
(2) Options are scheduled to expire according to Messrs. Eeg's and Bylin's
employment agreements, as amended. Mr. Bowles options terminated prior to
the expiration date upon termination of his employment.
(3) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. The total appreciation
of the options over their ten-year terms at 5% and 10% is 63% and 159%,
respectively.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth for each of the Company's named executive
officers certain information concerning options exercised during 1998 and the
number of shares subject to both exercisable and unexercisable stock options as
of March 31, 1998. The following table also sets forth the value of unexercised
"in-the-money" options held at March 31, 1998.
<TABLE>
<CAPTION>
Number of
Number of Value Realized (2) Securities Underlying Value of Unexercised
Shares (Market Price at Unexercised Options at in-the-money options at
Acquired on Exercise Less March 31, 1998 March 31, 1998 (1)
Name Exercise Exercise Price) Exercisable Unexercisable. Exercisable Unexercisable.
---- -------- --------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
David A. Eeg - $ - 162,500 - $ 221,875 $ -
Gene E. Bowles, Jr. 62,500 229,688 - - - -
Robert E. Bylin - - 60,157 - 36,057 -
</TABLE>
35
<PAGE> 36
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at March 31, 1998 and the exercise of
such person's option.
(2) The value realized represents the estimated value of shares of the
Company's Common Stock determined as of the date of exercise by reference
to the market value of the Company's Common Stock, less the option exercise
price.
Employee Stock Plans
1993 Stock Option Plan
The 1993 Stock Option Plan (the "1993 Plan") provides for the grant of
555,555 shares of Common Stock by officers, employees, consultants and directors
of Artecon. The Board of Directors is responsible for administration of the 1993
Plan and determines the term of each option, option exercise price, number of
shares for which each option is granted, and the rate at which each option is
exercisable. Option granted under the 1993 Plan generally vest over a four-year
period. Upon completion of the Merger, all the outstanding options granted under
the 1993 Plan became fully vested and exercisable.
1996 Stock Option Plan
The 1996 Plan provides for granting to employees, including officers,
directors, and consultants, of non-statutory stock options. A total of 3,000,000
shares of Common Stock are currently reserved for issuance pursuant to the 1996
Plan. As of March 31, 1998, options to purchase 774,646 shares of Common Stock
were outstanding under the 1996 Plan and 2,225,354 shares of Common Stock
remained available for issuance under the 1996 Plan. In April 1998, Artecon
granted options to purchase 1,471,500 shares at exercise prices ranging from
$3.38 to $3.75. Additionally , 217,500 options with exercise prices ranging from
$5.13 to $7.00 were cancelled and re-granted at $3.375 per share.
1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan (the "Purchase Plan") provides for
the opportunity to purchase Common Stock of the Company through accumulated
payroll deductions. A total of 400,000 shares of Common Stock are currently
reserved for issuance under the Purchase Plan. As of March 31, 1998, 131,545
shares of Common Stock had been purchased under the Purchase Plan and 268,455
shares remained available for purchase under the Purchase Plan.
401(k) Plan
Artecon has a savings plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan"). The 401(k) Plan allows eligible employees to
contribute up to 15 percent of their compensation on a pre-tax basis up to the
statutorily prescribed annual limit ($10,000 in 1998). The Company matches 50
percent of the employee's contribution up to a specified limit. Such matching
contributions vest incrementally over 5 years.
DIRECTOR COMPENSATION
Prior to the Storage Dimensions Merger, non-employee directors of Artecon
California(Messrs. Jason Sauey and W.R. Sauey) received an annual fee of $1,350
each for attending board meetings for the year ended March 31, 1998. In
addition, during the fiscal year ended March 31, 1998, Artecon California
granted to Mr. Jason Sauey, as compensation for his services as a director of
Artecon California, an option to purchase 50,000 shares of Artecon California
common stock at an exercise price of $0.035 per share, which Mr. Sauey exercised
during such fiscal year. During the fiscal year ended March 31, 1998, Mr. W.R.
Sauey received a bonus of $14,938 as compensation for his services as Chairman
of the Board. Prior to the Storage Dimensions Merger, the non-employee directors
of Storage Dimensions each received an annual fee of $16,000 plus $1,000 for
each board meeting attended in person for their services as directors.
36
<PAGE> 37
Effective April 1998, each non-employee member of the Board of Directors of
the Company receives an annual fee of $10,000 plus $2,000 for each Board meeting
attended in person for their services as directors. The 1996 Plan provides that
options may be granted to non-employee directors. See "Employee Stock Plans -
1996 Stock Option Plan. " In April 1998, each non-employee director received an
initial grant of options to purchase 50,000 shares of Common Stock at an
exercise price of $3.75 per share. Concurrently with such grant, Mr. Fitzgerald
and Dr. Park surrendered for cancellation certain non-employee director stock
options granted to them prior to the Storage Dimensions Merger.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of May 15,1998 by: (i) each person or entity
who is known by the Company to beneficially own five percent or more of the
outstanding shares of Common Stock;(ii) each director of the Company;(iii) the
Named Executive Officers; and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Shares of
Stock Percent of Preferred Stock Percent Of Preferred
Beneficially Common Stock Beneficially Stock Owned
Name and address Owned (1) Owned (2) Owned (1) (2)
- ---------------- --------- --------- --------- ---
<S> <C> <C> <C> <C>
5% Stockholders
Capital Partners Group....... 2,900,623(5) 13.5% -- --
Maxtor Corporation .......... 1,600,000 7.5% -- --
Officers & Directors
W.R. Sauey................... 5,282,884(3) 24.7% 2,494,159(4) 100%
James L. Lambert............. 3,492,847(6) 16.3% -- --
Dana W. Kammersgard.......... 1,381,837(7) 6.4% -- --
Tesfaye Hailemichael......... 174,838 * -- --
David A. Eeg................. 301,982(8) 1.4% -- --
Gene E. Bowles............... 139,482 * -- --
Robert E. Bylin.............. 131,638(9) * -- --
Jason C. Sauey............... 360,604 1.7% -- --
Dr. Chong Sup Park........... 1,600,000(10) 7.5% -- --
Brian D. Fitzgerald.......... 2,900,623(5) 13.5% -- --
Norman R. Farquhar........... -- * -- --
William J. Filip............. 15,000 * -- --
All executive officers and
directors as a group
(9 persons)(11).............. 15,208,633 71.0% 2,494,159 100%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied by executive officers,
directors, principal stockholders and the Company's transfer agent.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally sole voting and
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
Company believes that the persons named in the table above have sole voting
and investment power with respect to all shares of Common Stock and
Preferred Stock shown as beneficially owned by them.
(2) Percentage of beneficial ownership is based on 21,416,323 shares of Common
Stock outstanding as of May 15, 1998. Preferred Stock is based on 2,494,159
shares of Series A Preferred Stock outstanding as of May 15, 1998.
(3) Includes (i) 891,151 shares of Common Stock held by Flambeau
Corp.,(ii)235,507 shares of Common Stock held by Flambeau Products Corp.,
(iii) 38,333 shares of Common Stock held by Seats, Inc. and (iv) 1,038,103
shares of Common Stock held by the W.R. & Floy A. Sauey
37
<PAGE> 38
Grandparents Trust established for the benefit of certain grandchildren of
W.R. Sauey. Mr. Sauey is Chairman of the Board and the principal
shareholder in each of Flambeau Corp., Flambeau Products Corp. and Seats,
Inc. (collectively, the "Sauey Affiliates"). Mr. Sauey disclaims beneficial
ownership of all the above-listed shares, except to the extent of his
pecuniary or pro rata interest in such shares.
(4) Includes (i) 1,038,604 shares of Series A Preferred Stock held by Flambeau
Corp., (ii) 1,038,604 shares of Series A Preferred Stock held by Flambeau
Products Corp. and (iii) 169,074 shares of Series A Preferred Stock held by
Seats, Inc. Mr. Sauey disclaims beneficial ownership of all the
above-listed shares, except to the extent of his pecuniary or pro rata
interest in such shares.
(5) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
shares held by CP Acquisition, L.P. No. 4B, 3,612 shares held by Capital
Partners, Inc., and 293,781 shares held by FGS, Inc. The following
affiliated entities are included in "Capital Partners Group"; (a) CP
Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
the sole stockholder, an officer and a director, and (d) FGS, Inc., a
Delaware corporation, of which Mr. Fitzgerald is the controlling
stockholder, an officer and a director. Mr. Fitzgerald may be deemed to
beneficially own the shares held by the entities comprising the Capital
Partners Group.
(6) Includes 546 shares of Common Stock held by Lisa Kammersgard, the spouse of
Mr. Kammersgard.
(7) Includes 316,894 shares of Common Stock held by Pamela Lambert, the spouse
of Mr. Lambert, and 166 shares of Common Stock held by Mr. Lambert'S
daughter.
(8) Includes options to purchase 162,500 shares of Common Stock exercisable at
or within 60 days of May 15, 1998.
(9) Includes options to purchase 60,157 shares of Common Stock exercisable at
or within 60 days of May 15, 1998.
(10) Represents shares held by Maxtor Corporation. Dr. Park is President of
Hyundai Electronics America, the parent of Maxtor Corporation, and Chairman
of the Board of Maxtor Corporation.
(11) Includes 2,203,094 shares of Common Stock held by the Sauey Affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Falcon Acquisition purchase price of $3,500,000 included $1,000,000 in
cash and a promissory note in the original principal amount of $1,250,000 (the
"Artecon Note"). Subsequent to the issuance of the Artecon Note, Artecon
California and Falcon amended the Artecon Note to decrease the principal amount
due thereunder to $750,000. Concurrently with the Falcon Acquisition, Falcon
transferred the Falcon Technology to Founding Partners, a California general
partnership ("Founding Partners"), in exchange for a promissory note in the
principal amount of $1,750,000 (the "Founding Partners Note"). Dana Kammersgard,
James Lambert and W.R. Sauey, each of whom is an executive officer and/or
director of the Company, are the general partners of Founding Partners. Founding
Partners is considered to be a Special Purpose Entity and, accordingly, has been
consolidated with the Company for financial reporting purposes. The purchase
price was allocated among the acquired assets to $10,232,000 for other assets
acquired, $638,000 to goodwill and other intangible assets, $14,138,000 for
liabilities assumed and to in-process research and development expenses of
$3,700,000, which had no future alternative use, based on management
assumptions. Under the terms of the Artecon Note, as adjusted, and the Founding
Partners Note (collectively, the
38
<PAGE> 39
"Notes"), the Company and Founding Partners, respectively, are required to make
monthly payments to Falcon of $15,935 and $37,182, respectively, through August
2002. Each of the Notes bears interest at the rate of 10% per annum. As of March
31, 1998, the approximate total amount of principal and interest outstanding
under the Artecon Note was $680,000, and the total approximate amount of
principal and interest outstanding under the Founding Partners Note was
$1,588,000.
In connection with the Falcon Acquisition and the transfer of the Falcon
Technology, Artecon California and Founding Partners entered into a Technology
License Agreement, dated August 21, 1997, pursuant to which Founding Partners
granted to Artecon California an exclusive, perpetual license of the Falcon
Technology in exchange for monthly payments of $39,000 payable through August
2002.
On December 27, 1997, Founding Partners and Artecon California amended the
Technology License Agreement to provide for, among other things, the transfer of
the Falcon Technology from Founding Partners to Artecon California upon the
satisfaction in full of Founding Partners' obligations under the Founding
Partners Note.
Pursuant to certain commitments between Artecon and the Nordic Group, in
which W.R. Sauey holds a controlling interest, Artecon was obligated to pay fees
to the Nordic Group for certain software maintenance services provided by and
overhead costs incurred by the Nordic Group. Such fees totaled approximately
$9,000 to $11,000 per month and represented Artecon's portion of overhead costs
paid by the Nordic Group on its behalf. Such payments terminated effective upon
the closing of the Merger. In addition, the Company leases certain real property
from W.R. Sauey at a monthly rental fee of approximately $1,125 under a
month-to-month lease between the parties.
Since January 1997, Artecon California made a series of short-term loans to
Flambeau Corp., a company in which W.R. Sauey is the principal shareholder, in
the aggregate principal amount of $6,145,000. Such loans were made pursuant to
the terms of a promissory note dated January 16, 1997 which bore interest at a
rate of 7.25% per annum and which was due and payable on demand. The aggregate
principal amount (including $14,506 in total interest payments) was paid in full
by Flambeau Corp. in August 1997.
Between 1994 and 1997, Artecon California issued to Tesfaye Hailemichael,
the Company's Chief Financial Officer and Treasurer, an aggregate of 55,000
Performance Appreciation Plan Participation Units ("PPUs") under Artecon's
Participative Performance Appreciation Plan. On June 30, 1997, Mr. Hailemichael
and Artecon entered into an agreement whereby each PPU held by Mr. Hailemichael
was converted into one share of Common Stock of Artecon California. All of such
shares were converted into Common Stock of the Company pursuant to the Merger.
During the fiscal years ended March 31, 1996, 1997, 1998, Artecon
California made payments to certain entities affiliated with W.R. Sauey (the
"Nordic Group Companies") of approximately $98,000, $85,000, and $130,000,
respectively, for the purchase of certain products and services from the Nordic
Group Companies. In addition, during the fiscal years ended March 31, 1996, 1997
and 1998, the company received payments for the sale of certain products and
services from certain of the Nordic Group Companies of approximately $162,000,
$74,000, and $125,000, respectively. As of March 31, 1998, the Company had
accounts receivable from certain Nordic Group Companies of approximately $3,000
and accounts payable of zero.
Since March 31, 1994, Artecon California made payments to W.R. Sauey and
certain of his affiliates in the aggregate amount of $585,700 in connection with
the repurchase of shares of Preferred and Preferred B of Artecon pursuant to an
Agreement for Repurchase of Preferred Shares of Stock dated December 22, 1994
among Artecon California, Flambeau Corp., Flambeau Products Corp., Seats, Inc.
39
<PAGE> 40
and W.R. Sauey (the "Artecon Repurchase Agreement"). On December 23, 1997 the
parties to the Artecon Repurchase Agreement amended such agreement to provide
for its termination upon consummation of the Storage Dimensions Merger.
In connection with the Storage Dimensions Merger, Capital Partners entered
into a standstill agreement with the Company pursuant to which it agreed not to
purchase additional shares of the Company's Common Stock, with certain
exceptions, until the earlier of five years from the closing of the Merger or
such time as Capital Partners no longer holds 5% of the outstanding Common Stock
of the Company. . Mr. Fitzgerald, a director of the Company, is also an officer
of Capital Partners.
In connection with the Storage Dimensions Merger, the Company and each of
David Eeg, the Company's former President and Chief Executive Officer, and
Robert Bylin, the Company's former Chief Financial Officer , amended the
employment agreements of such persons to provide certain severance benefits upon
termination of their relationship with the Company.
Under the terms of Mr. Eeg's employment agreement, as amended, upon
termination of his status as a full time employee or consultant of the Company
at either his option or the option of the Company, Mr. Eeg is entitled to
receive severance payments equal to 66 weeks of his regular salary, which shall
be paid over such period. In addition, Mr. Eeg's stock options granted under the
Company's stock option plans were amended to provide that such options may be
exercised for a period of two years from the date of termination of his status
as a full-time employee or consultant of the Company. Mr. Eeg's status as a
full-time employee or consultant of the Company terminated as of April 29, 1998.
Subject to the terms of his employment agreement, as amended, Mr. Eeg will be
paid an aggregate of approximately $356,000 in severance payments in equal
bi-weekly installments over the 66 weeks following his termination date.
Under the terms of Mr. Bylin's employment agreement, as amended, upon
termination of his status as a full time employee or consultant of the Company
at either his option or the option of the Company, Mr. Bylin is entitled to
receive severance payments equal to 47 weeks of his regular salary, which shall
be paid over such period. In addition, Mr. Bylin's stock options granted under
the Company's stock option plans were amended to provide that such stock options
may be exercised for a period of one year from the date of termination of his
status as a full-time employee or consultant of the Company under certain
circumstances. Mr. Bylin's status as a full-time employee or consultant of the
Company terminated as of April 10, 1998. Subject to the terms of his employment
agreement, as amended, Mr. Bylin will be paid an aggregate of approximately
$145,000 in severance payments in equal bi-weekly installments over the 47 weeks
following his termination date.
In addition, pursuant to their respective employment agreements, as
amended, Mr. Eeg and Mr. Bylin have agreed not to compete with the Company
during the time severance payments are being made to them by the Company.
Gene E. Bowles, Jr., the Company's former Executive Vice President,
Marketing and Customer Service, terminated his employment with the Company in
January 1998. Under the terms of his employment agreement, Mr. Bowles will be
paid an aggregate of approximately $241,000 in severance payments in equal
bi-weekly installments over the 52 weeks following his termination date.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
For financial reporting purposes, the Storage Dimensions Merger was
accounted for as an acquisition of Storage Dimensions by Artecon California,
and, as such, the historical financial results of the Company included in this
Annual Report are those of Artecon California.
a) DOCUMENTS FILED WITH REPORT
(1). FINANCIAL STATEMENTS
The consolidated balance sheets for the years ended March 31, 1998 and
1997, and the consolidated statements of operations, statements of
shareholders' equity and cash flows for each of the two years ended
March 31, 1998 and March 29, 1997, together with the notes thereto.
The consolidated balance sheets for the years ended March 30, 1996 and
March 25, 1995, and the consolidated statements of operations,
statements of shareholders' equity (deficit) and cash flows for each
of the two years ended March 30, 1996 and March 25, 1995, together
with the notes thereto.
40
<PAGE> 41
(2). FINANCIAL DATA SCHEDULES
See Exhibit 27.1 below
(3). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization by and among the Registrant, Storage Acquisition Corp. and Artecon,
Inc., dated as of December 22, 1997. (1)(3)
3.1 Second Amended and Restated Certificate of Incorporation of Registrant. (2)
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.
3.3 Bylaws of Registrant. (5)
4.1 Form of Registrant's Common Stock Certificate. (5)
4.2 Form of Registrant's Series A Preferred Stock Certificate. (4)
10.1 Form of Voting Agreement, dated December 22, 1997, between Registrant and the shareholders of Artecon California, a
California corporation formerly known as Artecon, Inc. ("Artecon California"), as named therein. (3)
10.2 Form of Voting Agreement, dated December 22, 1997, between Artecon California and the stockholders of the Registrant
as named therein. (3)
10.3 Form of Indemnification Agreement entered into between the Registrant and its directors and officers. (2)
10.4 Registrant's 1996 Stock Option Plan, as amended. (5)(6)
10.5 Registrant's 1996 Employee Stock Purchase Plan, as amended. (5)(6)
10.6 Stockholders Agreement, dated December 26, 1992, among the Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B, Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
certain other management investors. (2)
10.7 Lease, dated October 8, 1993, between the Registrant and Callahan-Pentz Properties, McCarthy Four. (2)
10.8 First Amendment to Lease, dated June 28, 1995, between the Registrant and Callahan-Pentz Properties, McCarthy Four. (2)
10.9 Credit Agreement, Revolving Credit Note, Security Agreements, Guaranty of Payment, Patent Security Agreement and
Trademark Security Agreement, each dated May 15, 1998, among the
Registrant, LaSalle National Bank and the other parties named
therein. (1)
10.10 Lease, dated July 9, 1993, as amended, between Artecon, Inc. and Vector Associates.
10.11 Asset Purchase Agreement, dated August 21, 1997, among Artecon California, Falcon Systems, Inc. and Craig Caudill.
10.12 Technology Purchase Agreement, dated August 21, 1997, among Founding Partners, Falcon Systems, Inc. and Craig Caudill.
10.13 Promissory Note, dated August 21, 1997, issued by Artecon California to Falcon Systems, Inc.
10.14 Promissory Note, dated August 21, 1997, issued by Founding Partners to Falcon Systems, Inc.
10.15 Technology License Agreement, dated August 21, 1997, between Artecon California and Founding Partners.
10.16 Amendment to Technology License Agreement, dated December 22, 1997, between Artecon California and Founding Partners.
10.17 Form of employment agreement between the Registrant and certain employees. (2)(6)
10.18 Amendment No. 1 to the Employment Agreement, dated March 9, 1998, between the Registrant and David A. Eeg. (6)
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
10.19 Amendment No. 1 to the Employment Agreement, dated March 9, 1998, between the Registrant and Robert Bylin. (6)
10.20 Standstill Agreement, dated December 22, 1997, between Artecon California and certain stockholders of the Registrant
as named therein. (4)
11 Statement re computation of per share earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
24 Power of Attorney. Reference is made to page II-44.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-20045), as amended, and incorporated herein by reference.
(3) Filed as an exhibit to the Schedule 13D filed by Artecon California, a
California corporation (formerly known as Artecon, Inc.) on December
29, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-47593) and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Registration Statement on Form S-8
(No. 333-56281) and incorporated herein by reference.
(6) Indicates management or compensatory plan or arrangement required to
be identified pursuant to Item 14(c).
42
<PAGE> 43
(b) Reports on Form 8-K
On March 30, 1998, the Company filed a Current Report on Form 8-K dated
March 13, 1998 reporting under Item 5 ("Change in Fiscal Year") that the
Company's fiscal year end had been changed from December 28 to March 31.
On April 7, 1998, the Company filed a Current Report on Form 8-K dated
March 31, 1998 reporting under Item 2 ("Acquisition or Disposition of Assets")
that the Company had completed its merger with Artecon California, pursuant to
an Agreement and Plan of Merger and Reorganization, dated December 22, 1997, and
under Item 4 ("Change in Registrant's Certifying Accountant") the change in the
Company's independent public accountants from Price Waterhouse LLP to Deloitte &
Touche LLP.
(c) See response to Item 14(a)(3) above.
(d) See response to Item 14(a)(2) above.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARTECON, INC.
By: /s/ JAMES L. LAMBERT
----------------------------------
James L. Lambert
President
Date: June 29, 1998
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James L. Lambert and Tesfaye
Hailemichael, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of them or their
or his substitute or substituted, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ JAMES L. LAMBERT President and Chief Executive Officer June 29, 1998
- ------------------------- and Director(Principal Executive Officer)
JAMES L. LAMBERT
/s/ TESFAYE HAILEMICHAEL Chief Financial Officer and Treasurer June 29, 1998
- ------------------------- (Principal Financial and
TESFAYE HAILEMICHAEL Accounting Officer)
/s/ W.R. SAUEY Chairman of the Board of Directors June 29, 1998
- -------------------------
W.R. SAUEY
/s/ NORMAN R. FARQUHAR Director June 29, 1998
- -------------------------
NORMAN R. FARQUHAR
/s/ WILLIAM J. FILIP Director June 29, 1998
- -------------------------
WILLIAM J. FILIP
/s/ BRIAN D. FITZGERALD Director June 29, 1998
- -------------------------
BRIAN D. FITZGERALD
/s/ DR. CHONG SUP PARK Director June 29, 1998
- -------------------------
DR. CHONG SUP PARK
/s/ JASON C. SAUEY Director June 29, 1998
- ------------------
JASON C. SAUEY
</TABLE>
44
<PAGE> 45
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Artecon, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................F-2
Consolidated Balance Sheets as of March 31, 1998 and
March 29, 1997..............................................................F-3
Consolidated Statement of Operations for the two years
Ended March 31, 1998........................................................F-5
Consolidated Statement of Shareholders' Equity for the
two years ended March 31, 1998..............................................F-6
Consolidated Statement of Cash Flows for the two years
ended March 31, 1998........................................................F-7
Notes to Consolidated Financial Statements..................................F-10
Report of Independent Auditors..............................................F-27
Consolidated Balance Sheets as of March 30, 1996 and
March 25, 1995..............................................................F-28
Consolidated Statements of Income for the two years ended
March 30, 1996..............................................................F-29
Consolidated Statements of Stockholders' Equity (Deficit)
for the two years ended March 30, 1996......................................F-30
Consolidated Statements of Cash Flows for the two years ended
March 30, 1996..............................................................F-31
Notes to Consolidated Financial Statements..................................F-32
Independent Auditor's Report on Schedule....................................S-1
Schedule II - Valuation and Qualifying Accounts.............................S-2
</TABLE>
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Artecon, Inc.
We have audited the accompanying consolidated balance sheets of Artecon, Inc.
and its subsidiaries (the Company) as of March 31, 1998 and March 29, 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Artecon, Inc. and its
subsidiaries at March 31, 1998 and March 29, 1997 and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Costa Mesa, California
May 15, 1998
F-2
<PAGE> 47
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,992 $ 746
Accounts receivable, less allowance for doubtful accounts and sales
returns of $801 at March 31, 1998 and $170 at March 29, 1997 18,415 5,895
Inventories, net 12,354 6,372
Deferred income taxes 3,510 48
Prepaid expenses and other 1,654 749
-------- --------
Total current assets 43,925 13,810
PROPERTY AND EQUIPMENT:
Machinery and equipment 4,474 1,538
Tooling molds 1,158 912
Furniture and fixtures 105 77
Computer software 347 54
-------- --------
6,084 2,581
Less accumulated depreciation (2,358) (1,558)
-------- --------
Property and equipment, net 3,726 1,023
OTHER ASSETS 133 4
GOODWILL, net 4,668
OTHER INTANGIBLE ASSETS, net 3,291
DEFERRED INCOME TAXES 1,602 357
-------- --------
$ 57,345 $ 15,194
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 48
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,161 $ 5,243
Accrued compensation 2,431 371
Accrued merger liabilities 5,406
Other accrued liabilities 4,317 1,132
Income taxes payable 138
Short-term borrowings 35
Current portion of long-term debt 756 116
-------- --------
Total current liabilities 27,106 7,000
LONG-TERM LIABILITIES 13 104
BORROWINGS UNDER LINES OF CREDIT 7,899 2,732
LONG-TERM DEBT 2,585 189
MINORITY INTEREST 63 72
COMMITMENTS (Note 12)
SHAREHOLDERS' EQUITY:
Convertible preferred A shares, $.005 par value, 10,000 shares authorized, 2,494
shares issued and outstanding at March 31, 1998; liquidation preference of $4,988
at March 31, 1998 12
Convertible preferred shares, no par value; 10,000 shares authorized; 1,112 shares
issued and outstanding at March 29, 1997; liquidation preference of $22
at March 29, 1997 2,219
Convertible preferred B shares, no par value; 10,000 shares authorized; 1,405 shares
issued and outstanding at March 29, 1997; liquidation preference of $28
at March 29, 1997 2,810
Common shares, $.005 par value at March 31, 1998, no par value at March 29, 1997;
40,000 shares authorized; 21,387 and 5,193 shares issued and outstanding at
March 31, 1998 and March 29, 1997, respectively 107 601
Additional paid-in capital 39,148
Foreign currency translation adjustment (97) (330)
Accumulated deficit (19,491) (203)
-------- --------
Total shareholders' equity 19,679 5,097
-------- --------
$ 57,345 $ 15,194
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 49
ARTECON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
NET REVENUES $ 66,340 $ 55,317
COST OF SALES 52,120 42,782
-------- --------
GROSS MARGIN 14,220 12,535
OPERATING EXPENSES:
Selling, general and administrative 13,928 8,990
Research and development 3,102 2,317
Acquired in-process research and development costs 18,200
-------- --------
Total operating expenses 35,230 11,307
-------- --------
OPERATING INCOME (LOSS) (21,010) 1,228
OTHER EXPENSE:
Other (expense) income, net (124) (10)
(Loss) gain on foreign currency transactions, net (141) 45
Interest, net (820) (282)
-------- --------
Total other expense (1,085) (247)
-------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION (22,095) 981
INCOME TAX (BENEFIT) PROVISION (2,807) 340
-------- --------
NET (LOSS) INCOME $(19,288) $ 641
======== ========
BASIC NET (LOSS) INCOME PER SHARE $ (3.30) $ 0.12
======== ========
WEIGHTED AVERAGE SHARES USED TO CALCULATE
BASIC NET INCOME (LOSS) PER SHARE 5,841 5,202
======== ========
DILUTED NET (LOSS) INCOME PER SHARE $ (3.30) $ 0.08
======== ========
WEIGHTED AVERAGE SHARES USED TO CALCULATE
DILUTED NET INCOME (LOSS) PER SHARE 5,841 8,410
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 50
ARTECON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED SHARES PREFERRED B SHARES PREFERRED A SHARES
--------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 30, 1996 1,212 $2,419 1,405 $2,810 -- $--
Repurchase of common and preferred shares (100) (200)
Foreign currency translation adjustment
Net income
------ ------ ------ ------ ------ ------
BALANCE, March 29, 1997 1,112 2,219 1,405 2,810
Issuance of common shares (57) (68)
Conversion of preferred shares to common shares (23) (46)
Conversion of convertible preferred and
preferred B shares to convertible
preferred A shares (1,089) (2,116) (1,405) (2,742) 2,494 12
Assumed issuance of common stock in connection
with acquisition
Foreign currency translation adjustment
------ ------ ------ ------ ------ ------
Net loss
BALANCE, March 31, 1998 -- $ -- -- $ -- 2,494 $ 12
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES CURRENCY TOTAL
--------------------- PAID-IN TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
------ ------- ------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 30, 1996 5,210 $601 $(312) $(798) $4,720
Repurchase of common and preferred shares (17) (46) (246)
Foreign currency translation adjustment (18) (18)
Net income 641 641
------ ------- ------- ---------- ------- ------
BALANCE, March 29, 1997 5,193 601 (330) (203) 5,097
Issuance of common shares 851 817 692
Conversion of preferred shares to common
shares 29 46
Conversion of convertible preferred and
preferred B shares to convertible
preferred A shares 4,846
Assumed issuance of common stock
in connection with acquisition 15,314 (1,357) 34,302 32,945
Foreign currency translation adjustment 233 233
Net loss (19,288) (19,288)
------ ------- ------- ---------- ------- ------
BALANCE, March 31, 1998 21,387 $ 107 $ 39,148 $ (97) $(19,491) $ 19,679
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 51
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(19,288) $ 641
Adjustments to reconcile net (loss) income to net cash
provided by operating activities, net of effects of acquisition:
Depreciation and amortization 1,001 664
Loss on asset disposal 8
Compensation expense related to stock issuances 699
Acquired in-process research and development costs 18,200
Provision for doubtful accounts and sales returns 271 10
Deferred income taxes (2,868) (18)
Loss on termination of subsidiary operations 32
Minority interest (9) (18)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 258 226
Inventories 3,276 (980)
Prepaid expenses and other assets (580) (175)
Accounts payable 4 240
Accrued compensation 406 (327)
Accrued merger liabilities (1,175)
Other accrued liabilities 132 374
Income taxes payable (138) 105
Long-term liabilities (91) (13)
-------- --------
Net cash provided by operating activities 51 761
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (668) (260)
Proceeds from sale of assets 21
Cash received for acquisitions, net of cash paid 7,351
-------- --------
Net cash provided by (used in) investing activities 6,704 (260)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 52
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings $ 24,988 $ 23,116
Payments on bank borrowings (24,802) (23,381)
Note payable to related party (19)
Issuance of common shares 17
Repurchase of preferred shares (230)
Repurchase of common shares (16)
-------- --------
Net cash provided by (used in) financing activities 203 (530)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 288 (18)
-------- --------
NET INCREASE (DECREASE) IN CASH 7,246 (47)
CASH, beginning of year 746 793
-------- --------
CASH, end of year $ 7,992 $ 746
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 663 $ 307
======== ========
Income taxes $ 880 $ 289
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Additions of property and equipment for note payable $ 360
========
DETAIL OF BUSINESSES ACQUIRED IN PURCHASE BUSINESS COMBINATIONS:
On August 21, 1997, the Company acquired certain net assets of Falcon Systems,
Inc. A summary of the transaction is as follows:
Fair value of other assets acquired $ 10,232
Acquired in-process research and development costs 3,700
Other intangible assets 420
Goodwill 127
Acquired developed technology 91
Note to Falcon shareholder (2,500)
Cash paid for acquisition, net of cash acquired (432)
--------
Liabilities assumed $ 11,638
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 53
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
On March 31, 1998, the Company acquired the net assets of
Storage Dimensions, Inc. A summary of the transactions is
as follows:
Fair value of other assets acquired $ 17,281
Acquired in-process research and development 14,500
Other intangible assets 2,400
Goodwill 4,538
Acquired developed technology 500
Cash acquired 7,783
Fair market value of stock (32,945)
--------
Liabilities assumed $ 14,057
========
</TABLE>
The fair market value of stock was contractually determined based on the
average bid and ask price of Storage Dimensions common stock of 3.96875
on December 18, 1997.
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 54
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS ACTIVITIES
Description of Business - Artecon, Inc. and its wholly- and
majority-owned subsidiaries, (collectively, the Company or Artecon),
are manufacturers and suppliers of value-added computer products and
services in the open systems workstation and server markets. The
Company's principal markets include Canada, Japan, United States and
Europe. The Company sells its products through reseller channels,
worldwide government agencies and Fortune 1000 companies.
On August 21, 1997, the Company acquired certain net assets of Falcon
Systems, Inc. (Falcon), a manufacturer and distributor of computer
peripheral equipment. The purchase price of $3,500 included $1,000 in
cash and $2,500 of promissory notes (Note 7). The acquisition was
recorded as a purchase and the results of operations for the period
from August 21, 1997 to March 31, 1998 are included in the accompanying
consolidated financial statements. The purchase price was allocated
$10,232 to assets acquired (consisting primarily of inventories,
accounts receivable, property and equipment and other current assets),
$638 to goodwill and other intangible assets, $14,138 to liabilities
assumed, and to in-process research and development expenses of $3,700,
which had no future alternative use, based on management assumptions.
In connection with the acquisition, a partnership was created to
purchase certain assets from Falcon. The partners are majority
shareholders of the Company. The partnership is considered to be a
Special Purpose Entity and, accordingly, the accompanying consolidated
financial statements include the accounts of the partnership and all
intercompany transactions have been eliminated.
On March 31, 1998, Artecon, Inc. and Storage Dimensions, Inc. (SDI)
completed a reverse merger whereby SDI acquired Artecon, Inc.
Immediately after the merger, SDI changed its name to Artecon, Inc. In
the merger, shareholders of the former Artecon, Inc. received
approximately 62% of the total issued and outstanding common stock, and
100% of the total issued and outstanding Preferred Stock of the new
Artecon, Inc. Since the former Artecon shareholders received a
substantial majority of the shares of common stock of the newly named
Artecon, the transaction was treated as a purchase of SDI by Artecon
for accounting purposes. As a result, the historical financial
statements of Artecon, Inc. for the periods prior to the merger are
those of Artecon, Inc., rather than those of SDI. The purchase price
was allocated $25,064 to assets acquired (consisting primarily of cash
and cash equivalents, accounts receivable, inventories, property and
equipment, deferred tax assets, and other assets), $7,438 to goodwill
and other intangible assets, $14,057 to liabilities assumed and to
in-process research and development expenses of $14,500, which had no
future alternative use, based on management assumptions.
F-10
<PAGE> 55
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unaudited pro forma results of operations of the Company for the years
ended March 31, 1998 and March 29, 1997 are included below. Such pro
forma presentation has been prepared assuming that the acquisitions had
occurred as of April 1, 1996 for the Company.
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Net revenues $ 144,595 $ 183,298
Net income (loss) (10,942) (18,183)
Pro forma basic and diluted net income (loss) per share $ (0.53) $ (1.39)
Weighted average shares used to calculate pro forma basic
and diluted net income (loss) per share 20,667 13,074
</TABLE>
The pro forma results include the historical accounts of the Company,
Falcon and SDI and pro forma adjustments, as may be required, including
the in-process research and development expense, the amortization of
goodwill and other intangible assets, and the interest expense related
to the promissory notes issued to Falcon's previous shareholder. The
in-process research and development expense has been included as if
recorded on April 1, 1996 and has been excluded from the year ended
March 31, 1998. The pro forma results of operations are not necessarily
indicative of actual results that may have occurred had the operations
of Falcon and SDI been combined in prior years.
The Company's fiscal year was previously on a 52 to 53-week basis that
ended on the Saturday nearest to March 31. The fiscal year ended March
29, 1997 contained 52 weeks. For convenience, effective December 31,
1997, the Company changed its fiscal year as ending on March 31 and its
fiscal quarters as ending on June 30, September 30 and December 31,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Artecon and its subsidiaries. All
significant intercompany transactions and balances have been eliminated
in consolidation.
Credit Risk - The Company performs ongoing credit evaluations of its
customers and requires no collateral. The Company maintains reserves
for potential credit losses.
Inventories - Inventories are comprised of purchased parts and
assemblies, which include direct labor and overhead, and are valued at
the lower of cost (first-in, first-out) or market.
F-11
<PAGE> 56
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets (ranging from
three to five years). Depreciation expense was $859 and $664 for the
years ended March 31, 1998 and March 29, 1997 respectively.
Foreign Currency - The accounts of foreign subsidiaries consolidated
herein have been translated from their respective functional currencies
at appropriate exchange rates in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 52. Cumulative translation adjustments are included as a
separate component of shareholders' equity. Gains and losses on
short-term intercompany foreign currency transactions are recognized as
incurred (Note 13).
Long-Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived
assets to be held are reviewed whenever events or changes in
circumstances indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such
value has occurred.
Goodwill and Other Intangible Assets - Goodwill related to acquisitions
is being amortized on a straight-line basis over a period of seven
years. Accumulated amortization was $142 and $89 at March 31, 1998 and
March 29, 1997, respectively. Other intangible assets related to
acquisitions is being amortized on a straight-line basis over two to
four years. Goodwill and other intangible assets are periodically
reviewed for events or changes whenever circumstances which indicate
that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of goodwill to determine
whether or not an impairment to such values has occurred.
Revenue Recognition - The Company recognizes revenue from product sales
upon shipment, including products sold under a stock rotation program
that entitles the buyer to the right to return products under certain
conditions. The Company provides allowance for estimated returns.
Revenue from service contracts is recognized ratably over the term of
the contract.
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.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax
F-12
<PAGE> 57
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
returns. Under this statement, deferred tax assets and liabilities are
determined based on the difference between the financial statement and
tax bases of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse.
Concentrations - The Company currently utilizes a limited number of
suppliers for certain devices used in its products but has no long-term
supply contracts with them. Due to the cyclical nature of the industry
and competitive conditions, there can be no assurance that the Company
will not experience difficulties in meeting its supply requirement in
the future.
Approximately 27% and 35% of revenues for the years ended March 31,
1998 and March 29, 1997, were to four and two, respectively. For the
year ended March 31, 1998, no customer accounted for 10% or more of
total revenues. The loss of, or a reduction in sales to, any such
customers would have a material adverse effect on the Company's
business, operating results and financial condition.
Revenues derived from various U.S. government agencies were
approximately $1,861 and $1,400 for the years ended March 31, 1998 and
March 29, 1997, respectively. Export sales to international customers
amounted to approximately $7,737 and $7,675 for the years ended March
31, 1998 and March 29, 1997, respectively.
Accounting for Stock-Based Compensation - The Company accounts for
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
Earnings per Share - In December 1997, the Company adopted SFAS No.
128, Earnings per Share. SFAS No. 128 redefines earnings per share
under generally accepted accounting principles. Under the new standard,
primary net income per share is replaced by basic net income per share
and fully diluted net income per share is replaced by diluted net
income per share. All historical earnings per share information has
been restated as required by SFAS No. 128.
Recent Accounting Pronouncements - Effective April 1, 1998, the Company
will adopt SFAS No. 130, Reporting Comprehensive Income, SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information,
and SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits. The Company is reviewing the impact of such
statements on its financial statements.
Reclassifications - Certain prior year balances have been reclassified
to conform with the current year presentation.
F-13
<PAGE> 58
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Purchased parts and materials $ 7,521 $ 4,084
Work-in-process 1,891 211
Finished goods 2,942 2,077
------- -------
$12,354 $ 6,372
======= =======
</TABLE>
4. ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Revenues from sales to affiliated companies for the years ended March
31, 1998 and March 29, 1997 were approximately $125 and
$74, respectively. Accounts receivable from affiliated
companies were approximately $3 and $7 at March 31, 1998 and March 29,
1997, respectively, and are included in accounts receivable in the
accompanying consolidated balance sheets.
The Company purchases certain goods from affiliates and also is subject
to a management fee of approximately $4 per month from an affiliate.
Purchases from affiliated companies for the years ended March 31, 1998
and March 29, 1997 were approximately $130 and $85, respectively.
Certain of these expenses were terminated upon completion of the
merger.
5. SHORT-TERM BORROWINGS
As a result of the merger with SDI (Note 1), the Company has assumed a
Loan and Security Agreement (the Agreement) with a financial
institution, which expires May 16, 1998. Under the revolving line of
credit provisions of the Agreement, the Company may borrow up to
$11,000 based upon eligible accounts receivable and inventory. Under
the terms of the Agreement, deposits from collections of accounts
receivable are restricted. The Agreement also allows the Company to
borrow up to $1,000 for purchases of property and equipment under its
capital expenditure facility and up to $400 under its term loan
provisions. Such borrowings reduce the available borrowings under the
revolving line of credit. Borrowings bear interest at the rate of prime
plus .75% (8.5% as of March 31, 1998) and are collateralized by all of
the Company's assets. Borrowings outstanding under the line at March
31, 1998 include $35 representing borrowings under the term loan
provisions.
F-14
<PAGE> 59
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. BORROWINGS UNDER LINE OF CREDIT
The Company has a line of credit agreement with a United States bank.
The agreement, which expires on September 1, 1999, provides for maximum
borrowings of up to $12,500 and is collateralized by substantially all
of the assets of the Company. The Company may choose between borrowing
at the bank's prime rate, as it may vary from time to time, or it may
choose a rate that is fixed for an agreed-upon period of from 30 to 180
days, with interest due quarterly, at the LIBOR rate in effect at the
commencement of the agreed-upon fixed period, plus 2.0%. This line of
credit agreement requires that the Company comply with certain
covenants, including minimum tangible net worth requirements.
On May 15, 1998, the Company entered into a $15,000 revolving credit
facility with a U.S. bank (the new line of credit). The new line of
credit provides for financing collateralized by all assets of the
Company, as defined by the agreement, and matures May 14, 2001, unless
otherwise renewed. The new line of credit bears interest, at the
borrower's option, at the bank's prime rate or LIBOR plus 175 basis
points. Monthly payments consist of interest only, with the principal
due at maturity.
The Japanese subsidiary has three lines of credit with a Japanese bank
for borrowings up to an aggregate 75 million Yen (US$565 at March 31,
1998) at rates ranging from 1.62% to 2.4%. At March 31, 1998, 40
million Yen (approximately US$300) was outstanding. Interest is due
monthly with the principal due one year from the commencement of the
agreement (February 1999). Borrowings are collateralized by inventories
of the Japanese subsidiary.
At March 31, 1998, the Company's borrowings under lines of credit were
as follows:
<TABLE>
<CAPTION>
<S> <C>
U.S. bank line, variable interest at prime (8.5% at March 31, 1998) $1,599
U.S. bank line, interest ranging from 7.63% to 7.69% 6,000
Japan bank lines, interest ranging from 1.62% to 2.4% 300
------
$7,899
======
</TABLE>
On May 15, 1998, the Company repaid the amounts outstanding under the
U.S. bank lines, with available proceeds from the new line of credit.
During the years ended March 31, 1998 and March 29, 1997, the Company
made short-term loans to an affiliate totaling $754 and $1,850,
respectively. The loans bore interest at 7.25% per annum and interest
income related to these loans was immaterial. No amounts were
outstanding at March 31, 1998 and March 29, 1997 related to the loans.
F-15
<PAGE> 60
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Term loan payable to bank, bearing interest at 7.72% per annum, collateralized
by property and equipment and monies in possession of the bank, monthly
installments of principal and interest of $11 through October 1999 $ 190 $ 305
Term loan payable to bank, bearing interest at 8.5% per annum, collateralized by
substantially all the assets of the Company, monthly installments of principal
and interest of $17 through September 2002 883
Promissory notes payable to former shareholder of Falcon (Note 1), bearing
interest at 10% per annum, monthly installments of principal and interest
of $53 through August 2002 2,268
------- -------
3,341 305
Less current portion (756) (116)
------- -------
$ 2,585 $ 189
======= =======
</TABLE>
Long-term debt at March 31, 1998 matures as follows:
<TABLE>
Fiscal year ending:
<S> <C>
1999 $ 756
2000 738
2001 725
2002 780
2003 342
------
$3,341
======
</TABLE>
F-16
<PAGE> 61
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company has the option for the term loan payable through 2002 to
elect an interest rate equal to the bank's cost of funds rate plus
2.25% or the bank's LIBOR rate plus 2.25% at various monthly or
quarterly periods as defined in the agreement.
Subsequent to March 31, 1998, the term loans payable to the bank were
repaid with funds available under a new revolving credit facility
(Note 6).
Interest expense related to long-term debt was $160 and $13 for the
years ended March 31, 1998 and March 29, 1997, respectively.
8. SHAREHOLDERS' EQUITY
Immediately prior to the merger, there were two classes of preferred
shares: the "Preferred" shares and the "Preferred B" shares. There were
10,000 shares of each preferred class authorized. All preferred shares
were nonvoting, did not provide for dividends, and had a liquidation
preference over common shares. The shares were convertible into common
shares, at the option of the holder, at the earlier of three years
after issuance or upon the occurrence of certain other events, at the
conversion rate of one common share for each 0.8 preferred share. The
liquidation preference for the Preferred was $.01 per share and for the
Preferred B was $2.00 per share.
In December 1994, the Company entered into a repurchase agreement with
certain shareholders who were holders of the Company's outstanding
preferred shares. The agreement required the Company to redeem 100
shares of the outstanding preferred shares and grants the Company the
option to repurchase the remaining shares at any time during the
five-year period ending December 22, 1999 at prices ranging from $2.00
to $2.50 per share. During the year ended March 29, 1997, the Company
repurchased 100 Preferred shares under the agreement at $2.30 per
share.
As consideration for the option to repurchase the preferred shares, in
the period ended March 29, 1997, the Company issued 276 common shares
to the holders of preferred shares at the ratio of approximately one
share of common stock for each ten shares of preferred stock that were
valued at $0.50 per common share. The value ascribed to the common
stock outstanding at the date of issuance has been shown as a reduction
in the carrying value of the preferred stock.
In June and October 1997, the Company issued a total of 95 shares of
common stock to certain employees in exchange for stock participation
rights previously granted. The common stock was issued at prices of
$1.20 and $2.00 per share. No stock participation rights or other
options to purchase common stock were outstanding at March 31, 1998.
Management has recorded $73 in compensation expense for the period
ended March 31, 1998 as a result of these issuances.
In July 1997, the Company issued 475 shares of common stock to certain
officers of the Company at a price of $0.035 per share. Management has
recorded $553 in compensation expense for the period ended March 31,
1998 as a result of these issuances.
F-17
<PAGE> 62
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As a result of, and immediately following, the merger, each share of
common stock of the former Artecon, Inc. was converted into 2.19 shares
of common stock of the new Artecon, Inc., and each share of convertible
preferred stock and convertible preferred B stock of the former
Artecon, Inc. was converted into one share of Series A convertible
preferred stock of the new Artecon, Inc.
The convertible preferred A shares have voting rights, provide for
dividends when and if declared by the Board of Directors and have
liquidation preference over common shares. The convertible preferred A
shares are convertible into common shares, at the option of the holder,
any time after January 1, 1999 at the conversion rate, as defined in
the amended Articles of Incorporation.
The convertible preferred A shares are automatically converted into
common shares upon a unanimous resolution by the Board of Directors or
upon the close of business on the first day following the date on which
the average of the closing per share sales price of the common stock as
reported on the NASDAQ National Market for 20 consecutive trading days
equals or exceeds $9.00 per share, at the conversion rate defined in
the amended Articles of Incorporation.
9. EARNINGS PER SHARE
Basic net (loss) income per share is computed using the weighted
average number of common shares outstanding during the periods
presented.
Diluted net (loss) income per share is computed using the weighted
average number of common and common stock equivalent shares outstanding
during the periods presented assuming the conversion of all shares of
the Company's Convertible preferred stock into common stock. Common
stock equivalent shares have not been included where inclusion would be
antidilutive.
The following is a reconciliation between the components of the basic
and diluted net income per share calculations (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 29, 1997
---------------------------------- ------------------------------
WEIGHTED PER SHARE NET WEIGHTED PER SHARE
NET LOSS SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ ------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net (loss) income
per share $(19,288) 5,841 $ (3.30) $ 641 5,202 $ 0.12
Effect of dilutive
securities - preferred
stock 3,208
-------- ----- -------- -------- ----- ------
Diluted net (loss) income
per share plus assumed
conversions $(19,288) 5,841 $ (3.30) $ 641 8,410 $ 0.08
======== ===== ======== ======== ===== ======
</TABLE>
F-18
<PAGE> 63
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. EMPLOYEE STOCK AND SAVINGS PLANS
Savings Plan - The Company has a savings plan, which qualifies under
Section 401(k) of the Internal Revenue Code. Under the plan,
participating U.S. employees may defer up to 15% of their pretax
salary, but not more than statutory limits. The Company matches 50% of
eligible employees' contributions up to a specified limit ($500). The
Company's matching contributions to the savings plan were $38 and $23
for the years ended March 31, 1998 and March 29, 1997, respectively.
Stock Plans - In connection with the Merger, the Company adopted, and
the Board of Directors approved, the following employee stock plans:
1996 Employee Stock Purchase Plan
Under the Company's 1996 Employee Stock Purchase Plan (the Purchase
Plan), a total of 200 shares of SDI's common stock was originally
reserved for issuance under the Purchase Plan. The Purchase Plan was
amended in January 1998 and a total of 400 shares of Artecon common
stock has been reserved for issuance under the amended purchase plan.
As of March 31, 1998, 132 shares of common stock had been purchased
under the Purchase Plan and 268 shares of common stock remained
available for purchase under the Purchase Plan.
1993 Stock Option Plan
The 1993 Stock Option Plan (the 1993 Plan) provides for the granting of
nonstatutory stock options for the purchase of up to an aggregate of
556 shares of the Company's common stock by officers, employees,
consultants and directors of the Company. The Board of Directors is
responsible for administration of the 1993 Stock Option Plan. The Board
of Directors determines the term of each option, option exercise price,
number of shares for which each option is granted and the rate at which
each option is exercisable. Options granted under the 1993 Stock Option
Plan generally vest over a four-year period.
1996 Stock Option Plan
The 1996 Stock Option Plan (the 1996 Plan) provides for the granting to
employees and consultants of nonstatutory stock options. A total of
3,000 shares of common stock are currently reserved for issuance
pursuant to the 1996 Plan. As of March 31, 1998, 989 options have been
granted under the 1996 Plan.
Nonstatutory stock options may be granted at an exercise price per
share of not less than 100% of the fair value per common share on the
date of the grant (not less than 110% of the fair value in the case of
holders of more than 10% of the Company's voting stock). Options
granted under the 1993 and 1996 Stock Option Plans generally expire ten
years from the date of the grant.
F-19
<PAGE> 64
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Transactions under the 1993 and 1996 Stock Option Plans are summarized
as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
<S> <C> <C>
OUTSTANDING, March 30, 1996 458 $0.20
Granted (weighted average fair value of $5.11) 718 $5.11
Exercised (70) $0.20
Canceled (116) $0.37
-----
OUTSTANDING, March 29, 1997 990 $3.99
Granted (weighted average fair value of $5.94) 492 $5.77
Exercised (146) $0.40
Canceled (277) $5.47
-----
OUTSTANDING, March 31, 1998 1,059 $5.06
=====
</TABLE>
In April 1998, the Company granted 1,472 options at exercise prices
ranging from $3.38 to $3.75 and canceled and regranted 218 options at
an exercise price of $3.38.
F-20
<PAGE> 65
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options
outstanding and exercisable at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE MARCH 31, LIFE EXERCISE MARCH 31, EXERCISE
PRICES 1998 (YEARS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
$0.20 191 6.38 $ 0.20 191 $ 0.20
$1.00 - $5.88 183 9.10 3.58 183 3.58
$6.00 - $6.75 211 9.11 6.35 211 6.35
$7.00 - $7.69 474 8.99 7.01 474 7.01
----- -----
1,059 8.56 5.06 1,059 5.06
====== ======
</TABLE>
Fair value disclosures
Had compensation cost for options granted in 1998 and 1997 under
the Company's option plan been determined based on the fair value at
the grant dates, as prescribed in SFAS No. 123, the Company's net
(loss) income and pro forma net (loss) income per share would have been
as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Net (loss) income:
As reported $(19,288) $ 641
Pro forma (19,923) 640
Basic net (loss) income per share:
As reported $ (3.30) $0.12
Pro forma (3.41) 0.12
Diluted net (loss) income per share:
As reported $ (3.30) $0.08
Pro forma (3.41) 0.08
</TABLE>
F-21
<PAGE> 66
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for
grants during the applicable periods: dividend yield of 0.0% for all
periods; risk-free interest rates of 5.49% to 6.57% for options granted
during the year ended March 31, 1998 and 5.97% to 6.48% for options
granted during the year ended March 29, 1997. An 80% volatility factor
was used all periods, and a weighted average expected option term of
five years for all periods.
Because the determination of the fair value of all options granted
after the Company became a public entity includes an expected
volatility factor and because additional option grants are expected to
be made each year, the above pro forma disclosures are not
representative of pro forma effects of reported net income for future
years.
11. INCOME TAXES
Significant components of the provision (benefit) for income taxes are
as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Current:
Federal $ 17 $245
State (11) 145
Foreign 20 9
------- ----
26 399
Deferred:
Federal (2,150) 53
State (602) (66)
Foreign (81) (46)
------- ----
(2,833) (59)
------- ----
$(2,807) $340
======= ====
</TABLE>
F-22
<PAGE> 67
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Statutory federal rate (35)% 35%
State taxes, net of federal benefit (2) 5
In-process research and development 23
Foreign tax (benefit) provision (6)
Other 1 1
--- ---
(13)% 35%
=== ===
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Deferred tax assets:
Uniform capitalization $ 100 $ 43
Tax credit carryforwards 713 267
Goodwill 53
Inventory reserve 2,117 227
Other reserves and accruals 1,258 258
Book over tax depreciation 501 92
In-process research and development 1,523
Acquisition costs 1,002
Net operating losses 2,125
------ ----
Total deferred tax assets 9,392 887
</TABLE>
F-23
<PAGE> 68
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Import reserve $ 346 $428
Amortization 160
State taxes 537 13
Acquired intangibles 1,242
----- ----
Total deferred tax liabilities 2,285 441
Valuation allowance (1,995)
----- ----
Net deferred tax assets $5,112 $446
====== ====
</TABLE>
The deferred tax assets and liabilities of SDI are included on the
Company's balance sheet at March 31, 1998. A valuation allowance of
$1,995 has been established to reflect limitations on SDI's net
operating losses as it is not more likely than not that these losses
will be utilized. Any future reduction of the valuation allowance
established at the date of the merger will reduce goodwill related to
the merger.
12. COMMITMENTS
The Company leases office and equipment under noncancelable operating
leases. Lease terms range from three to five years. The Company's
United States headquarters is leased under an operating lease that has
been extended to December 1999. The lease provides for rent escalation
between a minimum of 3% and a maximum of 4% on January 1, 1998 and 1999
based on the consumer price index during the prior year.
Future minimum lease commitments for all operating leases are as
follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
1999 $2,605
2000 1,025
2001 241
2002 60
------
$3,931
======
</TABLE>
F-24
<PAGE> 69
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total rent expense for the years ended March 31, 1998 and March 29,
1997 was approximately $1,027 and $698, respectively.
13. HEDGING ACTIVITIES
The Company's Japanese subsidiary enters into derivative financial
instruments, primarily foreign currency forward exchange contracts, to
manage foreign exchange risk on foreign currency transactions and does
not use the contracts for trading purposes. These financial instruments
are used to protect the Company from the risk that the eventual net
cash inflows from the foreign currency transactions will be adversely
affected by changes in exchange rates. Gains and losses related to
hedges of firmly committed transactions are deferred and recognized
when the hedged transaction occurs.
The following table summarizes the notional amount, which approximates
fair market value, of the Company's outstanding foreign exchange
contracts at March 31, 1998.
<TABLE>
<CAPTION>
U.S.
DOLLAR
EQUIVALENT MATURITY
<S> <C> <C>
U.S. Dollars $100 April 1998
U.S. Dollars 100 May 1998
U.S. Dollars 100 June 1998
----
$300
====
</TABLE>
The counterparties to these instruments are major financial
institutions. The Company is exposed to credit losses in the event of
nonperformance by counterparties to its forward exchange contracts but
has no off-balance sheet credit risk of accounting loss. The Company
anticipates, however, that the counterparties will be able to fully
satisfy their obligations under the contracts. The Company does not
obtain collateral or other security to support the forward exchange
contracts subject to credit risk but monitors the credit standing of
the counterparties.
F-25
<PAGE> 70
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. GEOGRAPHICAL INFORMATION
Revenue, income (loss) before income taxes and identifiable assets are
as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
------------------------------
MARCH 31, MARCH 29,
1998 1997
<S> <C> <C>
REVENUE:
North America $ 58,557 $48,169
Europe 4,271 3,176
Japan 3,512 3,972
-------- -------
$ 66,340 $55,317
======== =======
INCOME (LOSS) BEFORE TAXES:
North America $(19,104) $ 545
Europe 24 94
Japan (208) 2
-------- -------
$(19,288) $ 641
======== =======
ASSETS:
North America $ 56,187 $14,057
Europe 232 579
Japan 1,539 1,967
Eliminations (613) (1,409)
-------- -------
$ 57,345 $15,194
======== =======
</TABLE>
F-26
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Artecon, Inc.
We have audited the accompanying consolidated balance sheets of Artecon,
Inc. at March 30, 1996 and March 25, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Artecon, Inc.
at March 30, 1996 and March 25, 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
June 12, 1996
F-27
<PAGE> 72
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 793,454 $ 298,897
Accounts receivable, less allowance for doubtful accounts
of $180,465 and $112,725 at March 30, 1996 and March
25, 1995, respectively................................. 6,130,073 8,128,112
Inventories, net.......................................... 4,592,821 3,652,789
Deferred income taxes..................................... 390,448 53,261
Prepaid expenses and other................................ 576,028 581,281
----------- -----------
Total current assets................................... 12,482,824 12,714,340
Property and equipment:
Machinery and equipment................................... 1,050,627 781,514
Tooling molds............................................. 863,485 617,485
Furniture and fixtures.................................... 69,243 120,274
----------- -----------
1,983,355 1,519,273
Less accumulated depreciation............................. (916,232) (625,527)
----------- -----------
1,067,123 893,746
Other assets................................................ 33,250 376,273
----------- -----------
Total assets...................................... $13,583,197 $13,984,359
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,251,522 $ 6,001,465
Accrued liabilities....................................... 2,377,826 1,674,430
Note payable to related party............................. 18,642 17,486
Other current liabilities................................. 30,317 40,550
Income taxes payable...................................... 32,889 45,000
----------- -----------
Total current liabilities.............................. 5,711,196 7,778,931
Long-term liabilities....................................... 116,821 152,765
Borrowings under lines of credit............................ 2,941,498 2,500,000
Minority interest........................................... 90,965 --
Deferred income taxes....................................... 2,932 --
Commitments
Shareholders' equity:
Convertible preferred shares, no par value; 10,000,000
shares authorized, 1,211,949 and 1,280,449 shares
issued and outstanding at March 30, 1996 and March 25,
1995, respectively, liquidation preference $12,120 .... 2,418,900 2,555,900
Convertible preferred B shares, no par value; 10,000,000
shares authorized, 1,405,208 shares issued and outstanding
at March 30, 1996 and March 25, 1995, liquidation
preference $2,810,414..................................... 2,810,414 2,810,414
Common shares, no par value; 20,000,000 shares authorized,
5,210,225 and 5,225,225 shares issued and outstanding
at March 30, 1996 and March 25,1995, respectively...... 585,961 601,203
Foreign currency translation adjustment................... (311,914) (40,818)
Accumulated deficit....................................... (783,576) (2,374,036)
----------- -----------
Total shareholders' equity............................. 4,719,785 3,552,663
----------- -----------
Total liabilities and shareholders' equity........ $13,583,197 $13,984,359
=========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 73
ARTECON, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
MARCH 30, MARCH 25,
1996 1995
----------- -----------
<S> <C> <C>
Net revenues................................................ $47,171,827 $47,773,787
Cost of sales............................................... 34,716,899 38,296,376
----------- -----------
Gross margin................................................ 12,454,928 9,477,411
Operating expenses:
Selling, general and administrative....................... 8,924,260 7,886,557
Research and development.................................. 1,405,373 1,134,395
Other income.............................................. (122,755) (131,225)
----------- -----------
Total operating expenses.................................... 10,206,878 8,889,727
Operating income............................................ 2,248,050 587,684
Other (expense) income:
Interest, net............................................. (228,274) (215,969)
(Loss) gain on foreign currency transactions, net......... (335,633) 162,684
Minority interest in earnings of subsidiary............... (77,552) (10,287)
Loss on termination of subsidiary operations.............. (256,397) --
----------- -----------
(897,856) (63,572)
Income before income taxes.................................. 1,350,194 524,112
Provision (benefit) for income taxes........................ (240,266) 70,736
----------- -----------
Net income.................................................. $ 1,590,460 $ 453,376
=========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 74
ARTECON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE FOREIGN
PREFERRED SHARES PREFERRED B SHARES COMMON SHARES CURRENCY
----------------------- ----------------------- --------------------- TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ADJUSTMENT
---------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 26, 1994..... 1,380,449 $2,760,900 1,405,208 $2,810,414 5,225,225 $601,203 $ (43,130)
Repurchase of preferred
shares.................... (100,000) (205,000) -- -- -- -- --
Foreign currency translation
adjustment................ -- -- -- -- -- -- 2,312
Net income.................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- ---------
Balance at March 25, 1995..... 1,280,449 2,555,900 1,405,208 2,810,414 5,225,225 601,203 (40,818)
Repurchase of common and
preferred shares.......... (68,500) (137,000) -- -- (15,000) (15,242) --
Foreign currency translation
adjustment................ -- -- -- -- -- -- (271,096)
Net income.................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- ---------
Balance at March 30, 1996..... 1,211,949 $2,418,900 1,405,208 $2,810,414 5,210,225 $585,961 $(311,914)
========== ========== ========== ========== ========== ======== =========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance at March 26, 1994..... $(2,827,412) $3,301,975
Repurchase of preferred
shares.................... -- (205,000)
Foreign currency translation
adjustment................ -- 2,312
Net income.................. 453,376 453,376
----------- ----------
Balance at March 25, 1995..... (2,374,036) 3,552,663
Repurchase of common and
preferred shares.......... -- (152,242)
Foreign currency translation
adjustment................ -- (271,096)
Net income.................. 1,590,460 1,590,460
----------- ----------
Balance at March 30, 1996..... $ (783,576) $4,719,785
=========== ==========
</TABLE>
See accompanying notes.
F-30
<PAGE> 75
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
MARCH 30, MARCH 25,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,590,460 $ 453,376
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 557,482 494,033
Deferred income taxes.................................. (334,255) --
Loss on termination of subsidiary operations........... 256,397 --
Minority interest...................................... 90,965 --
Changes in operating assets and liabilities:
Accounts receivable.................................. 1,998,039 (2,727,050)
Inventories.......................................... (940,032) 2,711
Prepaid expenses and other........................... 5,253 (115,416)
Accounts payable..................................... (2,749,943) 2,084,299
Accrued liabilities.................................. 703,396 416,929
Other current liabilities............................ (10,233) 3,204
Income taxes payable................................. (12,111) --
Long-term liabilities................................ (35,944) 57,309
------------ ------------
Net cash provided by operating activities................... 1,119,474 669,395
INVESTING ACTIVITIES
Purchases of property and equipment......................... (644,233) (295,148)
------------ ------------
Net cash used in investing activities....................... (644,233) (295,148)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................... 18,575,498 21,440,365
Payments on bank borrowings................................. (18,134,000) (21,348,365)
Note payable to related party............................... 1,156 (3,275)
Repurchase of preferred shares.............................. (137,000) (205,000)
Repurchase of common shares................................. (15,242) --
------------ ------------
Net cash provided by (used in) financing activities......... 290,412 (116,275)
Effect of exchange rate changes on cash..................... (271,096) 2,312
------------ ------------
Net increase in cash........................................ 494,557 260,284
Cash at beginning of year................................... 298,897 38,613
------------ ------------
Cash at end of year......................................... $ 793,454 $ 298,897
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest.................................................. $ 218,396 $ 178,329
============ ============
Income taxes.............................................. $ 103,598 $ 69,009
============ ============
</TABLE>
See accompanying notes.
F-31
<PAGE> 76
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Artecon, Inc. and its wholly and majority-owned subsidiaries, Artecon
Canada, Inc., Artecon Japan, Ltd., Artecon S.A., and Artecon B.V., (together the
"Company" or "Artecon") are manufacturers and suppliers of value-added computer
products and services in the open systems workstation and server markets. The
Company's subsidiaries purchase finished product from the parent and resell it
in their respective locations. The Company's principal markets include Canada,
Japan, United States and Europe and sells its products through reseller channels
worldwide.
The Company's fiscal year is on a 52-53 week basis and ends on the Saturday
nearest to March 31. The fiscal years ended March 30, 1996 and March 25, 1995
contained 53 and 52 weeks, respectively.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Artecon and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers and
requires no collateral. The Company maintains reserves for potential credit
losses. To date such losses have been within management's expectations.
INVENTORIES
Inventories are comprised of purchased parts and assemblies which include
direct labor and overhead and are valued at the lower of cost (first-in,
first-out) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
---------- ----------
<S> <C> <C>
Purchased parts and materials....................... $3,505,444 $2,519,814
Finished goods...................................... 1,087,377 1,132,975
---------- ----------
$4,592,821 $3,652,789
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives (three
to five years) of the assets. Depreciation expense was $470,856 and $407,328 in
1996 and 1995, respectively.
FOREIGN CURRENCY
The accounts of foreign subsidiaries consolidated herein have been
translated from their respective functional currencies at appropriate exchange
rates. Cumulative translation adjustments are included as a separate component
of shareholders' equity.
F-32
<PAGE> 77
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
OTHER ASSETS AND ASSET IMPAIRMENTS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Goodwill, net.......................................... $33,250 $357,063
Capitalized software, net.............................. -- 8,042
Other.................................................. -- 11,168
------- --------
$33,250 $376,273
======= ========
</TABLE>
Goodwill relates to acquisitions and is being amortized on a straight-line
basis over a period of seven years. Accumulated amortization was $59,850 and
$114,845 at March 30, 1996 and March 25, 1995, respectively. Effective December
31, 1995, the Company terminated the operations of its French subsidiary,
Artecon S.A. and wrote off the remaining $256,397 unamortized balance of
goodwill.
In 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 impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Artecon
plans to adopt Statement No. 121 during fiscal 1997. The financial impact of
adopting Statement No. 121 has not yet been determined.
REVENUES
The Company recognizes revenue upon shipment, including products sold under
a stock rotation program which entitles the buyer the right to return products
under certain conditions. The Company provides allowances for estimated returns.
Service contract revenues are recorded as the applicable services are performed
and totaled $450,000 and $375,000 in 1996 and 1995, respectively.
Revenues derived from various U.S. government agencies were approximately
$4.6 million and $1.2 million in 1996 and 1995, respectively. Export sales to
international customers amounted to approximately $11.9 million and $8.9 million
in 1996 and 1995, respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Revenues from sales to affiliated companies during 1996 and 1995 were
approximately $162,000 and $764,000, respectively. Accounts receivable from
affiliated companies were approximately $50,000 and $72,000 at March 30, 1996
and March 25, 1995, respectively and are included in accounts receivable in the
accompanying consolidated balance sheets.
F-33
<PAGE> 78
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
The Company purchases certain goods from affiliates and also is subject to
a management fee from an affiliate of approximately $4,000 per month. Purchases
from affiliated companies during 1996 and 1995 were approximately $98,000 and
$227,000, respectively. At March 25, 1995 accounts payable to affiliated
companies totaled $26,000 (none in 1996) and are included in accounts payable in
the accompanying consolidated balance sheets.
3. BORROWINGS UNDER LINE OF CREDIT
The Company has a line of credit agreement with a U.S. bank that expires on
September 1, 1997. The agreement provides for maximum borrowings of $4,500,000
and is collateralized by substantially all of the assets of the Company. The
Company may choose between borrowing at the bank's prime rate, as it may vary
from time to time, or it may choose a rate that is fixed for an agreed upon
period of from 30 to 180 days with interest due quarterly at the Eurodollar rate
in effect at the commencement of the agreed upon fixed period, plus 1.5%. This
line of credit agreement requires that the Company maintain certain financial
statement ratios.
The Company's Japanese subsidiary has four lines of credit with a Japanese
bank for borrowings up to an aggregate 70 million Yen ($652,498 at March 30,
1996) at rates ranging from 1.23% to 2.5%. Interest is due monthly with the
balance due six months from the date of the agreement. Borrowings are
collateralized by accounts receivable of the Japanese subsidiary.
At March 30, 1996, the Company's borrowings were as follows:
<TABLE>
<S> <C>
U.S. bank lines:
Variable interest at prime (8.25% at March 30, 1996)...... $ 289,000
Interest fixed at 7.06% through May 10, 1996.............. 2,000,000
Japan bank lines, interest ranging from 1.23% to 2.5%....... 652,498
----------
$2,941,498
==========
</TABLE>
4. SHAREHOLDERS' EQUITY
There are two classes of preferred shares, the "Preferred" shares and the
"Preferred B" shares. There are 10,000,000 shares of each preferred class
authorized. The preferred shares are non-voting, do not provide for dividends,
and have a liquidation preference over common shares. The shares are convertible
into common shares, at the option of the holder, at the earlier of three years
after issuance or upon the occurrence of certain other events, at the conversion
rate of one common share for each 0.8 preferred share. The liquidation
preference for the Preferred is $.01 per share, and the Preferred B is $2.00 per
share.
In December 1994, the Company entered into a repurchase agreement with
certain shareholders who were holders of the Company's outstanding preferred
shares. The agreement required the Company to redeem 100,000 shares of the
outstanding preferred shares and grants the Company the option to repurchase the
remaining shares at any time during the five year period ending December 22,
1999 at the prices ranging from $2.00-$2.50 per share. During fiscal 1996 and
1995, the Company repurchased 68,500 and 100,000 preferred shares under the
agreement at $2.20 and $2.00-$2.10 per share, respectively.
As consideration for granting the Company the option to repurchase the
preferred shares, the Company agreed to issue common shares to the holders of
preferred shares at their request at the ratio of one share of common for each
ten shares of preferred stock held prior to any repurchase by the Company at a
price to be determined by the Board of Directors but not less than the fair
value of such shares at the time of repurchase. These common shares are subject
to Company's first right-of-refusal to repurchase any or all of these shares. At
March 30, 1996, no common shares were issued under this agreement.
F-34
<PAGE> 79
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
5. INCOME TAXES
In accordance with Statement of Financial Accounting Standard No. 109
Accounting for Income Taxes, the Company has reversed its valuation allowance
for deferred tax assets of $845,505 at March 25, 1995 during fiscal year 1996 as
it is deemed to be more likely than not that the Company will be able to realize
such amounts as they become due. Primarily as a result of the reversal of the
valuation allowance, the Company has a net tax benefit of $240,266 during 1996.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Current:
Federal............................................. $ -- $14,858
State............................................... 93,989 45,000
Foreign............................................. -- 10,878
--------- -------
93,989 70,736
--------- -------
Deferred:
Federal............................................. (755,152) --
State............................................... (53,031) --
Foreign 473,928 --
--------- -------
(334,255) --
--------- -------
$(240,266) $70,736
========= =======
</TABLE>
Significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards............................ $326,984 $ 326,080
Net operating losses................................ 144,012 205,356
Various reserves and other.......................... 241,879 186,111
Inventory reserve................................... 160,000 221,776
-------- ---------
Total deferred tax assets............................. 872,875 939,323
Valuation allowance for deferred tax assets........... -- (845,505)
-------- ---------
Net deferred tax assets............................... 872,875 93,818
-------- ---------
Deferred tax liabilities:
Import reserve...................................... 473,928 --
Tax over book depreciation.......................... 11,431 40,557
-------- ---------
Total deferred tax liabilities........................ 485,359 40,557
-------- ---------
Net deferred tax assets............................... $387,516 $ 53,261
======== =========
</TABLE>
At March 30, 1996, the Company had federal net operating loss carryforwards
of approximately $424,000. The federal loss carryforwards will begin expiring in
2001, unless previously utilized. At March 30, 1996 the Company also has federal
tax credit carryforwards of approximately $327,000. The federal tax credit
carryforwards will begin expiring in 1999, unless previously utilized.
F-35
<PAGE> 80
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
Pursuant to Internal Revenue Code Section 382, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within a three year period.
6. COMMITMENTS
The Company leases office and testing equipment under non-cancellable
operating leases. Lease terms range from three to five years. The Company's U.S.
headquarters is leased under an operating lease that has been extended to
December 1999. The lease provides for rent escalation between a minimum of 3%
and a maximum of 4% on January 1, 1998 and 1999 based on the consumer price
index during the prior year.
Future minimum lease commitments for all operating leases are as follows:
<TABLE>
<S> <C>
Fiscal year ending:
1997................................................... $ 525,000
1998................................................... 479,000
1999................................................... 459,000
2000................................................... 314,000
----------
$1,777,000
==========
</TABLE>
Total rent expense for the years ended March 30, 1996 and March 25, 1995
was approximately $519,000 and $593,000, respectively.
F-36
<PAGE> 81
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and the Board of Directors
Artecon, Inc.
Carlsbad, California
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements for the years ended March 31, 1998 and March 29, 1997,
taken as a whole. The supplemental schedule listed in Item 14 is presented for
the purpose of additional analysis and is not a required part of the basic
financial statements. This schedule is the responsibility of Artecon, Inc.
management. Such supplemental schedule for the years ended March 31, 1998 and
March 29, 1997 has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects when considered in relation to the basic financial
statements taken as a whole. We have not audited the financial statements for
the year ended March 30, 1996 and therefore have not subjected the supplemental
schedule for the year then ended to auditing procedures. Accordingly, we express
no opinion on the schedule for the year ended March 30, 1996.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
May 15, 1998
Costa Mesa, California
S-1
<PAGE> 82
SCHEDULE II
ARTECON, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to
beginning of costs and other Balance at
period expenses accounts (1) Deductions end of period
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
and sales returns
Year ended March 31, 1998 170 259 1,179 807(2) 801
Year ended March 29, 1997 180 32 -- 42(2) 170
Year ended March 30, 1996 113 233 -- 166(2) 180
Inventory reserves
Year ended March 31, 1998 525 3,800 1,338 1,714(3) 3,949
Year ended March 29, 1997 400 797 -- 672(3) 525
Year ended March 30, 1996 545 690 -- 835(3) 400
</TABLE>
(1) Reserves of companies acquired.
(2) Uncollectible receivables charged off and credit issued for product returns.
(3) Consists primarily of the write-off of excess/obsolete inventories.
S-2
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization by and among the Registrant, Storage Acquisition Corp. and Artecon,
Inc., dated as of December 22, 1997. (1)(3)
3.1 Second Amended and Restated Certificate of Incorporation of Registrant. (2)
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.
3.3 Bylaws of Registrant. (5)
4.1 Form of Registrant's Common Stock Certificate. (5)
4.2 Form of Registrant's Series A Preferred Stock Certificate. (4)
10.1 Form of Voting Agreement, dated December 22, 1997, between Registrant and the shareholders of Artecon California, a
California corporation formerly known as Artecon, Inc. ("Artecon California"), as named therein. (3)
10.2 Form of Voting Agreement, dated December 22, 1997, between Artecon California and the stockholders of the Registrant
as named therein. (3)
10.3 Form of Indemnification Agreement entered into between the Registrant and its directors and officers. (2)
10.4 Registrant's 1996 Stock Option Plan, as amended. (5)(6)
10.5 Registrant's 1996 Employee Stock Purchase Plan, as amended. (5)(6)
10.6 Stockholders Agreement, dated December 26, 1992, among the Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B, Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
certain other management investors. (2)
10.7 Lease, dated October 8, 1993, between the Registrant and Callahan-Pentz Properties, McCarthy Four. (2)
10.8 First Amendment to Lease, dated June 28, 1995, between the Registrant and Callahan-Pentz Properties, McCarthy Four. (2)
10.9 Credit Agreement, Revolving Credit Note, Security Agreements, Guaranty of Payment, Patent Security Agreement and
Trademark Security Agreement, each dated May 15, 1998, among
the Registrant, LaSalle National Bank and the other parties
named therein. (1)
10.10 Lease, dated July 9, 1993, as amended, between Artecon, Inc. and Vector Associates.
10.11 Asset Purchase Agreement, dated August 21, 1997, among Artecon California, Falcon Systems, Inc. and Craig Caudill.
10.12 Technology Purchase Agreement, dated August 21, 1997, among Founding Partners, Falcon Systems, Inc. and Craig Caudill.
10.13 Promissory Note, dated August 21, 1997, issued by Artecon California to Falcon Systems, Inc.
10.14 Promissory Note, dated August 21, 1997, issued by Founding Partners to Falcon Systems, Inc.
10.15 Technology License Agreement, dated August 21, 1997, between Artecon California and Founding Partners.
10.16 Amendment to Technology License Agreement, dated December 22, 1997, between Artecon California and Founding Partners.
10.17 Form of employment agreement between the Registrant and certain employees. (2)(6)
10.18 Amendment No. 1 to the Employment Agreement, dated March 9, 1998, between the Registrant and David A. Eeg. (6)
10.19 Amendment No. 1 to the Employment Agreement, dated March 9, 1998, between the Registrant and Robert Bylin. (6)
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.20 Standstill Agreement, dated December 22, 1997, between Artecon California and certain stockholders of the Registrant
as named therein. (4)
11 Statement re computation of per share earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
24 Power of Attorney. Reference is made to page II-44.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-20045), as amended, and incorporated herein by reference.
(3) Filed as an exhibit to the Schedule 13D filed by Artecon California, a
California corporation (formerly known as Artecon, Inc.) on December
29, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-4
(No. 333-47593) and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Registration Statement on Form S-8
(No. 333-56281) and incorporated herein by reference.
(6) Indicates management or compensatory plan or arrangement required to
be identified pursuant to Item 14(c).
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
STORAGE DIMENSIONS, INC.
A DELAWARE CORPORATION
Storage Dimensions, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is Storage Dimensions, Inc.
SECOND: The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of Delaware on November 25, 1992 under the name SDI
Acquisition Corporation.
THIRD: The Board of Directors of the Corporation, acting in accordance with the
provisions of Sections 141 and 242 of the General Corporation Law of the State
of Delaware, adopted resolutions amending its Second Amended and Restated
Certificate of Incorporation as follows:
ARTICLE I shall be amended and restated to read in its entirety as
follows:
"The name of the Corporation is Artecon, Inc. (hereinafter sometimes
referred to as the "Corporation")."
ARTICLE IV shall be amended and restated to read in its entirety as
follows:
"1. The Corporation is authorized to issue a total of Fifty Million (50,000,000)
shares of stock in two classes designated respectively "Preferred Stock" and
"Common Stock." The total number of shares of Preferred Stock the Corporation
shall have authority to issue is Ten Million (10,000,000), par value one-half of
one cent ($.005) per share, and the total number of shares of Common Stock the
Corporation shall have authority to issue is Forty Million (40,000,000), par
value one-half of one cent ($.005) per share.
2. The preferences, privileges and restrictions granted to or imposed on the
respective classes and series of shares of Common Stock and Preferred Stock are
as follows:
(a) DESIGNATION OF SERIES OF PREFERRED STOCK. The Preferred Stock may
be issued from time to time in one or more series. The Board of Directors is
hereby authorized, within the limitations and restrictions stated in this
Certificate of Incorporation,
1.
<PAGE> 2
to fix or alter the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
(b) DESIGNATION OF SERIES A PREFERRED STOCK. Two Million Four Hundred
Ninety-Four Thousand One Hundred Fifty-Nine (2,494,159) of the shares of
Preferred Stock are hereby designated "Series A Preferred Stock" ("Series A
Stock"). The rights, preferences and privileges of the Series A Stock are as
specified in this Section 2 of Article IV.
(c) DIVIDEND RIGHTS. The holders of record of Preferred Stock and
Common Stock shall be entitled to receive dividends on a non-cumulative basis
when and as declared by the Board of Directors out of funds legally available
therefor. No right shall accrue to the holders of the Series A Stock by reason
of the fact that dividends are not declared and thereafter paid in any year.
(d) PREFERENCE ON LIQUIDATION.
(i) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Series A
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Corporation to the holders of the
Common Stock or any other class or series of stock of the Corporation, an amount
equal to two dollars ($2.00) per share (as adjusted for any stock dividends,
combinations or splits, reclassifications or the like with respect to such
shares) plus all accrued, accumulated or declared but unpaid dividends on each
share of Series A Stock held by such holders. If upon the occurrence of any
liquidation, dissolution or winding up of the Corporation, either voluntary or
involuntary, the assets and funds to be distributed among the holders of Series
A Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
(ii) After payment to the holders of the Series A Stock of the
amount set forth in subsection (i), the entire remaining assets and funds of the
Corporation legally
2.
<PAGE> 3
available for distribution, if any, shall be distributed ratably among the
holders of the Common Stock in proportion to the number of shares then held by
such holders.
(iii) For purposes of this subsection (d), a merger or
consolidation of the Corporation with or into any other corporation or
corporations, or the merger of any other corporation or corporations into the
Corporation in which the holders of the Corporation's outstanding Common Stock
immediately prior to the effective date of such transaction do not hold at least
fifty percent (50%) of all outstanding voting securities of the surviving
entity, or a sale of all or substantially all of the assets of the Corporation,
shall be treated as a liquidation, dissolution or winding up of the Corporation.
(e) VOTING RIGHTS. Except as otherwise required by law, the shares of
the Series A Stock shall be voted together with this Corporation's Common Stock
as a single class at any annual or special meeting of stockholders of this
Corporation, or may act by written consent in the same manner as this
Corporation's Common Stock. Each share of Common Stock shall be entitled to one
vote. The holder of each share of Series A Stock shall be entitled to the number
of votes equal to the number of shares of Common Stock into which such share of
Series A Stock could be converted on the record date for the vote or, if no such
record date is established, at the date such vote is taken or any written
consent is solicited (in each case assuming such share is convertible as of such
date notwithstanding the time limitation on any such conversion set forth in
Section 2(f)(i)), shall have voting rights and powers equal to the voting rights
and powers of the Common Stock, and shall be entitled to notice of any
stockholders meeting in accordance with the Bylaws of this Corporation in the
same manner and to the same extent as holders of the Common Stock. Fractional
votes shall not be permitted, however, and any fractional voting rights
resulting from the above formula (after aggregating all shares into which shares
of Series A Stock held by each holder could be converted) shall be rounded to
the nearest whole number (with one-half being rounded upward.)
(f) CONVERSION. The holders of the Series A Stock shall have the
following rights and shall be subject to the following restrictions with respect
to the conversion of the Series A Stock into shares of Common Stock:
(i) CONVERSION AT THE OPTION OF THE HOLDER. Each share of
Series A Stock shall be convertible, at the option of the holder thereof,
without the payment of additional consideration, at any time after January 1,
1999, at the office of the Corporation or any transfer agent for the Series A
Stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing two dollars ($2.00) by the greater of (A) $6.00 and
(B) the then applicable Conversion Price, determined as provided in subsection
(f)(iii).
3.
<PAGE> 4
(ii) AUTOMATIC CONVERSION. Each share of Series A Stock shall
automatically be converted into fully paid and nonassessable shares of Common
Stock effective as of 5:30 p.m. East Coast Time on the earlier of:
(1) at the close of business on the day on which the
Board of Directors shall have duly and unanimously adopted a resolution
requesting such conversion, in which case the number of shares of Common Stock
issuable upon conversion of each Share of Series A Stock shall be determined by
dividing two dollars ($2.00) by the then applicable Conversion Price, determined
as provided in subsection (f)(iii); and
(2) at the close of business on the first business
day following the date on which the average of the closing per share sales price
of the Common Stock as reported on the Nasdaq National Market (or any other U.S.
securities market or exchange on which the Common Stock may trade) for twenty
(20) consecutive trading days equals or exceeds nine dollars ($9.00) per share
(subject to adjustment for any stock splits, stock dividends, stock
consolidations or the like) (the "Average Price"), in which case the number of
shares of Common Stock issuable upon conversion of each such share of Series A
Stock shall be determined by dividing two dollars ($2.00) by the Average Price.
(iii) CONVERSION PRICE. In the case of conversion under
subsections (f)(i) and (f)(ii)(1), the conversion price for the Series A Stock
shall be equal to the average of the closing sales prices of the Common Stock as
traded on the Nasdaq National Market (or any other U.S. securities market or
exchange on which the Common Stock may trade) during the twenty (20) trading day
period ending on the day that is two (2) days prior to the date on which
conversion is requested by the Company or the holder, as the case may be (the
"Conversion Price"). Such Conversion Price shall be adjusted from time to time
in accordance with this subsection (f). All references to the Conversion Price
herein shall mean the Conversion Price as so adjusted.
(iv) MECHANICS OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of Series A Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series A Stock shall be
entitled to convert the same into full shares of Common Stock pursuant to
subsection (f)(i), it shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series A Stock, and shall give written notice to the Corporation at such office
that it elects to convert the same. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series A Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common
4.
<PAGE> 5
Stock on such date. In the event of a conversion pursuant to subsection (f)(ii),
such conversion shall be deemed to have occurred automatically without any
further action by the Corporation or the holder as of the day specified in
subsection (f)(ii), and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date;
provided, however, that before any holder of Series A Stock shall be entitled to
receive a certificate representing the shares of Common Stock into which such
holder's shares of Series A Stock have been converted into pursuant to
subsection (f)(ii), it shall surrender the certificate or certificates
representing such shares of Series A Stock, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A Stock. The Corporation
shall, as soon as practicable after receipt of such surrendered certificates and
notice, if applicable, issue and deliver at such office to such holder of Series
A Stock a certificate or certificates, registered in such names as specified by
the holder, for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock.
(v) ADJUSTMENTS TO CONVERSION PRICE.
(1) In the event the Corporation shall at any time or
from time to time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation or any of its subsidiaries other than
shares of Common Stock, then in each such event provision shall be made so that
the holders of Series A Stock shall receive, upon the conversion thereof, the
securities of the Corporation which they would have received had their stock
been converted into Common Stock on the date of such event.
(2) If there occurs any capital reorganization or any
reclassification of the capital stock of the Corporation (other than any event
provided for in subsection (f)(v)(1) above), each share of Series A Stock shall
thereafter be convertible into the same kind and amounts of securities or other
assets, or both, that were issuable or distributable to the holders of shares of
outstanding Common Stock upon such reorganization or reclassification, in
respect of that number of shares of Common Stock into which such shares of
Series A Stock might have been converted immediately prior to such
reorganization or reclassification; and in any such case, appropriate
adjustments (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of Series A Stock to the end that the
provisions of this Article IV shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or other assets thereafter
deliverable upon the conversion of the Series A Stock.
5.
<PAGE> 6
(3) Upon the occurrence of each adjustment or
readjustment of the number or kind of shares issuable upon conversion of a share
of Series A Stock pursuant to this subsection (f)(v), the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series A Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A Stock,
furnish or cause to be furnished to such holder a like certificate prepared by
the Corporation setting forth (i) such adjustments and readjustments, and (ii)
the number of shares and the amount, if any, of other property which at the time
would be received upon the conversion of Series A Stock.
(vi) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, the Corporation shall mail to each holder of Series
A Stock at least 30 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, security or right, and the amount and character of
such dividend, distribution, security or right.
(vii) ISSUE TAXES. The holders of Series A Stock shall pay any
and all issue, transfer and other taxes that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of Series A
Stock pursuant hereto.
(viii) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Stock; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Articles of
Incorporation.
(ix) NOTICES. Any notice required by the provisions of this
Section 2 to be given to the holders of shares of Series A Stock shall be deemed
given if deposited in the
6.
<PAGE> 7
United States mail, postage prepaid, and addressed to each holder of record at
its address appearing on the books of the Corporation.
(g) NO REISSUANCE OF SERIES A STOCK. No share or shares of Series A
Stock acquired by the Corporation by reason of conversion or otherwise shall be
reissued. In the event of any such conversion or other acquisition, the shares
so issued or acquired shall revert to the status of authorized but unissued
shares of Preferred Stock."
ARTICLE VII shall be amended and restated to read in its entirety as
follows:
"1. The number of directors which shall constitute the whole Board of Directors
shall be fixed exclusively by one or more resolutions adopted by a majority of
the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption).
2. Subject to the rights of the holders of any series of Preferred Stock (other
than the Series A Stock) to elect additional directors under specified
circumstances, the directors shall be divided into three classes as nearly equal
in size as practicable designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the adoption and filing of this Certificate of
Amendment of Certificate of Incorporation, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the adoption
and filing of this Certificate of Amendment of Certificate of Incorporation, the
term of office of the Class II directors shall expire and Class II directors
shall be elected for a full term of three years. At the third annual meeting of
stockholders following the adoption and filing of this Certificate of Amendment
of Certificate of Incorporation (the "First Class Three Meeting"), the term of
office of the Class III directors shall expire and Class III directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. The Board of Directors or any individual director may be removed from office
at any time (i) with cause by the affirmative vote of the holders of a majority
of the voting power of all the then-outstanding shares of voting stock of the
Corporation entitled to vote at an election of directors (the "Voting Stock") or
(ii) without cause by (1) until the First
7.
<PAGE> 8
Class III Meeting, the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of all the then-outstanding shares of the
Voting Stock, and (2) after the First Class III Meeting, the affirmative vote of
at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all
the then-outstanding shares of the Voting Stock."
FOURTH: Thereafter, pursuant to a resolution of the Board of Directors, this
Certificate of Amendment was submitted to the stockholders of the Corporation
for their approval, and was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
8.
<PAGE> 9
IN WITNESS WHEREOF, the undersigned, James L. Lambert and Dana W.
Kammersgard, have signed this Certificate of Amendment as President and
Secretary, respectively, of the Corporation, this 31st day of March, 1998.
/s/ JAMES L. LAMBERT
-----------------------------------
James L. Lambert, President
/s/ DANA W. KAMMERSGARD
-----------------------------------
Dana W. Kammersgard, Secretary
9.
<PAGE> 1
EXHIBIT 10.9
CREDIT AGREEMENT
BY AND AMONG
LASALLE NATIONAL BANK
AS AGENT,
CERTAIN FINANCIAL INSTITUTIONS
AS LENDERS
AND
ARTECON CALIFORNIA
DATED AS OF MAY 15, 1998
<PAGE> 2
INDEX OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A Revolving Credit Note
Exhibit B Letter of Credit Reimbursement Agreement
Exhibit C Assignment and Acceptance
Exhibit D Borrowing Base Certificate
Exhibit E Compliance Certificate
SCHEDULES
Schedule 1.01 Allocations
<PAGE> 3
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (as from time to time amended, modified, restated,
supplemented and in effect, this "Agreement") is entered into as of May 15, 1998
by and among ARTECON CALIFORNIA, a California corporation (the "Borrower"), the
financial institutions listed as lenders on the signature pages hereof or that
hereafter become a party hereto pursuant to Section 9.04 hereof (each of such
financial institutions, together with such party's successors and assigns,
referred to individually as a "Lender" and collectively as the "Lenders"), and
LASALLE NATIONAL BANK, a national banking association, its successors and
assigns, as agent for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower has requested that the Agent and the Lenders extend
credit in the form of a revolving credit facility (with a letter of credit
sub-facility).
B. The Agent and the Lenders are willing to make such credit facility
available to the Borrower, and the Borrower is willing to borrow from the
Lenders on the terms and subject to the conditions hereafter set forth.
AGREEMENT
NOW, THEREFORE, for and in consideration of the matters set forth in the
Recitals and the covenants and provisions herein set forth, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
SECTION 1.1 DEFINED TERMS. As used in this Agreement, the following
terms shall have the meanings specified below:
"Account Debtor" shall mean the Account Debtor defined in the Borrower
Security Agreement.
"Accountants" shall mean Deloitte & Touche LLP or another independent
certified public accounting firm selected by Borrower and satisfactory to the
Required Lenders.
"Accounts" shall mean the Accounts defined in the Borrower Security
Agreement.
"Accounts Availability" shall mean 80% of the net amount (after
deduction for amounts credited by the Borrower to Account Debtors and such
reserves as the Agent, in its reasonable credit judgement, deems proper and
necessary) of Eligible Accounts.
"Accounts Report" shall mean a report delivered to the Lenders by the
Borrower, as required by Section 5.05 of this Agreement, consisting of an aged
trial balance of all of the
1.
<PAGE> 4
Borrower's Accounts existing as of the date of such Accounts Report, specifying
for each Account Debtor obligated on the Accounts, such Account Debtor's name,
outstanding balance and the aging of such outstanding balance.
"Affected Lender" shall mean the Affected Lender described in Section
2.15.
"Affiliate" shall mean, with respect to any Person, any other Person
(including any member of the immediate family of any such natural Person) which
directly or indirectly beneficially owns or controls 5% or more of the total
voting power of shares of capital stock of such Person having the right to vote
for directors under ordinary circumstances, any Person controlling, controlled
by or under common control with any such Person (within the meaning of Rule 405
under the Securities Act of 1933), and any shareholder, director or executive
officer of any such Person.
"Agent" shall mean the Agent defined in the preamble of this Agreement
and any successors appointed pursuant to Section 8.08.
"Applicable Margin" shall mean (a) 0% in the case of Prime Rate Loans
and (b) 1.75% in the case of LIBOR Loans.
"Asset Disposition" shall mean the disposition whether by sale, lease,
transfer, loss, damage, destruction, condemnation or otherwise of any of the
following: (a) any of the capital stock or other equity or ownership interest of
any of the Borrower's Subsidiaries or (b) any or all of the assets of the
Borrower or any of its Subsidiaries other than sales of inventory in the
ordinary course of business or other dispositions of motor vehicles in the
ordinary course of business consistent with past practice.
"Assignment and Acceptance" shall mean an assignment and acceptance
entered into by a Lender and an assignee of such Lender, and accepted by the
Agent, in substantially the form of Exhibit C.
"Board" shall mean the Board of Governors of the Federal Reserve System
of the United States.
"Borrower Security Agreement" shall mean that security agreement
executed and delivered by the Borrower and the Agent on the Closing Date in form
and substance acceptable to the Agent, as amended, restated or otherwise
modified from time to time.
"Borrower's Representative" shall mean the Borrower's Chairman,
President or Chief Financial Officer, or any other person or persons as the
Borrower shall designate in writing to the Agent.
"Borrowing Base" shall mean and, at any particular time, be equal to the
sum of (a) the Accounts Availability plus (b) the Inventory Availability, all as
determined by the Required Lenders from time to time in accordance with this
Agreement.
"Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday in the State of Illinois on which the Agent is open for business in
Chicago, Illinois and, with respect to
2.
<PAGE> 5
LIBOR Loans, a day on which dealings in Dollars may be carried on by the Agent
in the London interbank eurodollar market.
"Canada" shall mean Artecon Canada, Inc., a Canadian corporation.
"Capital Expenditures" shall mean, for any period, the aggregate amount
(whether paid in cash or accrued as a liability) that would, in accordance with
GAAP, be included on a consolidated statement of cash flows of the Borrower and
its Subsidiaries for such period as additions to equipment, fixed assets, real
property or improvements or other capital assets (including, but not limited to,
capital lease obligations).
"Cash Equivalents" shall mean (a) securities issued or fully guaranteed
or insured by the United States Government or any agency thereof and backed by
the full faith and credit of the United States having maturities of not more
than three months from the date of acquisition; (b) certificates of deposit,
time deposits, Eurodollar time deposits, repurchase agreements, reverse
repurchase agreements, or banker's acceptances, having in each case a tenor of
not more than three months, issued by any U.S. commercial bank having combined
capital and surplus of not less than $100,000,000 whose short term securities
are rated at least A-1 by Standard & Poor's Corporation and P-1 by Moody's
Investors Service, Inc.; and (c) commercial paper of an issuer rated at least
A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service Inc.
and in either case having a tenor of not more than three months.
"Closing Date" shall mean the date on which all of the conditions
precedent set forth in Article IV have been satisfied and on which the first
Loan is made by the Lenders to the Borrower hereunder.
"Collateral" shall mean the Collateral defined in the Security
Agreements.
"Collateral Documents" shall mean the Security Agreements, the Parent
Guaranty, the Negative Pledge Agreement, the Subordination Agreement and any
pledge agreement entered into pursuant to Section 5.12.
"Commitment" shall mean the aggregate commitment of the Lenders to the
Borrower to make Loans and issue or participate in Letters of Credit under the
Revolving Credit Facility in a maximum principal amount not in excess of
$15,000,000.
"Consolidated Net Income" shall mean, for any period, net income (or
loss) for the Borrower and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
"Consolidated Stockholder's Equity" shall mean for the Borrower and its
Subsidiaries (without duplication) the sum of the capital stock, capital in
excess of par and stated value of shares of its capital stock, retained earnings
and any other account, including any special account for common stock subject to
redemption, which, in accordance with GAAP, constitutes stockholder's equity (or
such other appropriate account designation), but shall specifically exclude all
amounts due from officers, employees, stockholders (other than revenues due from
stockholders in the ordinary course of business) and Affiliates.
3.
<PAGE> 6
"Consolidated Tangible Net Worth" shall mean, as of any particular date,
(a) Consolidated Stockholder's Equity, minus (b) the value of the Borrower's
consolidated unamortized debt discount and expense, prepaid expenses, deposits,
unamortized deferred charges (exclusive of deferred income or similar taxes),
goodwill, organization costs, noncompetition agreements, patents, copyrights,
trademarks and other intangible items and amounts payable to the Borrower by
Affiliates, all as determined in accordance with GAAP.
"Default" shall mean any event that with notice or lapse of time or both
would constitute an Event of Default.
"Default Rate" shall mean the Default Rate described in Section 2.04.
"Dollars" and the symbol "$" shall mean the lawful currency of the
United States of America.
"Eligible Accounts" shall mean those Accounts included in an Accounts
Report which, as of the date of such Accounts Report and at all times thereafter
do not violate the negative covenants and other provisions of this Agreement and
do satisfy the affirmative covenants and other provisions of this Agreement,
including all of the following criteria:
(a) The Account arises because of the sale of goods in the
ordinary course of business and such goods have been shipped or delivered on
open account and on an absolute sale basis and not on consignment, on approval
or on a sale-or-return basis or subject to any other repurchase or return
agreement and no material part of such goods has been returned, repossessed,
rejected, lost or damaged;
(b) The Account is not evidenced by chattel paper or an
instrument of any kind;
(c) The Account Debtor obligated on such Account is not insolvent
or the subject of any bankruptcy or insolvency proceeding of any kind, or the
Agent has not notified the Borrower that the Agent is dissatisfied with the
creditworthiness of such Account Debtor;
(d) The Account Debtor's principal place of business is located
in the United States and the Account Debtor does not owe other amounts to the
Borrower that are more than 90 days past due; provided, however, that (i) with
respect to an Account Debtor whose principal place of business is located
outside of the United States, such Account shall not be excluded pursuant to
this clause (d) if it is (A) supported by a letter of credit issued or confirmed
by a bank acceptable to the Agent or (B) covered by a credit insurance policy
endorsed to the Agent (which endorsements may be received by the Agent within 30
days after the Closing Date for Accounts arising prior to the expiration of such
period), and issued by an insurance company, acceptable to the Agent and (ii)
with respect to an Account Debtor that owes other amounts to the Borrower that
are more than 90 days past due, only that portion of such Accounts owed by such
Account Debtor that are more than 90 days past due shall be excluded, unless 25%
or more of all Accounts of such Account Debtor are more than 90 days past due,
in which case all Accounts of such Account Debtor shall be excluded;
4.
<PAGE> 7
(e) The Account is a valid, legally enforceable obligation of the
relevant Account Debtor not subject to any offset (including any possible right
of offset existing by reason of accounts payable owed by the Borrower to such
Account Debtor ("Contra Accounts")), counterclaim or defense denying liability
thereunder; provided, however, that if such offset, Contra Account, counterclaim
or defense exists, such Account shall be ineligible only to the extent it is
subject to offset, Contra Account, counterclaim or defense;
(f) The Account is subject to and covered by a perfected,
first-priority security interest of the Agent on behalf of the Lenders and is
not subject to any other Lien;
(g) The Account is evidenced by an invoice or other documentation
in a form acceptable to the Agent, which invoice is dated no later than five (5)
days after the date of shipment to the Account Debtor and has a due date not
later than 90 days after the invoice date;
(h) The Account is not owing from an employee, officer, agent,
director, stockholder or Affiliate of the Borrower or from the United States of
America or any State or lawful government or any department, agency or
instrumentality thereof;
(i) The Account does not arise out of a contract or order which,
by its terms forbids, restricts or makes void or unenforceable the assignment by
the Borrower to the Agent of the Account arising with respect thereto;
(j) The Account Debtor is not located in any state denying
creditors access to its courts in the absence of a Notice of Business Activities
Report or similar filing, unless the Borrower has either qualified as a foreign
corporation authorized to transact business in such state or has filed a Notice
of Business Activities Report or similar filing with the applicable state agency
for the then current year;
(k) Each of the warranties and representations set forth herein
and in the Security Agreements with respect to the Account has been reaffirmed
with respect to such Account at the time the most recent Accounts Report was
delivered to the Lenders, unless such representation or warranty relates to an
earlier time, in which case it shall have been reaffirmed as of such earlier
time; and
(l) The Account is one against which the Lenders are legally
permitted to make advances and all applicable legal requirements with respect to
such Account have been satisfied.
An Account which is at any time an Eligible Account, but which subsequently
fails to meet any of the foregoing requirements, shall forthwith cease to be an
Eligible Account.
"Eligible Inventory" shall mean that Inventory which does not violate
the negative covenants and other provisions of this Agreement and does satisfy
the affirmative covenants and other provisions of this Agreement, including all
of the following criteria:
(a) The Inventory is in good condition, meets all standards
imposed by any governmental agency, or department or division thereof, having
regulatory authority over such goods, their use or sale and is either currently
usable or currently saleable in the ordinary course
5.
<PAGE> 8
of the Borrower's business and is not obsolete, slow-moving or otherwise
unacceptable to the Agent due to age, type, category or quantity;
(b) The Inventory is located at the Premises (and, in any event,
is not located with a processor), is subject to and covered by a perfected,
first-priority security interest of the Agent on behalf of the Lenders and is
not subject to any other Lien (except for Permitted Liens); provided, however,
that with respect to any Premises leased by the Borrower, the Agent shall also
have received a landlord's and lien waiver in form and substance acceptable to
the Agent (which waivers may be received by Agent within 45 days after the
Closing Date for Premises leased as of the Closing Date);
(c) The Inventory has not been consigned to a customer of, or
from a supplier to, the Borrower;
(d) Each of the warranties and representations set forth herein
and in the Borrower Security Agreement relating to Inventory is true;
(e) The Inventory was not purchased by the Borrower in or as part
of a "bulk" transfer or sale of assets unless the Borrower has complied with all
applicable bulk sales or bulk transfer laws; and
(f) The Inventory is not work-in-process.
Inventory of the Borrower which is at any time Eligible Inventory but which
subsequently fails to meet any of the foregoing requirements shall forthwith
cease to be Eligible Inventory.
"Environmental Laws" shall mean all laws relating to environmental,
health or safety matters, including those relating to fines, orders,
injunctions, penalties, damages, contribution, cost recovery, compensation,
losses or injuries resulting from the release or threatened release of Hazardous
Materials and to the generation, use, storage, transportation, or disposal of
Hazardous Materials, in any manner applicable to the Borrower or its
Subsidiaries or their respective properties, each as heretofore and hereafter
amended or supplemented, and any analogous future or present local, state or
federal statutes, rules and regulations promulgated thereunder or pursuant
thereto, and any other present or future law, ordinance, rule, regulation,
permit or permit condition, order or directive addressing environmental, health
or safety issues.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as the same may be amended from time to time.
"ERISA Affiliate" shall mean any corporation, trade or business that is
treated as a single employer with the Borrower or any of its Subsidiaries
pursuant to Section 4001(b)(1) of ERISA.
"Event of Default" shall mean the Events of Default specified in Section
7.01.
"Federal Funds Rate" shall mean, for any period, a fluctuating interest
rate per annum equal for each day during such period to (a) the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next
6.
<PAGE> 9
preceding Business Day) by the Federal Reserve Bank of New York or (b) if such
rate is not so published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by the Lender from three
Federal funds brokers of recognized standing selected by it.
"Fees" shall mean all of the fees payable by the Borrower to the Agent
or the Lenders pursuant to Section 2.08 and Section 2.14 of this Agreement and
elsewhere under the Loan Documents.
"Financial Officer" shall mean either the President or the Chief
Financial Officer of the Borrower.
"Fiscal Month" shall mean each monthly accounting period of the Borrower
ending on the last day of each month of each year. Any references in the Loan
Documents to Borrower's 'fiscal month' (or words of similar import) shall be
deemed to refer to a Fiscal Month as herein defined.
"Fiscal Quarter" shall mean each quarterly accounting period of the
Borrower ending on the last day of March, June, September, December of each
year. Any references in the Loan Documents to Borrower's 'fiscal quarter' (or
words of similar import) shall be deemed to refer to a Fiscal Quarter as herein
defined.
"Fiscal Year" shall mean each annual accounting period of Borrower
ending on the March 31 of each year. Except as expressly indicated otherwise,
any references in the Loan Documents to Borrower's 'fiscal year' (or words of
similar import) shall be deemed to refer to a Fiscal Year as herein defined.
"Foreign Subsidiary" shall mean each of Storage Dimensions, GMBH, a
German company, Artecon, BV, a Netherlands company, Artecon Japan, Ltd., a
Japanese Company, and Artecon FSC, a Barbados company.
"Founding Partners" shall mean Founding Partners, a California general
partnership.
"Funded Debt" shall mean, with respect to any Person, all Indebtedness
of such Person that by its terms or by the terms of any instrument or agreement
relating thereto matures more than one year from, or is renewable or extendable
at the option of the debtor to a date more than one year from, the date of
creation thereof (including an option of the debtor under a revolving credit or
similar arrangement obligating the lender or lenders to extend credit over a
period of one year or more), including any current maturities of such
Indebtedness.
"GAAP" shall mean generally accepted accounting principles as set forth
in statements from Auditing Standards No. 69 entitled "The Meaning of 'Present
Fairly in Conformance with Generally Accepted Accounting Principles in the
Independent Auditors Reports'" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances as of the date of determination.
7.
<PAGE> 10
"Guaranty" shall mean any obligation, contingent or otherwise, of any
Person guarantying or having the economic effect of guarantying any Indebtedness
of any other Person in any manner, whether directly or indirectly, and including
any obligation of such Person, direct or indirect (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness, or (c) to maintain working capital, equity capital
or other financial condition of the primary obligor so as to enable the primary
obligor to pay such Indebtedness (including any obligation to make capital
contributions, loans or other payments pursuant to a keep well guaranty or
similar instrument); provided, however, that the term "Guaranty" shall not
include endorsements for collection or deposit, in either case in the ordinary
course of business.
"Hazardous Materials" shall mean (a) any chemical, material or substance
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous waste," "restricted
hazardous waste," "toxic pollutants," contaminants," "pollutants," "toxic
substances" or words of similar import under any applicable local, state or
federal law or under the regulations adopted or publications promulgated
pursuant thereto, including Environmental Laws, (b) any oil, petroleum or
petroleum derived substances, any drilling fluids, produced waters or other
wastes associated with the exploration, development or production of crude oil,
any flammable substances or explosives, any radioactive materials, any hazardous
wastes or substances, any toxic wastes or substances or any other materials or
pollutants which (i) pose a hazard to any property of the Borrower or any of its
Subsidiaries or to Persons on or about such properties, or (ii) cause such
properties to be in violation of any Environmental Laws, (c) asbestos in any
form which is or could become friable, radon gas, urea formaldehyde foam
insulation, or transformers or other electrical equipment which contain any oil
or dielectric fluid containing polychlorinated biphenyls, and (d) any other
chemical, material or substance, exposure to which is prohibited, limited or
regulated by any governmental authority.
"Inactive Subsidiaries" shall mean SDI Foreign Operations, Inc., a
Delaware corporation, and, until formally dissolved under applicable law,
Canada.
"Indebtedness" shall mean, with respect to any Person, without
duplication (a) all obligations of such Person for borrowed money, or with
respect to deposits with such Person or advances to such Person of any kind, (b)
all obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person upon which interest charges are
customarily paid, (d) all obligations of such Person under conditional sale or
other title retention agreements relating to property purchased by such Person,
(e) all obligations of such Person issued or assumed as the deferred purchase
price of property or services (other than trade payables and accrued expenses
incurred in the ordinary course of business not yet due and payable or not yet
more than 60 days in arrears or with respect to which such Person is contesting
in good faith the amount or validity thereof), (f) all Indebtedness of others
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on property owned or
acquired by such Person, whether or not the obligations secured thereby have
been assumed, (g) all obligations of such Person under leases that are
classified as capital leases under GAAP, (h) all Guaranties of such Person
(including
8.
<PAGE> 11
contingent obligations of such Person in respect of joint ventures, partnerships
or other strategic relationships in which such person is a member), (i) all
obligations of such Person under any Interest Rate Protection Agreement and (j)
all obligations of such Person under or with respect to letters of credit and
bankers acceptances.
"Interest Payment Date" shall mean: (a) with respect to any Prime Rate
Loan, the first Business Day of each calendar month and the date of any
conversion of such Prime Rate Loan into a LIBOR Loan; and (b) with respect to
any LIBOR Loan, the last day of each applicable Interest Period.
"Interest Period" shall mean with respect to any LIBOR Loan (i)
initially, the period commencing on the initial date of borrowing as set forth
in the Notice of Borrowing described in Section 2.05 or the conversion date, or
continuation date, as the case may be with respect to such LIBOR Loan and ending
one month, two months or three months thereafter, as selected by the Borrower in
the Notice of Borrowing or Notice of Conversion, and (ii) thereafter, each
period commencing on the last day of the next preceding Interest Period
applicable to such LIBOR Loan and ending one month, two months or three months
thereafter, as selected by the Borrower in the Notice of Continuance described
in Section 2.09; provided, however, that the foregoing provisions relating to
Interest Periods are subject to the following:
(a) if any Interest Period would otherwise end on a day which is
not a Business Day, that Interest Period shall be extended to the next
succeeding Business Day except if the result of such extension would be for such
Interest Period to end in another calendar month in which event such Interest
Period shall end on the immediately preceding Business Day;
(b) any Interest Period that would otherwise extend beyond the
Revolving Credit Termination Date shall end on the Revolving Credit Termination
Date;
(c) if the Borrower fails to give notice of the length of the
Interest Period it requests with respect to the LIBOR Loan, it shall be deemed
to have selected a LIBOR Loan of one month; and
(d) any Interest Period pertaining to a LIBOR Loan that begins on
the last Business Day of a calendar month (or a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month.
"Interest Rate Protection Agreement" shall mean any interest rate swap,
cap, collar or similar interest rate hedging strategy or agreement now existing
or hereafter entered into by any Person.
"Interest Rate Protection Agreement Obligations" shall mean all
obligations, liabilities, charges, costs, expenses and other amounts payable to
any Lender or its Affiliates under any Interest Rate Protection Agreement
between the Borrower and any Lender.
"Inventory" shall mean the Inventory defined in the Borrower Security
Agreement.
9.
<PAGE> 12
"Inventory Availability" shall mean the lesser of (a) 30% of the net
amount (after deduction for such reserves as the Agent, in its reasonable credit
judgement, deems proper and necessary) of Eligible Inventory, valued on a
first-in, first- out basis (at the lower of cost or market) and (b) $5,000,000.
"Letter of Credit" shall mean any letter of credit issued by the Agent
for the account of the Borrower in accordance with Section 2.08.
"Letter of Credit Obligations" shall mean, at any particular time, the
sum of (a) Reimbursement Obligations and (b) the aggregate maximum amount then
available to be drawn under the Letters of Credit.
"Letter of Credit Reimbursement Agreement" shall mean, with respect to a
Letter of Credit, such reimbursement agreement as the Agent may employ in the
ordinary course of business for its own account in substantially the form
contained in Exhibit B.
"LIBOR Loan" shall mean any Loan (or portion thereof) bearing interest
at the LIBOR Rate, as designated by Borrower in its Notice of Borrowing, Notice
of Conversion or Notice of Continuance.
"LIBOR Rate" shall mean with respect to each Interest Period for any
LIBOR Loan the rate of interest per annum equal to the quotient of (a) the rate
of interest per annum (expressed as a whole number) at which deposits in U.S.
Dollars in immediately available funds are offered to the Agent at approximately
11:00 a.m. (London, England time) two Business Days prior to the beginning of
such Interest Period in the London interbank eurodollar market for a period
equal to such Interest Period and in a Dollar amount equal or comparable to the
principal amount of such LIBOR Loan, divided by (b) a number equal to 1.0 minus
the daily average for the applicable Interest Period of the maximum rate
(expressed as a decimal) at which reserves (including, without limitation,
basic, supplemental, marginal and emergency reserves) are imposed during such
Interest Period by the Board (or any successor) under Regulation D on
"eurocurrency liabilities," as defined in such Board's Regulation D (or in
respect of any other category of liabilities that includes deposits by reference
to which the interest rate on the LIBOR Loans is determined by any category of
extension of credit or other assets that includes loans by non-United States
offices of any lender to United States residents) subject to any amendments of
such reserve requirement by such Board or its successor, taking into account any
transitional adjustments thereto (such LIBOR Rate to be adjusted to the next
higher 1/16 of one percent). For purposes of this definition, the LIBOR Loans
shall be deemed to be "eurocurrency liabilities" as defined in Regulation D.
"Lien" shall mean, with respect to any asset, any lien, mortgage,
security interest, charge or encumbrance of any kind, including the rights of a
vendor, lessor, or similar party under any conditional sale agreement or other
title retention agreement or lease substantially equivalent thereto, any
production or advance payment and any other right of or arrangement with any
creditor to have his claim satisfied out of any property or assets, or the
proceeds therefrom, prior to the general creditors of the owner thereof.
10.
<PAGE> 13
"Loan" shall mean any advance made by the Lenders to the Borrower under
the Revolving Credit Facility.
"Loan Account" shall mean the Loan Account defined in Section 2.07(b).
"Loan Documents" shall mean collectively this Agreement (including the
Disclosure Schedule), the Notes, the Collateral Documents, any Interest Rate
Protection Agreement between the Borrower and any Lender (or its Affiliates),
and the reports, certificates, financial statements and other agreements and
instruments executed and delivered by the Borrower in connection herewith or
therewith.
"Margin Stock" shall have the meaning assigned such term in
Regulation U.
"Material Adverse Effect" shall mean (a) a material adverse effect upon
the business, operations, prospects, properties, assets, liabilities, operating
results, cash flows or condition (financial or otherwise) of the Borrower or the
Parent or (b) a material impairment of the ability of the Borrower or the Parent
to perform the obligations, or the impairment of the validity or enforceability
of, or material impairment of the rights or remedies of, or benefits to, the
Agent or the Lenders, under any Loan Document, including a material impairment
of the value of the Collateral.
"Multiemployer Plan" shall mean a multiemployer plan (within the meaning
of Section 3(37) of ERISA) that is maintained for employees of the Borrower or
any of its Subsidiaries or any ERISA Affiliate.
"Negative Pledge Agreement" shall mean the negative pledge agreement
executed and delivered by each Foreign Subsidiary and the Inactive Subsidiaries
in favor of the Agent on the Closing Date in form and substance acceptable to
the Agent, as amended, restated or otherwise modified from time to time.
"Notes" shall mean collectively the Revolving Credit Notes to be
executed and delivered by the Borrower on the Closing Date or pursuant to any
Assignment and Acceptance.
"Notice of Borrowing" shall mean the Notice of Borrowing described in
Section 2.05.
"Notice of Continuance" shall mean the Notice of Continuation described
in Section 2.09(b).
"Notice of Conversion" shall mean the Notice of Conversion described in
Section 2.09(a).
"Obligations" shall mean (a) the due and punctual payment of (i) the
principal and interest (including interest accruing during the pendency of any
bankruptcy, insolvency, receivership or other similar proceeding, regardless of
whether allowed or allowable in such proceeding) on the Loans, when and as due,
whether at maturity, by acceleration, upon one or more dates set for prepayment
or otherwise, (ii) each payment required to be made by the Borrower under this
Agreement in respect of any Letter of Credit and Reimbursement Obligation, when
and as due, including in respect of reimbursement of disbursements, interest
11.
<PAGE> 14
thereon and obligations to provide such collateral, (iii) all amounts owed to
the Agent or any Lender arising from overdrafts on the Borrower's accounts with
the Agent or any Lender, (iv) all other monetary obligations, including but not
limited to, guaranties, fees, costs, expenses and indemnities, whether primary,
secondary, direct, contingent, fixed or otherwise (including monetary
obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding regardless of whether allowed or
allowable in such proceeding), of the Borrower under this Agreement and the
other Loan Documents, and (v) all Interest Rate Protection Agreement
Obligations, and (b) the due and punctual performance of all covenants,
agreements, obligations and liabilities of the Borrower under or pursuant this
Agreement and the other Loan Documents.
"Parent" shall mean Artecon, Inc., a Delaware corporation.
"Parent Guaranty" shall mean that guaranty executed and delivered by the
Parent in favor of the Agent on the Closing Date in form and substance
acceptable to the Agent, as amended, restated or otherwise modified from time to
time.
"Parent Merger" shall have the meaning assigned such term in
Section 6.04.
"Parent Security Agreement" shall mean that security agreement executed
and delivered by the Parent and the Agent on the Closing Date in form and
substance acceptable to the Agent, as amended, restated or otherwise modified
from time to time.
"Pension Plan" shall mean any Plan and any Multiemployer Plan that is
subject to the provisions of Section 302 of ERISA or Title IV of ERISA.
"Percentage" shall mean, with respect to any Lender, the Percentage of
such Lender specified opposite such Lender's name on Schedule 1.01 hereto or in
the Assignment and Acceptance pursuant to which it became a Lender hereunder.
"Permitted Liens" shall mean the Liens permitted by Section 6.02.
"Person" shall mean and includes natural persons, corporations
(business, municipal or not-for-profit), limited partnerships, general
partnerships, limited liability companies, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts and other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" shall mean any employee benefit plan (within the meaning of
Section 3(3) of ERISA), other than a Multiemployer Plan, that is maintained for
employees of the Borrower or any ERISA Affiliate.
"Premises" shall mean the Premises described in Section 3.16.
"Prime Rate" shall mean on any day a fluctuating rate per annum equal to
the higher of (a) the rate of interest designated by the Agent from time to time
as its "Prime Rate," and (b) a rate of interest equal to the sum of (i) the
Federal Funds Rate, plus (ii) 0.5%. The Prime Rate is not necessarily the lowest
rate of interest charged by the Agent in connection with extensions of
12.
<PAGE> 15
credit. Changes in the rate of interest on a Prime Rate Loan shall take effect
simultaneously with each change in the Prime Rate. The applicable Prime Rate
shall be determined by the Agent in its sole judgment, and such determination
shall be conclusive absent manifest error.
"Prime Rate Loan" shall mean any Loan (or portion thereof) bearing
interest at the Prime Rate, as designated by the Borrower pursuant to its Notice
of Borrowing, Notice of Conversion or Notice of Continuance.
"Regulation D, G, T, U or X" shall mean Regulation D, G, T, U or X of
the Board, as each of the same is from time to time in effect, and all official
rulings and interpretations thereunder or thereof.
"Reimbursement Obligations" shall mean all amounts owed by the Borrower
to the Lenders (whether or not evidenced by any note or instrument), direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, representing the principal of and interest on payments made
by the Lenders under or in connection with any Letter of Credit, including but
not limited to, all unpaid drawings, fees, premiums, expenses, attorneys' fees,
accountants' fees, capital adequacy charges, increased costs and similar costs
and expenses owed or payable under this Agreement or any Letters of Credit,
including, but not limited to, the fees set forth in Section 2.08 hereof.
"Replacement Lender" shall mean the Replacement Lender described in
Section 2.15.
"Reportable Event" shall mean any Reportable Event within the meaning of
Section 4043(b) of Title IV of ERISA or the regulations issued thereunder.
"Required Lenders" shall mean Lenders whose aggregate Percentages equal
or exceed 67%.
"Revolving Credit Availability" shall mean the Revolving Credit
Availability described in Section 2.01(a).
"Revolving Credit Commitment" shall mean, with respect to any Lender,
the Commitment of such Lender to make Loans and issue or participate in Letters
of Credit under the Revolving Credit Facility in a maximum principal amount not
in excess of the amount of the Revolving Credit Commitment (for the relevant
time period specified herein) specified opposite such Lender's name on Schedule
1.01 hereto or in the Assignment and Acceptance pursuant to which it became a
Lender hereunder, as such amount may be reduced or otherwise adjusted from time
to time pursuant to this Agreement.
"Revolving Credit Facility" shall mean the Revolving Credit Facility
described in Section 2.01(a).
"Revolving Credit Notes" shall mean the Revolving Credit Notes described
in Section 2.02, to be executed and delivered by the Borrower on the Closing
Date, in substantially the form of Exhibit A.
"Revolving Credit Termination Date" shall mean May 15, 2001.
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<PAGE> 16
"Revolving Credit Utilizations" shall mean, at any particular time, the
sum of (a) the aggregate outstanding principal balance of the Revolving Credit
Notes at that time, plus (b) the Letter of Credit Obligations at that time with
respect to Letters of Credit issued under the Revolving Credit Facility.
"Security Agreements" shall mean, collectively, the Borrower Security
Agreement and the Parent Security Agreement, together with all intellectual
property security agreements delivered in connection therewith.
"Seller Note" shall mean that promissory note made by the Borrower in
favor of the Sellers due August 21, 2002, having an initial principal amount of
$1,250,000, bearing interest at a rate of 10% per annum, payable in consecutive
equal monthly installments of $15,935.28 and subject to the Subordination
Agreement.
"Sellers" shall mean Falcon Systems, Inc.
"Subordination Agreement" shall mean that Subordination Agreement dated
as of August 21, 1997, made by Sellers in favor of the Sanwa Bank California and
assigned by Sanwa Bank California to the Agent, on behalf of itself and the
Lenders, as of the Closing Date, in form and substance acceptable to the Agent,
as amended, restated or otherwise modified from time to time.
"Subsidiary" shall mean, as to any Person (a) any corporation, more than
50% of whose stock of any class or classes having by the terms thereof ordinary
voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (b) any partnership, association, joint
venture, or other entity in which such Person and/or one or more Subsidiaries of
such Person has greater than a 50% equity interest at the time.
"Taxes" shall mean the Taxes defined in Section 2.06(f).
"Transactions" shall mean collectively the execution, delivery and
performance by the Borrower of this Agreement and the other Loan Documents to
which it is a party, the borrowing by the Borrower hereunder, the grant of Liens
pursuant to the Collateral Documents and all other transactions contemplated by
this Agreement and the other Loan Documents.
"United States" and "U.S." shall each mean the United States of America.
SECTION 1.2 ACCOUNTING TERMS. Except as otherwise herein specifically
provided, each accounting term used herein shall have the meaning given it under
GAAP; provided, however, that each reference in Article VI hereof, or in the
definition of any term used in Article VI hereof, to GAAP, shall mean GAAP as in
effect in the United States on the date hereof.
SECTION 1.3 INTERPRETATION. In this Agreement and each other Loan
Document, unless a clear contrary intention appears:
(a) The singular number includes the plural number and vice
versa;
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(b) Reference to any Person includes such Person's successors and
assigns but, if applicable, only if such successors and assigns are permitted by
the Loan Documents, and reference to a Person in a particular capacity excludes
such Person in any other capacity;
(c) reference to either gender includes the other gender;
(d) reference to any agreement (including this Agreement and the
Schedules (which shall include the Disclosure Schedule) and Exhibits and the
other Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof and, if applicable, the terms hereof and the other Loan
Documents, and reference to any promissory note includes any promissory note
which is an extension or renewal thereof or a substitute or replacement
therefor;
(e) reference to any law, rule, regulation, order, decree,
requirement, policy, guideline, directive or interpretation means as amended,
modified, codified, replaced or reenacted, in whole or in part, and in effect on
the determination date, including rules and regulations promulgated thereunder;
(f) reference to any Article, Section, Schedule (including the
Disclosure Schedule), or Exhibit means such Article or Section of this Agreement
or Schedule or Exhibit to this Agreement;
(g) "hereunder", "hereof", "hereto" and words of similar import
shall be deemed references to this Agreement as a whole and not to any
particular Article, Section or other provision hereof;
(h) "including" (and with correlative meaning "include") means
including without limiting the generality of any description preceding such
term; and
(i) relative to the determination of any period of time "from"
means "from and including and "to" means "to but excluding".
ARTICLE 2
THE FACILITIES
SECTION 2.1 THE LOANS.
(a) REVOLVING CREDIT FACILITY. Subject to the terms and
conditions of this Agreement, each Lender, severally and not jointly, shall make
available to the Borrower during the term of this Agreement up to the Revolving
Credit Termination Date, a revolving line of credit (the "Revolving Credit
Facility") in an amount not to exceed at any one time the lesser of (i) such
Lender's Revolving Credit Commitment and (ii) such Lender's Percentage of the
Borrowing Base (the "Revolving Credit Availability"). Subject to the terms and
conditions of this Agreement, the Borrower may borrow, repay, prepay and
reborrow under the Revolving Credit Facility.
15.
<PAGE> 18
(b) LOAN ADVANCES. All Loans shall be made ratably by the Lenders
in accordance with their respective Percentages; provided, however, that failure
of any Lender to make any Loan shall not relieve any other Lender of its
obligation to lend its respective Percentage hereunder, but a Lender shall not
be responsible for the failure of any other Lender to make any Loan hereunder.
SECTION 2.2 THE NOTES. The Revolving Credit Facility and the Loans made
by the Lenders to the Borrower thereunder shall be evidenced by the Revolving
Credit Notes. Each Lender shall, and is hereby authorized by the Borrower to,
record on any schedules attached to the Notes (or on a continuation of such
schedules attached to the Notes and made a part thereof), or otherwise record in
such Lender's internal records, an appropriate notation evidencing the date and
amount of each Loan from such Lender, each payment of principal of any portion
of each Loan, each payment of interest on each Loan and the other information
provided for on such schedule; provided, however, that the failure of such
Lender to make such a notation or any error in such a notation shall not affect
the obligation of the Borrower to repay the Loans in accordance with the terms
of the Notes and this Agreement.
SECTION 2.3 MAINTENANCE OF LOANS; INTEREST.
(a) MAINTENANCE OF LOANS. The Loans may be made and maintained as
(a) Prime Rate Loans, or (b) LIBOR Loans, or (c) any combination of Prime Rate
Loans and LIBOR Loans, provided that all Loans comprising a part of the same
borrowing shall be of the same type. The aggregate principal amount of each
Loan, whether new, converted or continued, shall not be less than $100,000 for a
Prime Rate Loan or $500,000 for a LIBOR Loan and shall be in integral multiples
of $25,000 for Prime Rate Loans and $100,000 for LIBOR Loans. More than one
borrowing may occur on the same date, but at no time shall there be outstanding
more than six LIBOR Loans.
(b) INTEREST. Except as set forth in Section 2.04, the Borrower
shall pay to the Lenders interest on the outstanding principal balance of the
Loans from time to time at a rate per annum equal to: (a) with respect to Prime
Rate Loans, the Prime Rate plus the Applicable Margin; and (b) with respect to
LIBOR Loans, the LIBOR Rate plus the Applicable Margin. The records of the Agent
as to the interest rate applicable to a particular advance shall be binding and
conclusive absent manifest error. Interest shall be payable from, and including,
the day of such advance of the Loan to, but excluding, the day of repayment of
such advance. Interest shall be computed on the basis of the actual number of
days elapsed on the basis of a year consisting of 360 days, and shall be payable
as provided in Section 2.07. Interest on the outstanding principal amount of
each Loan shall be due and payable in arrears on each Interest Payment Date and
upon payment (including prepayment) in whole or in part thereof.
(c) INABILITY TO DETERMINE INTEREST RATE. In the event, and on
each occasion, that on the day two Business Days prior to the commencement of
any Interest Period for a LIBOR Loan, the Agent shall have determined in good
faith (which determination shall be conclusive and binding upon the Borrower)
that Dollar deposits in the amount of such LIBOR Loan are not generally
available in the London Interbank market, or the Required Lenders shall have
determined that the rate at which such Dollar deposits are being offered will
not adequately and fairly reflect the cost to such Lenders of maintaining the
principal amount of such LIBOR
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Loan during such Interest Period, the Agent or such Lenders shall promptly after
such determination shall have been made give telex or telecopy notice of such
determination, confirmed in writing, to the Borrower. In the event of such a
determination, any request by the Borrower for the making of, conversion to or
continuation of a LIBOR Loan shall be deemed to be a request for a Prime Rate
Loan. Each Lender shall use reasonable efforts to notify the Borrower of a
change in the circumstances causing the LIBOR Loans to be unavailable but shall
not incur any liability for any failure so to notify the Borrower.
SECTION 2.4 INTEREST ON OVERDUE AMOUNTS. If the Borrower shall default
in the payment of the principal of or interest on any Loan or any other amount
becoming due hereunder, by scheduled maturity, notice of prepayment,
acceleration or otherwise, the Borrower shall on demand from time to time from
the Agent pay interest, to the extent permitted by law, on such defaulted amount
from the day after the due date thereof to the date of actual payment (after as
well as before judgment) at a rate per annum, equal to the interest rate
applicable to such Loan under Section 2.03 plus 2% per annum ("Default Rate").
SECTION 2.5 BORROWING PROCEDURES. In order to effect a Loan under the
Revolving Credit Facility, the Borrower's Representative shall give the Agent
written notice or telephone notice (immediately confirmed by facsimile) not
later than 2:00 p.m. (Chicago time) on (a) the third Business Day prior to the
proposed borrowing date in the case of a LIBOR Loan, and (b) not later than 2:00
p.m. (Chicago time) one Business Day prior to the proposed borrowing date in the
case of a Prime Rate Loan (the "Notice of Borrowing"). The Borrower hereby
authorizes each Lender to extend advances and make Loans to the Borrower based
on written or telephone notice from Borrower's Representative. Each Notice of
Borrowing shall specify the principal amount of the Loans to be made pursuant to
such borrowing, the date of such borrowing (which shall be a Business Day),
whether the Loans being made pursuant to such Borrowing are to be initially
maintained as Prime Rate Loans or LIBOR Loans and, if LIBOR Loans, the initial
Interest Period to be applicable thereto. The Agent shall promptly give each
Lender notice of such proposed borrowing, of such Lender's Percentage thereof
and of the other matters required to be specified in the Notice of Borrowing.
SECTION 2.6 DISBURSEMENT OF LOAN FUNDS.
(a) PRO RATA AVAILABILITY. No later than 11:00 a.m. (Chicago
time) on the date specified in each Notice of Borrowing, each Lender will make
available to the Agent its Percentage share of each Loan requested to be made on
such date and the Agent shall make such amounts available to the Borrower by
2:00 p.m. (Chicago time) on such date in Chicago, Illinois in immediately
available funds in accordance with the Borrower's written directions.
(b) FAILURE TO MAKE AVAILABLE. Unless the Agent shall have been
notified by any Lender prior to any date specified in any Notice of Borrowing
that such Lender does not intend to make available to the Agent such Loan on
such date, the Agent may assume that such Lender has made such amount available
to the Agent on such date and the Agent in its sole discretion may, but shall
not be obligated to, make available to the Borrower a corresponding amount on
such date. If such corresponding amount is not in fact made available to the
Agent by such Lender on or prior to such date, such Lender agrees to pay and the
Borrower agrees to repay to the Agent within two Business Days of demand such
corresponding amount together with
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interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is paid or repaid to the Agent, at the
interest rate applicable to such Loan. If such Lender shall pay to the Agent
such amount, such amount so paid shall constitute such Lender's Loan, and if
both such Lender and the Borrower shall have paid and repaid, respectively, such
corresponding amount, the Agent shall promptly pay over to the Borrower such
corresponding amount in same day funds, but the Borrower shall remain obligated
for all interest thereon to the extent not already paid by the Borrower pursuant
to the preceding sentence. Nothing in this Section 2.06(b) shall be deemed to
relieve any Lender of its obligation hereunder to make its Loan on any date
specified in any Notice of Borrowing.
SECTION 2.7 PAYMENTS.
(a) PRINCIPAL AND INTEREST. If not sooner paid, the outstanding
principal amount of each Loan made under the Revolving Credit Facility shall be
paid on the Revolving Credit Termination Date. If no Default or Event of Default
then exists, the Revolving Credit Termination Date may be extended by the
Lenders (i) for an additional one year period upon notice from the Agent to the
Borrower on or before the first anniversary of the Closing Date that all of the
Lenders have agreed to such extension and (ii) for an additional one year period
upon notice from the Agent to the Borrower on or before the second anniversary
of the Closing Date that all of the Lenders have agreed to such extension (it
being agreed that any such extension shall be at the sole discretion of each
Lender and no Lender shall have an obligation to agree to any such extension).
All payments by the Borrower pursuant to this Agreement, the Note or any other
Loan Document, whether in respect of principal, interest, or otherwise, shall be
made without setoff, counterclaim or deduction in same day funds by the Borrower
to the Agent. All such payments required to be made to the Lenders shall be made
not later than 2:00 p.m. (Chicago time) on the date due by wire transfer (or by
advice of transfer from or between accounts of the Borrower at the Agent) to the
Loan Account or such other account as the Agent shall specify from time to time
by notice to the Borrower. Funds received after that time shall be deemed to
have been received by the Agent on the next following Business Day. The Agent
shall pay to each Lender its applicable portion of each such payment promptly
after receipt. Whenever any payment to be made shall otherwise be due on a day
which is not a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in computing interest,
if any, in connection with such payment.
(b) LOAN ACCOUNT. The Borrower shall maintain such demand deposit
accounts ("Loan Account") with the Agent as the Agent may require into which all
advances of the Loans by the Lenders to the Borrower shall be made. The Borrower
hereby authorizes the Agent, and the Agent may, in its sole and absolute
discretion, charge for any payments due hereunder, under the Notes and under the
other Loan Documents, the Loan Account or any other bank account of the Borrower
with the Agent; provided, however, that the provisions of this Section 2.07(b)
shall not affect the Borrower's obligation to pay when due all amounts payable
by the Borrower under this Agreement, the Notes and any other Loan Document,
whether or not there are sufficient funds in the Loan Account or any other bank
account of the Borrower.
(c) MANDATORY PAYMENTS. If at any time the Revolving Credit
Utilizations exceed the Revolving Credit Availability, the Borrower immediately
shall pay to the Agent an amount equal to such excess, which will be applied (in
the Agent's sole discretion) to the
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outstanding principal amount of the Revolving Credit Notes or held by the Agent
as cash collateral to secure the obligations of the Borrower hereunder with
respect to the Letters of Credit.
(d) APPLICATION OF PAYMENTS. Effective from and after an Event of
Default, the Borrower irrevocably waives the right to direct the application of
payments and collections received by the Agent from or on behalf of the
Borrower, and the Borrower agrees that the Agent shall have the continuing
exclusive right to apply and reapply any and all such payments and collections
against the Obligations in such manner as the Agent may deem appropriate,
notwithstanding any entry by the Agent upon any of its books and records. To the
extent that the Borrower makes a payment or payments to the Agent or the Agent
receives any payment or proceeds of the Collateral for the Borrower's benefit,
which payments or proceeds or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy act, state
or federal law, common law or equitable case, then, to the extent of such
payment or proceeds received, the Obligations or part thereof intended to be
satisfied shall be revived and shall continue in full force and effect, as if
such payments or proceeds had not been received by the Agent.
(e) TAXES ON PAYMENTS. All payments made by the Borrower under
the Notes or this Agreement shall be made free and clear of, and without
deduction or withholding for or on account of, any present or future income,
stamp or other taxes, levies, assessments, imposts, deductions, charges, or
withholdings imposed by any foreign, Federal, state, local or other jurisdiction
or any governmental agency thereof or political subdivision or taxing authority
therein, excluding taxes imposed on the overall net income of a Lender by the
jurisdiction in which such Lender has its principal office (all such
non-excluded taxes being hereinafter called "Taxes"). If any Taxes are required
to be withheld from any amounts so payable to a Lender hereunder or under the
Notes, the amounts so payable to such Lender shall be increased to the extent
necessary to yield to such Lender (after payment of all Taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified in
the Notes or this Agreement. If (i) the Borrower or any other Person is required
by law to make any deduction or withholding on account of any Taxes or other
amount from any sum paid or expressed to be payable by the Borrower to the
Lenders under this Agreement; or (ii) any party to this Agreement (or any Person
on its behalf) other than the Borrower is required by law to make any deduction
or withholding from, or any payment on or calculated by reference to the amount
of, any such sum received or receivable by the Lenders under this Agreement,
then: (A) the Borrower shall notify the Agent of any such requirement or any
change in any such requirement as soon as the Borrower becomes aware of it; (B)
such Borrower shall pay any such Taxes or other amount before the date on which
penalties attached thereto become due and payable, such payment to be made (if
the liability to pay is imposed on the Borrower) for its own account or (if that
liability is imposed on any other party to this Agreement) on behalf of and in
the name of that party; (C) the sum payable by the Borrower in respect of which
the relevant deduction, withholding or payment is required shall be increased to
the extent necessary to ensure that, after the making of that deduction,
withholding or payment, that party receives on the due date and retains (free
from any liability in respect of any such deduction, withholding or payment) a
sum equal to that which it would have received and so retained had no such
deduction, withholding or payment been required or made; and (D) within thirty
(30) days after payment of any sum from
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which the Borrower is required by law to make any deduction or withholding, and
within thirty (30) days after the due date of payment of any Taxes or other
amount which it is required by clause (B) above to pay, it shall deliver to the
Agent all such certified documents and other evidence as to the making of such
deduction, withholding or payment as (1) are reasonably satisfactory to other
affected parties as proof of such deduction, withholding or payment and of the
remittance thereof to the relevant taxing or other authority and (2) are
reasonably required by any such party to enable it to claim a tax credit with
respect to such deduction, withholding or payment. If the Borrower fails to pay
any Taxes when due to the appropriate taxing authority, the Borrower shall
indemnify the Lenders for any incremental taxes, interest or penalties that may
become payable by the Lenders as a result of any such failure.
(f) NON-US LENDERS. Each Lender that is not incorporated under
the laws of the United States of America or a state thereof (each a "Non-US
Lender") agrees that it will, not less than 10 Business Days after the date of
this Agreement, (i) deliver to each of the Borrower and the Agent two duly
completed copies of United States Internal Revenue Service Form 1001 or 4224,
certifying in either case that such Lender is entitled to receive payments under
this Agreement without deduction or withholding of any United States federal
income taxes, and (ii) deliver to each of the Borrower and the Agent a United
States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it
is entitled to an exemption from United States backup withholding tax. Each such
Lender further undertakes to deliver to each of the Borrower and the Agent (x)
renewals or additional copies of such form (or any successor form) on or before
the date that such form expires or becomes obsolete, and (y) after the
occurrence of any event requiring a change in the most recent forms so delivered
by it, such additional forms or amendments thereto as may be reasonably
requested by the Borrower or the Agent. All forms or amendments described in the
preceding sentence shall certify that such Lender is entitled to receive
payments under this Agreement without deduction or withholding of any United
States federal income taxes, unless an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form or amendment with respect to it and such Lender advises
the Borrower and the Agent that it is not capable of receiving payments without
any deduction or withholding of United States federal income tax. If a Lender
has determined that it will be subject to any such deduction or counterclaim,
that Lender will fund and maintain Loans at another branch or office of that
Lender which would not subject such Lender to such deduction or counterclaim if,
in that Lender's opinion, the same would not adversely affect it or its Loans or
the income obtained therefrom. For any period during which such a Lender has
failed to provide the Borrower with such appropriate forms (unless such failure
is due to a change in treaty, law or regulation, or any change in the
interpretation or administration thereof by any governmental authority,
occurring subsequent to the date on which a form originally was required to be
provided), such Lender shall not be entitled to indemnification under this
Section 2.07(f) with respect to Taxes imposed by the United States; provided,
however, that, should a Lender which is otherwise exempt from or subject to a
reduced rate of withholding tax become subject to Taxes because of its failure
to deliver a form required above, the Borrower shall take such steps as such
Lender shall reasonably request to assist such Lender to recover such Taxes. Any
Lender that is entitled to an exemption from or reduction of withholding tax
with respect to payments under this Agreement or any Note pursuant to the law of
any relevant jurisdiction or any treaty shall deliver to the Borrower (with a
copy to the Agent), at the time or times
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prescribed by applicable law, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate.
SECTION 2.8 LETTERS OF CREDIT.
(a) OBLIGATION TO ISSUE. Subject to the terms and conditions of
this Agreement, the Agent hereby agrees to issue for the account of the Borrower
one or more Letters of Credit, up to an aggregate face amount at any time
outstanding equal to the lesser of (i) the unused amount of the Revolving Credit
Availability, and (ii) $2,000,000, from time to time during the term of this
Agreement up to the Business Day which is 15 Business Days prior to the
Revolving Credit Termination Date. The Letter of Credit Obligations shall
constitute financial accommodations under the Revolving Credit Facility and
shall increase the utilization of the Revolving Credit Facility by the stated
amount of the Letter of Credit; provided, however, that with respect to Loans
made to reimburse the Agent for a drawing under a Letter of Credit, Letter of
Credit Obligations shall not include the amount of such drawing.
(b) TYPES AND AMOUNTS. The Agent shall not have any obligation to
issue any Letter of Credit at any time: (i) if the aggregate maximum amount then
available for drawing under Letters of Credit, after giving effect to the Letter
of Credit requested hereunder, shall exceed any limit imposed by law or
regulation upon the Agent; or (ii) if the proposed Letter of Credit has an
expiration date later than five Business Days immediately preceding the
Revolving Credit Termination Date.
(c) CONDITIONS. In addition to being subject to the satisfaction
of the conditions precedent contained in Article IV, the obligation of the Agent
to issue any Letter of Credit is subject to the satisfaction in full of the
following conditions: (i) the Borrower shall have delivered to the Agent, at
such times and in such manner as the Agent may prescribe, a Letter of Credit
Reimbursement Agreement (excluding standard provisions requiring additional
collateral) and such other documents and materials as may be required by the
Agent pursuant to the terms thereof, and the terms of the proposed Letter of
Credit shall be reasonably satisfactory to the Agent and shall be consistent
with the Agent's ordinary practice with respect to terms of its letters of
credit; and (ii) as of the date of issuance of the Letter of Credit, no order,
judgment or decree of any court, arbitrator or governmental authority shall
purport by its terms to enjoin or restrain the Agent from issuing the Letter of
Credit and no law, rule or regulation applicable to the Agent and no request or
directive (whether or not having the force of law and whether or not the failure
to comply therewith would be unlawful) from any governmental authority with
jurisdiction over the Agent shall prohibit or request the Agent to refrain from
the issuance of Letters of Credit generally or the issuance of that Letter of
Credit.
(d) ISSUANCE OF LETTERS OF CREDIT. The Borrower shall give the
Agent written notice of a requested issuance of a Letter of Credit, which Letter
of Credit shall be issued in a manner and within such period of time consistent
with the Agent's ordinary practice with respect to issuing letters of credit.
Such notice shall be irrevocable and in the form of the customary letter of
credit application used by the Agent and shall specify (i) the stated amount of
the Letter of Credit requested, (ii) the effective date (which day shall be a
Business Day) of issuance of such requested Letter of Credit, (iii) the date on
which such requested Letter of Credit is to
21.
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expire (subject to Section 2.08(b)(ii), (iv) the Person for whose benefit the
requested Letter of Credit is to be issued, and (v) whether such Letter of
Credit is a commercial or standby Letter of Credit and (vi) the amount of Letter
of Credit Obligations then outstanding.
(e) EXTENSION/AMENDMENT OF LETTERS OF CREDIT. The Agent shall not
be obligated to extend or amend any Letter of Credit if the issuance of a new
Letter of Credit having the same terms as such Letter of Credit as so extended
or amended would be prohibited by Section 2.08(b).
(f) REIMBURSEMENT OBLIGATIONS; DUTIES OF THE AGENT.
Notwithstanding any provisions to the contrary in any Letter of Credit
Reimbursement Agreement: (i) the Borrower shall reimburse the Agent for drawings
under a Letter of Credit issued by it no later than the earlier of (A) the time
specified in such Letter of Credit Reimbursement Agreement, and (B) one Business
Day after the payment by the Agent of such drawing; and (ii) any Reimbursement
Obligation with respect to any Letter of Credit shall bear interest from the
date of the relevant drawing under the pertinent Letter of Credit at the
interest rate applicable to Prime Rate Loans under the Revolving Credit Facility
for one Business Day after such date and thereafter at the interest rate for
past due Loans in accordance with Section 2.04. In the event this Agreement and
any Letter of Credit Reimbursement Agreement are inconsistent, the terms of this
Agreement shall prevail.
(g) PAYMENT OF REIMBURSEMENT OBLIGATIONS. The Borrower agrees to
pay to the Agent the amount of all Reimbursement Obligations, interest and other
amounts payable to the Lenders under or in connection with any Letter of Credit
issued on behalf of the Borrower immediately when due, irrespective of any
claim, setoff, defense or other right which the Borrower may have at any time
against the Agent, any Lender or any other Person.
(h) COMPENSATION FOR LETTERS OF CREDIT. The Borrower shall pay to
the Agent for the ratable benefit of each Lender on the first Business Day of
each calendar quarter a letter of credit fee (the "Letter of Credit Fees") equal
to 1.5% per annum of (i) the stated amount of each commercial letter of credit
and (ii) the aggregate amount permitted to be drawn under each standby Letter of
Credit, in any case with a minimum fee of $200 per year per Letter of Credit.
The Agent shall promptly upon receipt thereof, distribute to each Lender its
respective Percentage of any Letter of Credit Fees received hereunder. All
Letter of Credit Fees shall be computed on the basis of the actual number of
days elapsed in a year of 360 days.
(i) INDEMNIFICATION; EXONERATION. In addition to amounts payable
as elsewhere provided in this Section 2.08, the Borrower hereby agrees to
protect, indemnify, pay and save the Agent and each of the Lenders harmless from
and against any and all loss, liability, damage and expense (including
reasonable attorneys' fees and expenses) which the Agent or a Lender may incur
or be subject to as a consequence, direct or indirect, of (i) the issuance of or
participation in a Letter of Credit, other than as a result of its gross
negligence or willful misconduct or (ii) the failure of the Agent to honor a
drawing under such Letter of Credit as a result of any act or omission, whether
rightful or wrongful, of any present or future de jure or de facto governmental
authority. As between the Borrower and the Agent and the Lenders, the Borrower
assumes all risks of the acts and omissions of or misuse of such Letter of
Credit by the beneficiary of such Letter of Credit. In furtherance and not in
limitation of the foregoing, subject
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to the provisions of the Letter of Credit Reimbursement Agreements, the Agent
and the Lenders shall not be responsible for (A) the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document submitted by
any party in connection with the application for and issuance of a Letter of
Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged, (B) the validity or sufficiency
of any instrument transferring or assigning or purporting to transfer or assign
a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any reason,
(C) failure of the beneficiary of a Letter of Credit to comply duly with
conditions required in order to draw upon such Letter of Credit, (D) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, or other similar form of teletransmission or
otherwise, whether or not they be in cipher, (E) errors in interpretation of
technical terms; (F) any loss or delay in the transmission or otherwise of any
document required in order to make a drawing under any Letter of Credit or of
the proceeds thereof, (G) the misapplication by the beneficiary of a Letter of
Credit of the proceeds of any drawing under such Letter of Credit, and (H) any
consequences arising from causes beyond the control of a Lender, except in each
case if caused by the gross negligence or willful misconduct of the Agent or a
Lender. In furtherance and extension and not in limitation of the specific
provisions hereinabove set forth, any action taken or omitted by the Agent or a
Lender under or in connection with Letters of Credit issued on behalf of the
Borrower or any related certificates, if taken or omitted in good faith, shall
not in the absence of gross negligence or willful misconduct by the Agent or
such Lender, put the Agent or any Lender under any resulting liability to the
Borrower or relieve the Borrower of any of its obligations hereunder to the
Agent or any Lender.
(j) LETTER OF CREDIT PARTICIPATIONS. The Agent irrevocably agrees
to grant and hereby grants to each other Lender, and, to induce the Agent to
issue Letters of Credit hereunder, each other Lender irrevocably agrees to
accept and purchase and hereby accepts and purchases from the Agent, on the
terms and conditions hereinafter stated, for such Lender's own account and risk
an undivided interest equal to such Lender's Percentage in obligations and
rights under each Letter of Credit issued hereunder and the amount of each draft
paid by the Agent thereunder. Each Lender (other than the Agent) unconditionally
and irrevocably agrees with the Agent that, if a draft is paid under any Letter
of Credit for which the Agent is not reimbursed in full by the Borrower in
accordance with the terms of this Agreement, such Lender shall pay to the Agent
upon demand at the Agent's address for notices specified herein an amount equal
to such Lender's Percentage of the amount of such draft, or any part thereof,
which is not so reimbursed. Whenever, at any time after the Agent has made
payment under any Letter of Credit and has received from another Lender its pro
rata share of such payment in accordance with this paragraph, the Agent receives
any payment related to such Letter of Credit (whether directly from the Borrower
or otherwise, including proceeds of collateral applied thereto by the Agent), or
any payment of interest on account thereof, the Agent will distribute to such
other Lender its Percentage share thereof; provided, however, that in the event
that any such payment received by the Agent shall be required to be returned by
the Agent, such other Lender shall return to the Agent the portion thereof
previously distributed by the Agent to it.
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SECTION 2.9 CONVERSION OPTIONS; CONTINUANCE.
(a) CONVERSION REQUIREMENTS. Provided that no Default or Event of
Default has occurred and is continuing, the Borrower may elect from time to time
to convert a Prime Rate Loan, or any portion thereof, to a LIBOR Loan by giving
the Lenders at least three Business Days' prior irrevocable notice of conversion
(which notice must be received by the Lenders prior to 11:00 a.m. (Chicago time)
(the "Notice of Conversion"). If the date on which a Prime Rate Loan is to be
converted to a LIBOR Loan is not a Business Day, then such conversion shall be
made on the next succeeding Business Day, and during the period from such date
to such succeeding Business Day, such Prime Rate Loan shall bear interest as if
it were a Prime Rate Loan. All or any part of outstanding borrowings may be
converted as provided herein.
(b) CONTINUANCE. Any LIBOR Loan may be continued as such, in
whole or in part, upon the expiration of an Interest Period with respect thereto
if the Borrower gives the Lenders irrevocable notice of continuance (which
notice must be received by the Lenders prior to 11:00 a.m. (Chicago time), at
least three Business Days prior to the date of expiration of the Interest Period
expiring with respect to the LIBOR Loan which is requested to be continued),
specifying (i) the LIBOR Loan, or portion thereof, requested to be continued;
(ii) the date of expiration of the Interest Period expiring with respect to the
LIBOR Loan, or portion thereof, which is requested to be continued; and (iii)
the length of the Interest Period with respect to such LIBOR Loan, or portion
thereof, after the continuation thereof; provided, however, that no LIBOR Loans
may be continued as such when any Default or Event of Default has occurred and
is continuing, but shall be automatically converted to a Prime Rate Loan on the
last day of the Interest Period for such LIBOR Loan (the "Notice of
Continuance"). If the Borrower does not comply with the notice provisions of
this clause (b), such LIBOR Loan shall be automatically converted to a Prime
Rate Loan upon the expiration of the Interest Period with respect thereto.
(c) RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. Any Notice of
Conversion or Continuance pursuant to this Section 2.09 shall be deemed to be a
representation that all of the representations and warranties of the Borrower
contained in this Agreement shall then be true and correct in all material
respects as if made on such date, except to the extent that such representations
and warranties expressly relate to an earlier date, and that no Default or Event
of Default shall have occurred and be continuing.
SECTION 2.10 REQUIREMENTS OF LAW.
(a) INCREASED COSTS. Notwithstanding any other provisions herein,
in the event that the introduction of or any change in any law, rule,
regulation, treaty or directive or in the interpretation or application thereof,
or compliance by the Agent or a Lender with any request or directive (whether or
not having the force of law) from any central bank or other governmental
authority, agency or instrumentality or regulatory body:
(i) subjects the Agent or such Lender to any tax of any
kind whatsoever with respect to this Agreement, the Notes, the other Loan
Documents or the Loans made hereunder, or changes the basis of taxation of
payments to the Agent or such Lender of principal, interest or any other amount
payable hereunder (except for changes in the rate of tax
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imposed on the overall net income of the Agent or such Lender by the United
States, any state or subdivision thereof);
(ii) imposes, modifies, holds applicable any reserve,
special deposit, compulsory loan or similar requirement against assets held by,
or deposits or other liabilities in or for the account of, advances or loans by,
or other credit extended by, or any other acquisition of funds by, any office of
the Agent or such Lender (which is not otherwise included in the determination
of the LIBOR Rate hereunder); or
(iii) imposes on the Agent or such Lender or the London
interbank market any other condition;
and the result of any of the foregoing is to increase the cost to the Agent or
such Lender of agreeing to make, making, continuing or maintaining or
participating in LIBOR Loans, or to reduce any amount receivable thereunder or
to increase the withholding taxes payable then, in any such case, the Borrower
shall pay the Agent or such Lender, within 15 days after the demand by the Agent
or such Lender, any additional amounts necessary to compensate the Agent or such
Lender on an after-tax basis for such additional cost or reduced amount
receivable or increased withholding taxes payable which the Agent or such Lender
deems to be material as determined by the Agent or such Lender with respect to
this Agreement, the Notes, the other Loan Documents or the Loans made hereunder.
(b) CAPITAL ADEQUACY. In the event that any Lender shall have
determined that, after the date hereof, the adoption of any law, rule,
regulation, treaty or guideline regarding capital adequacy, or any change in any
of the foregoing or in the interpretation or application of any of the foregoing
or compliance by such Lender with any request or directive regarding capital
adequacy (whether or not having the force of law) from any central bank or other
governmental authority, agency or instrumentality or regulatory body, does or
shall have the effect of reducing the rate of return on such Lender's or its
parent's capital as a consequence of its obligations under this Agreement to a
level below that which such Lender or such parent could have achieved but for
such adoption, change, or compliance (taking into consideration such Lender's or
such parent's policies with respect to capital adequacy) by an amount deemed by
such Lender to be material, then from time to time, after submission by such
Lender to the Borrower of a written request therefore, the Borrower shall pay to
such Lender, within 15 days after its demand, such additional amount or amounts
as will compensate such Lender or such parent on an after-tax basis for such
reduction.
If a Lender has determined that it (or its parent) will be subject to any such
reduction, that Lender will fund and maintain Loans at another branch or office
of that Lender which would not subject such Lender (or its parent) to such
reduction if, in that Lender's opinion, the same would not adversely affect such
Lender (or its parent) or its Loans or the income obtained therefrom.
(c) CERTIFICATE FOR CLAIM. If a Lender or its parent becomes
entitled to claim any additional amounts pursuant to this Section 2.10, it shall
promptly notify the Borrower of the event by reason of which it has become so
entitled. A certificate setting forth in reasonable detail any additional
amounts payable pursuant to the foregoing sentence submitted by such Lender or
its parent shall be conclusive and binding on the Borrower in the absence of
manifest
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error. The provisions of this Section 2.10 shall survive the repayment of the
Loans and the termination of this Agreement.
(d) NO WAIVER. Failure on the part of any Lender or its parent to
demand compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital with respect to any period shall
not constitute a waiver of such party's right to demand compensation with
respect to such period or any other period. The protection of this Section 2.10
shall be available to such party regardless of any possible contention of the
invalidity or inapplicability of the law, rule, regulation, guideline or other
change or condition which shall have occurred or been imposed; provided, however
that if such party shall have recouped any amount theretofore paid to it by the
Borrower under this Section 2.10, such Lender shall pay to the Borrower an
amount equal to the net recoupment so received by such party, as determined in
good faith by such party.
SECTION 2.11 ILLEGALITY. Each Lender may make or maintain its LIBOR
Loans at or for the credit of any branch, subsidiary or affiliate office inside
or outside the United States or any international banking facility within the
United States, as such Lender may elect from time to time. Notwithstanding any
other provisions herein, if any law, rule, regulation, treaty or directive or
any change therein or in the interpretation or application thereof, shall make
it unlawful for a Lender to maintain LIBOR Loans as contemplated by this
Agreement, the agreement of such Lender to make or maintain LIBOR Loans shall
terminate and all outstanding LIBOR Loans of such Lender shall be converted
automatically to Prime Rate Loans, on the last day of the then current Interest
Period or within such earlier period as required by law.
SECTION 2.12 INDEMNITY. The Borrower agrees to indemnify each Lender and
to hold each Lender harmless from any cost, loss or expense which each such
party may sustain or incur as a consequence of (a) the Borrower making a payment
or prepayment of principal or interest on any LIBOR Loan (including, without
limitation, through a conversion to the same or a different type of Loan or
pursuant to Section 2.11 above) on a day which is not the last day of an
Interest Period with respect thereto, (b) any failure by the Borrower to borrow
or convert any Loan hereunder after a Notice of Borrowing or Notice of
Conversion has been given (in the case of LIBOR Loans), (c) default by the
Borrower in making any prepayment after the Borrower has given a notice of
prepayment, and (d) any acceleration of the maturity of the Loans in accordance
with the terms of this Agreement, including, but not limited to, any such
reasonable cost, loss or expense arising in liquidating the Loans and from
interest or fees payable by the Lender to lenders of funds obtained by it in
order to maintain the Loans hereunder. A certificate setting forth in reasonable
detail any additional amounts payable pursuant to the preceding sentence
submitted by a Lender shall be conclusive and binding upon the Borrower absent
manifest error. The provisions of this Section 2.12 shall survive the repayment
of the Loans and the termination of this Agreement.
SECTION 2.13 SHARING OF SETOFFS. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, setoff or counterclaim against
the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of
the United States Code or other security or interest arising from, or in lieu
of, such secured claim, received by such Lender under any applicable bankruptcy,
insolvency or other similar law or otherwise, or by any other means, obtain
payment (voluntary or involuntary) in respect of any Loan or any other amount
owing
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hereunder or under the Notes or the Loan Documents (other than or amounts
payable pursuant to Sections 2.10, 2.11, and 2.12) as a result of which the
unpaid principal portion of its Loans shall be proportionately less than the
unpaid principal portion of the Loans of any other Lender, it shall
simultaneously purchase from such other Lender at face value a participation in
the Loans of such other Lender, so that the aggregate unpaid principal amount of
the Loans and such other amounts held by each Lender shall be in the same
proportion to the aggregate unpaid principal amount of all Loans then
outstanding as the principal amount of its Loans prior to such exercise of
banker's lien, setoff or counterclaim or other event was to the principal amount
of all Loans outstanding prior to such exercise of banker's lien, setoff or
counterclaim or other event; provided, however, that, if any such purchase or
purchases or adjustments shall be made pursuant to this Section 2.13 and the
payment giving rise thereto shall thereafter be recovered, such purchase or
purchases or adjustments shall be rescinded to the extent of such recovery and
the purchase price or prices or adjustment restored without interest. The
Borrower expressly consents to the foregoing arrangements and agrees that any
Lender holding a participation in a Loan deemed to have been so purchased may
exercise any and all rights of banker's lien, setoff or counterclaim with
respect to any and all moneys owing by the Borrower to such Lender by reason
thereof as fully as if such Lender had made a loan directly to the Borrower in
the amount of such participation.
SECTION 2.14 FEES. The Borrower shall pay to the Agent for the benefit
of the Lenders a fee of .25% per annum of the average daily unused Revolving
Credit Commitment, payable in arrears on the first Business Day of each calendar
quarter. Commitment fees shall be computed on the basis of the actual number of
days elapsed on the basis of a year consisting of 360 days.
SECTION 2.15 OPTIONAL REPLACEMENT OF LENDERS. Within 15 days after
receipt by the Borrower of written notice and demand from any Lender for payment
pursuant to Section 2.07(e) or 2.10 or, as provided in Section 9.09, in the case
of certain refusals by any Lender to consent to certain proposed amendments,
modifications, terminations or waivers with respect to this Agreement that have
been approved by Required Lenders (any such Lender demanding such payment or
refusing to consent being referred to herein as an "Affected Lender"), the
Borrower may, at its option, notify the Agent and such Affected Lender of its
intention to obtain, at Borrower's expense, a replacement Lender ("Replacement
Lender") for such Affected Lender, which Replacement Lender shall be reasonably
satisfactory to the Agent. In the event the Borrower obtains a Replacement
Lender that will refinance all outstanding Obligations owed to such Affected
Lender and assume its Revolving Credit Commitment hereunder within ninety (90)
days following notice of Borrower's intention to do so, the Affected Lender
shall sell and assign all of its rights and delegate all of its obligations
under this Agreement to such Replacement Lender in accordance with the
provisions of Section 9.04; provided, however, that the Borrower has reimbursed
such Affected Lender for any administrative fee payable pursuant to Section 9.04
and, in any case where such replacement occurs as the result of a demand for
payment pursuant to Section 2.07(e) or 2.10, paid all amounts required to be
paid to such Affected Lender pursuant to Section 2.07(e) or 2.10 through the
date of such sale and assignment.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to execute this Agreement and perform their
obligations hereunder, the Borrower represents and warrants to the Agent and the
Lenders as follows:
SECTION 3.1 ORGANIZATION; CORPORATE POWERS. The Borrower and its
Subsidiaries are each duly organized, validly existing and in good standing
under the laws of states of their respective organization. Each of the Borrower
and its Subsidiaries has the requisite power and authority, including all
material licenses, registrations, permits, franchises, patents, copyrights,
trademarks, trade names, consents and approvals, to own its property and assets
and to carry on its business as now conducted and is qualified to do business
and in good standing in every jurisdiction where such qualification is required,
except where failure to so qualify would not be reasonably likely to have a
Material Adverse Effect. The Borrower has all requisite power and authority to
consummate the Transactions.
SECTION 3.2 AUTHORIZATION. The consummation of the Transactions (a) has
been duly authorized by all requisite corporate action of the Borrower and (b)
will not (i) violate (A) any applicable provision of law, statute, rule or
regulation (including Regulations G, T, U or X) or the articles of incorporation
or other constitutive documents or the by-laws or regulations of the Borrower,
(B) any order of any court, or any rule, regulation or order of any other agency
of government binding upon the Borrower, or (C) any provisions of any material
indenture, agreement or other instrument to which the Borrower is a party, or by
which the Borrower or any of its respective properties or assets is or may be
bound, (ii) be in conflict with, result in a breach of or constitute (alone or
with notice or lapse of time or both) a default under any indenture, agreement
or other instrument referred to in clause (b)(i)(C) above or (iii) result in the
creation or imposition of any Lien (other than in favor of the Lender as
contemplated by this Agreement) upon any property or assets of the Borrower.
SECTION 3.3 GOVERNMENTAL APPROVAL. Except as specifically provided by
the Loan Documents, no registration with or consent or approval of, or other
action by, any federal, state or other governmental agency, authority or
regulatory body is or will be required in connection with the consummation of
the Transactions by the Borrower.
SECTION 3.4 ENFORCEABILITY. This Agreement constitutes, and each of the
other Loan Documents when duly executed and delivered by the Borrower will
constitute, legal, valid and binding obligations of the Borrower enforceable in
accordance with their respective terms, except as enforceability may be limited
by equitable principles, bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally.
SECTION 3.5 FINANCIAL MATTERS. The Borrower has heretofore furnished to
the Lenders audited financial statements for the Fiscal Year ending March 29,
1997 and audited financial statements for the portion of the Fiscal Year ending
December 31, 1997, which financial statements fairly state the Borrower's
consolidated financial condition and results of operations as of the dates, and
for the periods, set forth therein. Such financial statements and the notes
thereto, together with the schedules to this Agreement, disclose all material
liabilities, direct or
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contingent, of the Borrower and its Subsidiaries as of the dates thereof. The
financial statements referred to in this Section 3.05 have been prepared in
accordance with GAAP.
SECTION 3.6 NO MATERIAL ADVERSE CHANGE. Since December 31, 1997 (March
31, 1998, with respect to clause (a) of the definition of Material Adverse
Effect) there has been no event or occurrence that would be reasonably likely to
have a Material Adverse Effect.
SECTION 3.7 SUBSIDIARIES. As of the Closing Date, each of the
Subsidiaries of the Borrower and the Parent are listed in the Disclosure
Schedule. Neither the Parent nor the Borrower is a partner or joint venturer in
any partnerships or joint ventures.
SECTION 3.8 LITIGATION. Except as described in the Disclosure Schedule,
there are no actions, suits or proceedings at law or in equity or by or before
any arbitrator or any governmental instrumentality or other agency or regulatory
authority now pending or threatened in writing against or, to the Borrower's
knowledge, otherwise affecting the Borrower or any of its Subsidiaries or the
businesses, assets or rights of the Borrower or any of its Subsidiaries (a)
which involve this Agreement or any of the other Loan Documents or any of the
Transactions, or (b) as to which, if adversely determined, would be,
individually or in the aggregate, reasonably likely to have a Material Adverse
Effect.
SECTION 3.9 COMPLIANCE WITH LAWS. Neither the Parent, the Borrower nor
any of its Subsidiaries are in violation in any material respect of any
applicable law, including but not limited to, any Environmental Law, or in
default with respect to any applicable judgment, writ, injunction, decree, rule
or regulation of any court or governmental agency or instrumentality.
SECTION 3.10 ENVIRONMENTAL PROTECTION. After giving effect to the
Transactions: (a) the business of the Borrower and its Subsidiaries, the methods
and means employed by the Borrower and its Subsidiaries in the operation thereof
(including all operations and conditions at or in the properties of the Borrower
and its Subsidiaries), and the assets owned, leased, held or operated by the
Borrower and its Subsidiaries, comply in all material respects with all
applicable laws, rules, regulations, ordinances and codes of every kind,
including Environmental Laws; (b) the Borrower and its Subsidiaries have
obtained all permits under Environmental Laws necessary to its operations other
than such permits the absence of which could not, individually or in the
aggregate, have a Material Adverse Effect, and all such permits are in good
standing and the Borrower and its Subsidiaries are in compliance with all
material terms and conditions of such permits; and (c) neither the Borrower nor
its Subsidiaries have received (i) any claim or notice of violation, lien,
complaint, suit, order or other claim or notice to the effect that it is or may
be liable to any Person as a result of (A) the environmental condition of any of
their respective properties or any other property, or (B) the release or
threatened release of any Hazardous Materials, or (ii) any letter or request for
information under Section 104 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9604), or
comparable state laws, and to the best of the Borrower's knowledge, none of the
operations of the Borrower or its Subsidiaries are the subject of any federal or
state investigation evaluating whether any remedial action is needed to respond
to a release or threatened release of any Hazardous Material at the Borrower's
or its Subsidiaries' properties or at any other location, including any location
to which the Borrower or its Subsidiaries have transported, or arranged for the
transportation of, any Hazardous Materials.
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SECTION 3.11 FEDERAL RESERVE REGULATIONS. Neither the Parent, the
Borrower nor its Subsidiaries are engaged principally, or as of one of their
important activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock. Neither the Loans nor any of the proceeds
thereof, are for the purpose, whether immediate, incidental or ultimate of (a)
buying or carrying Margin Stock, or (b) extending credit to others for the
purpose of buying or carrying Margin Stock, or (c) refunding indebtedness
originally incurred for such purpose, or for any purpose which entails a
violation of, or which is inconsistent with, the provisions of Regulations of
the Board, including Regulations G, T, U and X thereof.
SECTION 3.12 TAXES. Each of the Borrower and each of its Subsidiaries
have filed or caused to be filed all Federal, state and local tax returns which
are required to be filed by it, and has paid or caused to be paid all taxes
shown to be due and payable on such returns or on any assessments received by
it, other than any taxes or assessments, the validity of which the Borrower is
contesting in good faith by appropriate proceedings, and with respect to which
the Borrower shall have set aside on its books adequate reserves.
SECTION 3.13 LABOR AND EMPLOYMENT. Each of the Borrower, each of its
Subsidiaries and each Plan is in compliance in all material respects with those
provisions of ERISA, the Internal Revenue Code of 1986 and the Age
Discrimination in Employment Act, and the regulations and published
interpretations thereunder which are applicable to the Borrower, its
Subsidiaries or such Plan. As of the date hereof, no Reportable Event has
occurred with respect to any Pension Plan as to which the Borrower or any of its
Subsidiaries was required to file a report with the Pension Benefit Guaranty
Corporation. No Pension Plan (other than a Multiemployer Plan) has any material
amount of unfunded benefit liabilities (within the meaning of Section
4001(a)(18) of ERISA) or any accumulated funding deficiency (within the meaning
of Section 302(a)(2) of ERISA), whether or not waived, and neither the Borrower
nor any of its ERISA Affiliates has incurred or expects to incur any material
withdrawal liability under Subtitle E of Title IV of ERISA to a Multiemployer
Plan. No Plan of the Borrower or its Subsidiaries obligates any of them to
provide post-retirement medical benefits, except as may be required by the
Consolidated Omnibus Budget Reconciliation Act of 1986. The Borrower and its
Subsidiaries are in compliance in all material respects with all labor and
employment laws, rules, regulations and requirements of all applicable domestic
and foreign jurisdictions. There are no pending of threatened labor disputes,
work stoppages or strikes.
SECTION 3.14 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT.
Neither the Parent, the Borrower nor any of its Subsidiaries is (a) an
"investment company" or a company "controlled" by an "investment company" within
the meaning of, or subject to regulation under, the Investment Company Act of
1940, as amended, or (b) a "holding company" or "subsidiary company" as defined
in, or subject to regulation under, the Public Utility Holding Company Act of
1935, as amended.
SECTION 3.15 CAPITALIZATION. The record and beneficial owners of the
equity interests of the Borrower and the Subsidiaries of the Borrower and the
Subsidiaries of the Parent are correctly set forth in the Disclosure Schedule.
All such equity interests are owned free and clear of all Liens. The owners of
such equity interests have the unencumbered right to vote all of such interests.
Except as described on the Disclosure Schedule, there are no outstanding
options,
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warrants or rights to purchase, nor any agreement for the subscription, purchase
or acquisition of, any of such interests.
SECTION 3.16 PROPERTIES; SECURITY INTERESTS. Each of the Borrower and
each of its Subsidiaries has good and marketable title to, or valid leasehold
interests in, all of its material assets and properties reflected in the
December 31, 1997 balance sheet, except for (a) such properties as are no longer
useful in the conduct of its business or have been disposed of in the ordinary
course of business, subject to no Liens except for Permitted Liens and (b)
intellectual property licensed by the Borrower from Founding Partners. All such
assets and properties are in good repair, working order and condition and all
such assets and properties are owned by the Borrower and its Subsidiaries, as
the case may be, free and clear of all Liens other than Permitted Liens. The
Security Agreements create and grant to the Lenders a valid and perfected
first-priority security interest in all the Collateral, subject only to
Permitted Liens. All real estate owned or leased by the Borrower or its
Subsidiaries ("Premises") is listed in the Disclosure Schedule.
SECTION 3.17 INTELLECTUAL PROPERTY; LICENSES. Each of the Borrower and
each of its Subsidiaries possesses adequate assets, licenses, patents, patent
applications, copyrights, trademarks, trademark applications and tradenames to
continue to conduct its business as heretofore conducted. No event has occurred
which permits, or after notice or lapse of time or both would permit, the
revocation or termination of any of the foregoing which taken in isolation or
when considered with all other such revocations or terminations would be
reasonably likely to have a Material Adverse Effect. Neither the Borrower nor
any of its Subsidiaries have notice or knowledge of any fact or any past,
present or threatened occurrence that would be reasonably likely to preclude or
impair the Borrower's or any such Subsidiaries' ability to retain or obtain any
authorization necessary for the operation of their respective businesses.
SECTION 3.18 SOLVENCY. Neither the Parent nor the Borrower is insolvent
and the execution and delivery of this Agreement and the other Loan Documents
pursuant thereto and the consummation of the Transactions will not render either
such Person insolvent. The fair value and present fair saleable value of the
respective assets of the Parent exceeds its respective liabilities. The fair
value and present fair saleable value of the respective assets of the Borrower
exceeds its respective liabilities. The Parent and the Borrower understand that
in this context "insolvent" means that the present fair saleable value of the
total assets of a Person is less than the amount of the total respective
liabilities of that Person. The Parent and the Borrower also understand that the
term "liabilities" includes any legal liability, whether matured or unmatured,
liquidated or unliquidated, absolute, fixed or contingent (with contingent
liabilities valued based on the Borrower's or the Parent's, as applicable, good
faith estimate of the probability of occurrence). The Parent and the Borrower
will be able to pay its respective debts as they become absolute and mature. In
the event that the maximum amount available under this Agreement is borrowed by
the Borrower, neither the Parent nor the Borrower will incur debts beyond its
respective ability to pay as they mature. The borrowing of the maximum amount
available under this Agreement, and the granting of liens by the Parent and the
Borrower on their respective properties pursuant to this Agreement and the other
Loan Documents executed pursuant thereto, will not leave the Parent or the
Borrower, as the case may be, with property remaining in such Person's hands
constituting unreasonably small capital with which to conduct its business.
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SECTION 3.19 COMPLETE DISCLOSURE. All factual information furnished by
or on behalf of the Borrower to the Agent or the Lenders for purposes of or in
connection with this Agreement or the Transactions is, and all other such
factual information hereafter furnished by or on behalf of the Borrower will be,
true and accurate in all material respects on the date as of which such
information is furnished and not incomplete by omitting to state any fact
necessary to make such information not misleading at such time in light of the
circumstances under which such information was provided.
ARTICLE 4
CONDITIONS TO THE LOAN
SECTION 4.1 GENERAL CONDITIONS. The obligation of the Lenders to make
each Loan or issue each Letter of Credit is subject to the satisfaction of the
Lenders with the fulfillment of the following conditions precedent:
(a) REVOLVING CREDIT AVAILABILITY. With respect to a borrowing
under the Revolving Credit Facility, after giving effect to such Loan or the
issuance of such Letter of Credit, the Revolving Credit Utilizations will not
exceed the Revolving Credit Availability.
(b) BORROWING NOTICE. The Lender shall have received a notice of
such borrowing or issuance of such Letter of Credit as required by Section 2.05
or Section 2.08, as the case may be.
(c) REPRESENTATIONS. The representations and warranties set forth
in Article III shall be true and correct in all material respects with the same
effect as though made on and as of such date, except to the extent such
representations and warranties refer to an earlier date, in which case they
shall be true and correct in all material respects as of such earlier date.
(d) COMPLIANCE. The Borrower, the Parent, the Foreign
Subsidiaries and the Inactive Subsidiaries shall be in compliance in all
material respects with all the terms and provisions contained herein and in the
other Loan Documents to be observed or performed by them, and at the time of and
immediately after such borrowing or issuance, no Default or Event of Default
shall have occurred and be continuing.
The acceptance by the Borrower of the proceeds of any Loan or the issuance of
any Letter of Credit hereunder shall be deemed to constitute a representation
and warranty by the Borrower on the date of such Loan or the date of the
issuance of such Letter of Credit, as the case may be, that all of the
conditions set forth in Section 4.01 have been satisfied.
SECTION 4.2 CONDITIONS TO FIRST ADVANCE. The obligations of the Lenders
to make the initial advance under the Revolving Credit Facility is subject to
the following additional conditions precedent (or, as expressly set forth below,
subsequent conditions), all of which shall be in form and substance satisfactory
to the Lenders in their sole and absolute discretion:
(a) LEGAL OPINION. The Lenders shall have received a favorable
written opinion of counsel for the Borrower and the Parent in form and substance
acceptable to the Agent and its counsel.
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(b) AUTHORIZATION DOCUMENTATION. The Lenders shall have received
for the Borrower and the Parent (i) a copy of the articles of incorporation of
such Person, certified by the applicable jurisdictional authority as of a recent
date, (ii) certificates of good standing from the applicable authority of such
Person's jurisdiction of incorporation and each other jurisdiction where the
failure of such Person to be so qualified could reasonably be expected to have a
Material Adverse Effect, all dated as of a recent date, (iii) a certificate of
the Secretary or an Assistant Secretary of such Person, dated the Closing Date
and certifying (A) that attached thereto is a true and complete copy of the
articles of incorporation and by-laws of such Person as in effect on the date of
such certificate, (B) that attached thereto is a true and complete copy of
resolutions duly adopted by such Person authorizing the execution, delivery and
performance of the Transactions to which such Person is a party, and that such
resolutions have not been modified, rescinded or amended and are in full force
and effect, and (C) as to the incumbency and specimen signature of each officer
of such Person executing any Loan Document, (iv) a certificate of another
officer of such Person as to the incumbency and specimen signature of the
Secretary or such Assistant Secretary of such Person, and (v) such other
documents as any Lender or its counsel may reasonably request.
(c) NOTES. Each Lender shall have received a Revolving Credit
Note, duly executed and delivered by the Borrower, payable to its order and
otherwise complying with the provisions of Section 2.02.
(d) LOAN DOCUMENTS. The Lenders shall have received the Loan
Documents, duly executed and delivered by the parties thereto (provided that (i)
the Negative Pledge Agreement may be executed and delivered within 30 days after
the Closing Date and (ii) delivery of any pledge agreement by the Parent shall
be governed by Section 5.12).
(e) INSURANCE. The Lenders shall have received certificates
evidencing the insurance required under the Security Agreements and Section 5.03
of this Agreement.
(f) CERTIFICATION. The Lenders shall have received a certificate,
dated as of the Closing Date, whereby a Financial Officer certifies as to the
matters specified in Section 4.01(a), (c), and (d).
(g) SEARCHES. The Lenders shall have received recently dated
reports describing all Lien filings with respect to the Borrower and the Parent
reflected in such jurisdictions as the Agent may require. No such report shall
list any Lien other than Permitted Liens. The Lenders shall also have received
recently dated judgment and state and federal tax lien search reports for the
Borrower and the Parent, satisfactory to the Lenders.
(h) RELEASES. The Lenders shall have releases of Liens (other
than Permitted Liens) and evidence of repayment of existing indebtedness
(provided that termination statements relating to financing statements which the
Borrower is in good faith unable to determine as of the Closing Date may be
delivered within forty-five (45) days after the Closing Date).
(i) FINANCING STATEMENTS. The Lenders shall have received all
such fully executed UCC financing statements under the Credit Agreement and the
Collateral Documents as any Lender may reasonably request.
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(j) FINANCIAL INFORMATION. The Lenders shall have received
projections for Fiscal Year 1999 and the financial deliveries described in
Section 3.05.
(k) FURTHER ASSURANCES. The Lenders shall have received all
further documents, notifications and other assurances reasonably required by the
Lenders to evidence and secure the Obligations.
ARTICLE 5
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with the Lenders that, so long as this
Agreement shall remain in effect or the principal of or interest on the Notes,
any Fee or any other expense or amount payable hereunder shall be unpaid or any
Letter of Credit shall be outstanding hereunder, unless the Required Lenders
shall otherwise consent in writing, the Borrower shall, and shall cause each of
its Subsidiaries to:
SECTION 5.1 EXISTENCE. Do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its legal existence, except
(a) Canada may be dissolved under applicable law and (b) to the extent expressly
permitted in accordance with Section 6.04.
SECTION 5.2 BUSINESSES AND PROPERTIES: COMPLIANCE WITH LAWS. Except to
the extent expressly permitted in accordance with Section 6.04, at all times (a)
do or cause to be done all things necessary to preserve, renew and keep in full
force and effect the rights, licenses, registrations, authorizations, permits,
franchises, patents, copyrights, trademarks and trade names, material to the
conduct of its business, (b) maintain and operate its business in substantially
the manner in which it is presently conducted and operated, (c) comply in all
material respects with all laws and regulations applicable to the operation of
such business, including but not limited to, all Environmental Laws, whether now
in effect or hereafter enacted and with all other applicable laws and
regulations, (d) take all action which may be required to obtain, preserve,
renew and extend all franchises, registrations, licenses, permits and other
authorizations which may be material to the operation of such business (e)
maintain, preserve and protect all property material to the conduct of such
business, and (f) keep its property in good repair, working order and condition
and from time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times.
SECTION 5.3 INSURANCE. Maintain insurance required by the Borrower
Security Agreement, including but not limited to, coverage on its insurable
properties, including all inventory, equipment and real property, against the
perils of fire, theft, burglary, public liability, worker's compensation and
business interruption and such other risks as are customary with companies
similarly situated and in the same or similar business under policies issued by
financially sound and reputable insurers in such amounts as are customary with
companies similarly situated and in the same or similar business. The Borrower
shall pay all insurance premiums payable by it and shall deliver the policy or
policies of such insurance (or certificates of insurance with copies of such
policies) to the Lenders. All insurance policies of the Borrower
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shall contain endorsements, in form and substance reasonably satisfactory to the
Agent, providing that the insurance shall not be cancelable except upon 30 days'
prior notice to the Agent. The Agent shall be shown as additional named insured
parties under all such insurance policies.
SECTION 5.4 OBLIGATIONS AND TAXES. Pay and discharge promptly when due
all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits or in respect of its property before the same shall
become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise, which, if unpaid, might give rise to liens
or charges upon such properties or any part thereof; provided, however, that the
Borrower shall not be required to pay and discharge or to cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith by appropriate
proceedings and the Borrower shall have set aside on its books adequate reserves
with respect thereto.
SECTION 5.5 FINANCIAL STATEMENTS; REPORTS. The Borrower shall maintain a
standard system of accounting in accordance with GAAP and furnish to the Agent:
(a) ANNUAL STATEMENTS. Promptly upon their becoming publicly
available and in any event within 90 days after close of each Fiscal Year of the
Borrower, a copy of the Parent's (i) consolidated (A) balance sheet as of the
end of the Fiscal Year and (B) statements of income, cash flow and shareholder's
equity for such Fiscal Year, setting forth in each case in comparative form the
corresponding figures for the preceding Fiscal Year, all in reasonable detail,
and in each case prepared by the Parent and audited by the Accountants, together
with a certificate of the Accountants which shall state that the audit made by
the Accountants in connection with such financial statements has been made in
accordance with GAAP, such financial statements have been prepared in accordance
with GAAP and in a manner consistent with that applied in prior fiscal periods
(except that, from and after the Fiscal Year ending March 31 1998, the Borrower
has elected to base its Fiscal Year on a period of 12 full months rather than 52
or 53 weeks, as applicable) and such financial statements fairly present the
consolidated financial position of the Parent and (ii) unaudited consolidating
(A) balance sheets as of the end of the Fiscal Year and (B) statements of
income, cash flow and shareholder's equity for such Fiscal Year, setting forth
in each case in comparative form the corresponding figures for the preceding
Fiscal Year, all in reasonable detail and containing such information as any
Lender may require and certified by a Financial Officer. The Borrower shall
deliver a Compliance Certificate in the form of Exhibit E hereto with such
annual financial statements.
(b) QUARTERLY STATEMENTS. Promptly upon their becoming publicly
available and in any event within 45 days after the end of each Fiscal Quarter
of the Borrower, a copy of the Parent's unaudited consolidated and consolidating
(i) balance sheets as of the end of such Fiscal Quarter and (ii) statements of
income, cash flow and shareholders' equity for such Fiscal Quarter and for the
period from the beginning of the then current year to the end of such Fiscal
Quarter, all in reasonable detail and containing such information as any Lender
may require and certified by a Financial Officer.
(c) BORROWING BASE CERTIFICATE. Within 20 days after the end of
each Fiscal Month, a borrowing base certificate of a Financial Officer in the
form of Exhibit D hereto.
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(d) ACCOUNTS REPORT. Within 20 days after the end of each Fiscal
Month, an Accounts Report.
(e) COMPLIANCE CERTIFICATE. Within 45 days after the end of each
Fiscal Quarter, a certificate of a Financial Officer in the form of Exhibit E
hereto.
(f) ACCOUNTANT REPORTS. Promptly upon the receipt thereof, copies
of all reports submitted to the Borrower by independent certified public
accountants in connection with each annual, interim or special audit of the
financial statements of the Borrower or any of its Subsidiaries made by such
accountants, including, without limitation, the comment letter submitted by such
accountants to management in connection with their annual audit.
(g) PUBLIC FILINGS AND PRESS RELEASES. Promptly upon their
becoming publicly available and to the extent not otherwise delivered pursuant
to this Agreement, copies of (i) all financial reports, notices and proxy
statements, (ii) all regular and periodic reports and all registration
statements and prospectuses filed with any securities exchange or with the
Securities and Exchange Commission or any governmental or private regulatory
authority and (iii) all press releases and other statements concerning material
changes or developments in the business of the Parent or the Borrower.
(h) ADDITIONAL INFORMATION. Promptly, from time to time, such
other information regarding the compliance by the Borrower or any of its
Subsidiaries with the terms of this Agreement and the other Loan Documents or
the affairs, operations or condition (financial or otherwise) of the Borrower or
any of its Subsidiaries as any Lender may reasonably request and which is
capable of being obtained, produced or generated by the Borrower or any of its
Subsidiaries or of which the Borrower or any of its Subsidiaries has knowledge.
SECTION 5.6 LITIGATION AND OTHER NOTICES. Give the Agent prompt written
notice of the following:
(a) ORDERS: INJUNCTIONS. The issuance by any court or
governmental agency or authority of any injunction, order, decision or other
restraint prohibiting, or having the effect of prohibiting, the making of any
Loan or the issuance of any Letter of Credit or the initiation of any litigation
or similar proceeding seeking any such injunction, order or other restraint.
(b) LITIGATION. The filing or commencement of any action, suit or
proceeding against the Borrower or any of its Subsidiaries whether at law or in
equity or by or before any court or any federal, state, municipal or other
governmental agency or authority and which, if adversely determined against the
Borrower or any of its Subsidiaries would be reasonably likely to result in
liability in excess of $250,000 in the aggregate.
(c) ENVIRONMENTAL MATTERS. (i) Any release or threatened release
of any Hazardous Material required to be reported to any federal, state or local
governmental or regulatory agency under any applicable Environmental Laws, (ii)
any remedial action taken by the Borrower or any of its Subsidiaries or any
other Person in response to any Hazardous Material on, under or about the
Borrower's or any of its Subsidiaries' properties or any other property, and
(iii) any violation by the Borrower or any of its Subsidiaries of any
Environmental Law, in each case, which would be reasonably likely to result in a
Material Adverse Effect.
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(d) DEFAULT. Any Default or Event of Default, specifying the
nature and extent thereof and the action (if any) which is proposed to be taken
with respect thereto.
(e) MATERIAL ADVERSE EFFECT. Any development in the business or
affairs of the Parent, the Borrower or any of its Subsidiaries which would be
reasonably likely to have a Material Adverse Effect.
SECTION 5.7 ERISA. Comply in all material respects with the applicable
provisions of ERISA and the provisions of the Internal Revenue Code of 1986
relating thereto and (a) furnish to the Agent as soon as possible, and in any
event within 30 days after the Borrower knows or has reason to know thereof,
notice of (i) the establishment by the Borrower or any ERISA Affiliate of any
Pension Plan, (ii) the commencement by the Borrower or any of its Subsidiaries
of contributions to a Multiemployer Plan, (iii) any failure by the Borrower or
any ERISA Affiliate to make contributions required by Section 302 of ERISA
(whether or not such requirement is waived pursuant to Section 303 of ERISA), or
(iv) the occurrence of any Reportable Event with respect to any Pension Plan for
which the reporting requirement is not waived, together with a statement of the
controller, treasurer or executive vice president of the Borrower setting forth
details as to such Reportable Event and the action which the Borrower proposes
to take with respect thereto, together with a copy of the notice of such
Reportable Event given to the Pension Benefit Guaranty Corporation if any notice
is required to be given to said Corporation, (b) promptly after receipt thereof,
a copy of any notice the Borrower or any of its Subsidiaries may receive from
the Pension Benefit Guaranty Corporation relating to the intention of said
Corporation to terminate any Pension Plan, or to appoint a trustee to administer
any Pension Plan and (c) promptly after receipt thereof, a copy of any notice of
withdrawal liability from any Multiemployer Plan.
SECTION 5.8 MAINTAINING RECORDS; ACCESS TO PREMISES AND INSPECTIONS.
Maintain financial records in accordance with generally accepted practices and,
upon reasonable notice, at all reasonable times and as often as any Lender may
reasonably request, permit any authorized representative designated by any
Lender to visit and inspect the properties and financial records of the Borrower
and any of its Subsidiaries and to make extracts from such financial records at
the Lender's expense, and permit any authorized representative designated by any
Lender to discuss the affairs, finances and condition of the Borrower and any of
its Subsidiaries with the Borrower's or such Subsidiary's chief financial
officer and such other officers as the Borrower shall deem appropriate, and the
Borrower's independent public accountants. The Lenders may from time to time
request field audits in scope acceptable to them (which shall occur no less
frequently than once every two years and, unless a Default or an Event of
Default has occurred and is continuing, no more frequently than once a year),
which will be paid for by the Borrower.
SECTION 5.9 USE OF PROCEEDS. Use the proceeds of the Revolving Credit
Facility only for working capital and general corporate purposes and to
refinance existing indebtedness.
SECTION 5.10 YEAR 2000 COMPLIANCE. On or before September 30, 1999,
employ in the businesses of the Parent, the Borrower and its Subsidiaries only
those computer systems and components which accurately accept, create,
manipulate, sort, sequence, calculate, compare and output calendar date
information with respect to calendar year 1999 and each subsequent calendar year
beginning on or after January 1, 2000, in each case where necessary in order
that
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the business of the Parent, the Borrower and its Subsidiaries may be properly
conducted at all times.
SECTION 5.11 BANKING BUSINESS. In order to facilitate the Lenders'
maintenance and monitoring of their security interest in the Collateral, within
30 days after the Closing Date, the Borrower shall, and shall cause the Parent
and all domestic Subsidiaries of the Borrower or the Parent to, maintain all of
its respective principal accounts and banking activities with the Agent.
SECTION 5.12 PLEDGE AGREEMENT. If the Parent Merger is not consummated
within ninety (90) days after the Closing Date, the Parent shall, upon the
request of Agent, pledge to the Agent and the Lenders, as additional security
for the Obligations, all issued and outstanding shares of the Borrower's capital
stock, all on terms and conditions acceptable to the Agent.
ARTICLE 6
NEGATIVE COVENANTS
The Borrower covenants and agrees with the Lenders that, so long as this
Agreement shall remain in effect or the principal of or interest on the Notes,
any Fee or any other expense or amount payable hereunder shall be unpaid or any
Letter of Credit shall be outstanding hereunder, unless the Required Lenders
shall otherwise consent in writing, it will not and it will not permit any of
its Subsidiaries to, either directly or indirectly:
SECTION 6.1 INDEBTEDNESS. Incur, create, assume or permit to exist any
Indebtedness, including pursuant to any Guaranty, except that the following
Indebtedness is permitted:
(a) Indebtedness incurred pursuant to this Agreement and the
other Loan Documents;
(b) Indebtedness incurred in the ordinary course of business with
respect to customer deposits, trade payables and other unsecured current
liabilities not the result of borrowing and not evidenced by any note or other
evidence of indebtedness;
(c) unsecured Indebtedness incurred in the ordinary course of
business not to exceed $250,000 at any time;
(d) Interest Rate Protection Agreements with the Agent;
(e) the Indebtedness listed in the Disclosure Schedule as of the
Closing Date (provided that, notwithstanding any other provision of this
Agreement, no later than 45 days after the Closing Date all of such Indebtedness
held by Congress Financial Corporation shall be paid in full and all agreements
with respect thereto shall be terminated in full);
(f) Indebtedness of Foreign Subsidiaries not to exceed (i)
$1,500,000 in the aggregate at any time during Fiscal Year 1998, (ii) $2,000,000
in the aggregate at any time during Fiscal Year 1999 and (iii) $2,500,000 in the
aggregate at any time thereafter;
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(g) Indebtedness consisting of capital lease obligations and
Indebtedness (including as incurred in connection with the purchase of
intellectual property licensed as of the Closing Date by the Borrower from
Founding Partners) secured by Liens permitted by Section 6.02 (g), not to exceed
(i) $1,600,000 in the aggregate at any time in the case of the intellectual
property described in this clause (g) and (ii) $1,000,000 in the aggregate at
any time in all other cases; and
(h) extensions, renewals and replacements of the Indebtedness
(other than the Seller Note and the Indebtedness held by Congress Financial
Corporation) referred to in paragraphs (a) through (g) of, and in amounts
permitted by, this Section 6.01.
SECTION 6.2 NEGATIVE PLEDGE. Create, incur, assume or permit to exist
any Lien on any property or assets now owned or hereafter acquired by it
(including the capital stock of its Subsidiaries, none of which shall be subject
to any Liens, whether or not described in clauses (b) through (e) below) or on
any income or rights in respect of any thereof, except:
(a) Liens created pursuant to the Loan Documents on behalf of the
Lenders;
(b) Liens for or priority claims imposed by law which are
incidental to the conduct of business or the ownership of properties and assets
(including mechanic's, warehousemen's, attorneys' and statutory landlords'
liens) and deposits, pledges or liens to secure statutory obligations, surety or
appeal bonds or other liens of like general nature incurred in the ordinary
course of business and not in connection with the borrowing of money; provided,
however, that in each case, the obligation secured is not overdue or, if
overdue, is being contested in good faith and adequate reserves have been set up
by in a manner satisfactory to Lenders; provided, further, that the lien and
security interest provided in the Loan Documents or any portion thereof created
or intended to be created thereby is not, in the opinion of the Lenders,
unreasonably jeopardized thereby;
(c) Liens securing the payment of taxes, assessments and
governmental charges or levies incurred in the ordinary course of business,
either (i) not delinquent, or (ii) being contested in good faith by appropriate
legal or administrative proceedings and as to which the Borrower shall have set
aside on its books adequate reserves, and so long as during the period of any
such contest, the Borrower shall suffer no loss of any privilege of doing
business or any other right, power or privilege necessary or material to the
operation of its business;
(d) the Liens identified in the Disclosure Schedule as of the
Closing Date (provided that, notwithstanding any other provision of this
Agreement, no later than 45 days after the Closing Date all of such Liens
securing Indebtedness held by Congress Financial Corporation shall be released
and terminated in full);
(e) Liens securing secured Indebtedness identified in the
Disclosure Schedule as of the Closing Date;
(f) Liens securing capital lease obligations permitted under
Section 6.01(g);
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(g) Liens securing Indebtedness incurred to finance the
acquisition of assets by the Borrower and its Subsidiaries and permitted under
Section 6.01(g), provided that each such Lien attaches only to the applicable
assets so acquired; and
(h) extensions, renewals and replacements of Liens (other than
the Liens in favor of Congress Financial Corporation) referred to in paragraphs
(a) through (g) of this Section 6.02; provided, however, that any such
extension, renewal or replacement Lien shall be limited to the property or
assets covered by the Lien extended, renewed or replaced and that the
obligations secured by any such extension, renewal or replacement Lien shall be
in an amount not greater than the amount of the obligations secured by the Lien
extended, renewed or replaced.
SECTION 6.3 SALE OF ASSETS. Except as expressly permitted by the
Borrower Security Agreement, sell, transfer or otherwise dispose of any of its
assets (including the capital stock of its Subsidiaries, none of which shall be
disposed of, whether or not in the manner described below), including the
Collateral and the Premises, except (a) bona fide sales of Inventory to
customers for fair value in the ordinary course of business, dispositions of
obsolete equipment not used or useful in the business and dispositions of motor
vehicles in the ordinary course of business consistent with past practices, (b)
closing of sales or other non-material offices, based on the reasonable
determination of the board of directors of the Borrower or any Subsidiary of the
Borrower, as applicable, that such action is in the best business interest of
the Borrower or such Subsidiary, as applicable, and (c) Asset Dispositions if
all of the following conditions are met: (i) the market value of assets sold or
otherwise disposed of in any single transaction or series of related
transactions does not exceed $250,000 and the aggregate market value of assets
sold or otherwise disposed of in any fiscal year of the Borrower does not exceed
$500,000; (ii) the consideration received is at least equal to the fair market
value of such assets; (iii) the sole consideration received is cash or
replacement equipment or fixed assets to be used in the ordinary course of
business; (iv) after giving effect to the sale or other disposition of the
assets included within the Asset Disposition, the Borrower is in compliance on a
pro forma basis with the covenants set forth in Article VI recomputed for the
most recently ended Fiscal Month for which information is available and is in
compliance with all other terms and conditions contained in this Agreement; and
(v) no Default or Event of Default shall result from such sale or other
disposition.
SECTION 6.4 CONSOLIDATIONS, MERGERS OR PURCHASES OF ASSETS. Merge into
or consolidate or combine with any other Person, or purchase, lease or otherwise
acquire (in one transaction or a series of related transactions) all or any part
of the property or assets of any Person (other than purchases or other
acquisitions of inventory, materials, leases, property and equipment in the
ordinary course of business); provided that, the Borrower may merge (a) any of
its Subsidiaries into itself or any of its wholly-owned Subsidiaries, with the
Borrower or such wholly- owned Subsidiary remaining as the survivor of such
merger and (b) into the Parent (the "Parent Merger") so long as, for each of
clauses (a) and (b) above, (i) the Borrower delivers written notice of such
merger to the Agent at least fifteen (15) Business Days prior to the date
thereof, and such notice includes a reasonably detailed description of such
merger, (ii) as of the consummation of such merger, the Agent shall have
received duly executed amendments and supplements to the Loan Documents as
requested by the Agent to reflect such merger, together with such other
documents, agreements, certificates, instruments and opinions as the Agent may
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request and (iii) no Default or Event of Default has occurred which is then
continuing or would arise as a result of such merger.
SECTION 6.5 RESTRICTED PAYMENTS. Declare or pay, directly or indirectly,
any dividend or distribution or make any other payment of any other kind to any
of its shareholders or its Affiliates (including any redemption, purchase or
acquisition of, whether in cash, property, securities or a combination thereof,
any stock, partnership interests or capital accounts or warrants, options or any
of its other securities), make any payment in respect of the Seller Note or set
apart any sum for any aforesaid purpose, except (a) for distributions by
Subsidiaries of the Borrower to the Borrower, (b) for regularly scheduled
payments of principal and interest under the Seller Note; provided that (i) such
payments are permitted to be made in accordance with the Subordination Agreement
and (ii) no Default or Event of Default has occurred and is continuing or would
arise as a result of any such payment, (c) for distributions to the Parent to
pay its federal and state income taxes, to the extent directly attributable to
the Parent's tax liability in respect of the Borrower, (d) for distributions to
the Parent to permit it to maintain its corporate existence, (e) as required to
meet obligations under employee stock options and employee stock purchase
agreements and (f) the Borrower may consummate a reverse stock split to the
extent required by the applicable securities regulations.
SECTION 6.6 INVESTMENTS, LOANS AND ADVANCES. Purchase, or hold
beneficially, any stock, other securities or evidences of Indebtedness of, or
make or permit to exist any loan, Guaranty or advance to, or make any investment
or acquire any interest whatsoever in, any other Person (including, but not
limited to (a) the Parent, (b) the Foreign Subsidiaries and the Inactive
Subsidiaries and (c) the formation or acquisition of any Subsidiaries not
existing on the date of this Agreement), except (i) investments in cash and Cash
Equivalents and (ii) in the case of the Parent, as permitted by Section 6.05.
SECTION 6.7 TRANSACTIONS WITH AFFILIATES. Sell or transfer any assets
to, or purchase or acquire any assets of, or make any loan, advance or
investment in, or otherwise engage in any material transaction with, or permit
any Affiliate to sell or transfer assets to, or purchase or acquire any assets
of, or otherwise engage in any other material transaction with any other
Affiliate, except (a) sales to and purchases from Affiliates in the ordinary
course of business on "arms-length" terms no less favorable to the Borrower than
similar arrangements with third parties, and (b) the transactions identified in
the Disclosure Schedule.
SECTION 6.8 FISCAL YEAR; ACCOUNTING. After its Fiscal Year ending March
31, 1998, change its Fiscal Year or method of accounting (other than immaterial
changes and methods), except as required by GAAP.
SECTION 6.9 LIMITATIONS ON SALE OF ASSETS. Permit or place any material
restriction, directly or indirectly, on the sale, pledge, transfer or other
disposition of any material asset (other than such restrictions as ordinarily
appear in contracts entered into in the ordinary course of business, examples of
which include restrictions on the ability to assign leases or contract rights
and obligations and the restrictions arising under this Agreement and the other
Loan Documents).
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SECTION 6.10 ISSUANCE OF EQUITY INTERESTS; SUBSIDIARIES. Without the
prior written approval of the Required Lenders, (a) issue any capital stock or
other equity interests or any options or warrants to purchase, or securities
convertible into, capital or equity interests, except as required to meet
obligations under employee stock options and employee stock purchase agreements
or (b) establish, acquire or otherwise permit to exist any Subsidiaries.
SECTION 6.11 CERTAIN DOCUMENTS. Amend, modify or waive (or agree to the
amendment, modification or waiver of) any term or provision of its articles of
incorporation or bylaws or any lease of any Premises in any manner that would be
reasonably likely to have a Material Adverse Effect.
SECTION 6.12 BUSINESS ACTIVITIES. Engage in, or permit or cause the
Parent or the Inactive Subsidiaries to engage in, any business activities other
than (a) in the case of the Borrower, those engaged in by it (or substantially
related to those engaged by it) on the Closing Date, (b) in the case of the
Parent, those activities incidental to its ownership of the Borrower and its
other Subsidiaries, (c) the performance of such Person's obligations under the
Loan Documents to which it is a party and (d) activities incidental to the
maintenance of such Person's corporate existence.
SECTION 6.13 BANK ACCOUNTS. Commencing no later than 30 days after the
Closing Date, maintain any bank accounts other than petty cash accounts having
an aggregate balance not to exceed $100,000 at any time, payroll accounts and
bank accounts maintained with the Agent; provided that the Borrower may deposit
checks received from Account Debtors into petty cash accounts located in
California, so long as all amounts at any time in excess of $100,000 contained
in the Borrower's petty cash accounts are transferred to the Agent within three
(3) days of the Borrower's receipt of checks in respect thereof.
SECTION 6.14 CONSOLIDATED NET INCOME. Permit Consolidated Net Income for
(a) the first Fiscal Quarter of any Fiscal Year to be less than ($1,500,000),
(b) the first two quarters of any Fiscal Year to be less than ($1,000,000),
cumulatively, (c) the first three quarters of any Fiscal Year to be less than
$0, cumulatively, and (d) any Fiscal Year to be less than $1,000,000.
SECTION 6.15 CONSOLIDATED TANGIBLE NET WORTH. Permit Consolidated
Tangible Net Worth to be less than the sum of (a) $10,300,000 plus (b) 50% of
the cumulative positive Consolidated Net Income for Fiscal Year 1999 and each
Fiscal Year thereafter.
ARTICLE 7
DEFAULTS
SECTION 7.1 EVENTS OF DEFAULT. Each of the following events shall
constitute events of default ("Events of Default") hereunder:
(a) any representation or warranty made by or on behalf of the
Borrower in connection with this Agreement or the other Loan Documents or any of
the Transactions shall prove to have been false or misleading in any material
respect when made;
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(b) default shall be made in the payment of any (i) principal
when and as the same shall become due and payable, whether at the due date
thereof or at a date fixed for prepayment thereof or by acceleration thereof or
otherwise, or (ii) interest on the Loans or any other amount payable hereunder
within 5 days of the due date thereof;
(c) default shall be made in the due observance of any covenant,
condition or agreement on the part of the Borrower contained in Sections 4.02(d)
(as regards the Negative Pledge Agreement), 5.01, 5.05, 5.06(d), 5.11, 5.12 or
Article VI;
(d) default shall be made in the due observance or performance of
any other covenant, condition or agreement to be observed or performed by the
Borrower pursuant to the terms of this Agreement or the other Loan Documents and
such default shall continue unremedied for a period of 30 days after the earlier
of (i) written notice from any Lender of such default or (ii) actual knowledge
by the Borrower of such default;
(e) the Parent, the Borrower or any of its Subsidiaries shall (i)
voluntarily commence any proceeding or file any petition seeking relief under
Title 11 of the United States Code or any other federal or state bankruptcy,
insolvency or similar law, (ii) consent to the institution of, or fail to
controvert in a timely and appropriate manner, any such proceeding or the filing
of any such petition, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator or similar official for the Parent,
the Borrower or any of its Subsidiaries or for a substantial part of their
properties or assets, (iv) file an answer admitting the material allegations of
a petition filed against it in any such proceeding, (v) make a general
assignment for the benefit of creditors, (vi) become unable generally, or admit
in writing its inability, to pay its debts as they become due, (vii) suspend the
transaction of all or a substantial portion of its usual business or (viii) take
corporate action for the purpose of effecting any of the foregoing;
(f) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent jurisdiction seeking
(i) relief in respect of the Parent, the Borrower or any of its Subsidiaries of
a substantial part of any of its properties or assets under Title 11 of the
United States Code or any other federal or state bankruptcy, insolvency or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator or similar official for the Parent, the Borrower or any of its
Subsidiaries or for a substantial part of its properties, or (iii) the
winding-up or liquidation of the Parent, the Borrower or any of its
Subsidiaries; and such proceeding or petition shall continue undismissed for 60
days or an order or decree approving or ordering any of the foregoing shall
continue unstayed and in effect for 60 days;
(g) an event of default shall occur and be continuing with
respect to any Indebtedness of the Parent, the Borrower or any of its
Subsidiaries or any event shall occur if the effect of any such default or event
shall be to accelerate, or to permit the holder or obligee of any Indebtedness
(or any trustee or agent on behalf of such holder or obligee) to accelerate
(with or without notice or lapse of time or both) the maturity of Indebtedness
in an aggregate amount in excess of $250,000; or any payment of principal or
interest, regardless of amount, on any Indebtedness of the Parent, the Borrower
or any of its Subsidiaries in an aggregate principal amount in excess of
$250,000, shall not be paid when due, whether at maturity, by acceleration or
otherwise (after giving effect to any period of grace specified in the
instrument evidencing or governing such Indebtedness);
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(h) a Reportable Event shall have occurred with respect to any
Pension Plan or a notice of intent to terminate a Pension Plan shall have been
furnished to the affected parties (as provided in Section 4041(c)(1) of ERISA);
or the Pension Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Pension Plan, or a trustee shall have been appointed by a United
States District Court to administer any Pension Plan, if in any such case such
Pension Plan then has an amount of unfunded benefit liabilities (within the
meaning of Section 4001(a)(18) of ERISA) aggregating in excess of $250,000 or
the Borrower or any ERISA Affiliate incurs withdrawal liability to any
Multiemployer Plan under subtitle E of Title IV of ERISA aggregating in excess
of $250,000;
(i) a final judgment for the payment of money in excess of
$250,000 shall be rendered by a court or other tribunal against the Parent, the
Borrower or any of its Subsidiaries and shall remain undischarged for a period
of 30 consecutive days during which execution of such judgment shall not have
been stayed effectively or final judgments for the payment of money aggregating
in excess of $250,000 shall be rendered against the Parent, the Borrower or any
of its Subsidiaries and such judgments shall remain undischarged for a period of
30 consecutive days during which execution of such judgments shall not have been
stayed effectively;
(j) any Collateral Document shall cease to be in full force and
effect, enforceable in accordance with its terms, or the Borrower, the Parent,
the Sellers or any other Person shall assert the invalidity of any such
instrument (including the assignment of the Subordination Agreement to the
Agent, on behalf of itself and the Lenders), or any security interest or Lien
purported to be created by any Collateral Document shall cease to be a valid and
perfected first priority security interest in any collateral described therein,
subject only to Permitted Liens;
(k) a default or event of default shall occur under any of the
other Loan Documents, which shall remain uncured after the expiration of any
applicable notice, cure or grace period, if any; or
(l) the Parent, the Borrower or any of its Subsidiaries shall be
subject to any proceeding pertaining to the release by (i) any of such Persons,
(ii) any Person acting on behalf of the Parent, the Borrower or any of its
Subsidiaries, or (iii) any predecessor in interest to the assets and properties
of the Parent, the Borrower or any of its Subsidiaries of any Hazardous
Materials into the environment, or any violation of any Environmental Laws which
in either case, would be reasonably likely to have a Material Adverse Effect; or
(m) (i) the Parent shall cease to own and control all of the
economic and voting rights associated with all of the outstanding capital stock
of the Borrower, (ii) the Borrower shall cease to own and control all of the
economic and voting rights associated with all of the outstanding capital Stock
of any of its Subsidiaries, (iii) any person or group of persons (within the
meaning of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended) of 20% or more of the issued and outstanding shares of capital stock of
the Parent having the right to vote for the election of directors of the Parent
under ordinary circumstances or (iv) during any period of
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twelve consecutive calendar months, individuals who at the beginning of such
period constituted the board of directors of the Parent (together with any new
directors whose election by the board of directors of the Parent or whose
nomination for election by the stockholders of the Parent was approved by a vote
of at least two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose elections or nomination for
election was previously so approved) cease for any reason other than death or
disability to constitute a majority of the directors then in office.
SECTION 7.2 REMEDIES UPON DEFAULT. Upon the occurrence of any Event of
Default (other than an event described in Section 7.01(e) or (f)), and at any
time thereafter during the continuance of such event, the Agent may, and shall
at the request of the Required Lenders, by written notice to the Borrower, take
either or both of the following actions at the same or different times: (a)
terminate forthwith the Commitment of the Lenders hereunder, and (b) declare the
Notes to be forthwith due and payable, whereupon the principal of the Notes,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder and under the other Loan
Documents, shall become forthwith due and payable both as to principal and
interest, without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived by the Borrower, anything contained
herein or in the Notes to the contrary notwithstanding. Upon the occurrence of
any event described in Section 7.01(e) or (f), (i) the Commitment of the Lenders
shall automatically terminate, and (ii) the principal amount outstanding under
the Notes, together with all accrued interest thereon and any accrued unpaid
Fees and all other liabilities of the Borrower accrued hereunder and under the
other Loan Documents, shall automatically become due and payable, both as to
principal and interest, without presentment, demand, protest or other notice of
any kind, all of which are hereby expressly waived by the Borrower, anything
contained herein or in the Notes to the contrary notwithstanding. Upon any
acceleration of the Notes and the other amounts payable hereunder, the Borrower
shall pay to the Lenders an amount equal to the aggregate stated amount of all
Letters of Credit to be held by the Agent as cash collateral to secure the
obligations of the Borrower hereunder with respect to the Letters of Credit.
ARTICLE 8
THE AGENT
SECTION 8.1 APPOINTMENT. Each Lender hereby designates and appoints
LaSalle National Bank as the Agent of such Lender under this Agreement and the
other Loan Documents, and each Lender hereby irrevocably authorizes, and each
holder of any Note by the acceptance thereof will be deemed irrevocably to
authorize, the Agent to take such action on its behalf under the provisions of
this Agreement and the other Loan Documents and to exercise such powers as are
set forth herein or therein, together with such other powers as are reasonably
incidental thereto. The Agent agrees to act as such on the express conditions
contained in this Article VIII. The Agent may perform any of its duties
hereunder by or through its agents or employees.
SECTION 8.2 NATURE OF DUTIES. The Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement or in the
other Loan Documents. The duties of the Agent shall be mechanical and
administrative in nature. The Agent shall not have by reason
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of this Agreement a fiduciary relationship in respect of any Lender. Nothing in
this Agreement, expressed or implied, is intended to or shall be construed as to
impose upon the Agent any obligations in respect of this Agreement except as set
forth herein. Each Lender shall make its own independent investigation of the
financial condition and affairs of the Borrower in connection with the making
and the continuance of the Loans hereunder and shall make its own appraisal of
the creditworthiness of the Borrower, and the Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide any Lender
with any credit or other information with respect thereto, whether coming into
its possession before the making of the Loans or at any time or times
thereafter. If the Agent seeks the consent or approval of any Lender prior to
the taking or refraining from taking any action hereunder, the Agent shall send
notice thereof to each Lender.
SECTION 8.3 RIGHTS, EXCULPATION, ETC. Neither the Agent nor any of its
officers, directors, employees or agents shall be liable to any Lender for any
action taken or omitted by it hereunder or under any of the other Loan
Documents, or in connection herewith or therewith, unless caused by its or their
gross negligence or willful misconduct. The Agent shall not be responsible to
any Lender for any recitals, statements, representations or warranties herein or
in any other Loan Document or for the execution, effectiveness, genuineness,
validity, enforceability, collectibility, or sufficiency of this Agreement, any
Note or any of the other Loan Documents or any other agreement relating to the
transactions contemplated hereby or thereby or the financial condition of
Borrower. Neither the Agent nor any of its officers, directors, employees or
agents shall have any responsibility to the Borrower on account of the failure
of or delay in performance or breach by any Lender of any of its obligations
hereunder or to any Lender on account of the failure or, the delay in
performance or breach by any other Lender or the Borrower of any of their
respective obligations hereunder or under the Notes or the other Loan Documents
or in connection herewith or therewith. The Agent shall not be required to make
any inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement, the Notes or any of the other Loan
Documents or the financial condition of the Borrower or the existence of any
Default or Event or Default. The Agent may at any time request instruction from
the Required Lenders with respect to any actions or approvals which by the terms
of this Agreement or any of the other Loan Documents the Agent is permitted or
required to take or to grant, and if such instructions are promptly requested
and the Agent complies with such instructions, the Agent shall be absolutely
entitled to take any action or to refrain from taking any action or to withhold
any approval, as the case may be and shall be under no liability whatsoever to
any person for action, inaction or withheld approval until it shall have
received such instructions from the Required Lenders. Without limiting the
foregoing, no Lender shall have any right of action whatsoever against the Agent
as a result of the Agent acting or refraining from acting under this Agreement,
the Notes or any of the other Loan Documents in accordance with the instructions
of the Required Lenders.
SECTION 8.4 RELIANCE. The Agent shall be entitled to rely upon any
written notice, statement, certificate, order or other document or any telephone
message believed by it to be genuine and correct and to have been signed, sent
or made by the proper person, and with respect to all matters pertaining to this
Agreement, the Notes or any of the Loan Documents and its duties hereunder or
thereunder, upon advice of counsel selected by it. The Agent may deem and treat
the payee of any Note as the owner thereof for all purposes hereof until it
shall have received from the payee of such Note notice, given as provided
herein, of the transfer thereof.
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SECTION 8.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent has received notice from a Lender or the Borrower
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the Agent
receives such a notice, the Agent shall give prompt notice thereof to the
Lenders and, in the case of a notice received from any Lender, the Borrower. The
Agent shall take such action with respect to such Default or Event of Default as
shall be reasonably directed by the Required Lenders; provided, however, that
unless and until the Agent shall have received such directions, the Agent may
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default or Event of Default as it shall deem
advisable in the best interests of the Lenders.
SECTION 8.6 INDEMNIFICATION. To the extent that the Agent is not
reimbursed and indemnified by the Borrower, the Lenders will reimburse and
indemnify the Agent for and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against the Agent, acting pursuant hereto, in any way relating
to or arising out of this Agreement or any of the other Loan Documents or any
action taken or omitted by the Agent under this Agreement or any of the other
Loan Documents in proportion to each Lender's Percentage; provided, however,
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent's gross negligence or willful misconduct.
The obligations of the Lenders under this Section 8.06 shall survive the payment
in full of the Notes and the termination of this Agreement.
SECTION 8.7 THE AGENT INDIVIDUALLY. With respect to its Percentage share
hereunder, the Loans made by it and any Notes issued to or held by it, the Agent
shall have and may exercise the same rights and powers hereunder and is subject
to the same obligations and liabilities as and to the extent set forth herein
for any other Lender or holder of a Note. The terms "Lenders" or "Required
Lenders" or any similar terms shall, unless the context clearly otherwise
indicates, include the Agent in its individual capacity as a Lender or one of
the Required Lenders. The Agent may accept deposits from, lend money to, and
generally engage in any kind of banking, trust or other business with the
Borrower, as if it were not acting as the Agent pursuant hereto.
SECTION 8.8 SUCCESSOR TO THE AGENT. The Agent may resign from the
performance of all of its functions and duties hereunder at any time by giving
at least 30 Business Days' prior written notice to the Borrower and the Lenders.
Such resignation shall take effect upon the acceptance by a successor Agent of
appointment pursuant to subsections (b) and (c) below or as otherwise provided
below. Upon the effectiveness of such resignation, the Agent shall be relieved
of all of its obligations hereunder and shall no longer be a party hereto
(except, if applicable, in its capacity as a Lender) and shall have no further
obligations or rights as the Agent hereunder (except, if applicable as a Lender,
or except rights which, pursuant to the provisions of this Agreement, survive
the termination of this Agreement and the repayment of the Notes) and the
successor Agent shall succeed to such obligations and rights.
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(a) Upon any such notice of resignation, the Required Lenders
shall appoint a successor Agent who shall be reasonably satisfactory to the
Borrower (it being agreed that any Lender shall be deemed to be acceptable) and
shall be an incorporated bank or trust company.
(b) If a successor Agent shall not have been so appointed within
said 30 Business Day period, the retiring Agent, with the consent of the
Borrower, shall then appoint a successor Agent who shall serve as Agent until
such time, if any, as the Required Lenders, with the consent of the Borrower,
which consent shall not be unreasonably withheld, appoint a successor Agent as
provided above.
(c) Nothing contained in this Article VIII or in any other
provision of this Agreement or any other Loan Document shall restrict the
ability of the Agent to change its office to any other branch or office.
Accordingly, without any prior consent of any Lender or the Borrower, the Agent
may change its address for purposes of the Loan Documents by giving a notice in
accordance with Section 9.01 hereof.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 NOTICES. Notices and other communications provided for
herein and in the other Loan Documents shall be in writing and shall be
delivered personally or mailed, by certified or registered mail, postage prepaid
(or in the case of facsimile communication, delivered by telex, graphic scanning
or other facsimile communications equipment) or delivered by overnight courier
addressed to the respective address set forth on the signature pages hereof or
in any Assignment and Acceptance pursuant to which such Lender became a party
hereto. All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of mailing or transmission, in each case addressed to such
Person as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such Person.
SECTION 9.2 OBLIGATIONS OF THE LENDERS. All obligations of each Lender,
as Lender hereunder, are not joint and several, but are separate and individual,
and no partnership or joint venture relationship shall be construed to exist
between the Agent and any Lender or between any Lenders in connection with this
Agreement or otherwise.
SECTION 9.3 SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made by the Borrower herein and in the other Loan
Documents shall be considered to have been relied upon by the Lenders and shall
survive the making by the Lenders of the Loans and the execution and delivery to
the Lenders of the Notes evidencing the Loans and shall continue in full force
and effect until the Notes and all accrued interest thereon and all other
Obligations then due and payable have been fully paid, no Letters of Credit are
outstanding hereunder, and the Lender has no further commitment to lend
hereunder.
SECTION 9.4 SUCCESSORS AND ASSIGNS.
(a) NO ASSIGNMENT BY BORROWER. Whenever in this Agreement or any
other Loan Document any of the parties hereto is referred to, such reference
shall be deemed to include
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the successors and assigns of such party; provided, however, that the Borrower
may not assign or delegate any of its duties, obligations or responsibilities
hereunder or under the Notes or any other Loan Document without the prior
written consent of each Lender, which consent shall be in each Lender's sole and
absolute discretion. All covenants, promises and agreements by or on behalf of
the Borrower which are contained in this Agreement or any other Loan Document to
which the Borrower is a party shall inure to the benefit of the successors and
assigns of the Agent and the Lenders.
(b) LENDERS' RIGHT TO ASSIGN. Each Lender may assign to one or
more banks or other financial institutions regularly engaged in making or
acquiring loans all or a portion of its interest, rights and obligations under
this Agreement (including all or a portion of its Revolving Credit Commitment
and the Loans at the time owing to it and the Notes held by it); provided,
however, that (i) except in the case of an assignment to a Lender or an
affiliate of a Lender, the Agent (and the Borrower, so long as no Default or
Event of Default has occurred and is continuing) must give its prior written
consent to such assignment (which consents shall not be unreasonably withheld),
(ii) each such assignment shall be of a constant, and not a varying, percentage
of all the assigning Lender's rights and obligations under this Agreement, (iii)
the aggregate amount of the Loans and Commitments of the assigning Lender
subject to each such assignment (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the Agent) shall not
be less than $5,000,000 (or, if less, all of the assigning Lender's Loans and
Commitments), (iv) the parties to each such assignment shall execute and deliver
to the Agent an Assignment and Acceptance to the Agent, together with the Notes
subject to such assignment and a processing and recordation fee of $5,000, and
(v) each assignment shall include a ratable portion of such Lender's Revolving
Credit Commitment and Loans thereunder. Upon acceptance and recording pursuant
to paragraph (d) of this Section 9.04, from and after the effective date
specified in each Assignment and Acceptance which effective date shall be at
least five Business Days after the execution thereof, (A) the assignee
thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender under
this Agreement and (B) the assigning Lender thereunder shall, to the extent
provided in such assignment, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto).
(c) AGREEMENTS OF ASSIGNOR AND ASSIGNEE. By executing and
delivering an Assignment and Acceptance, the assigning Lender thereunder and the
assignee thereunder shall be deemed to confirm to and agree with each other and
the other parties hereto as follows: (i) other than the representation and
warranty that it is the legal and beneficial owner of the interest being
assigned thereby free and clear of any adverse claim, such assigning Lender
makes no representation or warranty and assumes no responsibility with respect
to any statements, warranties or representations made in or in connection with
this Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, any Note or any other Loan
Document or any other instrument or document furnished pursuant hereto; (ii)
such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or the
performance or observance by the Borrower of any of its obligations under this
Agreement, any Note or any other Loan Document or any other instrument or
document furnished pursuant hereto; (iii) such assignee confirms that
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it has received a copy of this Agreement, together with copies of the most
recent financial statements delivered pursuant to Section 5.05 and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) such
assignee will independently and without reliance upon the Agent, such assigning
Lender or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee appoints and
authorizes the Agent to take such action as agent on it behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto; and (vi)
such assignee agrees that it will perform in accordance with their terms all the
obligations which by the terms of this Agreement are required to be performed by
it as a Lender.
(d) RECORDING OF ASSIGNMENT. The Agent shall maintain at its
office in the City of Chicago a copy of each Assignment and Acceptance delivered
to it and a register for the recordation of the names and addresses of the
Lenders, and the Commitments of, and principal amount of the Loans owing to,
each Lender pursuant to the terms hereof from time to time (the "Register"). The
entries in the Register shall be conclusive in the absence of manifest error and
the Borrower, the Agent and the Lenders may treat each person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement. The Register shall be available for inspection
by the Borrower and any Lender, at any reasonable time and from time to time
upon reasonable prior notice.
(e) ACCEPTANCE OF ASSIGNMENT BY AGENT. Upon its receipt of a duly
completed Assignment and Acceptance executed by an assigning Lender and assignee
together with the Notes subject to such assignment and the processing and
recording fee referred to in paragraph (b) above, the Agent shall (subject to
the consent of the Agent and the Borrower to such assignment, if required
pursuant to Section 9.04(b)), (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register and, with respect to
any Assignment and Acceptance and allocation of commitments under this Agreement
by the Agent, record such information on Schedule 1.01 and (iii) give prompt
notice thereof to the Borrower and the Lenders. Within five Business Days after
receipt of notice, the Borrower, at its own expense, shall execute and deliver
to the Agent, in exchange for the surrendered Notes, new Notes to the order of
such assignee in a principal amount equal to the applicable Percentage assumed
by it pursuant to such Assignment and Acceptance and, if the assigning Lender
has retained a Percentage, new Notes to the order of such assigning Lender in a
principal amount equal to the applicable Percentage retained by it. Such new
Notes shall be in an aggregate principal amount equal to the aggregate principal
amount of such surrendered Notes; such new Notes shall be dated the date of the
surrendered Notes which they replace and shall otherwise be in substantially the
form of the Notes. Each canceled Note shall be returned to the Borrower.
(f) PARTICIPATIONS. Each Lender may sell participations to one or
more banks or other entities in all or a portion of its rights and obligations
under this Agreement (including all or a portion of its Commitments and the
Loans owing to it and the Notes held by it); provided, however, that (i) such
Lender's obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the Borrower for the performance of
such obligations, (iii) the participating banks or other entities shall be
entitled to the benefit of the cost protection provisions contained in Article
II to the same extent that the Lender from which such
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participating bank or other entity acquired its participation would be entitled
to the benefit of such cost protection provisions had such Lender not sold such
participation(s) and (iv) the Borrower shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, and such Lender shall retain the sole right to
enforce the obligations of the Borrower relating to the Loans and to approve any
amendment, modification or waiver of any provision of this Agreement (other than
amendments, modifications or waivers with respect to any fees payable hereunder
or the amount of principal of or the rate at which interest is payable on the
Loans, or the extension of maturity of principal of or interest on the Loans).
SECTION 9.5 EXPENSES OF THE LENDERS; INDEMNITY. (a) The Borrower agrees
to pay all expenses reasonably incurred by the Agent (including the fees and
expenses of the Agent's counsel and its paralegals, field exam expenses and
related fees and environmental audit and appraisal fees) in connection with the
preparation and administration of this Agreement and the other Loan Documents,
or with any amendments, modifications or waivers of the provisions hereof or
thereof (whether or not the Transactions shall be consummated) or reasonably
incurred by the Agent and each Lender (including the fees and expenses of the
Agent's or any Lender's counsel and its paralegals) in connection with the
enforcement of its rights in connection with this Agreement or the other Loan
Documents. The Borrower further agrees that it shall indemnify the Agent and
each Lender from and hold it harmless against any documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this Agreement or any of the other Loan Documents.
(b) The Borrower agrees to indemnify the Agent, each Lender and
their respective Affiliates, directors, officers, employees and agents against,
and to hold each Lender and such Persons harmless from, any and all losses,
claims, damages, liabilities, penalties, actions, judgments, suits, costs, and
related expenses, including legal and paralegal fees and expenses, incurred by
or asserted against such Lender or any such Persons arising out of, in any way
connected with, or as a result of any claim, investigation, litigation or other
proceeding (whether or not the Agent or such Lender is a party) relating to (i)
this Agreement or the other Loan Documents, (ii) the performance by the parties
hereto and thereto of their respective obligations hereunder and thereunder
(including the making of the Commitment), (iii) consummation of the
Transactions, (iv) the release of Hazardous Materials, including any damage or
injury resulting from any such Hazardous Materials to or affecting the
Borrower's properties or the soil, water, air, vegetation, buildings, personal
property, persons or animals located on such properties or on any other property
or otherwise, or (v) any violation of any Environmental Laws. The foregoing
indemnity includes the cost of remedial action to the extent required to cause
the Borrower's properties to be in compliance with all applicable Environmental
Laws. Notwithstanding the foregoing, this indemnity shall not apply to any such
losses, claims, damages, liabilities or related expenses arising solely from the
gross negligence or willful misconduct of the Agent or a Lender.
(c) The relationship between the Borrower, the Agent and the
Lenders shall be solely that of borrower and lender. The Agent and the Lenders
shall not have any fiduciary responsibilities to the Borrower. The Agent and the
Lenders do not undertake any responsibility to the Borrower to review or inform
the Borrower of any matter in connection with any phase of the Borrower's
business or operations. The Borrower agrees that the Agent and the Lenders
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shall not have liability to the Borrower (whether sounding in tort, contract or
otherwise) for losses suffered by the Borrower in connection with, arising out
of, or in any way related to, the Transactions and the relationship established
by the Loan Documents, or any act, omission or event occurring in connection
therewith, unless it is determined by a court of competent jurisdiction in a
final and non-appealable order that such losses resulted from the gross
negligence or willful misconduct of the Person from which recovery is sought.
The Agent and the Lenders shall not have any liability with respect to, and the
Borrower hereby waives, releases and agrees not to sue for, any special,
indirect or consequential damages suffered by the Borrower in connection with,
arising out of, or in any way related to the Loan Documents or the transactions
contemplated thereby
(d) The provisions of this Section shall remain operative and in
full force and effect regardless of the expiration of the term of this
Agreement, the other Loan Documents, the consummation of the Transactions, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any of the other Loan Documents, or any
investigation made by or on behalf of such Lender. All amounts due under this
Section 9.05 shall be payable on written demand in reasonable detail therefor.
SECTION 9.6 RIGHT OF SETOFF. The Agent and each Lender are hereby
authorized at any time and from time to time after the occurrence and during the
continuance of an Event of Default to setoff and apply any and all deposits
(general or special, time or demand, provisional or final, whether held solely
or jointly with others) at any time held and other indebtedness at any time
owing by the Agent or any Lender to or for the credit or the account of the
Borrower (other than trust accounts held for the benefit of third parties in the
ordinary course of the Borrower's business) to amounts then due and payable
under this Agreement and the other Loan Documents, irrespective of whether or
not such Lender shall have made any demand under this Agreement or any of the
other Loan Documents. The rights of the Agent and the Lenders under this Section
9.06 are in addition to other rights and remedies (including other rights of
setoff) which the Agent and the Lenders may have under applicable law or under
the Loan Documents.
SECTION 9.7 APPLICABLE LAW. THIS AGREEMENT, THE NOTES AND EACH OF THE
OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW
DOCTRINE.
SECTION 9.8 WAIVERS. No failure or delay of the Agent or any Lender in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Agent and the Lenders hereunder
are cumulative and not exclusive of any rights or remedies which it would
otherwise have. No waiver of any provision of this Agreement, the Notes or the
other Loan Documents, or consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be authorized as provided
in Section 9.09, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice or demand on
the Borrower in any case shall entitle the Borrower or the Agent to any other or
further notice or demand in similar or other circumstances.
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SECTION 9.9 AMENDMENTS.
(a) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Required Lenders; provided,
however, that no such agreement shall (i) decrease the principal amount of, or
extend or advance the maturity of any date for the payment of any fee or any
principal of or interest on, any Loan, or waive or excuse any such payment or
any part thereof, or decrease the rate of any fee or interest on any Loan,
without the prior written consent of each holder of a Note affected thereby,
(ii) increase the Commitment of any Lender without the prior written consent of
such Lender, (iii) amend or modify the provisions of this Section 9.09 or the
definition of the "Required Lender", without the prior written consent of each
Lender, or (iv) amend or modify any other provision of this Agreement or of the
other Loan Documents that would have the effect of releasing all or a
substantial portion of the collateral securing the Loans without the prior
written consent of each Lender; provided, further, that no such agreement shall
amend, modify or otherwise affect the rights or duties of the Agent hereunder
without the prior written consent of the Agent. Each Lender and each holder of a
Note shall be bound by any modification or amendment authorized by this Section
9.09 regardless of whether its Notes shall have been marked to make reference
thereto, and any consent by any Lender or holder of a Note pursuant to this
Section 9.09 shall bind any person subsequently acquiring a Note from it,
whether or not such Note shall have been so marked.
(b) If, in connection with any proposed amendment, modification,
termination or waiver of any of the provisions of this Agreement as contemplated
by clauses (i), (iii) or (iv) of Section 9.09(a), the consent of Required
Lenders is obtained but the consent of one or more other Lenders whose consent
is required is not obtained, then the Borrower shall have the right, so long as
all non-consenting Lenders are treated as described below, to replace each such
non-consenting Lender with one or more Replacement Lenders pursuant to Section
2.15 so long as each such Replacement Lender consents to the proposed amendment,
modification, termination or waiver.
SECTION 9.10 SEVERABILITY. In the event any one or more of the
provisions contained in this Agreement, the Notes or the other Loan Documents
should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall not in any way be affected or impaired thereby.
SECTION 9.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one contract, and shall become effective
when copies hereof which, when taken together, bear the signatures of each of
the parties hereto shall be delivered or mailed to the Agent and the Borrower.
SECTION 9.12 HEADINGS. Article and Section headings and the Table of
Contents used herein are for convenience of reference only and are not to affect
the construction of, or to be taken into consideration in interpreting, this
Agreement.
SECTION 9.13 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
AGREES THAT ANY SUIT, ACTION, PROCEEDING OR CLAIM
53.
<PAGE> 56
AGAINST IT ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS, OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF,
MAY BE BROUGHT OR ENFORCED IN THE STATE OR FEDERAL COURTS LOCATED IN CHICAGO,
ILLINOIS OR COOK COUNTY, ILLINOIS AND THE BORROWER HEREBY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY PROTECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY PROCEEDING BROUGHT ACCORDINGLY, AND FURTHER
IRREVOCABLY WAIVES ANY CLAIMS THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
SECTION 9.14 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH
LENDER HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR UNDER OR IN
CONNECTION WITH ANY AMENDMENT, INSTRUMENT, DOCUMENT, OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR
ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT, AND AGREE THAT ANY SUCH ACTION SHALL BE TRIED BEFORE
A COURT AND NOT BEFORE A JURY. THE TERMS AND PROVISIONS OF THIS SECTION
CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS AGREEMENT.
SECTION 9.15 INTEREST LIMITATION. Anything in this Agreement, the Notes
or any Loan Document to the contrary notwithstanding, the Borrower shall never
be required to pay interest at a rate in excess of the highest lawful rate, and
if the effective rate of interest that would otherwise be payable under this
Agreement, the Notes or any Loan Document would exceed the highest lawful rate,
or if any holder of the Notes shall receive monies that are deemed to constitute
interest which would increase the effective rate of interest payable under this
Agreement, the Notes or any Loan Document to a rate in excess of the highest
lawful rate, then (a) the amount of interest that would otherwise be payable
under this Agreement, the Notes and the Loan Documents shall be reduced to the
amount allowed under applicable law, and (b) any interest paid in excess of the
highest lawful rate shall, at the option of the holders of the Notes, be either
refunded to the payor or credited on the principal of the Notes.
SECTION 9.16 LOAN DOCUMENTS. In the event of any conflict or
inconsistency between the terms and provisions of this Agreement and those of
any other Loan Document, the terms and provisions of this Agreement shall govern
and control to the extent of such conflict or inconsistency.
[signature pages follow]
54.
<PAGE> 57
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
above written.
BORROWER:
ARTECON CALIFORNIA
By: /s/ James L. Lambert
-------------------------------
Its: President
------------------------------
6305 El Camino Real
Carlsbad, California 92009
Attention: Chief Financial Officer
Telephone: (760) 931-5500
Facsimile: (760) 931-5527
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
above written.
AGENT AND LENDER:
LASALLE NATIONAL BANK
By: Michael J. Burton
-------------------------------
Its: First V.P.
------------------------------
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Michael J. Burton
Telephone: (312) 904-2677
Facsimile: (312) 904-6457
55.
<PAGE> 58
SCHEDULE 1.01
ALLOCATIONS
<TABLE>
<CAPTION>
Lender Revolving Credit Commitment Percentage
------ --------------------------- ----------
<S> <C> <C>
LaSalle National Bank $15,000,000 100%
</TABLE>
<PAGE> 59
EXHIBIT A
FORM OF
REVOLVING CREDIT NOTE
Chicago, Illinois
May __, 1998
$15,000,000.00
FOR VALUE RECEIVED, ARTECON CALIFORNIA, a California corporation (the
"Borrower"), hereby promises to pay to the order of LaSalle National Bank, a
national banking association, its successors and assigns (the "Lender"), at the
office of LaSalle National Bank, 135 South LaSalle Street, Chicago, Illinois, as
agent (the "Agent"), or pursuant to such other instructions or at such other
address as it shall designate, the principal sum of Fifteen Million United
States Dollars ($15,000,000.00) or, if less, the unpaid principal amount of all
Loans made under the Revolving Credit Facility at the time and in the amounts
provided in the Credit Agreement (as hereinafter defined), in lawful money of
the United States and in immediately available funds, and to pay interest on the
outstanding principal amount of such Loans, in like money, until paid, at the
times, at the rates per annum and in the manner specified in the Credit
Agreement. The holder of this Note is authorized to record on this Note the
amount and the date of each borrowing, each payment of principal with respect
thereto pursuant to the Credit Agreement, and such other information as it may
deem necessary, which notations shall constitute prima facie evidence of the
accuracy of the information recorded. Failure of the holder of this Note to make
any such notation or any error therein shall not limit or otherwise affect the
obligations of the Borrower hereunder and the records of the holder of this Note
shall at all times be determinative of the unpaid balance of this Note (whether
or not the holder of this Note has made such notations on this Note.)
This Note is one of the Revolving Credit Notes referred to in that
certain Credit Agreement dated as of May __, 1998 by and between the Borrower
and the lenders defined therein (as from time to time amended, modified,
restated or supplemented and in effect, the "Credit Agreement"), and is
expressly subject to the terms and provisions of the Credit Agreement. All
capitalized terms used in this Note without definition shall have the meanings
ascribed to them in the Credit Agreement.
The principal amount of this Note may be prepaid, reborrowed and repaid
by the Borrower in accordance with the terms of the Credit Agreement. The
principal amount of this Note is subject to mandatory repayment in accordance
with the Credit Agreement.
In accordance with the Loan Documents, the outstanding principal amount
hereof and all accrued interest thereon shall be due and payable to the Lender
on the Revolving Credit Termination Date without presentment, demand, protest or
notice of any kind, all of which, to
Exhibit A-1
<PAGE> 60
the extent permitted by applicable law, are hereby unconditionally and
irrevocably waived by the Borrower.
Failure or delay of the Lender to enforce any provision of this Note
shall not be deemed a waiver of any such provision, and the Lender shall not be
prevented from enforcing any such provision at a later time. Any waiver of any
provision hereof must be in writing and signed by an authorized officer of the
Lender. Any such waiver, and any consent or approval shall be effective only in
the specific instance and for the specific purpose for which it is given.
The obligations of the Borrower to the Lender hereunder and under the
Credit Agreement are secured by the liens granted to the Agent on behalf of the
Agent and the Lenders by the Borrower pursuant to the Loan Documents, and the
holder of this Note is entitled to the benefits of the Loan Documents.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW
PRINCIPLES.
BORROWER:
ARTECON CALIFORNIA
By:__________________________
Its:_________________________
Exhibit A-2
<PAGE> 61
GRID
ATTACHED TO AND MADE PART OF THE REVOLVING CREDIT NOTE
DATED MAY __, 1998
FROM ARTECON CALIFORNIA
PAYABLE TO LASALLE NATIONAL BANK
SCHEDULE OF ADVANCES
<TABLE>
<CAPTION>
Applicable Interest Amount of
Date of Loan Amount of Loan Rate Principal Paid Date of Payment Notation Made By
- ------------ -------------- ---- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
Exhibit A-3
<PAGE> 62
EXHIBIT B
This credit will be subject to the Uniform Customs and Practices for Documentary
Credits of the International Chamber of Commerce as adopted from time to time.
LASALLE NATIONAL BANK
- --------------------------------------------------------------------------------
INTERNATIONAL BANKING LASALLE BANKS
300 West Monroe Street
Chicago, Illinois 60606-5002 Date________________19__
Applicant's Phone Number _______
APPLICATION FOR STANDBY Contact Person _______
LETTER OF CREDIT Designated Party (Multi-Applicant) _______
(For Bank Use Only)
L/C No.___________________
Please issue an irrevocable Standby Letter of Credit substantially as set forth
below and forward the same to your correspondent (or advising bank, if indicated
below) for delivery to the Beneficiary or directly to the Beneficiary (as
applicable) by:
Air Mail Air Mail with short primary _______ advice ____ Courier
__________ Bank (if any) Applicant (name and address)
Beneficiary (name and address) Amount (USD unless otherwise indicated)
Expiry Date
Presentation for Payment: Drafts must
be drawn on you and presented with
accompanying documentation at your
office set forth above on or before the
expiry date, unless otherwise indicated
below.
Available by draft(s) at sight drawn on LaSalle National Bank, Chicago,
Illinois, accompanied by the following document(s):
Benficiary's signed statement reading as follows:_______________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Further Instructions (if any)___________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 63
Attachments (NOTE All attachments must also be signed.)
- --------------------------------------------------------------------------------
All draft(s) drawn must be marked as drawn under this CREDIT. The original
Letter of Credit must be presented for endorsement at the time of payment.
[ ] drawings are [_____] permitted [______] prohibited
<TABLE>
<S> <C>
Charge our account for all payments and less Your correspondents' charges. If any, are for.
under this ______________ unless otherwise
indicated. [__] Our account. [__] Beneficiary's account.
Account No.________________________________
</TABLE>
PLEASE DATE AND OFFICIALLY SIGN THE AGREEMENT ON PAGE 5 OF THIS APPLICATION.
<PAGE> 64
STANDBY LETTER OF CREDIT AGREEMENT (CORPORATE CUSTOMERS)
In consideration of LaSalle National Bank, Chicago, Illinois (the
"Issuer") issuing an irrevocable standby letter of credit substantially in
accordance with the Application appearing on the reverse side hereof or attached
hereto (the "Application") and as such letter of credit may be amended (the
"Credit"), the undersigned, jointly and severally [illegible] is more than one
of the undersigned (the "Applicant") unconditionally and irrevocably agrees as
follows:
1. ISSUER'S GENERAL OBLIGATIONS. Upon the issuance of a Credit, the
issuer's obligations to the Applicant with respect tot he Credit include good
faith and observance of general banking usage but do NOT include ability or
responsibility of any kind arising out of or in connection with (a) performance
of the underlying contract or other transactions between the Applicant and the
beneficiary or any other person (b) acts, errors, defaults or omissions of any
person other than the issuer including any use of the Credit by any such person
(c) loss or destruction of any telegram, cable, letter, instrument or document
[illegible] transit or in the possession of others (d) knowledge or lack of
knowledge of any custom or usage of any particular trade (e) transmission
delivery transaction or interpretation of any message including any
interruption, delay error or omission therein, (f) insufficiency, lack of
authorization, invalidity or lack of genuiness, truthfulness or error or fraud
in any documents presented under the Credit or in any instructions purporting to
be from the Applicant or the issuer's correspondent; (g) validity or correctness
of any transfer or proper identity of any transferee (if the Credit is issued in
transferable form), (h) waiver of any requirement which exists for the issuer's
protection and not the protection of the Applicant, or which waiver does not in
fact materially prejudice the Applicant, or (i) any other act or omission for
which banks are relieved of responsibility under the "Uniform Customs & Practice
[illegible] Documentary Credits of the international Chamber of Commerce
(hereinafter the "UCP"), in effect on the date hereof.
2. ISSUER'S OBLIGATIONS CONCERNING DOCUMENTS.
(a) The issuer's obligations relative to the Credit include the
examination of documents with reasonable care so as to ascertain that on their
face they appear to comply with the terms of Credit but NOT include inability or
responsibility of any kind arising out of or in connection with (i) validity,
sufficiency, truthfulness, genuiness or effect of documents which appear on
issuer's examination to be regular on their face, (ii) honor of drafts or
demands for payment which appear on issuer's examination to be regular on their
face, or (iii) the ultimate correctness of issuer's decision regarding
documentary compliance where such decision is based on the issuer's examination
of the documents or issuer's exercise of judgment in a manner not [illegible]
unreasonable. The issuer may in its discretion (but shall not be obligated to)
accept documents which substantially or reasonably comply with the terms of the
Credit.
(b) Unless otherwise specified in the Application, the issuer may
in its discretion accept or honor in the case of negotiable Credits as complying
with the Credit (i) drafts or documents signed by or issued to the purported
agent, executor, administrator, liquidator, receiver, trustee in bankruptcy or
other legal representative of any party designated in the Credit, (ii) drafts
which fail to bear any or adequate reference to the Credit or notation to be
made on the Credit, or the Credit to be surrendered, or documents to be
forwarded apart from the draft whether or not required by the Credit (iii)
drafts or documents which comply under the
<PAGE> 65
laws, rules, regulations and general banking or trade customs and usages of the
place of drawing or presentation, or (iv) drafts or documents which comply with
the UCP.
3. PAYMENT; COMMISSION.
(a) The Applicant shall pay the issuer in United States currency
at the office identified on the Application, the amount paid or to be paid by
the issuer or the issuer's agent or any party on issuer's behalf on each draft
or other order, instrument or demand draw, presented or purporting to be drawn
or presented under the Credit (the "term") together with all other amounts owing
to the issuer in connection therewith such payment to be made at the time of
honor of each item if so demanded by the issuer, on demand in advance of any
drawing in the case of items drawn in foreign currency, such payments shall be
at the issuer's current rate of exchange for transfers to the [illegible] of
payment in the currency in which such item is drawn (or, if for any reason the
issuer is unable to establish such a rate of exchange, in an amount equal to the
issuer's actual cost of settlement. The Applicant shall reimburse the issuer in
the same currency in which the item is payable provided that at the issuer's
action Application shall reimburse issuer in United States dollars for items
payable in a foreign currency at the rate at which issuer could see such foreign
currency in exchange for United States dollars for transfer of the place of
payment of the item or if there is no such rate, the United States dollar
equivalent of Applicant's actual cost of settlement. Applicant agrees to pay
issuer on demand in United States dollars such amounts as issuer may be required
to expend to comply with any and all governmental exchange regulations nor or
hereafter applicable to the purchase of foreign currency.
(b) The Applicant shall pay the issuer on demand, in United
States currency, at the office as identified on the Application (i) a non
refundable commission at such rate as the issuer may establish (ii) interest on
all amounts due and owing to the issuer from and including the date such amount
is paid or incurred by the issuer or otherwise due and owing hereunder until
such amount is paid in full at a fluctuating rate per annum equal to the lesser
of (x) issuer's Prime Rate plus two (2%) and (y) the maximum non-usurious rate
of interest permitted by applicable law in effect from time to time. "Prime
Rate" shall mean the rate in effect from time to time as set by the issuer and
called its Prime Rate for United States dollar loans which rate is not
necessarily the lowest or best interest rate offered by the issuer and interest
shall be calculated on the basis of a 360 day year for actual days elapsed
(unless such calculation would cause a usury violation in which event interest
shall be calculated on the basis of a year of 365 or 366 days) (iii) all charges
and expenses including attorney's fees, legal expenses, court costs or similar
costs or liabilities from time to time paid or incurred by the issuer in
connection with the issuance or maintenance of the Credit, the performance under
the Credit and this Agreement and all transactions (including, without
limitation the involvement of the issuer in any court proceeding regarding the
Credit related to or contemplated by this Agreement including without
limitation, the creation, perfection maintenance protection, exercise
enforcement or other realization upon the issuer's interests rights and
remedies) and (iv) all charges and fees payable under any fee schedule of the
issuer in effect from time to time or as otherwise agrees.
(c) All amounts payable by the Applicant hereunder shall be paid
at the office of the issuer, identified on the Application in immoderation
available and freely transferable funds at such pace or payment. The issuer is
authorized to set off or charge to any account or
<PAGE> 66
other funds of the Applicant in issuer's possession all obligations of the
Applicant owing hereunder irrespective of the currency in which such account or
funds are denominated.
(d) If as a result of any law regulation, treaty or directive or
any change therein or in the interpretation or application thereof or issuer's
compliance with any request or directive (whether or not having the force of
law) from any court or governmental authority agency instrumentality any
reserve, capital requirement, premium, special deposit, special assessment or
similar requirement against the issuer for such additional cost Determinations
by the issuer of the additional amounts required to compensate the issuer in
respect of the foregoing shall be [illegible], absent manifest error. The
Applicant further agrees to pay any applicable laws or other taxes imposed in
connection with the Credit other than net income taxes payable by the issuer and
to otherwise comply with all domestic and foreign laws and regulations
applicable to all transactions under or in connection with the Credit.
(e) The issuer may (but shall not be obligated to) make a loan to
the Applicant in an amount equal to the reimbursement obligation of the
Applicant under Section 3(a) hereof and the issuer shall be hereby authorized to
apply the proceeds of such loan to the repayment of such reimbursement
obligation. Each such loan shall except to the extent otherwise agreed to in
writing between the Applicant and the issuer be due on demand and shall bear
interest payable on demand at the rate per annum set fort in Section 3.b.(ii)
hereof.
4. GRANT OF SECURITY INTEREST. The Applicant hereby grants to the issuer
as security for all of its obligations to the issuer, whether absolute or
contingent due or to become due now or hereafter arising from this or any other
agreement the issuer may have with the Applicant, a security interest in and
pledges to the issuer all property of the Applicant of any nature, including all
goods, equipment, inventory, accounts, instruments, charter paper documents and
general [illegible] nor or hereafter in the actual or constructive possession of
the issuer or its correspondents or in transit to the issuer or its
correspondents from or for the Applicant in any manner whatsoever whether
expressly as security or otherwise and all proceeds and products of the
foregoing (the "Collateral"). The issuer shall have all of the rights of a
secured party under the Uniform Commercial Code (as in effect from time to time
in any applicable jurisdictions in the Collateral and in addition as of the
rights specified in this Agreement including the right to set off or apply any
of the collateral to any of the Applicants obligations to the issuer at any time
without notice, in any other manner and amount the issuer may determine. The
Applicant shall execute any financing statements trust receipts or other
documents the issuer requests in order to perfect, maintain, protect, enforce or
realize on the security interest in the Collateral and the Applicant shall pay
all filing recording and other fees in connection otherwise. The Applicant
authorizes issuer to pay this Agreement or any statement instrument, document or
amendment without the Applicants signature in all public offices as the issuer
in its sole discretion may deem necessary to create preserve, perfect or
validate any men or security interest or to enable the issuer to exercise or
enforce its rights with respect to such [illegible] or security interest and
agrees to [illegible] the cost of filing or recording the same and all other
costs and expenses in connection with the custody, care, preservation,
protection or connection of the Collateral upon request the Applicant shall
deposit with the issuer such additional security the Applicants obligations as
the issuer may be in good faith deem necessary or advisable for its protection.
<PAGE> 67
5. OBLIGATION OF APPLICANT; ASSUMPTION OF RISK BY APPLICANT;
INDEMNIFICATION OF ISSUER BY APPLICANT; SUBROGATION
(a) The Applicant's obligations to the issuer hereunder are, and
shall remain, absolute and unconditional notwithstanding any lack of
enforceability of the Credit or the existence of any claim counterclaim defense
or right to set off the Applicant may have against the issuer.
(b) The beneficiary or any other user of the Credit and any other
drawer of any draft or the presenter of any demand for payment thereunder shall
be deemed Applicant's agents and the Applicant assumes all risk, loss,
liability, charges and expenses with respect to their acts or omissions and also
with respect to any error, delay, misdelivery or loss in or arising out of the
transmission of telegrams, cables, letters or other communications, documents or
items forwarded in connection with the drafts or the Credit. The Applicant shall
not be relieved from any obligation or liability, nor shall the terms of this
Agreement be affected by the occurrence of the foregoing. Any action or inaction
by the issuer or its correspondents in connection with the Credit or with
instructions, drafts or documents relative to the Credit shall, if in good
faith, conclusively be deemed to have been authorized by the Applicant, and the
issuer shall have no liability therefor.
(c) The Applicant shall indemnify the issuer and its
correspondents and shall defend and hold the issuer and its correspondents
harmless from and against any and all claims, damages, loss, costs, expenses
(including any attorney's fees) and liabilities of any nature whatsoever,
sustained or incurred or asserted in connection with the Credit, the payment or
acceptance or refusal to pay or accent any draft or other demand for payment and
any other action or inaction in reliance upon the provisions of this Agreement
except, only if and to the extent shall any such claims, damages, loss, expenses
or liabilities, shall have been determined by a court of competent jurisdiction
to have been directly caused by the willful misconduct or gross negligence of
the issuer in performing its obligations under the Credit or by the issuer's
failure to make payment of any drawing or other demand for payment made in
strict conformity with the Credit, it is understood that in making payment under
the Credit the issuer's exclusive reliance on the documents presented to the
issuer in accordance with the terms of the Credit as to any and all matters set
forth therein, whether or not any statement or any document presented pursuant
to the Credit proves to be forged, fraudulent, invalid or insufficient in any
respect whatsoever, shall not be deemed willful misconduct or gross negligence
of the issuer.
(d) The issuer shall be subrogated (for purposes of defending
against the Applicants claims and processing against others to the extent of the
issuer's liability to the Applicant) to the Applicant's rights against any
person who may be liable to the Applicant on any underlying transaction, to the
rights of any holder in due course or person with similar status against the
Applicant and the rights of the beneficiary or its assignee or person with
similar status against the Applicant.
(e) The Applicant certifies that transactions in any commodities
covered by the Application are not prohibited under the foreign assets control
regulations of the United States Treasury Department and that any importation
covered by the Application conforms in every respect with as United States
regulations then in effect.
<PAGE> 68
6. DEFAULT; REMEDIES
(a) The Applicant shall be in default under this Agreement upon
the occurrence of any of the following (i) any failure by the Applicant to pay
or perform when and as due hereunder any of its [illegible] or liabilities under
this Agreement or any other agreement with the issuer or instrument delivered to
the issuer, including without limitation the Application's [illegible] to pay
[illegible] as sums due to the issuer (ii) any failure to furnish upon the
issuer's demand, additional security satisfactory to the issuer, (iii) any
failure to the furnish upon demand any financial information the issuer may
request or to permit an inspection of Applicant's books, records and accounts at
any reasonable time, (iv) any act or event evidencing or reasonably appearing to
evidence the bankruptcy reorganization, rehabilitation arrangement liquidation,
insolvency or financial instability of any party, hereto signing as an Applicant
or any guarantor thereof, (v) any material misrepresentation made in connection
with the Credit; (vi) any default by Applicant under any agreement involving the
borrowing of money or the containing of credit (vi) the death of a guardian
conservator or similar representative of any party signing as an Applicant or of
any guarantor thereof or (viii) any other act, event or occurrence which in the
issuer's sole judgment impairs the issuers security or increases its risk.
(b) Upon default all obligations and liabilities of the Applicant
to the issuer of whatever nature whether contingent or absolute shall become
immediately due and payable without [illegible] notice or demand and without
notice or intention to accelerate or notice of acceleration, all of which are
hereby waived and, without [illegible] the foregoing and any other rights of the
issuer hereunder the Applicant shall immediately pay to the issuer an amount
equal to the available undrawn amount of the Credit. The issuer shall have all
the rights and remedies of a secured party under the uniform Commercial Code,
and in addition to such rights and remedies, the Applicant further agrees that
any default under this Agreement shall also be a default under all other
agreements with the issuer.
(c) All amounts due and payable shall accrue from and including
the date such amount is paid or incurred by the issuer until payment if full, at
the rate per annum set forth in Section 3(b)(ii) hereof.
7. WAIVER BY ISSUER; ACTS NOT AFFECTING AGREEMENT. The issuer shall have
no duty to exercise any of its rights hereunder, and shall not be liable for any
failure or delay in doing so no failure or delay on the party of the issuer or
its correspondents shall operate as a waiver, and no notice to or demand by the
issuer or its correspondents shall be deemed a waiver of the issuer's right to
take any other or further action without notice or demand issuer's rights,
including as security interests in [illegible]; and Applicants [illegible] and
liabilities under this Agreement shall continue unimpaired and this Agreement
shall remain binding upon each party hereto signing as an Applicant
notwithstanding (a) release or substitution of any [illegible] or any right or
interest therein (b) extension of the maturity or time for presentation of
drafts, acceptances or documents (c) any other modification of the terms of the
Credit at the request or any party hereto signing as an Applicant, with or
without notification to any other party, or (d) any increase in the amount of
the Credit at the request of any party hereto. No delay extension of time,
renewal, compromise or other indulgence which the issuer may permit in
connection with any of its rights hereunder shall impair those rights and the
issuer shall not be deemed to have waived any rights unless such waiver is in
writing and signed by the issuer of its authorizing
<PAGE> 69
agent nor shall any such waiver constitute a waiver of any other rights of the
same right at any future time.
8. SOLE OBLIGATION OF ISSUER. Without [illegible] any other provision
herein [illegible] issuer is hereby expressly authorized and directed to honor
any request for payment which is made under and in compliance with the terms of
the Credit without regard [illegible] and without any duly on the part of the
issuer to inquire into the existence of any disputes or controversies between
any of the Applicant the beneficiary of the Credit or any other person firm or
corporation, or the respective rights, duties or liabilities of any of them or
whether any facts represented in any of the documents presented under the Credit
are true or correct. Furthermore, the Applicant agrees that the issuer's
obligation to the Applicant shall be limited to honoring requests for payment
made under and in compliance with the terms of the Credit and this Agreement and
the issuer's obligation remains so limited even if the issuer may have assisted
in the preparation of the wording of the Credit or any documents required to be
presented thereunder or the issuer may otherwise be aware of the underlying
transaction giving rise to the Credit and this Agreement.
9. DURATION OF AGREEMENT; BINDING UPON SUCCESSORS; INDEMNITY. This
Agreement shall remain in full force and effect until the issuer has actually
received written notice to the company from the Applicant and after receipt of
such written notice shall continue in full force and effect as to all
transactions between the Applicant and the issuer commenced prior to the date of
such receipt. All indemnities, covenants, agreements, representations and
warranties made in this Agreement shall survive the issuance by the issuer of
the Credit and shall continue in full force and effect so long as the Credit or
any portion thereof shall be unexpired or any sums drawn thereunder or other
amounts owing thereunder shall remain unpaid provided however that the
provisions of Section 2(b)(iii), 3(d), 5(c), 9, 11, 12(b), 12(c) and 12(k) shall
survive the termination of this Agreement. This Agreement shall not be revoked
or impaired by the death of any party hereto, by the revocation or release of
[illegible] obligations hereunder of any one or more parties hereto (or if any
party hereto shall be a partnership by any changes in the parties composing the
partnership. If this agreement is terminated or revoked as to any party for any
reason the Applicant shall indemnify and hold the issuer harmless from any loss
incurred in acting hereunder prior to the actual [illegible] of written notice
of such termination or revocation. The invalidity or lack of enforceability of
any provision hereof shall not affect the validity or enforcement, or any other
provision hereof if this Agreement is signed by two or more parties it shall
constitute the joint and several agreement of such parties, provided that the
Designated Party as defined below shall have the exclusive right to issue all
instructions relating to the Credit including without limitation instructions as
to the disposition of documents and any [illegible] waivers of discrepancies and
to agree with the issuer upon any amendments, modifications, extensions,
renewals or increases in the Credit or the further financing or refinancing of
any transaction effected hereunder irrespective of whether the same may now or
hereafter affect the rights of any party hereto or their legal representatives,
heirs or assigns the Designated Party shall have specimen signatures on file
with the issuer and the issuer may give any notices to the Designated Party
without notice to any other party.
10. LAW GOVERNING. The credit and this Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois applicable to
contracts made and to be wholly performed within such State. Unless inconsistent
with such state law or except so far
<PAGE> 70
as expressly stated in the Credit, the Credit and this Agreement are subject to
the terms of the UCP in effect on the date of the Application, provided,
however, that, without limiting the foregoing, Articles 45 and 47 of UCP 400 and
Articles 41 and 43 of UCP 500 shall have no application to the Credit or this
Agreement in the absence of proof expressly to the contrary, the UCP shall serve
as evidence of general banking usage.
11. GROSS-UP PROVISION. Any and all payments made to issuer hereunder
shall be made free and clear of, and without deduction or withholding for any
present or future taxes, levies, imposts, deductions, charges or withholdings of
any nature, and all liabilities with respect thereto, excluding taxed imposed on
net income of the issuer and all income and franchise taxes of the United States
and any political subdivision thereof imposed on the issuer (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities are referred to herein as taxes) if the Applicant shall be required
by law to deduct any Taxes from or in respect to any sum payable hereunder (I)
the sum payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 11, the issuer shall receive an amount equal to the sum the
issuer would have received and no deductions been made): (a) the Applicant shall
make as such deductions and (b) the Applicant shall pay the full amount deducted
to the relevant taxation authority or other authority in compliance with
applicable law. The Applicant shall indemnify the issuer for the full amount of
Taxes (including without limitation and Taxes imposed by any jurisdiction on
amounts payable hereunder) paid by the issuer and any party (including
penalties, interest and expenses) arising therefrom or with respect thereto
whether or not such Taxes were correctly or legally asserted. Payment upon this
indemnification shall be made within thirty (30) days from the date the issuer
makes written demand therefor. Within thirty (30) days after date of the payment
of Taxes the Applicant shall furnish to the issuer the original or certified
copy of a receipt evidencing payment thereof.
12. OTHER TERMS.
(a) If the Credit shall contain any provision for automatic
renewal the Applicant acknowledges and agrees that the issuer is under no
obligation to allow such renewal to occur and any such renewal shall remain
within the sole and absolute discretion of the issuer. The Applicant hereby
irrevocably consents to the automatic renewal of such Credit in accordance with
its terms should the issuer decide to allow such renewal to occur, provided,
however, that the Applicant shall have the right to request the issuer to
disallow such renewal on the condition that the Applicant shall give the issuer
prior written notice of such request not less than thirty (30) days prior to the
deadline imposed upon the issuer for notification to the beneficiary of
non-renewal of the Credit.
(b) The Applicant shall indemnify the issuer against any loss
incurred by the issuer as a result of any judgment or order being given or made
for the payment of any amount due hereunder in a particular currency (the
Currency of Account) and such judgment or order being expressed in a currency
(the Judgment Currency) other than the Currency of Account and as a result of
any variation having occurred in the rates of exchange between the date when
such amount is converted into the Judgment Currency and the date of actual
payment pursuant thereto. The foregoing indemnify shall constitute a separate
and independent obligation to the Applicant.
<PAGE> 71
(c) Each party signing as Applicant and any guarantor thereof
agree that if any amount paid to the issuer hereunder is rescinded or must be
otherwise restored or returned by the issuer due to the insolvency, bankruptcy,
liquidation or reorganization of any party hereto each party's obligations
hereunder with respect to each such amount shall be reinstated to the same
extent as if such payment had not been made.
(d) The Applicant authorizes the issuer to set forth the terms of
the Application in the Credit in such language as the issuer deems appropriate
with such variations from such terms as the issuer may in its discretion
determine to be necessary (which determination shall be conclusive) and not
materially inconsistent with the Application if Applicant or in the case of more
than one Applicant the Designated Party does not notify the issuer within ten
(10) calendar days of its issuance. Applicant agrees that such Credit is
conclusively presumed to be in proper form. Upon receipt of timely notice of any
discrepancy in the Credit the issuer will endeavor to obtain the consent of the
confirming party if any, and the beneficiary for an appropriate modification to
the Credit, provided, however, that the issuer shall assume no liability or
responsibility for its failure to obtain such consent.
(e) No Party to this Agreement may assign its rights or
obligations under this Agreement without the prior written consent of the issuer
provided that the obligations of the issuer under this Agreement may be provided
or fulfilled by any affiliate of the issuer so long as the issuer assumes full
responsibility for such obligations.
(f) This Agreement and any exhibits hereto constitute the entire
agreement among the parties and supersede any and all prior agreements,
proposals, negotiations and representations pertaining to the obligations and
duties to be performed under this Agreement. No amendments or modifications of
this Agreement shall be valid unless in writing and signed by or on behalf of
Applicant and Issuer.
(g) Except as otherwise provided in this Agreement, all notices
required to be given pursuant to this Agreement, all notices required to be
given pursuant to this Agreement shall be effective when received and shall be
sufficient if given in writing hand delivered or sent by First Class United
States Mail postage prepaid air courier or telecopier and addressed to the
appropriate party at its address as shown on the signature page hereof or at
such other address as the sending party shall have been advised in writing.
(h) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall as to such jurisdiction be ineffective
to the extent of such prohibition or lack of enforceability without invalidating
the remaining provisions hereof or affecting the validity or enforceability of
such provision in any other jurisdiction. Wherever possible each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law.
(i) This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts each of which when so
executed and delivered shall be deemed to be an original and all of when taken
together shall constitute one and the same instrument.
<PAGE> 72
(j) Regardless of the expiry date of the Credit, the Applicant
shall remain liable hereunder until the issuer is released from liability by
every person, firm, corporation or other entity which is entitled to draw or
demand payment under the Credit.
(k) Applicant agrees to indemnify and hold Issuer harmless from
each and every claim, demand, liability, loss, cost or expense, including, but
not limited to, attorneys fees and court costs which may arise or be created by
Issuer's acceptance of telecommunication instructions in connection with the
[illegible] including , but not limited to, telephone or facsimile instructions
in connection with any waiver or discrepancies.
(l) Applicant, or in the case of more than one person signing as
Applicant, the Designated Party agrees to examine promptly all instruments and
documents [illegible] to the Applicant or Designated Party as the case may be
from time to time and in the event the Applicant or Designated Party shall have
any claim of non-compliance with [illegible] instructions or of discrepancies or
other irregularity the Applicant or the Designated Party, as the case may be,
shall immediately notify the Issuer thereof in writing. The Applicant and the
Designated Party shall conclusively be deemed to have waived any such claim
against the Issuer unless such immediate notice is given as stated above.
(m) For multiple partners signing as Applicant, such parties may
request that the Credit be issued with the name of one of the Applicants and
agrees that such party shall be the Designated Party for the purposes of this
Agreement.
(n) The parties hereto each hereby submit to the jurisdiction of
the courts of the State of Illinois the venue of which shall be in the county of
Cook and the United States District Court for the Northern District of Illinois
as well as to the jurisdiction of all courts to which an appeal may be taken or
other review sought from the aforesaid courts for the purpose of any suit,
action or other proceeding arising out of Applicant's obligation under or with
respect to this Agreement and the Credit and expressly waive any and all
objections they may have as to venue in any such courts ISSUER AND APPLICANT
EACH WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER OF THEM AGAINST THE OTHER ON ANY MATTER WHATSOEVER (INCLUDING WITHOUT
LIMITATION, ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY
CONNECTED HEREIN OR THEREIN). No party to this Agreement, including but not
limited to any assignee or successor or a party that seek a jury that in any
lawsuit, proceeding, counterclaim or any other litigation procedure based upon,
or arising out of this Agreement, the Credit, any related instruments, any
Collateral or the dealings or the relationship between the parties. No party
will seek to consolidate any such action, in which a jury trial has been waived
with any other action in which a jury trial cannot be or has not been waived.
THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO
WITH LEGAL COUNSEL AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO
PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 73
________________________________________________________________________________
________________________________________________________________________________
IN WITNESS WHEREOF the parties have caused this Agreement to be executed
by their duly authorized officers as of this _____ day of _____________ 199___.
______________________________ ___________________________________
(Applicant) (Applicant)
By:___________________________ By:________________________________
Name__________________________ Name_______________________________
Title_________________________ Title______________________________
Address:______________________ Address:__________________________
______________________________ ___________________________________
______________________________ ___________________________________
<PAGE> 74
FOR BANK USE ONLY
LC#__________________ Amount $_______________ Date _______________________
Borrower________________ Branch # _______________ Bank # _________________
New Commercial Borrower [ ] Yes [ ] No Participation Sold [ ] Yes [ ] No
Customer Account # _________________ Name of Bank__________________________
New L/C Customer [ ] Yes [ ] No Amount of % Sold___________________
Collateral Code ________ _________ DDA Account #______________________
LOAN COMMITTEE APPROVAL/REVIEW DATE: _________________ (when required)
APPROVED BY: _________________ Account Officer
_________________ Division Head
_________________ Group Head
_________________ Control Administrator
Commission Fee:
__________% per annum on a 360-day basis
for actual days. Bill/debit
customers account (please
specify).
<PAGE> 75
EXHIBIT C
ASSIGNMENT AND ACCEPTANCE AGREEMENT
THIS ASSIGNMENT AND ACCEPTANCE (as from time to time amended, modified,
restated, supplemented and in effect, this "Assignment and Acceptance") is
entered into as of ___________, ____ by and between [insert Assignor Lender]
(the "Assignor") and [insert Assignee Lender] (the "Assignee"). Reference is
made to the Credit Agreement dated as of April __, 1998 (the "Agreement"), among
ARTECON CALIFORNIA, a California corporation (the "Borrower"), the financial
institutions party to the Credit Agreement (the "Lenders") and LASALLE NATIONAL
BANK, a national banking association, its successors and assigns, as agent for
the Lenders (in such capacity, the "Agent"). Capitalized terms used herein and
not otherwise defined shall have the meanings assigned to them in the Agreement.
The Assignor and Assignee agree as follows:
13. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, a ___% interest in and
to all the Assignor's rights and obligations under the Agreement as of the
Effective Date (as defined below) (including, without limitation, such
percentage interest in the Revolving Credit Commitment of the Assignor on the
Effective Date, such percentage interest in the Loans owing to the Assignor
outstanding on the Effective Date, together with such percentage interest in all
unpaid interest and fees and other amounts due with respect to such Loans
accrued to the Effective Date). Such purchase and sale is made without recourse.
14. The Assignor (i) represents that as of the date hereof, (A) its
Revolving Credit Commitment (without giving effect to assignments thereof which
have not yet become effective) is $________ and (B) the outstanding balance of
its Loans under the Revolving Credit Facility (unreduced by any assignments
thereof which have not yet become effective) is $___________; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statement, warranties or representations made in or in connection with the
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Agreement, the Notes, any Loan Documents or any
other instrument or document furnished pursuant thereto, other than that it is
the legal and beneficial owner of the interest being assigned by it hereunder
and that such interest is free and clear of any adverse claim; and (iii) makes
no representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or any other Person or the performance or
observance by the Borrower of its obligations under the Agreement or the Loan
Documents or any other instrument or document furnished pursuant thereto.
15. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Agreement, together with copies of the most recent
financial statements delivered pursuant to Section 5.05 thereof and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (iii)
agrees that it will, independently and without reliance upon the Agent, the
Assignor or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its
<PAGE> 76
own credit analysis and decision to enter into this Assignment and Acceptance;
(iii) agrees that it will, independently and without reliance upon the Agent,
the Assignor or any other Lender and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under the Agreement; (iv) appoints and authorizes
the Agent to take such action as agent on its behalf and to exercise such powers
under the Agreement as are delegated to the Agent by the terms thereof, together
with such powers as are reasonably incidental thereto; (vi) agrees that it will
perform in accordance with their terms all obligations which by the terms of the
Agreement are required to be performed by it as a Lender; (vii) represents that
on the date of this Assignment and Acceptance it is not presently aware of any
facts that would cause it to make a claim under the Agreement; and (viii) if
organized under the laws of a jurisdiction outside the United States, attaches
the forms prescribed by the Internal Revenue Service of the United States, which
have been duly executed, certifying as to the Assignee's exemption from United
States withholding taxes with respect to all payments to be made to the Assignee
under the Agreement or such other documents as are necessary to indicate that
all such payments are subject to such tax at a rate reduced by an applicable tax
treaty.
16. The effective date for this Assignment and Acceptance shall be
___________, ____ (the "Effective Date"), which date, in accordance with Section
9.04 of the Agreement, is at least five Business Days after the execution of
this Assignment and Acceptance. Following the execution of this Agreement and
Acceptance, it will be delivered to the Agent for acceptance and recording by
the Agent pursuant to Section 9.04 of the Agreement.
17. Upon such acceptance and recording, from and after the Effective
Date, (i) the Assignee shall be a party to the Agreement and, to the extent
provided in this Assignment and Acceptance, have the rights and obligations of a
Bank thereunder and (ii) the Assignor shall, to the extent provided in this
Assignment and Acceptance, relinquish its rights and be released from its
obligations under the Agreement.
18. Upon such acceptance and recording, from and after the Effective
Date, the Agent shall make all payments in respect of the interest assigned
hereby (including payments of principal, interest, fees and other amounts) to
the Assignee. The Assignor and Assignee shall make all appropriate adjustments
in payments for periods prior to the Effective Date by the Agent or with respect
to the making of this assignment directly between themselves.
19. This Assignment and Acceptance shall be governed by, and construed
in accordance with, the law of the State of Illinois applicable to agreements
made an to be performed in Illinois.
[NAME OF ASSIGNOR],
By: _______________________________________
Title:_____________________________________
<PAGE> 77
[NAME OF ASSIGNOR],
By: _______________________________________
Title:_____________________________________
Accepted this __ day of ______________, ____
LASALLE NATIONAL BANK,
as Agent
By: _______________________________________
Title:_____________________________________
<PAGE> 78
EXHIBIT D
BORROWING BASE CERTIFICATE
AS OF ___________________
LaSalle National Bank, as Agent
and Lenders
135 South LaSalle Street
Chicago, IL 60603
Attention: Michael J. Burton
<TABLE>
<S> <C>
REVOLVING CREDIT FACILITY
Accounts $________________
Less: Uninsured or unsupported foreign
over 90 days
government
25% or more ineligible
Credits in Prior
Other Ineligibles
Net Eligible Accounts
(1) X 85% Advance Rate
Inventory $________________
Less: Work-in-process
Off Premises without LL waiver
Obsolete
Other Ineligibles
Net Eligible Inventory
(2) Lesser of (a) Net Eligible Inventory X 30%
Advance Rate and (b) $5,000,000
Revolving Credit Borrowing Base (sum of (1) and (2))
Less: Outstanding Loans
Letters of Credit Outstandings
Reserves
Net Availability $________________
</TABLE>
[signature page follows]
<PAGE> 79
The undersigned Financial Officer hereby certifies that the above
information is true and correct as of the date set forth above.
ARTECON CALIFORNIA
By:_________________________________________
Financial Officer
<PAGE> 80
EXHIBIT E
COMPLIANCE CERTIFICATE
Date:____________
LaSalle National Bank, as Agent
and Lenders
135 South LaSalle Street
Chicago, IL 60603
Attention: Michael J. Burton
Pursuant to Section 5.05(e) of the Credit Agreement by and among LaSalle
National Bank, as Agent, certain Lenders and Artecon California, dated as of
April __, 1998 (the same, as it may be amended, restated, supplemented or
otherwise modified and in effect from time to time, the "Credit Agreement"), the
undersigned does hereby certify to you as of this date as follows (all
capitalized terms shall have the meaning set forth in the Credit Agreement):
(a) After giving effect to any Loan or issuance of any Letter of
Credit on or about the above date under the Revolving Credit
Facility, the Revolving Credit Utilizations do not exceed the
Revolving Credit Availability;
(b) The representations and warranties set forth in Article III of
the Credit Agreement are true and correct in all material
respects;
(c) The Borrower is in compliance in all material respects with all
the terms and provisions contained in the Credit Agreement and
in the other Loan Documents, and no Default or Event of Default
has occurred or is continuing; and
(d) The financial covenants calculated on Schedule 1 hereto are
correct and complete as of the dates indicated therein.
IN WITNESS WHEREOF, the undersigned has caused this certificate to be
duly executed and delivered as of the date set forth above.
ARTECON CALIFORNIA
By:_________________________________________
Financial Officer
<PAGE> 81
SCHEDULE 1
FINANCIAL COVENANT COMPLIANCE
Date: ________
<TABLE>
<S> <C>
A. Consolidated Net Income (for applicable period)
Amount: $
Requirement: $
Compliance: yes/no
B. Consolidated Tangible Net Worth
Consolidated Stockholder's Equity: $
less intangibles: ($ )
Amount: $
Requirement: $
Compliance: yes/no
</TABLE>
<PAGE> 82
PROMISSORY NOTE
$1,250,000 August 21, 1997
San Diego, California
For value received, the undersigned (collectively "Payor") promises to
pay to FALCON SYSTEMS, INC. ("FALCON"), a California corporation, or order
("Holder"), in lawful money of the United States of America and in immediately
available funds, the principal sum of one million two hundred fifty thousand
dollars ($1,250,000) (the "Principal Amount") together with interest thereon at
the times and in the manner set forth below.
This note (the "Note") is executed and delivered as part of the Purchase
Price pursuant to that certain Asset Purchase Agreement of even date herewith
among Payor, Holder and the sole shareholder of Holder (the "Purchase
Agreement"). Notwithstanding any other provision of this Note, this Note shall
be subject in all respects to the provisions of that certain Indemnity Agreement
of even date herewith among Payor, Founding Partners, a California general
partnership (the "Partnership"), each Partner of the Partnership, Falcon and
Craig Caudill (the "Indemnity Agreement"), including but not limited to Section
1(d), 1(e) and 2 of the Indemnity Agreement.
1. REPAYMENT OF PRINCIPAL AND INTEREST. Subject to the terms of this
Note, the outstanding Principal Amount shall be repaid, together with accrued
interest thereon as provided below, in equal monthly combined principal and
interest payment of twenty-six thousand five hundred fifty eight dollars and
eighty-one cents $26,558.81, with the first payment due on the date that is one
(1) month from the date hereof and subsequent payments due each monthly
anniversary thereafter for a period of five years following the date hereof.
2. INTEREST RATE. Subject to the terms of this Note, Payor promises to
pay interest on the outstanding principal amount hereof from the date hereof
until payment in full in accordance with paragraph 1, which interest shall be
payable at the rate of ten percent (10%) per annum or the maximum rate
permissible by law (which under the laws of California shall be deemed to be the
laws relating to permissible rates of interest on commercial loans), whichever
is less.
3. DEFAULT RATE. If the undersigned fails to pay any of the principal or
accrued interest when due, then all unpaid amounts, including all accrued but
unpaid interest, shall bear interest at 18% per annum, or the maximum rate
permissible by law in the event of a default of a promissory note of this type
and nature, whichever is less.
1.
<PAGE> 83
4. PLACE OF PAYMENT. Payments on this Note shall be payable at Holder's
office located at 485 Crocker Road, Sacramento, California 95864, unless another
place of payment shall be specified in writing by Holder.
5. SECURITY. This note is subject to the security and subordination
provisions of that certain Security Agreement by and between Artecon, Inc., a
California corporation, and Holder of even date herewith (the "Security
Agreement"), as well as the security provisions of that certain Subordination
Agreement by and among Payor and Holder of as of the date hereof.
6. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first
to accrued interest, and thereafter to the outstanding principal balance
thereof.
7. PREPAYMENTS. This Note may be prepaid in whole or in part at any time
without premium or penalty.
8. MISCELLANEOUS.
(a) This Note will be considered in default if, after fifteen
(15) days following written notice to Payor of Payor's failure to make any
payment of principal or accrued interest hereunder, such failure remains uncured
(provided that such notice shall not be required more than three times in any
calendar year). In such event, at Holder's option, all outstanding principal and
accrued interest and any other amounts payable under this Note will become due
and payable.
(b) Except as otherwise provided in this Note, Payor, all
endorsers, guarantors and sureties of this Note, and each of them, and their
successors and assigns, hereby waive demand, presentment for payment, notice of
non-payment, protest and notice of protest, and notice of dishonor, and
expressly agree that without notice, this Note or any payment due date hereunder
may be extended from time to time, and consent to acceptance of additional or
substitute parties or both, or the release of any party liable with respect to
this Note, all without affecting in any way their liability.
(c) If Payor fails to make any interest or installment payment
when due, Payor promises to pay all costs and expenses of collection and
reasonable attorneys' fees incurred by Holder to enforce the terms of this Note
and/or the Security Agreement including, without limitation, those expenses and
fees which may be incurred in connection with the appointment of a receiver and
all appearances in bankruptcy or insolvency proceedings. In any action brought
under or arising out of this Note, Payor hereby consents to the jurisdiction of
any competent court within the State of California and to service of process by
any means authorized by California law.
2.
<PAGE> 84
(d) Holder shall, at all times, have the right to proceed against
any portion of the security for this Note in such order and in such manner as
Holder may consider appropriate without waiving any rights with respect to any
such security. Any delay or omission on the part of Holder in exercising any
right hereunder shall not operate as a waiver of such right, or any other right
under this Note.
(e) This Note may not be terminated or amended orally, but only
by a termination or amendment in writing signed by Holder.
(f) Governing Law. This Note shall be governed by, and construed
and entered in accordance with, the laws of the State of California, as applied
to contracts entered into by California residents within the State of
California, which contracts are to be performed entirely within the State of
California.
(g) The provisions of this Note shall inure to the benefit of and
be binding on any successor to Payor and shall extend to any holder hereof.
ARTECON, INC.
By: /s/ James L. Lambert
-------------------------------
James L. Lambert, President
3.
<PAGE> 85
REVOLVING CREDIT NOTE
Chicago, Illinois
May 15, 1998
$15,000,000.00
FOR VALUE RECEIVED, ARTECON CALIFORNIA, a California corporation (the
"Borrower"), hereby promises to pay to the order of LaSalle National Bank, a
national banking association, its successors and assigns (the "Lender"), at the
office of LaSalle National Bank, 135 South LaSalle Street, Chicago, Illinois, as
agent (the "Agent"), or pursuant to such other instructions or at such other
address as it shall designate, the principal sum of Fifteen Million United
States Dollars ($15,000,000.00) or, if less, the unpaid principal amount of all
Loans made under the Revolving Credit Facility at the time and in the amounts
provided in the Credit Agreement (as hereinafter defined), in lawful money of
the United States and in immediately available funds, and to pay interest on the
outstanding principal amount of such Loans, in like money, until paid, at the
times, at the rates per annum and in the manner specified in the Credit
Agreement. The holder of this Note is authorized to record on this Note the
amount and the date of each borrowing, each payment of principal with respect
thereto pursuant to the Credit Agreement, and such other information as it may
deem necessary, which notations shall constitute prima facie evidence of the
accuracy of the information recorded. Failure of the holder of this Note to make
any such notation or any error therein shall not limit or otherwise affect the
obligations of the Borrower hereunder and the records of the holder of this Note
shall at all times be determinative of the unpaid balance of this Note (whether
or not the holder of this Note has made such notations on this Note.)
This Note is one of the Revolving Credit Notes referred to in that
certain Credit Agreement dated as of May 15, 1998 by and between the Borrower
and the lenders defined therein (as from time to time amended, modified,
restated or supplemented and in effect, the "Credit Agreement"), and is
expressly subject to the terms and provisions of the Credit Agreement. All
capitalized terms used in this Note without definition shall have the meanings
ascribed to them in the Credit Agreement.
The principal amount of this Note may be prepaid, reborrowed and repaid
by the Borrower in accordance with the terms of the Credit Agreement. The
principal amount of this Note is subject to mandatory repayment in accordance
with the Credit Agreement.
In accordance with the Loan Documents, the outstanding principal amount
hereof and all accrued interest thereon shall be due and payable to the Lender
on the Revolving Credit Termination Date without presentment, demand, protest or
notice of any kind, all of which, to the extent permitted by applicable law, are
hereby unconditionally and irrevocably waived by the Borrower.
Failure or delay of the Lender to enforce any provision of this Note
shall not be deemed a waiver of any such provision, and the Lender shall not be
prevented from enforcing any such provision at a later time. Any waiver of any
provision hereof must be in writing and signed by
1.
<PAGE> 86
an authorized officer of the Lender. Any such waiver, and any consent or
approval shall be effective only in the specific instance and for the specific
purpose for which it is given.
The obligations of the Borrower to the Lender hereunder and under the
Credit Agreement are secured by the liens granted to the Agent on behalf of the
Agent and the Lenders by the Borrower pursuant to the Loan Documents, and the
holder of this Note is entitled to the benefits of the Loan Documents.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW
PRINCIPLES.
BORROWER:
ARTECON CALIFORNIA
By: /s/ James L. Lambert
-------------------------------
Its: President
------------------------------
2.
<PAGE> 87
GRID
Attached to and made part of the Revolving Credit Note
dated May 15, 1998
from ARTECON CALIFORNIA
payable to LASALLE NATIONAL BANK
SCHEDULE OF ADVANCES
<TABLE>
<CAPTION>
Applicable Interest Amount of
Date of Loan Amount of Loan Rate Principal Paid Date of Payment Notation Made By
- ------------ -------------- ---- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
</TABLE>
1.
<PAGE> 88
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered into as of May 15, 1998 (as from time
to time amended, modified, restated, supplemented and in effect, this "Security
Agreement"), by and between ARTECON CALIFORNIA, a California corporation
("Borrower"), and LASALLE NATIONAL BANK, a national banking association, its
successors and assigns as agent (the "Agent") for certain Lenders pursuant to
the Credit Agreement (as hereafter defined).
RECITALS
A. Pursuant to and upon the terms and conditions set forth in the Credit
Agreement between the Borrower, the Agent and the Lenders party thereto dated
the date hereof (as from time to time amended, modified, restated, supplemented
and in effect, the "Credit Agreement"), the Agent and the Lenders have agreed to
make certain secured credit facilities available to the Borrower. All
capitalized terms used in this Security Agreement without definition shall have
the meanings ascribed to them in the Credit Agreement.
B. In order to induce the Agent and the Lenders to enter into the Credit
Agreement and to make the Loans thereunder, and in consideration therefor, the
Borrower has agreed to grant to the Agent for the benefit of the Lenders, a
first, prior and perfected lien on and security interest (subject only to
Permitted Liens) in all of the Borrower's assets and properties, whether now or
hereafter existing, owned or acquired all pursuant to the terms of this Security
Agreement, in order to secure (i) the due and punctual payment and performance
of all Obligations under the Credit Agreement, (ii) the due and punctual payment
of (A) the principal and interest (including interest accruing during the
pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on
the Loan, when and as due, whether at maturity, by acceleration, upon one or
more dates set for prepayment or otherwise, (B) all other monetary obligations,
including but not limited to, fees, costs, expenses and indemnities, whether
primary, secondary, direct, contingent, fixed or otherwise (including monetary
obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding regardless of whether allowed or
allowable in such proceeding), of the Borrower under the Credit Agreement and
the other Loan Documents (including any interest rate hedge agreement between
its Agent and the Borrower), and (iii) the due and punctual performance of all
covenants, agreements, obligations and liabilities of the Borrower under or
pursuant to the Credit Agreement and the other Loan Documents (including any
interest rate hedge Agreement between the Agent and the Borrower), and (iii) the
due and punctual performance of all covenants, agreements, obligations and
liabilities of the Borrower under or pursuant to the Credit Agreement and the
other Loan Documents (including any interest rate hedge Agreement between the
Agent and the Borrower) (collectively, the "Obligations").
C. It is a condition precedent to the making of Loans by the Lender that
the Borrower execute and deliver this Security Agreement.
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AGREEMENT
NOW, THEREFORE, for and in consideration of the covenants and provisions
set forth herein, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
SECURITY INTEREST
SECTION 1.1 GRANT OF SECURITY INTEREST. As security for the Obligations,
the Borrower hereby conveys, assigns, pledges and grants a continuing and
unconditional security interest to the Agent for the ratable benefit of the
Lenders, their successors and assigns, in and to:
(a) all equipment (including all "Equipment" as such term is
defined in Section 9-109(2) of the Uniform Commercial Code as in effect from
time to time in the State of Illinois (such code, together with any other
successor or applicable adoption of the Uniform Commercial Code in any
applicable jurisdiction, the "Code")), machinery, vehicles, fixtures,
improvements, supplies, office furniture, fixed assets, all as now owned or
hereafter acquired by the Borrower or in which the Borrower has or hereafter
acquires any interest, and any items substituted therefor as replacements and
any additions or accessions thereto;
(b) all goods (including all "Goods" as defined in Section 9-105
of the Code) and all inventory (including all "Inventory" as defined in Section
9-109(4) of the Code) of the Borrower, now owned or hereafter acquired by the
Borrower or in which the Borrower has or hereafter acquires any interest,
including but not limited to, raw materials, scrap inventory, work in process,
products, packaging materials, finished goods, all documents of title, chattel
paper and other instruments covering the same and all substitutions therefor and
additions thereto (all of the property described in this clause (b) being
hereafter collectively referred to as "Inventory");
(c) all present and future accounts in which the Borrower has or
hereafter acquires any interest (including all "Accounts" as defined in Section
9-106 of the Code), contract rights (including all rights to receive payments
and other rights under all equipment and other leasing contracts) and rights to
payment and rights or accounts receivable evidencing or representing
Indebtedness due or to become due the Borrower on account of goods sold or
leased or services rendered, claims, instruments and other general intangibles
(including tax refunds, royalties and all other rights to the payment of money
of every nature and description), including but not limited to, any such right
evidenced by chattel paper, and all liens, securities, guaranties, remedies,
security interests and privileges pertaining thereto (all of the property
described in this clause (c) being hereinafter collectively referred to as
"Accounts");
(d) all general intangibles now owned or hereafter acquired by
the Borrower or in which the Borrower has or hereafter acquires any interest,
(including all "General Intangibles" as defined in Section 9-106 of the Code)
including but not limited to, chooses in action and causes of action and all
licenses and permits (to the extent the collateral assignment of such licenses
and permits is not prohibited by applicable law), registrations, franchises,
corporate
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or other business records, systems, designs, software, goodwill, logos, indicia,
business identifiers, inventions, processes, production methods, proprietary
information, know-how and trade-secrets of the Borrower, and all trade-names,
logos, copyrights, patents, trademarks (including service marks) or patent or
trademark applications (including all copyrights, patents, trademarks and
applications listed on Schedule 1 hereto) (collectively, "Intellectual Property
Rights"), contract rights and any goodwill relating thereto;
(e) all other property owned by the Borrower or in which the
Borrower has or hereafter acquires any interest, wherever located, and of
whatever kind or nature, tangible or intangible;
(f) all insurance policies of any kind maintained in effect by
the Borrower, now existing or hereafter acquired, under which any of the
property referred to in (a) through (e) above is insured, including but not
limited to, any proceeds payable to the Borrower pursuant to such policies;
(g) all moneys, cash collateral, chattel paper, checks, notes,
bills of exchange, documents of title, money orders, negotiable instruments,
commercial paper, and other securities, instruments, documents, deposit
accounts, and any and all other lockbox and deposit accounts maintained with the
Agent or any Lender or any affiliate of the Agent or any Lender, deposits and
credits from time to time whether or not in the possession of or under the
control of the Agent or any Lender;
(h) any consideration received when all or any part of the
property referred to in (a) through (g) above is sold, transferred, exchanged,
leased, collected or otherwise disposed of, or any value received as a
consequence of possession thereof, including but not limited to, all products,
proceeds (including all "Proceeds" as defined in Section 9-306(1) the Code),
cash, negotiable instruments and other instruments for the payment of money,
chattel paper, security agreements or other documents, insurance proceeds or
proceeds of other proceeds now or hereafter owned by the Borrower or in which
the Borrower has an interest.
The property set forth in clauses (a) through (h) of the preceding sentence,
together with property of a similar nature which the Borrower hereafter owns or
in which the Borrower hereafter acquires any interest, is referred to herein as
the "Collateral."
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 REPRESENTATIONS AND WARRANTIES. The Borrower represents,
warrants and agrees that:
(a) The Borrower has and shall have absolute, good and exclusive
title to all the Collateral, wherever and whenever acquired, free and clear of
any Lien except as permitted by the Credit Agreement and the Borrower has not
filed a financing statement under the Code (or similar statement or instrument
of registration under the law of any jurisdiction) covering any Collateral
except as permitted by the Credit Agreement;
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(b) The Borrower has paid or will pay when due all taxes, fees,
assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and with respect to
which the Borrower has set aside on its books adequate reserves and which may
not result in any material impairment of the Lien on such Collateral;
(c) as a result of the execution and delivery (or the taking of
possession of cash or instruments) of this Security Agreement and the filing of
any financing statements or other documents necessary to assure, preserve and
perfect the security interest created hereby, the Agent, for the ratable benefit
of the Lenders, shall have a valid, perfected, enforceable first-priority lien
on, and a continuing security interest in, the Collateral, enforceable and
superior as such as against creditors and purchasers (other than purchasers of
Inventory in the ordinary course of business) and as against any owner of real
property where any of the equipment or Inventory is located and as against any
purchaser of such real property and any present or future creditor obtaining a
mortgage or other lien on such real property, and such lien shall be superior
and prior to all other Liens except as permitted by the Credit Agreement;
(d) the amount that has been or that shall be represented by the
Borrower to the Lenders from time to time owing by all obligors (such obligors
being hereinafter referred to as the "Account Debtors") in the aggregate with
respect to Accounts has not and will not materially deviate from the correct
amount actually and unconditionally owing at such time by such Account Debtors;
all Accounts represent bona fide transactions completed in accordance with the
terms and provisions contained in the invoices and other documents evidencing
the same; there are no material setoffs, counterclaims or disputes existing or
asserted with respect to Accounts and the Borrower has not made any agreement
with any Account Debtor for any deduction therefrom; to the Borrower's
knowledge, all Account Debtors have the capacity to contract and are solvent;
the goods giving rise to Accounts are not subject to any lien, claim or
encumbrance, except in favor of the Agent and except for as permitted by the
Credit Agreement; and the Borrower has no knowledge of any fact or circumstances
which would impair the validity or collectibility of Accounts;
(e) The Borrower has not changed its name (except as set forth on
Schedule 1A hereto) since the date of its formation and incorporation and during
such period the Borrower did not use, nor does the Borrower now use any
fictitious or trade name, except for the names set forth on Schedule 1A hereto;
(f) the location of the chief executive office of the Borrower
and all locations where the Borrower maintains records with respect to its
contract rights and Accounts are set forth on Schedule 1B hereto;
(g) all locations where the Borrower stores or processes raw
material, work in process, finished goods and inventory are set forth on
Schedule 1C hereto;
(h) all locations where the Borrower keeps machinery and
equipment are set forth on Schedule 1C hereto;
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(i) all Intellectual Property Rights material to the Borrower's
business are set forth on Schedule 1D hereto; and
(j) none of the Collateral is held by a third party in any
location as assignee, trustee, bailee, consignee or in any similar capacity.
SECTION 2.2 SURVIVAL. All representations, warranties and agreements of
the Borrower contained in this Security Agreement shall survive the execution,
delivery and performance of this Security Agreement until the termination of
this Security Agreement pursuant to Section 5.5 hereof.
ARTICLE 3
COVENANTS
SECTION 3.1 COVENANTS. The Borrower hereby covenants and agrees with the
Agent that so long as this Security Agreement shall remain in effect or any
Obligations shall remain unpaid or unperformed: (a) it shall give written notice
to the Agent of any levy or attachment, execution or other process against any
of the Collateral, which notice shall be given promptly unless expressly
provided otherwise in the Credit Agreement; (b) at its own cost and expense, it
shall take any and all actions reasonably necessary or desirable to defend the
Collateral against the claims and demands of all Persons other than the Agent
and the Lenders to defend the security interest of the Agent in the Collateral
and the priority thereof against any adverse Lien of any nature not permitted by
the Credit Agreement; (c) it shall keep all tangible Collateral properly insured
and in good order and repair and immediately notify the Agent of any event
causing any material loss, damage or depreciation in value of the Collateral and
of the extent of such loss, damage or depreciation; (d) at the request of the
Agent, it shall mark any Collateral which is chattel paper with a legend showing
the Agent's lien and security interest therein; (e) it shall promptly give
written notice to the Agent of any change in the Intellectual Property Rights
material to its business set forth on Schedule 1D hereto; and (f) it shall not:
amend or terminate any contract or other document or instrument constituting
part of the Collateral, except for transactions in the ordinary course of
business substantially consistent with past practice; voluntarily or
involuntarily exchange, lease, sell, transfer or otherwise dispose of any
Collateral, except as permitted by the Credit Agreement; make any compromise,
settlement, discharge or adjustment or grant any extension of time for payment
with respect to any Account or any Lien, Guaranty or remedy pertaining thereto,
except for transactions in the ordinary course of business substantially
consistent with past practice; change its name or use any fictitious or trade
name; change the location of its chief executive office; or permit any of the
Collateral (other than Collateral which constitutes goods which are mobile and
which are of a type normally used in more than one jurisdiction) to be removed
from or located in any place not identified as the location of such Collateral
on Schedule 1C, as the case may be, except after written notice to and with
written consent of the Lender and compliance with such procedures as the Agent
may reasonably impose to prevent any interruptions or discontinuity in the
security interest granted pursuant to this Security Agreement.
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ARTICLE 4
REMEDIAL MATTERS
SECTION 4.1 POWERS OF ATTORNEY. (a) The Borrower hereby irrevocably
appoints the Agent (and any officer or agent of the Agent) as its true and
lawful attorney-in-fact, with power of substitution for and in the name of the
Agent or otherwise, for the use and benefit of the Agent and the Lenders: (i) to
receive, endorse the name of the Borrower upon and deliver any notes,
acceptances, checks, drafts, money orders or other evidences of payment that may
come into the possession of the Lender with respect to the Collateral; (ii) from
and after the occurrence of an Event of Default, to cause the Borrower's mail to
be transferred to the Agent's own offices and to receive and open all mail
addressed to the Borrower for the purposes of removing any such notes,
acceptances, checks, drafts, money orders or other evidences of payment; (iii)
from and after the occurrence of an Event of Default, to demand, collect and
receive payment in respect of the Collateral and to apply any such payments
directly to the payment of the Obligations in accordance with Section 4.5
hereof; (iv) to receive and give discharges and releases of all or any of the
Collateral; (v) to commence and prosecute any and all suits, actions or
proceedings at law or in equity in any court of competent jurisdiction, to
collect or otherwise realize on all or any part of the Collateral or to enforce
any rights in respect thereof; (vi) to sign the name of the Borrower on any
invoice or bill of lading relating to any of the Collateral; (vii) to send
verification of any Accounts to any Account Debtor or customer; (viii) from and
after the occurrence of an Event of Default, to notify any Account Debtor or
other obligor of the Borrower with respect to any Collateral to make payment to
the Agent; (ix) to settle, compromise, compound, adjust or defend any actions,
suits or proceedings relating or pertaining to all or any of the Collateral; (x)
to take any action for purposes of carrying out of the terms of this Security
Agreement; (xi) to enforce all of the Borrower's rights and powers under and
pursuant to any and all agreements with respect to the Collateral; and (xii)
generally to sell, assign, transfer, pledge, make any agreement with respect to
or otherwise deal with all or any of the Collateral, and to do all other acts
and things necessary to carry out this Security Agreement, as fully and
completely as though the Agent were the absolute owner of the Collateral for all
purposes; provided, however, that nothing herein contained shall be construed as
requiring or obligating the Agent to make any commitment or to make any inquiry
as to the nature or sufficiency of any payment received by the Agent, or to
present or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby, and no action taken by the Agent or any
Lender or omitted to be taken with respect to the Collateral or any part thereof
shall give rise to any defense, counterclaim or offset in favor of the Borrower
or to any claim or action against the Agent or any Lender, except to the extent
of the Agent's or such Lender's gross negligence or willful misconduct. It is
understood and agreed that the power of attorney granted to the Agent for the
purposes set forth above in this Section 4.1 is coupled with an interest and is
irrevocable and the Borrower hereby ratifies all actions taken by its
attorney-in-fact by virtue hereof. The provisions of this Section 4.1 shall in
no event relieve the Borrower of any of its obligations hereunder or under any
of the other Loan Documents with respect to the Collateral or any part thereof
or impose any obligation on the Agent or any Lender to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Agent or any Lender of any other or further right which it
may have on the date of this Security
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Agreement or hereafter, whether hereunder, under any of the other Loan
Documents, by law or otherwise.
(b) Neither the Agent nor any Lender shall, under any
circumstance or in any event whatsoever, have any liability for any shortage,
damage, loss or destruction of any part of the Collateral, nor shall the Agent
or any Lender have any liability for any error or omission or delivery of any
kind incurred in the good faith settlement, collection or payment of any of the
Collateral or of any monies received in payment therefor or for any damages
resulting therefrom, nor shall this Security Agreement impose upon the Agent or
any Lender any obligation to perform any obligation with respect to the
Collateral. The costs of collection, notification and enforcement, including but
not limited to, attorneys' fees and out-of-pocket expenses, shall be borne
solely by the Borrower, whether the same are incurred by the Borrower, the Agent
or any Lender. The Borrower agrees to indemnify and hold the Agent and each
Lender harmless from and against any and all other claims, demands, losses,
judgments and liabilities (including but not limited to, liabilities for
penalties) of any nature, and to reimburse the Agent and each Lender for all
reasonable costs and expenses, including but not limited to attorneys' fees and
expenses, arising from this Security Agreement or the exercise of any right or
remedy granted to the Agent or any Lender hereunder other than those incurred as
a result of the gross negligence or willful misconduct of the Agent or any
Lender. In no event shall the Agent or any Lender be liable for any matter or
thing in connection with this Security Agreement other than to account for
moneys actually received by any of them in accordance with the terms hereof,
except to the extent incurred solely as a result of the Agent or any Lender's
gross negligence or willful misconduct.
SECTION 4.2 COLLECTIONS. Upon the occurrence and during the continuance
of an Event of Default, the Agent may, in its sole discretion, in its name or in
the name of the Borrower, or otherwise, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for, or make any compromise or settlement deemed desirable with respect
to, any of the Collateral, but shall be under no obligation to do so, or (b)
extend the time of payment, arrange for payment in installments, or otherwise
modify the term of, or release, any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of, the
Borrower, other than to discharge the Borrower in so doing with respect to
liabilities of the Borrower to the extent that the liabilities are paid or
repaid. After the occurrence and during the continuance of an Event of Default,
any money, checks, notes, bills, drafts, or commercial paper received by the
Borrower shall be held in trust for the Agent, for the ratable benefit of the
Lenders, and shall be promptly turned over to the Agent. The Agent may make such
payments and take such actions described above as the Agent, in its sole
discretion, deems necessary to protect its security interest in the Collateral
or the value thereof, and, in connection therewith, the Agent is hereby
unconditionally and irrevocably authorized (without limiting the general nature
of the authority hereinabove conferred) to pay, purchase, contest or compromise
any Liens which in the judgment of the Agent appear to be equal to, prior to or
superior to its security interest in the Collateral and any Liens not expressly
permitted by this Security Agreement or the other Loan Documents.
SECTION 4.3 POSSESSION; SALE OF COLLATERAL. (a) Upon the occurrence and
during the continuance of an Event of Default, the Agent may (i) require the
Borrower to assemble the tangible assets which comprise part of the Collateral
and make them available to the Agent at any place or places reasonably
designated by the Agent, (ii) with or without notice or demand for
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performance and without liability for trespass, enter any premises where the
Collateral may be located and take possession of the same, and may demand and
receive such possession from any person who has possession thereof, and may take
such measures as it may deem necessary or proper for the care or protection
thereof, including but not limited to, the right to remove all or any portion of
the Collateral, and (iii) with or without taking such possession may sell or
cause to be sold, in one or more sales or parcels, for cash, on credit or for
future delivery, without assumption of any credit risk, all or any portion of
the Collateral, at public or private sale or at any broker's board or any
securities exchange, without demand of performance or notice of intention to
sell or of time or place of sale, except ten (10) days' written notice to the
Borrower of the time and place of such sale or sales (and such other notices as
may be required by applicable statute, if any, and which cannot be waived),
which the Borrower hereby expressly acknowledges is commercially reasonable. The
Collateral may be sold or disposed of for cash, upon credit or for future
delivery, without assumption of any credit risk, as the Agent shall deem
appropriate. Each such purchaser at any such sale shall hold the property sold
absolutely, free from any claim or right on the part of the Borrower, and the
Borrower hereby waives (to the extent permitted by law) all rights of
redemption, stay and appraisal which the Borrower now has or may at any time in
the future have under any rule of law or statute now existing or hereafter
enacted. At any such sale, the Collateral, or portion thereof, to be sold may be
sold in one lot as an entirety or in separate parcels, as the Lender may (in its
sole and absolute discretion) determine. The Agent shall not be obligated to
make any sale of any Collateral if it shall determine not to do so, regardless
of the fact that notice of sale of such Collateral shall have been given. The
Agent may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further notice, be made at the
time and place to which the same was so adjourned. In case any sale of all or
any part of the Collateral is made on credit or for future delivery, the
Collateral so sold may be retained by the Agent until the sale price is paid by
the purchaser or purchasers thereof, but neither the Agent nor any Lender shall
incur any liability for the failure to collect or realize upon any or all of the
Collateral or for any delay in doing so and, in case of any such failure, shall
not be under any obligation to take any action with respect thereto; provided,
however, that such Collateral may be sold again upon like notice. At any public
sale made pursuant to this Section 4.3, the Agent may bid for or purchase, free
from any right of redemption, stay or appraisal and all rights of marshalling
the Collateral and any other security for the Obligations or otherwise on the
part of the Borrower (all said rights being also hereby waived and released by
the Borrower to the fullest extent permitted by law), the Collateral or any part
thereof offered for sale and may make payment on account thereof by using any
claim then due and payable to the Agent from the Borrower as a credit against
the purchase price, and the Agent may, upon compliance with the terms of sale,
hold, retain and dispose of such property without further accountability to the
Borrower therefor. For purposes hereof, a written agreement to purchase the
Collateral or any portion thereof shall be treated as a sale thereof; the Agent
shall be free to carry out such sale pursuant to such agreement, and the
Borrower shall not be entitled to the return of the Collateral or any portion
thereof subject thereto, notwithstanding the fact that after the Agent shall
have entered into such an agreement, all Events of Default shall have been
remedied and any obligations to the Agent shall have been paid in full. As an
alternative to exercising the power of sale herein conferred upon it, the Agent
may proceed by a suit or suits at law or in equity to foreclose this Security
Agreement and to sell the Collateral or any portion thereof pursuant to a
judgment or decree of a court or courts having
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competent jurisdiction or pursuant to a proceeding by a court-appointed
receiver. In any action permitted hereunder the Agent shall be entitled to the
appointment of a receiver without notice, to take possession of all or any
portion of the Collateral and to exercise such powers as the court shall confer
upon the receiver. Notwithstanding the foregoing, if an Event of Default shall
occur and be continuing, the Agent shall be entitled to apply, without notice to
the Borrower, any cash or cash items constituting Collateral in its possession
to payment of the Obligations.
(b) If an Event of Default shall occur and be continuing, the
Agent shall, in addition to exercising any and all rights and remedies afforded
to it hereunder, have all the rights and remedies of a secured party under all
applicable provisions of law, including but not limited to, the Code.
(c) The Borrower agrees that notwithstanding anything to the
contrary contained in this Security Agreement, the Borrower shall remain liable
under each contract or other agreement giving rise to Accounts and general
intangibles and all other contracts or agreements constituting part of the
Collateral and the Agent shall not have any obligation or liability in respect
thereof.
(d) After the occurrence and during the continuance of an Event
of Default, upon the Agent's request, the Borrower shall deliver to the Agent
all original and other documents, evidencing and relating to the sale and
delivery of Inventory or Accounts, including but not limited to, all original
orders, invoices and shipping receipts. The Borrower shall also furnish to the
Agent, promptly upon the request of the Agent, such reports, reconciliations and
aging balances regarding Accounts as the Agent may request from time to time.
SECTION 4.4 EVENT OF DEFAULT. An Event of Default shall exist hereunder
(a) if an "Event of Default" shall have occurred and be continuing under the
Credit Agreement or (b) if the Borrower shall breach any agreement contained
herein or otherwise default in the observance or performance of any of the
covenants, terms, conditions or agreements on the part of the Borrower contained
in this Security Agreement and (x) with respect to nonmonetary covenants, terms,
conditions or agreements, such non observance or non performance continues for a
period of thirty (30) days after the earlier of (i) written notice from the
Agent of such default or (ii) actual knowledge of the Borrower of such default
and (y) with respect to monetary covenants, terms, conditions or agreements,
such non observance or non performance continues for a period longer than the
applicable cure period, if any, set forth in the Credit Agreement. All cure
periods in this Section 4.4 shall run concurrently with any period allowed with
respect to any default under the Credit Agreement or any of the other Loan
Documents.
SECTION 4.5 APPLICATION OF PROCEEDS. Unless the Agent otherwise directs
pursuant to the Credit Agreement, the proceeds of any sale of Collateral
pursuant to this Security Agreement or any other Loan Document, as well as any
Collateral consisting of cash, shall be applied after receipt by the Agent as
follows:
First, to the payment of all reasonable costs, fees and expenses
of the Agent and the Lenders and their agents, representatives and
attorneys incurred in connection with such sale or with the retaking,
holding, handling, preparing for sale (or other disposition) of the
Collateral or otherwise in connection with this Credit Agreement, any
other Loan
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Document or any of the Obligations, including but not limited to, the
fees and expenses of the Agent's and any Lender's agents and attorneys
and court costs (whether at trial, appellate or administrative levels),
if any, incurred by the Agent or any Lender in so doing;
Second, to the payment of the outstanding principal balance and
accrued interest and fees on the Loan and other Obligations;
Third, to pay the Agent an amount equal to the aggregate stated
amount of all outstanding Letters of Credit, if any, to be held by the
Agent as cash collateral to secure the Obligations of the Borrower under
the Loan Documents with respect to Letters of Credit;
Fourth, to pay all other amounts payable by the Borrower under
the Loan Documents; and
Fifth, to the Borrower or to such other Person as a court may
direct.
SECTION 4.6 AUTHORITY OF AGENT. The Agent shall have and be entitled to
exercise all such powers hereunder as are specifically delegated to the Lender
by the terms hereof, together with such powers as are reasonably incidental
thereto. The Agent may execute any of its duties hereunder by or through its
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of such counsel concerning all matters pertaining to
its duties hereunder.
SECTION 4.7 CERTAIN WAIVERS; THE BORROWER NOT DISCHARGED. The Borrower
expressly and irrevocably waives (to the extent permitted by applicable law)
presentment, demand of payment and protest of nonpayment in respect of its
Obligations under this Security Agreement. The obligations and duties of the
Borrower hereunder are irrevocable, absolute, and unconditional and shall not be
discharged, impaired or otherwise affected by (a) the failure of the Agent or
any Lender to assert any claim or demand or to enforce any right or remedy
against the Borrower or any grantee under the provisions of this Security
Agreement or any other Loan Document or any waiver, consent, extension,
indulgence or other action or inaction in respect thereof, (b) any extension or
renewal of any part of the Obligations, (c) any rescission, waiver, amendment or
modification of any of the terms or provisions of any Loan Document or of any
agreement related thereto, (d) the release of any liens on or security interests
in any part of the Collateral or the release, sale or exchange of or failure to
foreclose against any security held by or for the benefit of the Agent for
payment or performance of the Obligations, (e) the bankruptcy, insolvency or
reorganization of the Borrower or any grantee or any other Person, (f) the
invalidity or unenforceability of any of the Loan Documents, (g) any change,
restructure or termination of the corporate structure or existence of the
Borrower or any grantee or any restructuring or refinancing of all or any
portion of the Obligations, or (h) any other event which under law would
discharge the obligations of a surety, except payment in full of the Obligations
and termination of the Commitment.
SECTION 4.8 TRANSFER OF SECURITY INTEREST. The Agent may transfer to any
other Person all or any part of the liens and security interests granted hereby,
and all, or any part of the
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Collateral which may be in the Agent's possession after the occurrence and
during the continuance of an Event of Default or, if to a successor Agent in
accordance with the Credit Agreement, at any time. Upon such transfer, the
transferee shall be vested with all the rights and powers of the Agent hereunder
with respect to such of the Collateral as is so transferred, but, with respect
to any of the Collateral not so transferred, the Agent shall retain all of its
rights and powers (whether given to it in this Security Agreement, or
otherwise). The Agent may, at any time, assign its rights as the secured party
hereunder to any Person, in the Agent's discretion, and upon notice to the
Borrower, but without any requirement for consent or approval by or from the
Borrower, and any such assignment shall be valid and binding upon the Borrower,
as fully as if it had expressly approved the same.
ARTICLE 5
MISCELLANEOUS
SECTION 5.1 FURTHER ASSURANCES. The Borrower agrees, at its expense, to
do such further things, to execute, acknowledge, deliver and cause to be duly
filed all such further instruments and documents and take all such actions as
the Agent may from time to time reasonably request for the better assuring and
preserving of the security interests and the rights and remedies created hereby,
including but not limited to, the execution and delivery of such additional
conveyances, assignments, agreements and instruments, the payment of any fees
and taxes required in connection with the execution and delivery of this
Security Agreement, the granting of the security interests created hereby and
the execution, filing and recordation of any financing statements (including
fixture filings) or other documents as the Agent may deem reasonably necessary
or desirable for the perfection of the security interests granted hereunder. The
Borrower hereby authorizes the Agent, as a secured party under the Code, to file
financing statements or continuation statements signed only by the Agent, and
agrees to pay all expenses in connection with any such filing. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any promissory note or other instrument, such note or instrument
shall be immediately pledged and delivered to the Agent, duly endorsed in a
manner satisfactory to the Agent. If at any time the Borrower shall take and
perfect a security interest in any property to secure payment and performance of
an Account, the Borrower, upon the request of the Agent, shall promptly assign
such security interest to the Agent. The Borrower agrees to notify the Agent
thirty (30) days prior to any change (a) in its corporate name, (b) in the
location of its chief executive office, (c) in its chief place of business, or
(d) in the office or offices where it keeps its records relating to the
Collateral. The Borrower agrees that, after the occurrence and during the
continuance of an Event of Default, it shall, upon request of the Agent, take
any and all actions, to the extent permitted by applicable law, at its own
expense, to obtain the approval of any governmental authority for any action or
transaction contemplated by this Security Agreement which is then required by
law, and specifically, without limitation, upon request of the Agent, to
prepare, sign and file with any governmental authority the Borrower's portion of
any application or applications for consent to the assignment of licenses held
by the Borrower, or for consent to the possession and sale of any of the
Collateral by or on behalf of the Agent. The Borrower further agrees that it
shall at all times, at its own expense and cost, keep accurate and complete
records with respect to the Collateral, including but not limited to, a record
of all payments and proceeds received in connection therewith or as a result of
the sale thereof and of all credits granted, and agrees that the Agent, the
Lenders, and their respective representatives,
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shall have the right upon reasonable notice at reasonable times to call at the
Borrower's place or places of business to inspect the Collateral and to examine
or cause to be examined all of the books, records, journals and other data
relating to the Collateral and to make extracts therefrom or copies thereof as
are reasonably requested.
SECTION 5.2 EFFECTIVENESS. This Security Agreement shall take effect
immediately upon execution by the Borrower and the Agent.
SECTION 5.3 INDEMNITY; REIMBURSEMENT OF LENDER; DEFICIENCY. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Agent
hereunder or under the other Security Documents, the Borrower agrees (a) to
indemnify and hold harmless the Agent and each Lender from and against any and
all claims, demands, losses, judgments and liabilities (including but not
limited to, liabilities for penalties) of whatever nature, relating thereto or
resulting therefrom, and (b) to reimburse the Agent and each Lender for all
reasonable costs and expenses, including but not limited to, the fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all reasonable costs incurred by the
Agent and each Lender in connection with any litigation relating to the
Collateral whether or not such Person shall be a party to such litigation,
including but not limited to, the fees and disbursements of attorneys for the
Agent and each Lender, and any out-of-pocket costs incurred by the Agent and
each Lender in appearing as a witness or in otherwise complying with legal
process served upon it. In no event shall the Agent or any Lender be liable, in
the absence of gross negligence or willful misconduct on its part, for any
matter or thing in connection with this Security Agreement other than to account
for moneys actually received by it in accordance with the terms hereof and the
Borrower hereby releases the Agent and each Lender from any and all claims,
causes of action and demands at anytime arising out of or with respect to this
Security Agreement, any other Loan Document or the Collateral. All indemnities
contained in this Section 5.3 and elsewhere in this Agreement shall survive the
expiration or earlier termination of this Security Agreement. After application
of the proceeds by the Agent pursuant to Section 4.5 hereof, the Borrower shall
remain liable to the Agent and the Lenders for any deficiency.
SECTION 5.4 CONTINUING LIEN. It is the intent of the parties hereto,
that (a) this Security Agreement shall constitute a continuing agreement as to
any and all future, as well as existing transactions, between the Borrower and
the Agent under or in connection with the Credit Agreement, and (b) the security
interest provided for herein shall attach to after-acquired as well as existing
Collateral and the Obligations covered by this Security Agreement shall include
any future advances under or in connection with the Credit Agreement.
SECTION 5.5 TERMINATION. Upon payment in full of all Obligations (except
indemnities which survive repayment of the Loan) and termination of all
commitments relating thereto, the Agent shall reassign and redeliver (or cause
to be so reassigned and redelivered), without recourse upon or warranty by the
Agent, and at the sole expense of the Borrower, to the Borrower, against receipt
therefor, such of the Collateral (if any) as shall not have been sold or
otherwise applied by the Agent pursuant to the terms hereof and not theretofore
reassigned and redelivered to the Borrower, together with appropriate
instruments of reassignment and release.
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SECTION 5.6 NOTICES. Any notice hereunder shall be conclusively deemed
to have been received by a party hereto and be effective in the manner set forth
in Section 9.01 of the Credit Agreement.
SECTION 5.7 SUCCESSORS AND ASSIGNS. Whenever in this Security Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party; and all covenants, promises
and agreements by or on behalf of the Agent that are contained in this Security
Agreement shall bind and inure to the benefit of its respective successors and
assigns. The Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of the Agent.
SECTION 5.8 APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT
GIVING EFFECT TO ILLINOIS CHOICE OF LAW DOCTRINE.
SECTION 5.9 WAIVERS. No failure or delay of the Agent in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Agent hereunder are cumulative and not exclusive of any
rights or remedies which it would otherwise have. No waiver of any provision of
this Security Agreement or consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be authorized as provided
in Section 5.10, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice or demand on
the Borrower in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.
SECTION 5.10 AMENDMENTS. Neither this Security Agreement nor any
provision hereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Borrower and the Agent.
SECTION 5.11 SEVERABILITY. In the event any one or more of the
provisions contained in this Security Agreement should be held invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.
SECTION 5.12 COUNTERPARTS. This Security Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered or mailed to the Agent.
SECTION 5.13 HEADINGS. Article and Section headings used herein are for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Security Agreement.
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SECTION 5.14 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
AGREES THAT ANY SUIT, ACTION, PROCEEDING OR CLAIM AGAINST IT ARISING OUT OF OR
IN ANY WAY RELATING TO THIS SECURITY AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT THEREOF, MAY BE BROUGHT OR ENFORCED IN THE STATE OR FEDERAL
COURTS LOCATED IN CHICAGO, ILLINOIS OR COOK COUNTY, ILLINOIS AND THE BORROWER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
PROTECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY PROCEEDING
BROUGHT ACCORDINGLY, AND FURTHER IRREVOCABLY WAIVES ANY CLAIMS THAT ANY SUCH
PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SECTION 5.15 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH
LENDER HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS SECURITY AGREEMENT OR UNDER OR IN CONNECTION WITH ANY
AMENDMENT, INSTRUMENT, DOCUMENT, OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS SECURITY AGREEMENT, AND AGREE THAT
ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS
AND PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES
ENTERING INTO THIS SECURITY AGREEMENT.
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IN WITNESS WHEREOF, the Agent and the Borrower have executed this
Security Agreement as of the date first above written.
ARTECON CALIFORNIA
By:/s/ James L. Lambert
-------------------------------
Its: President
------------------------------
LASALLE NATIONAL BANK
By:/s/ Michael J. Burton
-------------------------------
Its: First V.P.
------------------------------
15.
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SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered into as of May 15, 1998 (as from time
to time amended, modified, restated, supplemented and in effect, this "Security
Agreement"), by and between ARTECON, INC., a Delaware corporation ("Guarantor"),
and LASALLE NATIONAL BANK, a national banking association, its successors and
assigns as agent (the "Agent") for certain Lenders pursuant to the Credit
Agreement (as hereafter defined).
RECITALS
A. Pursuant to and upon the terms and conditions set forth in the Credit
Agreement between Artecon California, a California corporation (the "Borrower"),
the Agent and the Lenders party thereto dated the date hereof (as from time to
time amended, modified, restated, supplemented and in effect, the "Credit
Agreement"), the Agent and the Lenders have agreed to make certain secured
credit facilities available to the Borrower. All capitalized terms used in this
Security Agreement without definition shall have the meanings ascribed to them
in the Credit Agreement.
B. The Borrower is a wholly-owned subsidiary of the Guarantor and as a
condition to the Credit Agreement the Guarantor has executed and delivered in
favor of the Agent and the Lenders a Guaranty of Payment dated the date hereof
(as from time to time amended, modified, restated, supplemented and in effect,
the "Guaranty").
C. In order to induce the Agent and the Lenders to enter into the Credit
Agreement and to make the Loans thereunder, and in consideration therefor, the
Guarantor has agreed to grant to the Agent for the benefit of the Lenders, a
first, prior and perfected lien on and security interest (subject only to
Permitted Liens) in all of the Guarantor's assets and properties, whether now or
hereafter existing, owned or acquired all pursuant to the terms of this Security
Agreement, in order to secure (i) the due and punctual payment and performance
of all Liabilities (as defined in the Guaranty) under the Guaranty, (ii) the due
and punctual payment of (A) the principal and interest (including interest
accruing during the pendency of any bankruptcy, insolvency, receivership or
other similar proceeding, regardless of whether allowed or allowable in such
proceeding) on the Loan, when and as due, whether at maturity, by acceleration,
upon one or more dates set for prepayment or otherwise, (B) all other monetary
obligations, including but not limited to, fees, costs, expenses and
indemnities, whether primary, secondary, direct, contingent, fixed or otherwise
(including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding regardless of whether
allowed or allowable in such proceeding), of the Borrower under the Credit
Agreement and the other Loan Documents (including any interest rate hedge
agreement between its Agent and the Borrower), and (iii) the due and punctual
performance of all covenants, agreements, obligations and liabilities of the
Borrower under or pursuant to the Credit Agreement and the other Loan Documents
(including any interest rate hedge Agreement between the Agent and the
Borrower), and (iii) the due and punctual performance of all covenants,
agreements, obligations and liabilities of the Borrower under or pursuant to the
Credit Agreement and the other Loan Documents (including any interest rate hedge
Agreement between the Agent and the Borrower) (collectively, the "Obligations").
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D. It is a condition precedent to the making of Loans by the Lender that
the Guarantor execute and deliver this Security Agreement.
AGREEMENT
NOW, THEREFORE, for and in consideration of the covenants and provisions
set forth herein, and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
SECURITY INTEREST
SECTION 1.1 GRANT OF SECURITY INTEREST. As security for the Obligations,
the Guarantor hereby conveys, assigns, pledges and grants a continuing and
unconditional security interest to the Agent for the ratable benefit of the
Lenders, their successors and assigns, in and to:
(a) all equipment (including all "Equipment" as such term is
defined in Section 9-109(2) of the Uniform Commercial Code as in effect from
time to time in the State of Illinois (such code, together with any other
successor or applicable adoption of the Uniform Commercial Code in any
applicable jurisdiction, the "Code")), machinery, vehicles, fixtures,
improvements, supplies, office furniture, fixed assets, all as now owned or
hereafter acquired by the Guarantor or in which the Guarantor has or hereafter
acquires any interest, and any items substituted therefor as replacements and
any additions or accessions thereto;
(b) all goods (including all "Goods" as defined in Section 9-105
of the Code) and all inventory (including all "Inventory" as defined in Section
9-109(4) of the Code) of the Guarantor, now owned or hereafter acquired by the
Guarantor or in which the Guarantor has or hereafter acquires any interest,
including but not limited to, raw materials, scrap inventory, work in process,
products, packaging materials, finished goods, all documents of title, chattel
paper and other instruments covering the same and all substitutions therefor and
additions thereto (all of the property described in this clause (b) being
hereafter collectively referred to as "Inventory");
(c) all present and future accounts in which the Guarantor has or
hereafter acquires any interest (including all "Accounts" as defined in Section
9-106 of the Code), contract rights (including all rights to receive payments
and other rights under all equipment and other leasing contracts) and rights to
payment and rights or accounts receivable evidencing or representing
Indebtedness due or to become due the Guarantor on account of goods sold or
leased or services rendered, claims, instruments and other general intangibles
(including tax refunds, royalties and all other rights to the payment of money
of every nature and description), including but not limited to, any such right
evidenced by chattel paper, and all liens, securities, guaranties, remedies,
security interests and privileges pertaining thereto (all of the property
described in this clause (c) being hereinafter collectively referred to as
"Accounts");
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<PAGE> 105
(d) all general intangibles now owned or hereafter acquired by
the Guarantor or in which the Guarantor has or hereafter acquires any interest,
(including all "General Intangibles" as defined in Section 9-106 of the Code)
including but not limited to, chooses in action and causes of action and all
licenses and permits (to the extent the collateral assignment of such licenses
and permits is not prohibited by applicable law), registrations, franchises,
corporate or other business records, systems, designs, software, goodwill,
logos, indicia, business identifiers, inventions, processes, production methods,
proprietary information, know-how and trade-secrets of the Guarantor, and all
trade-names, logos, copyrights, patents, trademarks (including service marks) or
patent or trademark applications (including all copyrights, patents, trademarks
and applications listed on Schedule 1 hereto) (collectively, "Intellectual
Property Rights"), contract rights and any goodwill relating thereto;
(e) all other property owned by the Guarantor or in which the
Guarantor has or hereafter acquires any interest, wherever located, and of
whatever kind or nature, tangible or intangible;
(f) all insurance policies of any kind maintained in effect by
the Guarantor, now existing or hereafter acquired, under which any of the
property referred to in (a) through (e) above is insured, including but not
limited to, any proceeds payable to the Guarantor pursuant to such policies;
(g) all moneys, cash collateral, chattel paper, checks, notes,
bills of exchange, documents of title, money orders, negotiable instruments,
commercial paper, and other securities, instruments, documents, deposit
accounts, and any and all other lockbox and deposit accounts maintained with the
Agent or any Lender or any affiliate of the Agent or any Lender, deposits and
credits from time to time whether or not in the possession of or under the
control of the Agent or any Lender;
(h) any consideration received when all or any part of the
property referred to in (a) through (g) above is sold, transferred, exchanged,
leased, collected or otherwise disposed of, or any value received as a
consequence of possession thereof, including but not limited to, all products,
proceeds (including all "Proceeds" as defined in Section 9-306(1) the Code),
cash, negotiable instruments and other instruments for the payment of money,
chattel paper, security agreements or other documents, insurance proceeds or
proceeds of other proceeds now or hereafter owned by the Guarantor or in which
the Guarantor has an interest.
The property set forth in clauses (a) through (h) of the preceding sentence,
together with property of a similar nature which the Guarantor hereafter owns or
in which the Guarantor hereafter acquires any interest, is referred to herein as
the "Collateral."
3.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 REPRESENTATIONS AND WARRANTIES. The Guarantor represents,
warrants and agrees that:
(a) The Guarantor has and shall have absolute, good and exclusive
title to all the Collateral, wherever and whenever acquired, free and clear of
any Lien except as permitted by the Credit Agreement and the Guarantor has not
filed a financing statement under the Code (or similar statement or instrument
of registration under the law of any jurisdiction) covering any Collateral
except as permitted by the Credit Agreement;
(b) The Guarantor has paid or will pay when due all taxes, fees,
assessments and other charges now or hereafter imposed upon the Collateral
except for any tax, fee, assessment or other charge the validity of which is
being contested in good faith by appropriate proceedings and with respect to
which the Guarantor has set aside on its books adequate reserves and which may
not result in any material impairment of the Lien on such Collateral;
(c) as a result of the execution and delivery (or the taking of
possession of cash or instruments) of this Security Agreement and the filing of
any financing statements or other documents necessary to assure, preserve and
perfect the security interest created hereby, the Agent, for the ratable benefit
of the Lenders, shall have a valid, perfected, enforceable first-priority lien
on, and a continuing security interest in, the Collateral, enforceable and
superior as such as against creditors and purchasers (other than purchasers of
Inventory in the ordinary course of business) and as against any owner of real
property where any of the equipment or Inventory is located and as against any
purchaser of such real property and any present or future creditor obtaining a
mortgage or other lien on such real property, and such lien shall be superior
and prior to all other Liens except as permitted by the Credit Agreement;
(d) the amount that has been or that shall be represented by the
Guarantor to the Lenders from time to time owing by all obligors (such obligors
being hereinafter referred to as the "Account Debtors") in the aggregate with
respect to Accounts has not and will not materially deviate from the correct
amount actually and unconditionally owing at such time by such Account Debtors;
all Accounts represent bona fide transactions completed in accordance with the
terms and provisions contained in the invoices and other documents evidencing
the same; there are no material setoffs, counterclaims or disputes existing or
asserted with respect to Accounts and the Guarantor has not made any agreement
with any Account Debtor for any deduction therefrom; to the Guarantor's
knowledge, all Account Debtors have the capacity to contract and are solvent;
the goods giving rise to Accounts are not subject to any lien, claim or
encumbrance, except in favor of the Agent and except for as permitted by the
Credit Agreement; and the Guarantor has no knowledge of any fact or
circumstances which would impair the validity or collectibility of Accounts;
(e) The Guarantor has not changed its name (except as set forth
on Schedule 1A hereto) since the date of its formation and incorporation and
during such period the Guarantor did
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<PAGE> 107
not use, nor does the Guarantor now use any fictitious or trade name, except for
the names set forth on Schedule 1A hereto;
(f) the location of the chief executive office of the Guarantor
and all locations where the Guarantor maintains records with respect to its
contract rights and Accounts are set forth on Schedule 1B hereto;
(g) all locations where the Guarantor stores or processes raw
material, work in process, finished goods and inventory are set forth on
Schedule 1C hereto;
(h) all locations where the Guarantor keeps machinery and
equipment are set forth on Schedule 1C hereto;
(i) all Intellectual Property Rights material to the Guarantor's
business are set forth on Schedule 1D hereto; and
(j) none of the Collateral is held by a third party in any
location as assignee, trustee, bailee, consignee or in any similar capacity.
SECTION 2.2 SURVIVAL. All representations, warranties and agreements of
the Guarantor contained in this Security Agreement shall survive the execution,
delivery and performance of this Security Agreement until the termination of
this Security Agreement pursuant to Section 5.5 hereof.
ARTICLE 3
COVENANTS
SECTION 3.1 COVENANTS. The Guarantor hereby covenants and agrees with
the Agent that so long as this Security Agreement shall remain in effect or any
Obligations shall remain unpaid or unperformed: (a) it shall give written notice
to the Agent of any levy or attachment, execution or other process against any
of the Collateral, which notice shall be given promptly unless expressly
provided otherwise in the Credit Agreement; (b) at its own cost and expense, it
shall take any and all actions reasonably necessary or desirable to defend the
Collateral against the claims and demands of all Persons other than the Agent
and the Lenders to defend the security interest of the Agent in the Collateral
and the priority thereof against any adverse Lien of any nature not permitted by
the Credit Agreement; (c) it shall keep all tangible Collateral properly insured
and in good order and repair and immediately notify the Agent of any event
causing any material loss, damage or depreciation in value of the Collateral and
of the extent of such loss, damage or depreciation; (d) at the request of the
Agent, it shall mark any Collateral which is chattel paper with a legend showing
the Agent's lien and security interest therein; (e) it shall promptly give
written notice to the Agent of any change in the Intellectual Property Rights
material to its business set forth on Schedule 1D hereto; and (f) it shall not:
amend or terminate any contract or other document or instrument constituting
part of the Collateral, except for transactions in the ordinary course of
business substantially consistent with past practice; voluntarily or
involuntarily exchange, lease, sell, transfer or otherwise dispose of any
Collateral, except as permitted by the Credit Agreement; make any
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compromise, settlement, discharge or adjustment or grant any extension of time
for payment with respect to any Account or any Lien, Guaranty or remedy
pertaining thereto, except for transactions in the ordinary course of business
substantially consistent with past practice; change its name or use any
fictitious or trade name; change the location of its chief executive office; or
permit any of the Collateral (other than Collateral which constitutes goods
which are mobile and which are of a type normally used in more than one
jurisdiction) to be removed from or located in any place not identified as the
location of such Collateral on Schedule 1C, as the case may be, except after
written notice to and with written consent of the Lender and compliance with
such procedures as the Agent may reasonably impose to prevent any interruptions
or discontinuity in the security interest granted pursuant to this Security
Agreement. All issued and outstanding shares of capital stock of the Borrower
are now, and at all times prior to consummation of the Parent Merger will be,
owned beneficially and of record by the Guarantor, free and clear of all Liens
(other than Liens, if any, for the payment of taxes and other governmental
assessments which are imposed by law on the Guarantor's assets generally and are
incidental to the conduct of its business; provided, however, that such payment
is not delinquent or, if delinquent, is being contested in good faith by
appropriate legal or administrative proceedings and adequate reserves have been
set aside by the Guarantor on its books).
ARTICLE 4
REMEDIAL MATTERS
SECTION 4.1 POWERS OF ATTORNEY. The Guarantor hereby irrevocably
appoints the Agent (and any officer or agent of the Agent) as its true and
lawful attorney-in-fact, with power of substitution for and in the name of the
Agent or otherwise, for the use and benefit of the Agent and the Lenders: (i) to
receive, endorse the name of the Guarantor upon and deliver any notes,
acceptances, checks, drafts, money orders or other evidences of payment that may
come into the possession of the Lender with respect to the Collateral; (ii) from
and after the occurrence of an Event of Default, to cause the Guarantor's mail
to be transferred to the Agent's own offices and to receive and open all mail
addressed to the Guarantor for the purposes of removing any such notes,
acceptances, checks, drafts, money orders or other evidences of payment; (iii)
from and after the occurrence of an Event of Default, to demand, collect and
receive payment in respect of the Collateral and to apply any such payments
directly to the payment of the Obligations in accordance with Section 4.5
hereof; (iv) to receive and give discharges and releases of all or any of the
Collateral; (v) to commence and prosecute any and all suits, actions or
proceedings at law or in equity in any court of competent jurisdiction, to
collect or otherwise realize on all or any part of the Collateral or to enforce
any rights in respect thereof; (vi) to sign the name of the Guarantor on any
invoice or bill of lading relating to any of the Collateral; (vii) to send
verification of any Accounts to any Account Debtor or customer; (viii) from and
after the occurrence of an Event of Default, to notify any Account Debtor or
other obligor of the Guarantor with respect to any Collateral to make payment to
the Agent; (ix) to settle, compromise, compound, adjust or defend any actions,
suits or proceedings relating or pertaining to all or any of the Collateral; (x)
to take any action for purposes of carrying out of the terms of this Security
Agreement; (xi) to enforce all of the Guarantor's rights and powers under and
pursuant to any and all agreements with respect to the Collateral; and (xii)
generally to sell, assign, transfer, pledge, make any agreement with respect to
or otherwise deal with
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all or any of the Collateral, and to do all other acts and things necessary to
carry out this Security Agreement, as fully and completely as though the Agent
were the absolute owner of the Collateral for all purposes; provided, however,
that nothing herein contained shall be construed as requiring or obligating the
Agent to make any commitment or to make any inquiry as to the nature or
sufficiency of any payment received by the Agent, or to present or file any
claim or notice, or to take any action with respect to the Collateral or any
part thereof or the moneys due or to become due in respect thereof or any
property covered thereby, and no action taken by the Agent or any Lender or
omitted to be taken with respect to the Collateral or any part thereof shall
give rise to any defense, counterclaim or offset in favor of the Guarantor or to
any claim or action against the Agent or any Lender, except to the extent of the
Agent's or such Lender's gross negligence or willful misconduct. It is
understood and agreed that the power of attorney granted to the Agent for the
purposes set forth above in this Section 4.1 is coupled with an interest and is
irrevocable and the Guarantor hereby ratifies all actions taken by its
attorney-in-fact by virtue hereof. The provisions of this Section 4.1 shall in
no event relieve the Guarantor of any of its obligations hereunder or under any
of the other Loan Documents with respect to the Collateral or any part thereof
or impose any obligation on the Agent or any Lender to proceed in any particular
manner with respect to the Collateral or any part thereof, or in any way limit
the exercise by the Agent or any Lender of any other or further right which it
may have on the date of this Security Agreement or hereafter, whether hereunder,
under any of the other Loan Documents, by law or otherwise.
(b) Neither the Agent nor any Lender shall, under any
circumstance or in any event whatsoever, have any liability for any shortage,
damage, loss or destruction of any part of the Collateral, nor shall the Agent
or any Lender have any liability for any error or omission or delivery of any
kind incurred in the good faith settlement, collection or payment of any of the
Collateral or of any monies received in payment therefor or for any damages
resulting therefrom, nor shall this Security Agreement impose upon the Agent or
any Lender any obligation to perform any obligation with respect to the
Collateral. The costs of collection, notification and enforcement, including but
not limited to, attorneys' fees and out-of-pocket expenses, shall be borne
solely by the Guarantor, whether the same are incurred by the Guarantor, the
Agent or any Lender. The Guarantor agrees to indemnify and hold the Agent and
each Lender harmless from and against any and all other claims, demands, losses,
judgments and liabilities (including but not limited to, liabilities for
penalties) of any nature, and to reimburse the Agent and each Lender for all
reasonable costs and expenses, including but not limited to attorneys' fees and
expenses, arising from this Security Agreement or the exercise of any right or
remedy granted to the Agent or any Lender hereunder other than those incurred as
a result of the gross negligence or willful misconduct of the Agent or any
Lender. In no event shall the Agent or any Lender be liable for any matter or
thing in connection with this Security Agreement other than to account for
moneys actually received by any of them in accordance with the terms hereof,
except to the extent incurred solely as a result of the Agent or any Lender's
gross negligence or willful misconduct.
SECTION 4.2 COLLECTIONS. Upon the occurrence and during the continuance
of an Event of Default, the Agent may, in its sole discretion, in its name or in
the name of the Guarantor, or otherwise, (a) demand, sue for, collect or receive
any money or property at any time payable or receivable on account of or in
exchange for, or make any compromise or settlement deemed desirable with respect
to, any of the Collateral, but shall be under no obligation to do so, or (b)
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extend the time of payment, arrange for payment in installments, or otherwise
modify the term of, or release, any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of, the
Guarantor, other than to discharge the Guarantor in so doing with respect to
liabilities of the Guarantor to the extent that the liabilities are paid or
repaid. After the occurrence and during the continuance of an Event of Default,
any money, checks, notes, bills, drafts, or commercial paper received by the
Guarantor shall be held in trust for the Agent, for the ratable benefit of the
Lenders, and shall be promptly turned over to the Agent. The Agent may make such
payments and take such actions described above as the Agent, in its sole
discretion, deems necessary to protect its security interest in the Collateral
or the value thereof, and, in connection therewith, the Agent is hereby
unconditionally and irrevocably authorized (without limiting the general nature
of the authority hereinabove conferred) to pay, purchase, contest or compromise
any Liens which in the judgment of the Agent appear to be equal to, prior to or
superior to its security interest in the Collateral and any Liens not expressly
permitted by this Security Agreement or the other Loan Documents.
SECTION 4.3 POSSESSION; SALE OF COLLATERAL. (a) Upon the occurrence and
during the continuance of an Event of Default, the Agent may (i) require the
Guarantor to assemble the tangible assets which comprise part of the Collateral
and make them available to the Agent at any place or places reasonably
designated by the Agent, (ii) with or without notice or demand for performance
and without liability for trespass, enter any premises where the Collateral may
be located and take possession of the same, and may demand and receive such
possession from any person who has possession thereof, and may take such
measures as it may deem necessary or proper for the care or protection thereof,
including but not limited to, the right to remove all or any portion of the
Collateral, and (iii) with or without taking such possession may sell or cause
to be sold, in one or more sales or parcels, for cash, on credit or for future
delivery, without assumption of any credit risk, all or any portion of the
Collateral, at public or private sale or at any broker's board or any securities
exchange, without demand of performance or notice of intention to sell or of
time or place of sale, except ten (10) days' written notice to the Guarantor of
the time and place of such sale or sales (and such other notices as may be
required by applicable statute, if any, and which cannot be waived), which the
Guarantor hereby expressly acknowledges is commercially reasonable. The
Collateral may be sold or disposed of for cash, upon credit or for future
delivery, without assumption of any credit risk, as the Agent shall deem
appropriate. Each such purchaser at any such sale shall hold the property sold
absolutely, free from any claim or right on the part of the Guarantor, and the
Guarantor hereby waives (to the extent permitted by law) all rights of
redemption, stay and appraisal which the Guarantor now has or may at any time in
the future have under any rule of law or statute now existing or hereafter
enacted. At any such sale, the Collateral, or portion thereof, to be sold may be
sold in one lot as an entirety or in separate parcels, as the Lender may (in its
sole and absolute discretion) determine. The Agent shall not be obligated to
make any sale of any Collateral if it shall determine not to do so, regardless
of the fact that notice of sale of such Collateral shall have been given. The
Agent may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further notice, be made at the
time and place to which the same was so adjourned. In case any sale of all or
any part of the Collateral is made on credit or for future delivery, the
Collateral so sold may be retained by the Agent until the sale price is paid by
the purchaser or purchasers thereof, but neither the Agent nor any Lender shall
incur any liability for the
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failure to collect or realize upon any or all of the Collateral or for any delay
in doing so and, in case of any such failure, shall not be under any obligation
to take any action with respect thereto; provided, however, that such Collateral
may be sold again upon like notice. At any public sale made pursuant to this
SECTION 4.3, the Agent may bid for or purchase, free from any right of
redemption, stay or appraisal and all rights of marshalling the Collateral and
any other security for the Obligations or otherwise on the part of the Guarantor
(all said rights being also hereby waived and released by the Guarantor to the
fullest extent permitted by law), the Collateral or any part thereof offered for
sale and may make payment on account thereof by using any claim then due and
payable to the Agent from the Guarantor as a credit against the purchase price,
and the Agent may, upon compliance with the terms of sale, hold, retain and
dispose of such property without further accountability to the Guarantor
therefor. For purposes hereof, a written agreement to purchase the Collateral or
any portion thereof shall be treated as a sale thereof; the Agent shall be free
to carry out such sale pursuant to such agreement, and the Guarantor shall not
be entitled to the return of the Collateral or any portion thereof subject
thereto, notwithstanding the fact that after the Agent shall have entered into
such an agreement, all Events of Default shall have been remedied and any
obligations to the Agent shall have been paid in full. As an alternative to
exercising the power of sale herein conferred upon it, the Agent may proceed by
a suit or suits at law or in equity to foreclose this Security Agreement and to
sell the Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver. In any action permitted hereunder the Agent shall be
entitled to the appointment of a receiver without notice, to take possession of
all or any portion of the Collateral and to exercise such powers as the court
shall confer upon the receiver. Notwithstanding the foregoing, if an Event of
Default shall occur and be continuing, the Agent shall be entitled to apply,
without notice to the Guarantor, any cash or cash items constituting Collateral
in its possession to payment of the Obligations.
(b) If an Event of Default shall occur and be continuing, the
Agent shall, in addition to exercising any and all rights and remedies afforded
to it hereunder, have all the rights and remedies of a secured party under all
applicable provisions of law, including but not limited to, the Code.
(c) The Guarantor agrees that notwithstanding anything to the
contrary contained in this Security Agreement, the Guarantor shall remain liable
under each contract or other agreement giving rise to Accounts and general
intangibles and all other contracts or agreements constituting part of the
Collateral and the Agent shall not have any obligation or liability in respect
thereof.
(d) After the occurrence and during the continuance of an Event
of Default, upon the Agent's request, the Guarantor shall deliver to the Agent
all original and other documents, evidencing and relating to the sale and
delivery of Inventory or Accounts, including but not limited to, all original
orders, invoices and shipping receipts. The Guarantor shall also furnish to the
Agent, promptly upon the request of the Agent, such reports, reconciliations and
aging balances regarding Accounts as the Agent may request from time to time.
SECTION 4.4 EVENT OF DEFAULT. An Event of Default shall exist hereunder
(a) if an "Event of Default" shall have occurred and be continuing under the
Credit Agreement or (b) if the Guarantor
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shall breach any agreement contained herein or otherwise default in the
observance or performance of any of the covenants, terms, conditions or
agreements on the part of the Guarantor contained in this Security Agreement and
(x) with respect to nonmonetary covenants, terms, conditions or agreements, such
non observance or non performance continues for a period of thirty (30) days
after the earlier of (i) written notice from the Agent of such default or (ii)
actual knowledge of the Guarantor of such default and (y) with respect to
monetary covenants, terms, conditions or agreements, such non observance or non
performance continues for a period longer than the applicable cure period, if
any, set forth in the Credit Agreement. All cure periods in this Section 4.4
shall run concurrently with any period allowed with respect to any default under
the Credit Agreement or any of the other Loan Documents.
SECTION 4.5 APPLICATION OF PROCEEDS. Unless the Agent otherwise directs
pursuant to the Credit Agreement, the proceeds of any sale of Collateral
pursuant to this Security Agreement or any other Loan Document, as well as any
Collateral consisting of cash, shall be applied after receipt by the Agent as
follows:
FIRST, to the payment of all reasonable costs, fees and expenses
of the Agent and the Lenders and their agents, representatives and
attorneys incurred in connection with such sale or with the retaking,
holding, handling, preparing for sale (or other disposition) of the
Collateral or otherwise in connection with this Credit Agreement, any
other Loan Document or any of the Obligations, including but not limited
to, the fees and expenses of the Agent's and any Lender's agents and
attorneys and court costs (whether at trial, appellate or administrative
levels), if any, incurred by the Agent or any Lender in so doing;
SECOND, to the payment of the outstanding principal balance and
accrued interest and fees on the Loan and other Obligations;
THIRD, to pay the Agent an amount equal to the aggregate stated
amount of all outstanding Letters of Credit, if any, to be held by the
Agent as cash collateral to secure the Obligations of the Guarantor
under the Loan Documents with respect to Letters of Credit;
FOURTH, to pay all other amounts payable by the Guarantor under
the Loan Documents; and
FIFTH, to the Guarantor or to such other Person as a court may
direct.
SECTION 4.6 AUTHORITY OF AGENT. The Agent shall have and be entitled to
exercise all such powers hereunder as are specifically delegated to the Lender
by the terms hereof, together with such powers as are reasonably incidental
thereto. The Agent may execute any of its duties hereunder by or through its
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of such counsel concerning all matters pertaining to
its duties hereunder.
SECTION 4.7 CERTAIN WAIVERS; THE GUARANTOR NOT DISCHARGED. The Guarantor
expressly and irrevocably waives (to the extent permitted by applicable law)
presentment, demand of payment and protest of nonpayment in respect of its
Obligations under this Security Agreement. The obligations and duties of the
Guarantor hereunder are irrevocable, absolute, and unconditional
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and shall not be discharged, impaired or otherwise affected by (a) the failure
of the Agent or any Lender to assert any claim or demand or to enforce any right
or remedy against the Guarantor or any grantee under the provisions of this
Security Agreement or any other Loan Document or any waiver, consent, extension,
indulgence or other action or inaction in respect thereof, (b) any extension or
renewal of any part of the Obligations, (c) any rescission, waiver, amendment or
modification of any of the terms or provisions of any Loan Document or of any
agreement related thereto, (d) the release of any liens on or security interests
in any part of the Collateral or the release, sale or exchange of or failure to
foreclose against any security held by or for the benefit of the Agent for
payment or performance of the Obligations, (e) the bankruptcy, insolvency or
reorganization of the Guarantor or any grantee or any other Person, (f) the
invalidity or unenforceability of any of the Loan Documents, (g) any change,
restructure or termination of the corporate structure or existence of the
Guarantor or any grantee or any restructuring or refinancing of all or any
portion of the Obligations, or (h) any other event which under law would
discharge the obligations of a surety, except payment in full of the Obligations
and termination of the Commitment.
SECTION 4.8 TRANSFER OF SECURITY INTEREST. The Agent may transfer to any
other Person all or any part of the liens and security interests granted hereby,
and all, or any part of the Collateral which may be in the Agent's possession
after the occurrence and during the continuance of an Event of Default or, if to
a successor Agent in accordance with the Credit Agreement, at any time. Upon
such transfer, the transferee shall be vested with all the rights and powers of
the Agent hereunder with respect to such of the Collateral as is so transferred,
but, with respect to any of the Collateral not so transferred, the Agent shall
retain all of its rights and powers (whether given to it in this Security
Agreement, or otherwise). The Agent may, at any time, assign its rights as the
secured party hereunder to any Person, in the Agent's discretion, and upon
notice to the Guarantor, but without any requirement for consent or approval by
or from the Guarantor, and any such assignment shall be valid and binding upon
the Guarantor, as fully as if it had expressly approved the same.
ARTICLE 5
MISCELLANEOUS
SECTION 5.1 FURTHER ASSURANCES. The Guarantor agrees, at its expense, to
do such further things, to execute, acknowledge, deliver and cause to be duly
filed all such further instruments and documents and take all such actions as
the Agent may from time to time reasonably request for the better assuring and
preserving of the security interests and the rights and remedies created hereby,
including but not limited to, the execution and delivery of such additional
conveyances, assignments, agreements and instruments, the payment of any fees
and taxes required in connection with the execution and delivery of this
Security Agreement, the granting of the security interests created hereby and
the execution, filing and recordation of any financing statements (including
fixture filings) or other documents as the Agent may deem reasonably necessary
or desirable for the perfection of the security interests granted hereunder. The
Guarantor hereby authorizes the Agent, as a secured party under the Code, to
file financing statements or continuation statements signed only by the Agent,
and agrees to pay all expenses in connection with any such filing. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any promissory note or other instrument, such note or instrument
shall be immediately pledged and
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delivered to the Agent, duly endorsed in a manner satisfactory to the Agent. If
at any time the Guarantor shall take and perfect a security interest in any
property to secure payment and performance of an Account, the Guarantor, upon
the request of the Agent, shall promptly assign such security interest to the
Agent. The Guarantor agrees to notify the Agent thirty (30) days prior to any
change (a) in its corporate name, (b) in the location of its chief executive
office, (c) in its chief place of business, or (d) in the office or offices
where it keeps its records relating to the Collateral. The Guarantor agrees
that, after the occurrence and during the continuance of an Event of Default, it
shall, upon request of the Agent, take any and all actions, to the extent
permitted by applicable law, at its own expense, to obtain the approval of any
governmental authority for any action or transaction contemplated by this
Security Agreement which is then required by law, and specifically, without
limitation, upon request of the Agent, to prepare, sign and file with any
governmental authority the Guarantor's portion of any application or
applications for consent to the assignment of licenses held by the Guarantor, or
for consent to the possession and sale of any of the Collateral by or on behalf
of the Agent. The Guarantor further agrees that it shall at all times, at its
own expense and cost, keep accurate and complete records with respect to the
Collateral, including but not limited to, a record of all payments and proceeds
received in connection therewith or as a result of the sale thereof and of all
credits granted, and agrees that the Agent, the Lenders, and their respective
representatives, shall have the right upon reasonable notice at reasonable times
to call at the Guarantor's place or places of business to inspect the Collateral
and to examine or cause to be examined all of the books, records, journals and
other data relating to the Collateral and to make extracts therefrom or copies
thereof as are reasonably requested.
SECTION 5.2 EFFECTIVENESS. This Security Agreement shall take effect
immediately upon execution by the Guarantor and the Agent.
SECTION 5.3 INDEMNITY; REIMBURSEMENT OF LENDER; DEFICIENCY. In
connection with the Collateral, this Security Agreement and the administration
and enforcement or exercise of any right or remedy granted to the Agent
hereunder or under the other Security Documents, the Guarantor agrees (a) to
indemnify and hold harmless the Agent and each Lender from and against any and
all claims, demands, losses, judgments and liabilities (including but not
limited to, liabilities for penalties) of whatever nature, relating thereto or
resulting therefrom, and (b) to reimburse the Agent and each Lender for all
reasonable costs and expenses, including but not limited to, the fees and
disbursements of attorneys, relating thereto or resulting therefrom. The
foregoing indemnity agreement includes all reasonable costs incurred by the
Agent and each Lender in connection with any litigation relating to the
Collateral whether or not such Person shall be a party to such litigation,
including but not limited to, the fees and disbursements of attorneys for the
Agent and each Lender, and any out-of-pocket costs incurred by the Agent and
each Lender in appearing as a witness or in otherwise complying with legal
process served upon it. In no event shall the Agent or any Lender be liable, in
the absence of gross negligence or willful misconduct on its part, for any
matter or thing in connection with this Security Agreement other than to account
for moneys actually received by it in accordance with the terms hereof and the
Guarantor hereby releases the Agent and each Lender from any and all claims,
causes of action and demands at anytime arising out of or with respect to this
Security Agreement, any other Loan Document or the Collateral. All indemnities
contained in this Section 5.3 and elsewhere in this Agreement shall survive the
expiration or earlier termination
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of this Security Agreement. After application of the proceeds by the Agent
pursuant to Section 4.5 hereof, the Guarantor shall remain liable to the Agent
and the Lenders for any deficiency.
SECTION 5.4 CONTINUING LIEN. It is the intent of the parties hereto,
that (a) this Security Agreement shall constitute a continuing agreement as to
any and all future, as well as existing transactions, between the Guarantor and
the Agent under or in connection with the Credit Agreement, and (b) the security
interest provided for herein shall attach to after-acquired as well as existing
Collateral and the Obligations covered by this Security Agreement shall include
any future advances under or in connection with the Credit Agreement.
SECTION 5.5 TERMINATION. Upon payment in full of all Obligations (except
indemnities which survive repayment of the Loan) and termination of all
commitments relating thereto, the Agent shall reassign and redeliver (or cause
to be so reassigned and redelivered), without recourse upon or warranty by the
Agent, and at the sole expense of the Guarantor, to the Guarantor, against
receipt therefor, such of the Collateral (if any) as shall not have been sold or
otherwise applied by the Agent pursuant to the terms hereof and not theretofore
reassigned and redelivered to the Guarantor, together with appropriate
instruments of reassignment and release.
SECTION 5.6 NOTICES. Any notice hereunder shall be conclusively deemed
to have been received by a party hereto and be effective in the manner set forth
in Section 22 of the Guaranty.
SECTION 5.7 SUCCESSORS AND ASSIGNS. Whenever in this Security Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party; and all covenants, promises
and agreements by or on behalf of the Agent that are contained in this Security
Agreement shall bind and inure to the benefit of its respective successors and
assigns. The Guarantor may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of the Agent.
SECTION 5.8 APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT
GIVING EFFECT TO ILLINOIS CHOICE OF LAW DOCTRINE.
SECTION 5.9 WAIVERS. No failure or delay of the Agent in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Agent hereunder are cumulative and not exclusive of any
rights or remedies which it would otherwise have. No waiver of any provision of
this Security Agreement or consent to any departure by the Guarantor therefrom
shall in any event be effective unless the same shall be authorized as provided
in Section 5.10, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice or demand on
the Guarantor in any case shall entitle the Guarantor to any other or further
notice or demand in similar or other circumstances.
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SECTION 5.10 AMENDMENTS. Neither this Security Agreement nor any
provision hereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Guarantor and the Agent.
SECTION 5.11 SEVERABILITY. In the event any one or more of the
provisions contained in this Security Agreement should be held invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.
SECTION 5.12 COUNTERPARTS. This Security Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered or mailed to the Agent.
SECTION 5.13 HEADINGS. Article and Section headings used herein are for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Security Agreement.
SECTION 5.14 CONSENT TO JURISDICTION. THE GUARANTOR HEREBY IRREVOCABLY
AGREES THAT ANY SUIT, ACTION, PROCEEDING OR CLAIM AGAINST IT ARISING OUT OF OR
IN ANY WAY RELATING TO THIS SECURITY AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT THEREOF, MAY BE BROUGHT OR ENFORCED IN THE STATE OR FEDERAL
COURTS LOCATED IN CHICAGO, ILLINOIS OR COOK COUNTY, ILLINOIS AND THE GUARANTOR
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
PROTECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY PROCEEDING
BROUGHT ACCORDINGLY, AND FURTHER IRREVOCABLY WAIVES ANY CLAIMS THAT ANY SUCH
PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SECTION 5.15 WAIVER OF JURY TRIAL. THE GUARANTOR, THE AGENT AND EACH
LENDER HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN
CONNECTION WITH THIS SECURITY AGREEMENT OR UNDER OR IN CONNECTION WITH ANY
AMENDMENT, INSTRUMENT, DOCUMENT, OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS SECURITY AGREEMENT, AND AGREE THAT
ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS
AND PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES
ENTERING INTO THIS SECURITY AGREEMENT.
[signature page follows]
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IN WITNESS WHEREOF, the Agent and the Guarantor have executed this
Security Agreement as of the date first above written.
ARTECON, INC.
By:/s/ James L. Lambert
-------------------------------
Its: President
------------------------------
LASALLE NATIONAL BANK
By:/s/ Michael J. Burton
-------------------------------
Its: First V.P.
------------------------------
15.
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GUARANTY OF PAYMENT
THIS GUARANTY OF PAYMENT (as from time to time amended, modified,
restated, supplemented and in effect, this "Guaranty") is made as of May 15,
1998 by ARTECON, INC., a Delaware corporation (the "Guarantor"), for the benefit
of LASALLE NATIONAL BANK, a national banking association, its successors and
assigns, as agent (the "Agent"), and certain Lenders pursuant to the Credit
Agreement (as hereinafter defined).
RECITALS
A. Pursuant to a Credit Agreement dated as of the date hereof (as from
time to time amended, modified, restated, supplemented and in effect, the
"Credit Agreement") the Agent and the Lenders have agreed to make available to
Artecon California, a California corporation (the "Borrower"), a secured loan
facility, subject to the terms and conditions and for the purposes set forth in
the Credit Agreement.
B. The Guarantor owns all of the issued and outstanding capital stock of
the Borrower and the Guarantor will therefore receive direct and substantial
benefit and reasonably equivalent value from the Loan.
C. It is a condition precedent to the making of the Loan by the Lenders
that the Guarantor execute and deliver this Guaranty. The Guarantor therefore
deems the execution, delivery and performance of this Guaranty necessary and
convenient to the conduct, promotion and attainment of the business of the
Guarantor in furtherance of the corporate purpose of the Guarantor.
AGREEMENT
NOW, THEREFORE, in consideration of the premises stated above and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Guarantor agrees for the benefit of the Agent and the
Lenders as follows:
1. DEFINITIONS. All capitalized terms used in this Guaranty without
definition shall have the meanings ascribed to them in the Credit Agreement.
2. TYPE OF GUARANTY AND OBLIGATIONS COVERED. The Guarantor, as primary
obligor, and not as surety only, absolutely, unconditionally and irrevocably
guarantees (a) the due and punctual payment by the Borrower of (i) the principal
of, premium, if any, and interest on the Loan, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, and (ii) all other Obligations (including, but not limited to, the
reasonable fees and disbursements of the Agent's and the Lenders' attorneys and
other experts and any interest and fees with respect to any of the Obligations
accruing after the filing of a bankruptcy petition by the Borrower whether or
not allowed as claims in such a proceeding); (b) the due and prompt payment of
any costs and expenses incurred by the Agent and the Lenders in connection with
the enforcement (including but not limited to, with respect to any action, suit
or proceeding which may be instituted by the Agent and the Lenders to obtain
enforcement) of any of its rights or remedies under this Guaranty or any of the
other Loan Documents and (c) the due
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and punctual payment and performance of the obligations of the Borrower under
the Loan Documents (CLAUSES (a) THROUGH (c) above collectively the
"LIABILITIES").
3. TERM OF GUARANTY; NO DISCHARGE FOR INVALIDITY OF UNDERLYING
OBLIGATION; REINSTATEMENT; LIMITATIONS. (a) This Guaranty shall remain in full
force and effect, notwithstanding intervening events of any kind, until the
Liabilities are paid in full. No invalidity, irregularity or unenforceability of
any or all of the Liabilities hereby guaranteed, or any other circumstances
which might otherwise constitute a legal or equitable discharge or defense of
the Guarantor, shall affect, impair, or be a defense to this Guaranty, which
shall in every respect be construed as a primary obligation of the Guarantor,
and the Guarantor waives any and all defenses which may be available to the
Borrower with respect to the Liabilities and agrees not to assert any such
defense hereunder.
(b) If at any time all or any part of any payment theretofore
applied by the Agent or the Lenders to any of the Liabilities is or must be
rescinded or returned by the Agent or any Lender for any reason whatsoever,
including but not limited to, pursuant to a settlement agreement or compromise
effected by the Agent or any Lender with a claimant, such Liabilities shall, for
the purposes of this Guaranty, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence, notwithstanding
such application by the Agent or any Lender, and this Guaranty shall continue to
be effective or shall be reinstated, as the case may be, as to such Liabilities,
all as though such application by the Agent or any Lender had not been made.
(c) In any action or proceeding involving any state corporate
law, or any foreign or United States of America state or federal bankruptcy,
fraudulent conveyance, insolvency, reorganization or other law affecting the
rights of creditors generally, if the obligations of the Guarantor under Section
2 hereof would otherwise be held or determined to be void, invalid or
unenforceable, on account of the amount of the Guarantor's liability under
Section 2, then, notwithstanding any other provision hereof to the contrary, the
amount of such liability shall, without any further action by the Guarantor, the
Lenders or any other Person, be automatically limited and reduced to the highest
amount that is valid and enforceable as determined in such action or proceeding.
The Guarantor agrees that the Liabilities may from time to time exceed the
amount of the liability of the Guarantor hereunder without impairing this
Guaranty or the rights and remedies of the Agent or the Lenders hereunder.
4. WAIVERS BY THE GUARANTOR. (a)The Guarantor hereby expressly waives:
(i) notice of the acceptance by the Agent or any Lender of this Guaranty, (ii)
notice of the existence or creation or non-payment of all or any of the
Liabilities, (iii) presentment, demand, notice of dishonor, protest, notice of
protest and all other notices whatsoever, either in respect of this Guaranty or
any or all of the Liabilities, (iv) all diligence in collection or protection
of, or realization upon, the Liabilities, any obligations hereunder, or any
security for or guaranty of any of the foregoing, and (v) any requirement on the
part of the Agent or any Lender to mitigate the damages resulting from the
default of the Borrower.
(b) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR
IN ANY OTHER LOAN DOCUMENT, THE GUARANTOR AGREES THAT THIS GUARANTY IS A
GUARANTY OF PAYMENT AND OF
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PERFORMANCE AND NOT OF COLLECTION AND UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY
REQUIREMENT THAT THE AGENT OR A LENDER FIRST COMMENCE ANY ACTION OR ASSERT ANY
RIGHT AGAINST THE BORROWER OR ANY OTHER OBLIGOR, ENFORCE ANY RIGHT AGAINST ANY
OF THE SECURITY SECURING ANY OF THE LIABILITIES, OR JOIN BORROWER IN ANY ACTION
THE AGENT OR A LENDER MAY BRING AGAINST THE GUARANTOR UNDER THIS GUARANTY.
5. LENDER INDULGENCES, FORBEARANCE AND CONSENTS RELATING TO THE
BORROWER. The Agent and the Lenders may, at any time and from time to time,
whether before or after any discontinuance of this Guaranty, without the consent
of or notice to the Guarantor, except such notice as may be required by
applicable statute and cannot be waived, without incurring responsibility to the
Guarantor and without impairing or releasing the obligations of the Guarantor
hereunder, upon any terms or conditions, take any or all of the following
actions (which may or could have the effect of changing the risk hereby
undertaken by the Guarantor), to each of which actions the Guarantor hereby
consents: (a) change the manner, place or terms of payment of any of the
Liabilities; (b) change, extend or renew for one or more periods (whether or not
longer than the original period), alter or exchange any of the Liabilities; (c)
release, settle, subordinate or compromise any obligation of the Borrower with
respect to any of the Liabilities; (d) grant any indulgence or forbearance to
the Borrower, or consent to any action or failure to act of the Borrower, which,
in the absence of the Lenders' consent, violates or may be deemed to violate any
agreements of the Borrower with respect to any or all of the Liabilities; (e)
retain or obtain a security interest in any property to secure any of the
Liabilities or any obligation hereunder; (f) sell, substitute, exchange,
release, surrender, realize upon, or otherwise deal with in any manner all or
any part of any property securing any of the Liabilities or any obligation
hereunder; (g) retain or obtain, or release, the primary or secondary
obligations of any obligor or obligors, in addition to the Guarantor, with
respect to any of the Liabilities; (h) exercise or refrain from exercising any
rights against the Borrower or others (including the Guarantor) or otherwise act
or refrain from acting; (i) apply any sums paid or realized to any Liabilities
regardless of what Liabilities remain unpaid; (j) act or fail to act in any
manner referred to in this Guaranty which may deprive the Guarantor of its right
to subrogation against the Borrower to recover full indemnity for any payments
made pursuant to this Guaranty; and (k) resort to the Guarantor for payment of
any of the Liabilities, whether or not the Agent or the Lenders shall have
resorted to any property securing any of the Liabilities or any obligation
hereunder or shall have proceeded against the Borrower or any other obligor
primarily or secondarily obligated with respect to any of the Liabilities.
6. LENDER LIEN. The Guarantor hereby grants to the Agent, for the
ratable benefit of the Lenders, a lien and security interest as security for any
and all liabilities created by this Guaranty in any and all property received
from any source now or hereafter in the possession (all remittances and property
to be deemed in the possession of the Agent as soon as the same are put in
transit to it) or custody of the Agent for any purpose (including safekeeping or
pledge of any liability of the Guarantor), including the balance of any account
(whether general or special or for any specific purpose), of or for account of
the Guarantor, or in or as to which the Guarantor may have any interest or
power, including power of hypothecation or disposition, and all claims of any
description of the Guarantor against the Agent or any Lender. If any event shall
occur causing the acceleration of the Liabilities pursuant to Section 7.02 of
the Credit Agreement, or if
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any liability of the Guarantor under this Guaranty shall become due and owing
for any reason, the Agent may at its option, without demand, notice or
advertisement, which are hereby expressly waived, appropriate and apply any or
all present and future credit balances of the Guarantor, in whatever currencies
may be held by the Lenders and whether held in general or special accounts or
for any specific purpose, or any other present or future claim of the Guarantor
against the Agent or the Lenders toward the payment and extinguishment of the
liabilities created by this Guaranty.
7. SET-OFF. The Guarantor agrees that the Guarantor shall make no claim
or setoff, defense, recoupment or counterclaim of any sort whatsoever, nor shall
the Guarantor seek to impair, limit or defeat in any way his obligations
hereunder. The Guarantor hereby waives any right to such a claim in limitation
of its obligations hereunder. All payments made by the Guarantor under this
Guaranty shall be made free and clear of, and without deduction or withholding
for or on account of, any future income, stamp or other taxes, levies, imposts,
deductions, charges or withholdings, including, but not limited to, any taxes,
levies, imposts, duties, deductions, charges, assessments or withholdings
imposed by any foreign, federal, state or local jurisdiction or any political
subdivision thereof or therein, but excluding taxes imposed on net income of a
Lender by the jurisdiction in which such Lender has its principal office (all
such non-excluded taxes, levies, imposts, deductions, charges or withholdings
being hereinafter called "Taxes"). If any Taxes are required to be withheld from
any amounts so payable to the Lenders hereunder or under this Guaranty, the
amounts so payable to the Lenders shall be increased to the extent necessary to
yield to the Lenders (after payment of all Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Guaranty or the Credit Agreement. Whenever any Tax is paid by the Guarantor, as
promptly as possible thereafter, the Guarantor shall send to the Agent a
certified copy of any original official receipt received by the Guarantor
showing payment thereof. If the Guarantor fails to pay any Taxes when due to the
appropriate taxing authority, the Guarantor shall indemnify the Lenders for any
incremental taxes, interest or penalties that may become payable by the Lenders
as a result of any such failure.
8. REPRESENTATIONS. The Guarantor makes the following representations
and warranties which shall survive the execution and delivery of this Guaranty.
(a) The Guarantor is a corporation, duly organized, validly
existing and in good standing under the laws of Delaware.
(b) The Guarantor is qualified to do business as a foreign
corporation in each jurisdiction where the ownership or leasing of its property
or the conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on its
business, properties, assets, operations, prospects or condition, financial or
otherwise or its ability to perform any of its obligations under any of the Loan
Documents to which it is a party.
(c) The Guarantor has full corporate power and authority to own
its property and assets and to execute, deliver and perform this Guaranty and
the other Loan Documents to which it is a party.
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(d) This Guaranty and each of the other Loan Documents to which
the Guarantor is a party has been duly authorized and constitutes the legal,
valid and binding obligation of the Guarantor enforceable against the Guarantor
in accordance with its terms, subject only to limitations on enforceability as
may be applicable under equitable principles, bankruptcy or insolvency laws.
(e) Neither the execution, delivery or performance by the
Guarantor of this Guaranty, nor compliance by it with the terms and provisions
hereof, (i) will contravene any provision of any law, statute, rule or
regulation or any order, writ, injunction or decree of any court or governmental
instrumentality, or (ii) will conflict or be inconsistent with or result in any
breach of any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or the
obligation to create or impose) any lien upon any of the property or assets of
the Guarantor (other than in favor of the Lenders) pursuant to the terms of any
indenture, mortgage, deed of trust, credit agreement, loan agreement or any
other agreement, contract or instrument to which the Guarantor is a party or by
which it or any of its property or assets is bound or to which it may be
subject.
(f) No order, consent, approval, license, authorization or
validation of, or filing, recording or registration with (except as have been
obtained or made prior to the date of this Guaranty), or exemption by, any
governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with, (i) the execution,
delivery and performance of its Guaranty or (ii) the legality, validity, binding
effect or enforceability of this Guaranty.
(g) There are no actions, suits or proceedings pending or, to the
best knowledge of the Guarantor, threatened that are reasonably likely to
materially and adversely affect the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Guarantor.
(h) All factual information heretofore or contemporaneously
furnished by or on behalf of the Guarantor in writing to the Agent or the
Lenders (including but not limited to, all information contained herein) for
purposes of or in connection with this Guaranty or any transaction contemplated
herein is, and all other such factual information hereafter furnished by or on
behalf of the Guarantor in writing to the Agent or the Lenders will be, true and
accurate in all material respects on the date as of which such information is
dated or certified and, to the best of the Guarantor's knowledge, will not omit
to state any fact necessary to make such information not misleading at such time
in light of the circumstances under which such information was provided.
(i) All representations and warranties made by the Borrower in
Article III of the Credit Agreement are incorporated herein by this reference as
if fully set forth herein and shall be hereby deemed made by the Guarantor as if
the Guarantor was the Borrower referred to therein; provided that this clause
(i) shall not apply to the following provisions of the Credit Agreement insofar
as they relate to the Guarantor (but shall apply to the extent that, by their
terms, they would relate to the Guarantor's Subsidiaries): Section 3.05, Section
3.15 and Section 3.16 (other than the penultimate sentence thereof).
5.
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9. COVENANTS. All covenants set forth in Articles V and VI of the Credit
Agreement (including all information and reporting requirements) are
incorporated herein by this reference as if fully set forth herein and shall be
hereby deemed made by the Guarantor as if the Guarantor was the Borrower
referred to therein; provided that this Section 9 shall not apply to the
following provisions of the Credit Agreement insofar as they relate to the
Guarantor (but shall apply to the extent that, by their terms, they would relate
to the Guarantor's Subsidiaries): clauses (c), (d) and (e) of Section 5.05,
Section 6.05 (to the extent the Guarantor would be prohibited thereunder from
declaring, and paying to holders of its capital stock, dividends consisting of
additional shares of its capital stock) and clause (a) of Section 6.10. Without
limitation on the foregoing, the Guarantor agrees that it shall not, and not
permit any Subsidiary to, incur any Lien on any of its or their respective
properties or assets (including the capital stock of Subsidiaries of the
Guarantor or the Borrower) except as expressly permitted by the Credit
Agreement.
10. WAIVER OF SUBROGATION AND CONTRIBUTION. Until the Liabilities have
been indefeasibly paid in full, the Guarantor hereby irrevocably waives all
claims or other rights which it may now or hereafter acquire against any Person
which is primarily or contingently liable on the Liabilities (collectively, a
"Credit Party") that arise from the existence, payment, performance or
enforcement of the Guarantor's obligations under this Guaranty or any other Loan
Document, including but not limited to, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, any right to participate in any
claim or remedy of the Agent or any Lender against any Credit Party or any
Collateral which such Credit Party now has or hereafter acquires, whether or not
such claim, remedy or right arises in equity, or under contract, statute or
common law, including but not limited to, the right to take or receive from any
Credit Party, directly or indirectly, in cash or other property or by set-off or
in any other manner, payment or security on account of such claim or other
rights. If any amount shall be paid to the Guarantor in violation of this
Section 10 and the Liabilities shall not have been paid in full such amount
shall be deemed to have been paid to the Guarantor for the ratable benefit of,
and held in trust for the benefit of the Agent and the Lenders, and shall
forthwith be paid to the Agent to be credited and applied to the Liabilities,
whether matured or unmatured.
11. GUARANTY TO INURE TO BENEFIT OF ASSIGNEES OF LIABILITIES. Each
Lender may, from time to time, whether before or after any discontinuance of
this Guaranty, without notice to the Guarantor, assign or transfer any or all of
the Liabilities or any interest therein. Notwithstanding any such assignment or
transfer or any subsequent further assignment or transfer thereof, such
Liabilities shall be and remain Liabilities for the purposes of this Guaranty,
and each and every immediate and successive assignee or transferee of any of the
Liabilities or of any interest therein shall, to the extent of the interest of
such assignee or transferee in the Liabilities, be entitled to the benefits of
this Guaranty to the same extent as if such assignee or transferee were the
Lenders; provided, however, that unless the Agent shall otherwise consent in
writing, the Agent shall have an unimpaired right, prior and superior to that of
any such assignee or transferee, to enforce this Guaranty for the benefit of the
Lenders as to those of the Liabilities which the Lenders have not assigned or
transferred or which are then owed to the Lenders.
12. SUBORDINATION. Any and all rights and claims of the Guarantor
against the Borrower or against any of the Borrower's property (including any
rights and claims for rents, indebtedness or other obligations) shall be
subordinated and subject to, in right of payment, the prior indefeasible payment
and performance in full of all liabilities and obligations of the
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Borrower to the Agent and the Lenders, including but not limited to, the
Liabilities, and the lien of any such loan from the Guarantor to the Borrower
shall be inferior and subordinate to the lien of all Loan Documents.
13. COSTS AND EXPENSES. (a) The Guarantor agrees to pay all
out-of-pocket expenses reasonably incurred by (i) the Agent (including the fees
and expenses of the Agent's counsel and its paralegals, field exam expenses and
related fees and environmental audit and appraisal fees) in connection with the
preparation and administration of this Guaranty and the other Loan Documents, or
with any amendments, modifications or waivers of the provisions hereof or
thereof (whether or not the Transactions shall be consummated) or reasonably
incurred by the Agent and the Lenders (including the fees and expenses of the
Agent's and the Lenders' counsel and its paralegals) and (ii) the Agent and the
Lenders (including the fees and expenses of counsel and paralegals of each of
the Agent and the Lenders) in connection with the enforcement of the rights of
the Agent and the Lenders in connection with this Guaranty or the other Loan
Documents. The Guarantor further agrees that it shall indemnify the Agent and
the Lenders from and hold them harmless against any documentary taxes,
assessments or charges made by any governmental authority by reason of the
execution and delivery of this Guaranty or any of the other Loan Documents.
(b) The Guarantor agrees to indemnify the Agent, the Lenders and
their respective Affiliates, directors, officers, employees and agents against,
and to hold the Agent, the Lenders and such Persons harmless from, any and all
losses, claims, damages, liabilities, penalties, actions, judgments, suits,
costs, and related expenses, including reasonable legal and paralegal fees and
expenses, incurred by or asserted against the Agent, the Lenders or any such
Persons arising out of, in any way connected with, or as a result of any claim,
investigation, litigation or other proceeding (whether or not the Agent or any
Lender is a party) relating to (i) this Guaranty or the other Loan Documents,
(ii) the performance by the parties hereto and thereto of their respective
obligations hereunder and thereunder, (iii) the consummation of the
Transactions, (iv) the release of Hazardous Materials, including any damage or
injury resulting from any such Hazardous Materials to or affecting the
Guarantor's properties or the soil, water, air, vegetation, buildings, personal
property, persons or animals located on such properties or on any other property
or otherwise, or (v) any violation of any Environmental Laws. The foregoing
indemnity includes the cost of remedial action to the extent required to cause
the Guarantor's properties to be in compliance with all applicable Environmental
Laws. Notwithstanding the foregoing, with respect to the Agent and each Lender
separately, this indemnity shall not apply to any such losses, claims, damages,
liabilities or related expenses arising from the gross negligence or willful
misconduct of the Agent or such Lender.
(c) The provisions of this Section shall remain operative and in
full force and effect regardless of the expiration of the term of this Guaranty,
the other Loan Documents, the consummation of the Transactions, the repayment of
any of the liabilities, the invalidity or unenforceability of any term or
provision of this Guaranty or any of the other Loan Documents, or any
investigation made by or on behalf of the Lenders. All amounts due under this
SECTION 13 shall be payable on written demand in reasonable detail therefor.
14. SECURED GUARANTY. This Guaranty is secured by the Parent Security
Agreement and the Loan Documents executed in connection therewith.
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15. GOVERNING LAW. THIS GUARANTY SHALL BE CONSTRUED IN ACCORDANCE AND
GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ILLINOIS
CHOICE OF LAW DOCTRINE.
16. PLACE OF PAYMENT. Unless otherwise directed by the Agent, payment
hereunder shall in each case be made at the place of payment of the Liabilities
in respect to which such payment hereunder is made in immediately available
funds in the currency borrowed by the Borrower.
17. SEVERABILITY. In the event any one or more of the provisions
contained in this Guaranty should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein or therein shall not in any way be affected or
impaired thereby.
18. HEADINGS. Section headings in this Guaranty are included for
convenience of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Guaranty.
19. LOAN DOCUMENTS. The Guarantor acknowledges that a copy of the Credit
Agreement and other Loan Documents have been made available to it and that it is
familiar with their contents.
20. BANKRUPTCY. In the event of any bankruptcy, reorganization, winding
up, or similar proceedings with respect to the Borrower, no limitation on the
Borrower's liability under the Credit Agreement or any of the Loan Documents
that may now or hereafter be imposed by any federal, state or other statute,
law, regulation, or judicial or administrative determination applicable to such
proceedings shall in any way limit the obligation hereunder of the Guarantor,
which obligation is coextensive with the Borrower's liability as set forth in
the Credit Agreement and the Loan Documents without regard to any such
limitation.
21. AMENDMENTS. Neither this Guaranty nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Agent and the Guarantor.
22. NOTICES. (a) Notices and other communications provided for herein
and in the other Loan Documents shall be in writing and shall be delivered
personally or mailed, by certified or registered mail, postage prepaid (or in
the case of facsimile communication, delivered by telex, graphic scanning or
other facsimile communications equipment) or delivered by overnight courier
addressed:
(i) If to the Agent:
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Michael J. Burton
Telephone: (312) 904-2677
Facsimile: (312) 904-6457
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with a copy (which shall not constitute notice) to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: Ronald H. Jacobson
Telephone: (312) 558-5832
Facsimile: (312) 558-5700
(ii) IF TO THE GUARANTOR:
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Attention: Chief Financial Officer
Telephone: (760) 931-5500
Facsimile: (760) 931-5527
with a copy (which shall not constitute notice) to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121-2128
Telephone: (619) 550-6000
Facsimile: (619) 453-3555
Attention: Thomas A. Coll
(b) All notices and other communications given to any party
hereto in accordance with the provisions of this Guaranty shall be deemed to be
given on the date of receipt, in each case addressed to such party as provided
in this Section 22 or in accordance with the last unrevoked direction of such
Person.
23. CONSENT TO JURISDICTION. THE GUARANTOR HEREBY IRREVOCABLY AGREES
THAT ANY SUIT, ACTION, PROCEEDING OR CLAIM AGAINST IT ARISING OUT OF OR IN ANY
WAY RELATING TO THIS GUARANTY, OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT
THEREOF, MAY BE BROUGHT OR ENFORCED IN THE STATE OR FEDERAL COURTS LOCATED IN
CHICAGO, ILLINOIS OR COOK COUNTY, ILLINOIS AND THE GUARANTOR HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY PROTECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE VENUE OF ANY PROCEEDING BROUGHT ACCORDINGLY, AND
FURTHER IRREVOCABLY WAIVES ANY CLAIMS THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
24. WAIVER OF JURY TRIAL. THE GUARANTOR, THE AGENT AND EACH LENDER
HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
TO ENFORCE OR DEFEND ANY RIGHT, POWER, OR REMEDY UNDER OR IN CONNECTION WITH
THIS GUARANTY OR IN CONNECTION
9.
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WITH ANY AMENDMENT, INSTRUMENT, DOCUMENT, OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS GUARANTY AND AGREE THAT ANY SUCH
ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE TERMS AND
PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT FOR THE PARTIES
ENTERING INTO THIS GUARANTY.
25. INTEREST LIMITATION. Anything in this Guaranty or any Loan Document
to the contrary notwithstanding, the Guarantor shall never be required to pay
interest at a rate in excess of the highest lawful rate, and if the effective
rate of interest that would otherwise be payable under this Guaranty would
exceed the highest lawful rate, or if the Lenders shall receive monies that are
deemed to constitute interest which would increase the effective rate of
interest payable under this Guaranty, to a rate in excess of the highest lawful
rate, then (a) the amount of interest that would otherwise be payable under this
Guaranty shall be reduced to the amount allowed under applicable law, and (b)
any interest paid in excess of the highest lawful rate shall, at the option of
the Lenders, be either refunded to the payor or credited on the principal of the
Lenders.
26. JUDGMENT CURRENCY.
(a) If for any purpose, including the obtaining of judgment in
any court, it is necessary to convert a sum due hereunder from the currency in
which it is payable pursuant to the Credit Agreement (the "Payment Currency")
into another currency (the "Judgment Currency"), the parties hereto agree, to
the fullest extent that they may lawfully and effectively do so, that the rate
of exchange used shall be that at which, in accordance with normal banking
procedures, the Agent could purchase the Payment Currency with the Judgment
Currency in the Chicago foreign exchange market on the Business Day preceding
the date of final judgment.
(b) The obligation of the Guarantor in respect of any sum due
from it to the Lenders hereunder shall, notwithstanding any judgment or payment
in a currency other than the Payment Currency, be discharged only to the extent
that on the Business Day following receipt by the Agent of any sum so paid or
adjudged to be so due in the Judgment Currency the Agent may in accordance with
normal banking procedures, purchase the Payment Currency with the amount of
Judgment Currency so paid or adjudged to be due; if the amount in the Payment
Currency so purchased is less than the sum originally due to the Lenders in the
Payment Currency, the Guarantor agrees, as a separate obligation and additional
cause of action and notwithstanding any such payment or judgment, to indemnify
the Lenders against such loss and if the amount in the Payment Currency so
purchased exceeds the sum originally due to the Lenders in the Payment Currency,
the Lenders agree to remit to the Guarantor such excess.
(c) The term "rate of exchange" in this Section 26 means the spot
rate at which the Agent, in accordance with normal practices, is able on the
relevant date to purchase the Payment Currency with the Judgment Currency and
includes any premium and costs of exchange payable in connection with the
purchase.
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27. WAIVER OF RIGHTS. Without limiting the generality, scope or meaning
of any other provision of this Guaranty (including, but not limited to, the
agreement by the Guarantor that the internal laws of the State of Illinois shall
govern this Guaranty), the Guarantor:
(a) acknowledges that Section 2856 of the California Civil Code
authorizes and validates waivers of a guarantor's rights of subrogation and
reimbursement and certain other rights and defenses available to the Guarantor
under California law;
(b) unless and until all of the Obligations have been
indefeasibly repaid in full, waives all rights of subrogation, reimbursement,
indemnification, and contribution and waives all other rights and defenses that
are or may become available by reason of Sections 2787 to 2855, inclusive, of
the California Civil Code;
(c) waives all rights and defenses arising out of an election of
remedies by the Agent or the Lenders, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor's rights of subrogation and
reimbursement against the Borrower by the operation of Section 580d of the
California Code of Civil Procedure or otherwise;
(d) waives all rights and defenses that the Guarantor may have in
the event the Borrower's debt is secured by real property. This means, among
other things:
(i) The Agent or the Lenders may collect from the
Guarantor without first foreclosing on any real or personal property collateral
pledged by the Borrower;
(ii) If the Agent or the Lenders foreclose on any real
property collateral pledged by the Borrower:
(1) the amount of the debt may be reduced only by the
price for which that collateral is sold at the foreclosure sale, even if the
collateral is worth more than the sale price; and
(2) the Agent or the Lenders may collect from the
Guarantor even if the Agent or the Lenders, by foreclosing on the real property
collateral, have destroyed any right the Guarantor may have to collect from the
Borrower.
This is an unconditional and irrevocable waiver of any
rights and defenses the Guarantor may have in the event the Borrower's debt is
secured by real property. These rights and defenses include, but are not limited
to, any rights or defenses based upon Sections 580a, 580b, 580d, or 726 of the
California Code of Civil Procedure; and
(e) waives all rights and defenses, if any, now or hereafter
arising under the laws of the State of Illinois, which are the same as or
similar to the rights and defenses waived as described above.
[signature page follows]
11.
<PAGE> 129
IN WITNESS WHEREOF, the Guarantor has executed and delivered this
Guaranty as of the date written above.
ARTECON, INC.
By: /s/ James L. Lambert
-------------------------------
Its: President
------------------------------
12.
<PAGE> 130
PATENT SECURITY AGREEMENT
WHEREAS, Artecon California, a California corporation ("Grantor"), owns
the Patents and Patent applications listed on Schedule 1 annexed hereto, and is
a party to any patent licenses listed on Schedule 1 annexed hereto (the "Patent
Licenses");
WHEREAS, Grantor and LaSalle National Bank, as Agent (together with its
successors and assigns, the "Grantee"), and the Lenders are parties to that
certain Credit Agreement dated as of the date hereof (the same, as it may be
amended, restated, supplemented or otherwise modified and in effect from time to
time, the "Credit Agreement"; terms defined in the Credit Agreement and not
otherwise defined herein have the respective meanings provided for in the Credit
Agreement), providing for extensions of credit to be made to Grantor by the
Lenders; and
WHEREAS, pursuant to the terms of the Credit Agreement and the Borrower
Security Agreement, Grantor has granted to Grantee, for the benefit of Grantee
and the Lenders, a security interest in substantially all the assets of Grantor,
including all right, title and interest of Grantor in, to and under all now
owned and hereafter acquired Patents, Patent applications and Patent Licenses,
and all products and proceeds thereof, to secure the payment of all amounts
owing by Grantor under the Credit Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee, for the benefit of Grantee and the Lenders, a continuing security
interest in all of Grantor's right, title and interest in, to and under the
following (all of the following items or types of property being herein
collectively referred to as the "Patent Collateral"), whether presently existing
or hereafter created or acquired:
1. each Patent and Patent application, including, without
limitation, each Patent and Patent application referred to in
Schedule 1 annexed hereto, together with any reissues,
continuations or extensions thereof;
2. each Patent License, including, without limitation, each Patent
License listed on Schedule 1 annexed hereto; and
3. all products and proceeds of the foregoing, including, without
limitation, any claim by Grantor against third parties for past,
present or future infringement of any Patent, including, without
limitation, any Patent referred to in Schedule 1 annexed hereto,
any Patent issued pursuant to a Patent application referred to
in Schedule 1 and any Patent licensed under any Patent License
listed on Schedule 1 annexed hereto.
This security interest is granted in conjunction with the security interests
granted to Grantee pursuant to the Credit Agreement. Grantor hereby acknowledges
and affirms that the rights and remedies of Grantee with respect to the security
interest in the Patent Collateral made and granted hereby are more fully set
forth in the Credit Agreement and the Borrower Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
1.
<PAGE> 131
IN WITNESS WHEREOF, Grantor has caused this Patent Security Agreement to
be duly executed by its duly authorized officer thereunto as of this 5th day of
May, 1998.
ARTECON CALIFORNIA
By:/s/ James L. Lambert
-------------------------------
Title: President
----------------------------
Acknowledged:
LASALLE NATIONAL BANK,
as Agent
By:/s/ Michael J. Burton
-------------------------------
Title: First V.P.
----------------------------
2.
<PAGE> 132
STATE OF ____________ )
) ss
COUNTY OF __________ )
On this ______ day of May, 1998, before me personally appeared the
person whose signature is set forth above, to me known, who, being duly sworn,
did depose and say that he is the above-indicated officer of Artecon California,
a California corporation, and which executed the above instrument; and that he
signed his name thereto by authority of the Board of Directors of said
corporation.
----------------------------------
Notary Public
<PAGE> 133
TRADEMARK SECURITY AGREEMENT
WHEREAS, Artecon California, a California corporation ("Grantor"), owns
the Trademarks and Trademark applications listed on Schedule 1 annexed hereto,
and is a party to any trademark licenses listed on Schedule 1 annexed hereto
(the "Trademark Licenses");
WHEREAS, Grantor and LaSalle National Bank, as Agent (together with its
successors and assigns, the "Grantee"), and the Lenders are parties to that
certain Credit Agreement dated as of the date hereof (the same, as it may be
amended, restated, supplemented or otherwise modified and in effect from time to
time, the "Credit Agreement"; terms defined in the Credit Agreement and not
otherwise defined herein have the respective meanings provided for in the Credit
Agreement), providing for extensions of credit to be made to Borrower by the
Lenders;
WHEREAS, as a condition to the obligations of the Lenders under the
Credit Agreement, Grantor has executed and delivered in favor of Grantee and the
Lenders a Guaranty of Payment dated the date hereof (as the same may be amended,
restated or otherwise modified from time to time, the "Guaranty"); and
WHEREAS, pursuant to the terms of the Credit Agreement, Grantor has
granted to Grantee, for the benefit of Grantee and the Lenders, a security
interest in substantially all the assets of Grantor, including all right, title
and interest of Grantor in, to and under all now owned and hereafter acquired
Trademarks, Trademark applications and Trademark Licenses, and all products and
proceeds thereof, to secure the payment of all amounts owing by Borrower under
the Credit Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee, for the benefit of Grantee and the Lenders, a continuing security
interest in all of Grantor's right, title and interest in, to and under the
following (all of the following items or types of property being herein
collectively referred to as the "Trademark Collateral"), whether presently
existing or hereafter created or acquired:
1. each Trademark and Trademark application, including, without
limitation, each Trademark and Trademark application referred to
in Schedule 1 annexed hereto, together with any reissues,
continuations or extensions thereof and all goodwill associated
therewith;
2. each Trademark License, including, without limitation, each
Trademark License listed on Schedule 1 annexed hereto, together
with all goodwill associated therewith; and
3. all products and proceeds of the foregoing, including, without
limitation, any claim by Grantor against third parties for past,
present or future infringement of any Trademark, including,
without limitation, any Trademark referred to in Schedule 1
annexed hereto, any Trademark issued pursuant to a Trademark
application referred to in Schedule 1 and any Trademark licensed
under any Trademark License listed on Schedule 1 annexed hereto.
1.
<PAGE> 134
This security interest is granted in conjunction with the security interests
granted to Grantee pursuant to the Guaranty. Grantor hereby acknowledges and
affirms that the rights and remedies of Grantee with respect to the security
interest in the Trademark Collateral made and granted hereby are more fully set
forth in the Guaranty and the Parent Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
[signature page follows]
2.
<PAGE> 135
IN WITNESS WHEREOF, Grantor has caused this Trademark Security Agreement
to be duly executed by its duly authorized officer thereunto as of this 5th day
of May, 1998.
ARTECON CALIFORNIA
By:/s/ James L. Lambert
-------------------------------
Title: President
----------------------------
Acknowledged:
LASALLE NATIONAL BANK,
as Agent
By:/s/ Michael J. Burton
-------------------------------
Title: First V.P.
----------------------------
3.
<PAGE> 136
STATE OF ____________ )
) ss
COUNTY OF __________ )
On this ______ day of May, 1998, before me personally appeared the
person whose signature is set forth above, to me known, who, being duly sworn,
did depose and say that he is the above-indicated officer of Artecon California,
a California corporation, and which executed the above instrument; and that he
signed his name thereto by authority of the Board of Directors of said
corporation.
----------------------------------
Notary Public
<PAGE> 1
EXHIBIT 10.10
[CB COMMERCIAL LOGO] INDUSTRIAL REAL ESTATE LEASE
(SINGLE-TENANT FACILITY)
CB Commercial Real Estate Group, Inc.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: July 9, 1993
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): VECTOR ASSOCIATES, a
California Limited Partnership
Address of Landlord: Mr. Ted Munroe. VECTOR ASSOCIATES, 1810 South Bayfront,
Balboa Island, CA 92662
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): ARTECON, INC., A California
corporation
Address of Tenant: 2460 Impala Drive, Carlsbad, CA 92008-7236
Section 1.04. PROPERTY: (include street address, approximate square
footage and description)
6305 El Camino Real, Carlsbad, CA 92009
Containing approximately 67,200 square feet.
Section 1.05. LEASE TERM: three (3) years zero (0) months BEGINNING ON
January 1, 1994 or such other date as is specified in this Lease, and ENDING ON
December 31, 1996
Section 1.06. PERMITTED USES: (See Article Five) General office,
manufacturing, assembly, warehousing and all other legally permitted uses.
Section 1.07. TENANT'S GUARANTOR: (If none, so state) ARTECON, INC.
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: CB Commercial Real Estate Group, Inc.
Tenant's Broker: None
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ As per written Agreement
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $23,500.00
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: Approximately
one hundred sixty three (163)
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: Twenty Three Thousand Five Hundred and NO/100ths Dollars
($23,500.00) per month, for the first twelve (12) months, as provided in
Section 3.01, and shall be increased on the first day of the 13th & 25th
month(s) after the Commencement Date, such that the Base Rent year two (2) rent
shall be Twenty Six Thousand Nine Hundred and No/100ths ($26,900.00) Dollars
per month and Year three (3) rent shall be Thirty Thousand Two Hundred Fifty
and No/100ths ($30,250.00) Dollars per month.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04);
(iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.07); (v)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) zero (0) percent (-0-%) of the Profit (the "Landlord's Share").
Section 1.14. RIDERS: The following Riders are attached to and made a part
of this Lease: (If none, so state)
1.) Exhibit "A" Premises
2.) Addendum
3.) Right of First Offer Lease Rider
4.) Option to Extend Term Lease Rider
5.) Floor Plan
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
1
(SINGLE-TENANT NET FORM)
<PAGE> 2
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under any
provision of this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
fifteen (15) days after the March 16, 1994 Commencement Date, Tenant may elect
to cancel this Lease by giving written notice to Landlord within ten (10) days
after the fifteen (15) day period ends. If Tenant gives such notice, the Lease
shall be cancelled and neither Landlord nor Tenant shall have any further
obligations to the other. If delivery of possession of the Property to Tenant
is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment
to this Lease setting forth the actual Commencement Date and expiration date of
the Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rate and all
other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in
effect shall be increased by ten percent (10%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Will possibly be used during Option Period only. Section 3.02. COST OF
LIVING INCREASES. The Base Rent shall be increased one each date (the "Rental
Adjustment Date") stated in Paragraph 1.12(a) above in accordance with the
increase in the United States Department of Labor, Bureau of Labor Statistics,
Consumer Price Index for All Urban Consumers (all items for the geographical
Statistical Area in which the Property is located on the basis of 1982-1984 =
100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately before
each Rental Adjustment Date shall be increased by the percentage that the Index
has increased from the date (the "Comparison Date") on which payment of the
Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two Indices, and the new Base Rent. Any increase in the Base Rent provided
for in this Section 3.02 shall be subject to any minimum or maximum increase, if
provided for in Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant.
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord
a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security
Deposit to its full amount within ten (10) days after Landlord's written
request. Tenant's failure to do so shall be a material default under this
Lease. No interest shall be paid on the Security Deposit. Landlord shall not be
required to keep the Security Deposit separate from its other accounts and no
trust relationship is created with respect to the Security Deposit.
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
2
(SINGLE-TENANT NET FORM)
<PAGE> 3
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10)-day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taking authority
against the Property; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Property or against Landlord's business of
leasing the Property; (iii) any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services provided to the Property
by any governmental agency; (iv) any tax imposed upon this transaction or based
upon a re-assessment of the Property due to a change of ownership, as defined
by applicable law, or other transfer of all or part of Landlord's interest in
the Property; and (v) any charge or fee replacing any tax previously included
within the definition of real property tax. "Real property tax" does not,
however, include Landlord's federal or state income, franchise, inheritance or
estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall try to have personal property taxed separately from
the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after Tenant receives a written statement from
Landlord for such personal property taxes.
(e) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a "tax sale" or similar enforcement
proceeding.
Section 4.03. UTILITIES. Tenant shall pay, directly to the
appropriate supplier, the cost of all natural gas, heat, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Property. However, if any services or utilities are jointly
metered with other property, Landlord shall make a reasonable determination of
Tenant's proportionate share of the cost of such utilities and services and
Tenant shall pay such share to Landlord within fifteen (15) days after receipt
of Landlord's written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability
for bodily injury, property damage (including loss of use of property) and
personal injury arising out of the operation, use or occupancy of the Property.
Tenant shall name Landlord as an additional insured under such policy. The
initial amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence. The liability insurance obtained by Tenant under this Paragraph
4.04(a) shall (i) be primary and non-contributing; (ii) contain cross-liability
endorsements; and (iii) insure Landlord against Tenant's performance under
Section 5.05, if the matters giving rise to the indemnity under Section 5.05
result from the negligence of Tenant. The amount and coverage of such insurance
shall not limit Tenant's liability nor relieve Tenant of any other obligation
under this Lease. Landlord may at its sole cost and expense also obtain
comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(c) 1988 Southern California Chapter Initials
of the Society of Industrial -----------
and Office Realtors,(R) Inc.
[SIOR LOGO] -----------
3
(SINGLE-TENANT NET FORM)
<PAGE> 4
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall not
obtain insurance for Tenant's fixtures or equipment or building improvements
installed by Tenant on the Property. During the Lease Term, Landlord shall also
maintain a rental income insurance policy, with loss payable to Landlord, in an
amount equal to one year's Base Rent, plus estimated real property taxes and
insurance premiums. Tenant shall be liable for the payment of any deductible
amount under Landlord's or Tenant's insurance policies maintained pursuant to
this Section 4.04, in an amount not to exceed Ten Thousand Dollars ($10,000).
Tenant shall not do or permit anything to be done which invalidates any such
insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.07, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). If insurance policies maintained by Landlord cover improvements on real
property other than the Property, Landlord shall deliver to Tenant a statement
of the premium applicable to the Property showing in reasonable detail how
Tenant's share of the premium was computed. If the Lease Term expires before the
expiration of an insurance policy maintained by Landlord, Tenant shall be liable
for Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance which
Tenant is required to maintain under this Section 4.04. At least thirty (30)
days prior to the expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to providing a policy of
insurance, Tenant shall have the right to provide Landlord a certificate of
insurance, executed by an authorized officer of the insurance company, showing
that the insurance which Tenant is required to maintain under this Section 4.04
is in full force and effect and containing such other information which Landlord
reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to
any cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period
or if any such policy is cancelled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in
which case Tenant shall reimburse Landlord for the cost of such
insurance within fifteen (15) days after receipt of a statement that
indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this
Lease with companies holding a "General Policy Rating" of A-10 or
better, as set forth in the most current issue of "Best Key Rating
Guide". Landlord and Tenant acknowledge the insurance markets are
rapidly changing and that insurance in the form and amounts described
in this Section 4.04 may not be available in the future. Tenant
acknowledges that the insurance described in this Section 4.04 is for
the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease,
Tenant shall nevertheless maintain insurance coverage which is
customary and commercially reasonable in the insurance industry for
Tenant's type of business, as that coverage may change from time to
time. Landlord makes no representation as to the adequacy of such
insurance to protect Landlord's or Tenant's interests. Therefore,
Tenant shall obtain any such additional property or liability insurance
which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice
to the insurance carriers of this mutual waiver of subrogation.
Section 4.05. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within
fifteen (15) days after it becomes due, Tenant shall pay Landlord a late charge
equal to five percent (5%) of the overdue amount. The parties agree that such
late charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment.
Section 4.06. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate
of Prime +1% per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
Section 4.07. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12) month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord
may apply any funds in the impound account to any obligation then due under
this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
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Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes
with the rights of other tenants of Landlord, or which constitutes a nuisance
or waste. Tenant shall obtain and pay for all permits, including a Certificate
of Occupancy, required for Tenant's occupancy of the Property and shall
promptly take all actions necessary to comply with all applicable statutes,
ordinances, rules, regulations, orders and requirements regulating the use by
Tenant of the Property, including the Occupational Safety and Health Act.
Landlord to pay for Tenant Improvement Permit.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state
or local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property. The above definition shall exclude
general office products.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising
from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting
from the presence or use of Hazardous Material caused or permitted by Tenant;
(c) any breach or default in the performance of Tenant's obligations under this
Lease; (d) any misrepresentation or breach of warranty by Tenant under this
Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord
against any such cost, claim or liability at Tenant's expense with counsel
reasonably acceptable to Landlord or, at Landlord's election, Tenant shall
reimburse Landlord for any legal fees or costs incurred by Landlord in
connection with any such claim. As a material part of the consideration to
Landlord, Tenant assumes all risk of damage to property or injury to persons in
or about the Property arising from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, except for any claim arising out of
Landlord's negligence or willfull misconduct. As used in this Section, the term
"Tenant" shall include Tenant's employees, agents, contractors and invitees, if
applicable. (We require indemnity should Landlord, its agent use the Premises.)
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry except in the case of an emergency. Landlord
may place customary *"For Lease" signs on the Property *(Not before six (6)
months to the expiration of the Lease Term).
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
SECTION 6.01. EXISTING CONDITIONS. Tenants accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of
the Property and is not relying on any representations of Landlord or any
Broker with respect thereto. If Landlord or Landlord's Broker has provided a
Property Information Sheet or other Disclosure Statement regarding the
Property, a copy is attached as an exhibit to the Lease. Landlord shall be
responsible for the defects discovered by Tenant in the first ninety (90) days.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not
accessible to Tenant. The provisions of this Section 6.02 shall not, however,
exempt Landlord from liability for Landlord's negligence or willful misconduct,
or any breach of Landlord obligation under the Lease.
Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation),
Landlord shall have absolutely no responsibility to repair, maintain or replace
any portion of the Property at any time. Tenant waives the benefit of any
present or future law which might give Tenant the right to repair the Property
at Landlord's expense or to terminate the Lease due to the condition of the
Property.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Tenant shall keep all portions of the Property
(including structural, nonstructural, interior, exterior, and landscaped areas,
portions, systems and equipment) in good order, condition and repair (including
interior repainting and refinishing, as needed). If any portion of the
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Property or any system or equipment in the Property which Tenant is obligated to
repair cannot be fully repaired or restored, Tenant shall promptly replace such
portion of the Property or system or equipment in the Property, regardless of
whether the benefit of such replacement extends beyond the Lease Term; but if
the benefit or useful life of such replacement extends beyond the Lease Term
(as such term may be extended by exercise of any options), the useful life of
such replacement shall be prorated over the remaining portion of the Lease Term
(as extended), and Tenant shall be liable only for that portion of the cost
which is applicable to the Lease Term (as extended). Tenant shall maintain a
preventive maintenance contract providing for the regular inspection and
maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor. If any part of the Property is damaged by any
act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or
replacing such damaged property, whether or not Landlord would otherwise be
obligated to pay the cost of maintaining or repairing such property. It is the
intention of Landlord and Tenant that at all times Tenant shall maintain the
portions of the Property which Tenant is obligated to maintain in an
attractive, first-class and fully operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10)
days' prior notice to Tenant (except that no notice shall be required in the
case of an emergency), enter the Property and perform such maintenance or
repair (including replacement, as needed) on behalf of Tenant. In such case,
Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000)
in cost a year over the Lease Term and which are not visible from the outside
of any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
reasonably satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this
Paragraph 6.05(a) upon Landlord's written request. All alterations, additions,
and improvements shall be done in a good and workmanlike manner, in conformity
with all applicable laws and regulations, and by a contractor reasonably
approved by Landlord. Upon completion of any such work, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts, and proof
of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required
to repair under Article Seven (Damage or Destruction). In addition, Landlord
may require Tenant to remove any alterations, additions or improvements
(whether or not made with Landlord's consent) prior to the expiration of the
Lease and to restore the Property to its prior condition, all at Tenant's
expense. All alterations, additions and improvements which Landlord has not
required Tenant to remove shall become Landlord's property and shall be
surrendered to Landlord upon the expiration or earlier termination of the
Lease, except that Tenant may remove any of Tenant's machinery or equipment
which can be removed without material damage to the Property. Tenant shall
repair, at Tenant's expense, any damage to the Property caused by the removal
of any such machinery or equipment. In no event, however, shall Tenant remove
any of the following materials or equipment (which shall be deemed Landlord's
property) without Landlord's prior written consent: any power wiring or power
panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other
window coverings; carpets or other floor coverings; heaters, air conditioners
or any other heating or air conditioning equipment; fencing or security gates;
or other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or
improvements, to the extent shall such items are covered by Landlord's
Insurance.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies and, if the
damage was due to an act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate
the Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which the Property is located. Tenant shall pay the cost of such repairs, and
______________________________ Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by Tenant. Tenant shall
give Landlord written notice of such election within ten (10) days after
receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months of
the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
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Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, all rent payable during the period of
such damage, repair and/or restoration shall be reduced according to the
degree, if any, to which Tenant's use of the Property is impaired. Except for
such possible reduction in Base Rent, insurance premiums and real property
taxes, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair, or
restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in
the event of the substantial or total destruction of the leased property.
Tenant agrees that the provisions of Section 7.02 above shall govern the rights
and obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which
the Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If
the severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation
of law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below provided, however, that such consent
shall not be unreasonably withheld, conditioned or delayed. Any attempted
transfer without consent shall be void and shall constitute a non-curable
breach of this Lease. If Tenant is a partnership, any cumulative transfer of
more than fifty percent (50%) of the partnership interests shall require
Landlord's consent. If Tenant is a corporation, any change in the ownership of
a controlling interest of the voting stock of the corporation shall require
Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant
("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee. Landlord may consent
to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action
shall not relieve Tenant's liability under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice
of the offer, the Lease shall terminate as of the date specified and all the
terms and provisions of the Lease governing termination shall apply. If
Landlord does not so elect, the Lease shall continue in effect until otherwise
terminated and the provisions of Section 9.05 with respect to any proposed
transfer shall continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in
Section 9.01 shall set forth in writing the details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other information Landlord deems reasonably relevant.
Landlord shall have the right to withhold consent, or to grant consent, which
consent shall not in any event be unreasonably withheld, conditioned or delayed
but which consent may be reasonably based on the following factors: (i) the
business of the proposed assignee or subtenant and the proposed use of the
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Property; (ii) the net worth and financial reputation of the proposed assignee
or subtenant; (iii) Tenant's compliance with all of its obligations under the
Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If
Landlord objects to a proposed assignment solely because of the net worth
and/or financial reputation of the proposed assignee, Tenant may nonetheless
sublease (but not assign), all or a portion of the Property to the proposed
transferee, but only on the other terms of the proposed transfer.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Landlord's and Tenant's
performance of each of their respective obligations under this Lease is a
condition as well as a covenant. Tenant's right to continue in possession of the
Property and Landlord's right to receive payment of the rent is conditioned
upon such performance. Time is of the essence in the performance of all
covenants and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under
this Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge within ten (10)
days of Tenant's receipt of written notice from Landlord that such rent or
other charges is due and has not been paid.
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days after Tenant's
receipt of written notice from Landlord; provided that if more than thirty (30)
days are required to complete such performance, Tenant shall not be in default
if Tenant commences such performance within the thirty (30)-day period and
thereafter diligently pursues its completion.
(d) (i) If Tenant makes a general assignment or general arrangement
for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy
or for reorganization is filed by or against Tenant and is not dismissed within
thirty (30) days; (iii) if a trustee or receiver is appointed to take
possession of substantially all of Tenant's assets located at the Property or
of Tenant's interest in this Lease and possession is not restored to Tenant
within sixty (60) days; or (iv) if substantially all of Tenant's assets located
at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
sixty (60) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the
rent (or any other consideration) paid in connection with such assignment or
sublease over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant beyond the applicable cure periods set forth above, Landlord may, at any
time thereafter, with or without notice or demand and without limiting Landlord
in the exercise of any right or remedy which Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the time
of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves
Landlord could have reasonably avoided; (iii) the worth at the time of the
award of the amount by which the unpaid Base Rent, Additional Rent and other
charges which Tenant would have paid for the balance of the Lease Term after
the time of award exceeds the amount of such rental loss that Tenant proves
Landlord could have reasonably avoided; and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under the Lease or which in the ordinary
course of things would be likely to result therefrom,
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used in subparts (i) and (ii) above, the "worth at the time of the award" is
computed by allowing interest on unpaid amounts at the rate of fifteen percent
(15%) per annum, or such lesser amount as may then be the maximum lawful rate.
As used in subpart (iii) above, the "worth at the time of the award" is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of the award, plus one percent (1%). If
Tenant has abandoned the Property, Landlord shall have the option of (i)
retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws of judicial decisions of the state in which the Property is
located.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may
reasonably require, provided that Tenant's obligations under this Lease shall
not be increased in any material way (the performance of ministerial acts shall
not be deemed material), and Tenant shall not be deprived of its rights under
this lease. Tenant's right to quiet possession of the Property during the Lease
Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease deed of trust or mortgage or the date or recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, provided Tenant first receives an appropriate
Non-disturbance Agreement reasonably acceptable to tenant and its Counsel,
Tenant shall attorn to the transferee of or successor to Landlord's interest in
the Property and recognizes such transferee or successor as Landlord under this
Lease. Tenant waives the protection of any statute or rule of law which gives or
purports to give Tenant any right to terminate this Lease or surrender
possession of the Property upon the transfer of Landlord's interest.
Section 11.03 SIGNING OF DOCUMENTS. Provided Tenant has first received
a Non-Disburbance Agreement as set forth above, Tenant shall sign and deliver
any instrument or documents reasonable necessary or appropriate to evidence any
such attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after Tenant's receipt of written request, Tenant hereby
makes, constitutes and irrevocably appoints Landlord, or any transferee or
successor of Landlord, the attorney-in-fact to Tenant to execute and deliver any
such instrument or document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon either Landlord's or Tenant's written request, each shall execute,
acknowledge and deliver to the other a written statement certifying: (i) that
none of the terms or provisions of this Lease have been changed (or if they
have been changed, stating how they have been changed); (ii) that this Lease
has not been cancelled or terminated; (iii) the last date of payment of the
Base Rent and other charges and the time period covered by such payment; (iv)
that neither is not in default under this Lease (or, if either is claimed to be
in default, stating why); and (v) such other representations or information
with respect to Tenant, Landlord or the Lease as Landlord or Tenant may
reasonably request or which any prospective purchaser or encumbrancer of the
Property may require. Landlord or Tenant shall deliver such statement to the
other within ten (10) days after Landlord's or Tenant's receipt of such request.
Landlord or Tenant may give any such statement by the others to any prospective
purchaser or encumbrancer of the Property or sublease of assignee of the Lease.
Such purchaser or encumbrancer or sublease or assign may rely conclusively upon
such statement as true and correct.
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
9
(SINGLE-TENANT NET FORM)
<PAGE> 10
(b) If Landlord or Tenant does not deliver such statement to the other
within such ten (10)-day period, Landlord or Tenant, and any prospective
purchaser or encumbrancer or sublessee or assignee, may conclusively presume
and rely upon the following facts: (i) that the terms and provisions of this
Lease have not been changed except as otherwise represented by Landlord;
(ii) that this Lease has not been cancelled or terminated except as otherwise
represented by Landlord; (iii) that not more than one month's Base Rent or
other charges have been paid in advance; and (iv) that Landlord or Tenant, as
applicable is not in default under the Lease. In such event, Landlord or Tenant
shall be estopped from denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
Tenant's receipt of written request from Landlord but not more often than two
(2) times per year, Tenant shall deliver to Landlord such financial statements
as Landlord reasonably requires to verify the net worth of Tenant or any
assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver
to any lender designated by Landlord any financial statement required by
such lender to facilitate the financing or refinancing of the Property. Tenant
represents and warrants to Landlord that each such financial statement is a
true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach
or default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum as attorney's
fees and costs. The losing party in such action shall pay such attorneys' fees
and costs. Tenant shall also indemnify Landlord against and hold Landlord
harmless from all costs, expenses, demands and liability Landlord may incur if
Landlord becomes or is made a party to any claim or action (a) instituted by
Tenant against any third party, or by any third party against Tenant, or by or
against any person holding any interest under or using the Property by license
of or agreement with Tenant; (b) for foreclosure of any lien for labor or
material furnished to or for Tenant or such other person; (c) otherwise arising
out of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a
bankruptcy proceeding, or other proceeding under Title 11 of the United States
Code, as amended. Tenant shall defend Landlord against any such claim or action
at Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or
costs Landlord incurs in any such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's
consent, such fees not to exceed Five Hundred and No/100ths ($500.00) Dollars.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01 NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under
a ground lease of the Property at the time in question and their agents,
employees, contractors, invitees, successors or guests. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title. Any Landlord who transfers
its title or interest is relieved of all liability with respect to the
obligations of Landlord under this Lease to be performed on or after the date of
transfer. However, each Landlord shall remain liable for any breach or
liability with respect to any obligation of Landlord to be performed at such
date of transfer and deliver to its transferee all funds that Tenant previously
paid if such funds have not yet been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure,
Landlord shall not be in default if such cure is commenced within such thirty
(30)-day period and thereafter diligently pursued to completion.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision
or this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All Amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
10
(SINGLE-TENANT NET FORM)
<PAGE> 11
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord
from enforcing that provision or any other provision of this Lease in the
future. No statement on a payment check from Tenant or in a letter accompanying
a payment check shall be binding on Landlord. Landlord may, with or without
notice to Tenant, negotiate such check without being bound to the conditions of
such statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered to
both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker.
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. AGENCY DISCLOSURE; NO OTHER BROKERS.
Landlord and Tenant each warrant that they have dealt with no other real estate
broker(s) in connection with this transaction except: CB Commercial Real
Estate Group, Inc., who represents the Landlord
------------------------------------------
- -------------------------------------------------------------------------------
and N/A ,who
-------------------------------------------------------------
represents
---------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------.
In the event that CB Commercial represents both Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment in Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
11
(SINGLE-TENANT NET FORM)
<PAGE> 12
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on August 9, 1993 VECTOR ASSOCIATES, A CALIFORNIA
--------------------------- -----------------------------------
at Balboa Island, CA LIMITED PARTNERSHIP
--------------------------- -----------------------------------
By: /s/ JAMES E. "TED" MUNROE
-------------------------------
James E. ( "Ted") Munroe
Its: General Partner
-------------------------------
By:
-------------------------------
Its:
-------------------------------
"TENANT"
Signed on August 2, 1993 ARTECON, INC.,
--------------------------- -----------------------------------
Carlsbad, CA A CALIFORNIA CORPORATION
at --------------------------- -----------------------------------
By:
-------------------------------
James L. Lambert
Its: President
-------------------------------
By: /s/ TESFAYE HAILEMICHAEL
-------------------------------
Its: Secretary
-------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION
OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN
CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R), INC.,
ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR
AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS
LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
Initials ______________________________
______________________________
(Single-Tenant Net Form)
(C)1988 Southern California Chapter
of the Society of Industrial
and Office Realtors(R), Inc. [LOGO]
<PAGE> 13
ADDENDUM TO STANDARD INDUSTRIAL LEASE - SINGLE-TENANT FACILITY DATED JULY 9,
1993, BY AND BETWEEN VECTOR ASSOCIATES, A LIMITED PARTNERSHIP, AS LANDLORD AND
ARTECON, INC., A CALIFORNIA CORPORATION AS TENANT FOR THE SPACE LOCATED AT 6305
EL CAMINO REAL, CARLSBAD, CA 92009.
- -------------------------------------------------------------------------------
1.) CONDITION OF PREMISES:
Landlord will provide Tenant with approximately 20,250 square feet of
office built as follows: reception area, nine (9) offices, two (2)
additional conference rooms, kitchen/lunch room, restrooms for 150
people, open office area, entire office area will be re-carpeted, with
balance being warehouse. All such office space and other improvements
shall be constructed in substantial accordance with plans and
specifications prepared by Group I Architects, dated 7/20/93, P-1, P-2,
P-3. In addition to all improvements listed above, Landlord will paint
interior and exterior of facility white, Tenant's yellow corporate
accent stripe will be added, warehouse floor will be acid washed and
then sealed, parking lot will be sealed and striped and landscaping
upgraded. The Tenant Improvements are to be completed by December 24,
1993. Final space plan and costs to be approved by Landlord and Tenant.
2. If Tenant Improvements are not completed by Landlord on or before
December 24, 1993, then lease commencement shall be delayed until April
1, 1994 with no cost to Tenant and Tenant shall receive May 1994 of
lease rent free.
[SIG] [SIG]
----------------------- -----------------------
LANDLORD INITIALS TENANT'S INITIALS
<PAGE> 14
[CB COMMERCIAL LOGO] Right of First Offer Lease Rider
This Rider is attached to and made part of that certain lease dated
July 9, 1993 between VECTOR ASSOCIATES, A California Limited Partnership, as
Landlord, and ARTECON, INC., a California corporation, as Tenant, covering the
Property commonly known as 6305 El Camino Real, Carlsbad, CA 92009 (the
"Lease"). The terms used in this Rider shall have the same definitions as set
forth in the Lease. The provisions of this Rider shall prevail over any
inconsistent or conflicting provisions of the Lease.
RIGHT OF FIRST OFFER.
Each time during the Lease Term, Landlord intends to offer the Property
for sale to third parties or to accept an offer of a third party to purchase
the Property, Landlord shall first give written notice to Tenant of the
purchase price and other material terms upon which Landlord is willing to sell
the Property which material terms shall be identical to the terms of
Landlord's offer to any such third party. ("Landlord's Sale Notice").
Landlord's Sale Notice shall constitute an offer to sell the Property to Tenant
at the price and upon the terms and conditions contained in Landlord's Sale
Notice. Tenant shall have ten (10) days after receipt of Landlord's Sale Notice
in which to accept such offer. Tenant shall accept such offer, if at all, only
by written notice to Landlord in which Tenant shall agree to purchase the
Property from Landlord at the price and upon the terms and conditions contained
in Landlord's Sale Notice. If Tenant accepts such offer within the ten (10) day
period, Landlord and Tenant shall open an escrow, within five (5) days
thereafter, for the purchase and sale of the Property. Tenant shall purchase
the Property from Landlord through such escrow at the price and in accordance
with the terms and conditions contained in Landlord's Sale Notice. If Tenant
fails to give Landlord notice of Tenant's acceptance of the offer contained in
Landlord's Sale Notice within the fourteen (14) day period, then all rights of
Tenant to purchase the Property under this Rider shall terminate and Landlord
shall have no further obligation to notify Tenant of any other proposed
purchase or sale of the Property. Landlord shall thereafter have the
unconditional right to sell the Property to third parties or to accept the
offers from third parties to purchase the Property without further obligation to
Tenant. The preceding Right of First Offer shall not apply to (a) sales or
transfers among entities or persons related to Landlord, including, but not
limited to: partners, if Landlord is a partnership; shareholders, if Landlord
is a corporation; or family members of any individual Landlord or any such
partner or shareholder; (b) any transfer or disposition by assignment, gift,
devise, testamentary transfer, intestate successions; or (c) any transfer to a
trust for the benefit of any heir at law of Landlord (or any heir at law of any
partner or shareholder of Landlord) or for the benefit of Landlord.
Initials ______________________________
______________________________
(C)1982 Southern California Chapter of the
Society of Industrial Realtors(R), Inc. [LOGO]
Reprinted under license
<PAGE> 15
[CB COMMERCIAL LOGO] Option to Extend Term Lease Rider
This Rider is attached to and made part of that certain Lease (the
"Lease") dated July 9, 1993 between VECTOR ASSOCIATES, a California Limited
Partnership, as Landlord, and ARTECON, INC., a California corporation, as
Tenant, covering the Property commonly known as 6305 El Camino Real, Carlsbad,
CA 92009 (the "Property"). The terms used herein shall have the same definitions
as set forth in the Lease. The provisions of this Rider shall supersede any
inconsistent or conflicting provisions of the Lease.
A. OPTION(S) TO EXTEND TERM.
1. GRANT OF OPTION.
Landlord hereby grants to Tenant one (1) option(s) (the "Option(s)") to
extend the Lease Term for additional term(s) of three (3) years each (the
"Extension(s)"), on the same terms and conditions as set forth in the Lease,
but at an increased rent as set forth below. Each Option shall be exercised
only by written notice delivered to Landlord at least One Hundred Eighty (180)
days before the expiration of the Lease Term or the preceding Extension of the
Lease Term, respectively. If Tenant fails to deliver Landlord written notice of
exercise of an Option within the prescribed time period, such Option and any
succeeding Options shall lapse, and there shall be no further right to extend
the Lease Term. Each Option shall be exercisable by Tenant on the express
conditions that (a) at the time of the exercise, Tenant shall not be in default
under any of the provisions of the Lease beyond any applicable cure
periods and (b) Tenant has not been fifteen (15) or more days late in the
payment of rent more than a total of three (3) times during the Lease Term and
all preceding Extensions.
2. PERSONAL OPTIONS.
The Option(s) are personal to the Tenant named in Section 1.03 of the
Lease or any Tenant's Affiliate described in Section 9.02 of the Lease. If
Tenant subleases any portion of the Property or assigns or otherwise transfers
any interest under the Lease to an entity other than a Tenant Affiliate prior
to the exercise of an Option (whether with or without Landlord's consent), such
Option and any succeeding Options shall lapse. If Tenant subleases any portion
of the Property or assigns or otherwise transfers any interest of Tenant under
the Lease in accordance with Article 9 of the Lease after the exercise of an
Option and after the commencement of the Extension related to such Option, then
the term of the Lease shall expire upon the expiration of the Extension during
which such sublease or transfer occurred and only the succeeding Options shall
lapse.
B. CALCULATION OF RENT.
The Base Rent during the Extension(s) shall be determined by one or a
combination of the following methods (INDICATE METHOD UPON EXECUTION OF THE
LEASE):
( [ ] 1. COST OF LIVING ADJUSTMENT (Section B.1, below)
( Rental Adjustment Date(s): The first day of the 1st, 13th and
whichever ( 25th month(s) of the first Extension(s) of the Lease Term.
(
( [ ] 2. FAIR RENTAL VALUE ADJUSTMENT (Section B.2, below) as
greater ( determined by appraisers [ ] or broker [ ].
( Rental Adjustment Date(s): The first day of the 1st, 13th and
( 25th month(s) of the first Extension(s) of the Lease Term.
[ ] 3. FIXED ADJUSTMENT
The Base Rent shall be increased to the following amounts (the
"Adjusted Base Rent(s)") on the dates (the "Rental Adjustment
Date(s)") set forth below:
RENTAL ADJUSTMENT DATE(S) ADJUSTED BASE RENT(S)
_____________________________ $__________________________
_____________________________ $__________________________
_____________________________ $__________________________
_____________________________ $__________________________
1. COST OF LIVING ADJUSTMENT.
The Base Rent shall be increased on the dates specified in Section B.1,
above (the "Rental Adjustment Date(s)") by reference to the Index defined in
Section 3.02 of the Lease or the substitute index described in Paragraph
3.02(b) of the Lease, as follows: The Base Rent in effect immediately prior to
the applicable Rental Adjustment Date (the "Comparison Base Rent") shall be
increased by the percentage that the Index has increased from the month in
which the payment of the Comparison Base Rent commenced through the month in
which the applicable Rental Adjustment Date occurs. In no event shall the Base
Rent be reduced by reason of such computation.
Initials ______________________________
______________________________
(C)1988 Southern California Chapter
of the Society of Industrial
and Office Realtors(R), Inc.
<PAGE> 16
2. FAIR RENTAL VALUE ADJUSTMENT.
The Base Rent shall be increased on the date(s) specified in Section B.2,
above (the "Rental Adjustment Date(s)") to the "fair rental value" of the
Property, determined in the following manner:
(a) Not later than one hundred (100) days prior to any applicable Rental
Adjustment Date, Landlord and Tenant shall meet in an effort to negotiate, in
good faith, the fair rental value of the Property as of such Rental Adjustment
Date. If Landlord and Tenant have not agreed upon the fair rental value of the
Property at least ninety (90) days prior to the applicable Rental Adjustment
Date, the fair rental value shall be determined by appraisal, by one or more
appraisers or brokers (herein called "Appraiser(s)"), as provided in Section
B.2(b), below. If appraiser(s) are used, such appraiser(s) shall have at least
five (5) years' experience in the appraisal of commercial/industrial real
property in the area in which the Property is located and shall be members of
professional organizations such as MAI or equivalent. If broker(s)) are used,
such broker(s) shall have at least five (5) years' experience in the sales and
leasing of commercial/industrial real property in the area in which the Property
is located and shall be members of professional organizations such as the
Society of Industrial and Office Realtors or equivalent.
(b) If Landlord and Tenant are not able to agree upon the fair rental
value of the Property within the prescribed time period, then Landlord and
Tenant shall attempt to agree in good faith upon a single Appraiser not later
than seventy-five (75) days prior to the applicable Rental Adjustment date. If
Landlord and Tenant are unable to agree upon a single Appraiser within such
time period, then Landlord and Tenant shall each appoint one Appraiser not
later than sixty-five (65) days prior to the applicable Rental Adjustment Date.
Within ten (10) days thereafter, the two (2) appointed Appraisers shall appoint
a third (3rd) Appraiser. If either Landlord or Tenant fails to appoint its
Appraiser within the prescribed time period, the single Appraiser appointed
shall determine the fair rental value of the Property. If both parties fail to
appoint Appraisers within the prescribed time periods, then the first Appraiser
thereafter selected by a party shall determine the fair rental value of the
Property. Each party shall bear the cost of its own Appraiser and the parties
shall share equally the cost of the single or third Appraiser, if applicable.
(c) For the purposes of such appraisal, the term "fair market value" shall
mean the price that a ready and willing tenant would pay, as of the applicable
Rental Adjustment Date, as monthly rent to a ready and willing landlord of
property comparable to the Property if such property were exposed for lease on
the open market for a reasonable period of time and taking into account all of
the purposes for which such property may be used. If a single Appraiser is
chosen, then such Appraiser shall determine the fair rental value of the
Property. Otherwise, the fair rental value of the Property shall be the
arithmetic average of the two (2) of the three (3) appraisals which are closest
in amount, and the third appraisal shall be disregarded. In no event, however,
shall the Base Rent be reduced by reason of such computation. Landlord and
Tenant shall instruct the Appraiser(s) to complete the determination of the
fair rental value not later than thirty (30) days prior to the applicable Rental
Adjustment Date. If the fair rental value is not determined prior to the
applicable Rental Adjustment Date, then Tenant shall continue to pay to
Landlord the Base Rent applicable to the Property immediately prior to such
Extension, until the fair rental value is determined. When the fair rental
value of the Property is determined, Landlord shall deliver notice thereof to
Tenant, and Tenant shall pay to Landlord, within ten (10) days after the
receipt of such notice, the difference between the Base Rent actually paid by
Tenant to Landlord and the new Base Rent determined hereunder.
(C) 1988 Southern California Chapter Initials
of the Society of Industrial [SIOR LOGO](TM) ------
and Office Realtors,(R) Inc. ------
2
(SINGLE-TENANT NET FORM)
<PAGE> 17
EXHIBIT "B"
FLOOR PLAN
(TO BE ATTACHED)
<PAGE> 18
SUBJECT
PROPERTY
[DIAGRAM OF FLOOR PLAN]
<PAGE> 19
EXTENSION OF LEASE TERM ADDENDUM
THIS ADDENDUM IS ATTACHED TO AND MADE PART OF THAT CERTAIN LEASE (THE "LEASE")
DATED JULY 9, 1993 BETWEEN VECTOR ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
AS LANDLORD, AND ARTECON, INC., A CALIFORNIA CORPORATION, AS TENANT, COVERING
THE PROPERTY COMMONLY KNOWN AS 6305 EL CAMINO REAL, CARLSBAD, CALIFORNIA 92009
CONTAINING APPROXIMATELY 67,200 SQUARE FEET (THE "PROPERTY"). THE TERMS USED
HEREIN SHALL HAVE THE SAME DEFINITIONS AS SET FORTH IN THE LEASE. THE PROVISIONS
OF THIS RIDER SHALL SUPERSEDE ANY INCONSISTENT OR CONFLICTING PROVISIONS OF THE
LEASE.
EXTENSION OF LEASE TERM:
Landlord and Tenant hereby agree to extend the Lease Term for an additional
term of three (3) years on the same terms and conditions as set forth in the
Lease, but at an increased rent as set forth below:
January 1, 1997-December 31, 1997: Thirty Thousand Two Hundred fifty and
no/100ths Dollars ($30,250.00) per
month.
This monthly rental rate shall be increased on January 1, 1998 and January 1,
1999 by the Consumer Price Index during the prior year. The increase will be
calculated by the Los Angeles/Anaheim/Riverside Index (all urban consumers/
1967=100) with a minimum of three percent (3%) increase and a maximum of four
percent (4%) increase in rental rate.
ACCEPTED AND AGREED:
LANDLORD:
By: /s/ JAMES E. MUNROE 3/14/96
--------------------------------- ---------------------
JAMES E. "TED" MUNROE, DATE
GENERAL PARTNER
TENANT:
By: /s/ JAMES L. LAMBERT 3/21/96
--------------------------------- ---------------------
James L. Lambert, President DATE
<PAGE> 20
OPTION TO EXTEND TERM LEASE RIDER
[LOGO] CB
COMMERCIAL CB COMMERCIAL REAL ESTATE GROUP, INC.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
This Rider is attached to and made part of that certain Lease (the
"Lease") dated July 9, 1993 between Vector Associates, a California Limited
------------ ---------------------------------------
Partnership, as Landlord, and Artecon, Inc., a California Corporation, as
- ----------- ---------------------------------------
Tenant, covering the Property commonly known as 6305 El Camino Real, Carlsbad,
------------------------------
California 92009 containing approximately 67,200 square feet (the "Property").
- ------------------------------------------------------------
The terms used herein shall have the same definitions as set forth in the Lease.
The provisions of this Rider shall supersede any inconsistent or conflicting
provisions of the Lease.
A. OPTION(S) TO EXTEND TERM = January 1, 2000 through December 31, 2001.
1. GRANT OF OPTION.
Landlord hereby grants to Tenant one (1) option(s)(the "Option(s)") to
-------
extend the Lease Term for additional term(s) of two (2) years each (the
-------
"Extension(s)"), on the same terms and conditions as set forth in the Lease,
but at an increased rent as set forth below. Each Option shall be exercised
only by written notice delivered to Landlord at least one hundred eighty (180)
days before the expiration of the Lease Term or the preceding Extension of the
Lease Term, respectively. If Tenant fails to deliver Landlord written notice of
exercise of an Option within the prescribed time period, such Option and any
succeeding Options shall lapse, and there shall be no further right to extend
the Lease Term. Each Option shall be exercisable by Tenant on the express
conditions that (a) at the time of the exercise, and at all times prior to the
commencement of such Extension, Tenant shall not be in default under any of the
provisions of the Lease and (b) Tenant has not been ten (10) or more days late
in the payment of rent more than a total of three (3) times during the Lease
Term and all preceding Extensions.
2. PERSONAL OPTIONS.
The Option(s) are personal to the Tenant named in Section 1.03 of the Lease
or any Tenant's Affiliate described in Section 9.02 of the Lease. If Tenant
subleases any portion of the Property or assigns or otherwise transfers any
interest under the Lease to an entity other than a Tenant Affiliate prior to
the exercise of an Option (whether with or without Landlord's consent), such
Option and any succeeding Options shall lapse. If Tenant subleases any portion
of the Property or assigns or otherwise transfers any interest of Tenant under
the Lease to an entity other than a Tenant Affiliate after the exercise of an
Option but prior to the commencement of the respective Extension (whether with
or without Landlord's consent), such Option and any succeeding Options shall
lapse and the Lease Term shall expire as if such Option were not exercised. If
Tenant subleases any portion of the Property or assigns or otherwise transfers
any interest of Tenant under the Lease in accordance with Article 9 of the
Lease after the exercise of an Option and after the commencement of the
Extension related to such Option, then the term of the Lease shall expire upon
the expiration of the Extension during which such sublease or transfer occurred
and only the succeeding Options shall lapse.
B. CALCULATION OF RENT.
The Base Rent during the Extension(s) shall be determined by one or a
combination of the following methods (INDICATE METHOD UPON EXECUTION OF THE
LEASE):
[X] 1. COST OF LIVING ADJUSTMENT (Section B.1, below)
Rental Adjustment Date(s): The first day of the 1st and 13th
------------
month(s) of the one (1) and only Option to Extend the Lease Term.
---------------------------------
[ ] 2. FAIR RENTAL VALUE ADJUSTMENT (Section B.2, below) as determined by
appraiser [ ] or broker [ ].
Rental Adjustment Date(s): The first day of the_____________month(s)
of the ________________________Extension(s) of the Lease Term.
[ ] 3. FIXED ADJUSTMENT
The Base Rent shall be increased to the following amounts (the
"Adjusted Base Rent(s)") on the dates (the "Rental Adjustment
Date(s)") set forth below:
RENTAL ADJUSTMENT DATE(S) ADJUSTED BASE RENT(S)
------------------------------- $ -------------------------------
------------------------------- $ -------------------------------
------------------------------- $ -------------------------------
------------------------------- $ -------------------------------
1. COST OF LIVING ADJUSTMENT.
The Base Rent shall be increased on the dates specified in Section B.1,
above (the "Rental Adjustment Date(s)") by reference to the *Index defined
in Section 3.02 of the Lease or the substitute index described in Paragraph
3.02(b) of the Lease, as follows: The Base Rent in effect immediately prior to
the applicable Rental Adjustment Date (the "Comparison Base Rent") shall be
increased by the percentage that the Index has increased from the month in
which the payment of the Comparison Base Rent commenced through the month in
which the applicable Rental Adjustment Date occurs. In no event shall the Base
Rent be reduced by reason of such computation.
*This monthly rental rate shall be increased on January 1, 2000 and January 1,
2001 by the Consumer Price Index during the prior year. The increase will be
calculated by the Los Angeles/Anaheim/Riverside Index (all urban
consumers/1967=100) with a minimum of three percent (3%) increase and a maximum
of six percent (6%) increase in rental rate.
Initials /s/ JAMES E. MUNROE
-------------------------
/s/ JAMES L. LAMBERT
-------------------------
(c) 1988 Southern California Chapter
of the Society of Industrial [SIOR LOGO](TM)
and Office Realtors(R), Inc.
<PAGE> 1
EXHIBIT 10.11
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("AGREEMENT") is made and entered into as
of August 21, 1997, by and among ARTECON, INC., a California corporation
("BUYER"), FALCON SYSTEMS, INC., a California corporation ("SELLER") and CRAIG
CAUDILL, the sole shareholder of Seller (the "SOLE SHAREHOLDER").
RECITALS
A. Seller is engaged and has been engaged in a variety of activities,
including the manufacture and distribution of computer peripheral equipment (the
Seller's activities and operations being herein referred to as the "BUSINESS").
Buyer is engaged in a similar type of business as Seller.
B. Buyer desires to purchase from Seller, Seller desires to sell to
Buyer, and the Sole Shareholder desires to cause Seller to sell to Buyer, the
Business and substantially all of the property and assets of Seller pursuant to
the terms of this Agreement.
NOW, THEREFORE, In consideration of the foregoing premises, and the
mutual covenants set forth below, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties to this Agreement agree
as follows.
1. PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE TRANSFERRED. Subject to the terms and conditions of
this Agreement, on the Closing Date (as hereinafter defined) Seller shall, and
the Sole Shareholder shall cause Seller to, sell, transfer, convey, assign and
deliver to Buyer, and Buyer shall purchase and accept, all of the business,
rights, claims and assets (of every kind, nature, character and description,
whether real, personal or mixed, whether tangible or intangible, whether
accrued, contingent or otherwise, and wherever situated) of Seller, other than
the Excluded Assets (as hereinafter defined) (collectively the "Purchased
Assets"). The Purchased Assets shall include, but not be limited to, the
following:
1.1.1 THE BUSINESS. The Business as a going concern and all
goodwill pertaining thereto;
1.1.2 INTELLECTUAL PROPERTY RIGHTS. Subject to Section 1.2.8,
all of Seller's interest in any Intellectual Property Rights. As used herein,
the term "Intellectual Property Rights" shall mean and include: (i) all United
States, state and foreign trademark rights, trade dress, service marks, trade
names, and brand names, including all claims for infringement, and all
registrations thereof and applications therefor and all goodwill associated with
the foregoing accruing from the dates of first use thereof; (ii) all
1.
<PAGE> 2
United States and foreign copyrights, copyright registrations and copyright
applications, including all claims for infringement, and all other rights
associated with the foregoing and the underlying works of authorship; (iii) all
United States and foreign patents and patent applications, including all claims
for infringement and all international proprietary rights associated therewith;
(iv) all contracts or agreements granting any right, title, license or privilege
under the intellectual property rights of any third party; and (v) all
inventions, invention disclosures (internal or otherwise), mask works and mask
work registrations, know-how, discoveries, improvements, designs, trade secrets,
shop and royalty rights, employee covenants and agreements respecting
intellectual property and non-competition and all other types of intellectual
property. The Intellectual Property Rights include the items listed on Schedule
1.1.2;
1.1.3 OWNED REAL PROPERTY. All of the real property, including
fixtures, buildings, improvements, and all appurtenant rights owned by Seller,
including the real property described on Schedule 1.1.3 (the "Owned Real
Property");
1.1.4 LEASED REAL PROPERTY. All of the leases of real property
with respect to real property leased by Seller, including the leases (the "Real
Property Leases") described on Schedule 1.1.4 and (to the extent owned by Seller
and transferable under the applicable lease) all fixtures and tenant
improvements with respect to such leased real property (the "Leased Real
Property");
1.1.5 PERSONAL PROPERTY LEASES. All leases of machinery,
equipment, vehicles, furniture and other personal property leased by Seller,
including all such leases (the "PERSONAL PROPERTY LEASES") described in Schedule
1.1.5;
1.1.6 MACHINERY AND EQUIPMENT. All machinery, equipment
(including but not limited to personal computers and any rights to related
software), vehicles, tools, supplies, spare parts, furniture (i.e., desks,
chairs, cabinets, publications, shelves and other office equipment) and all
other personal property not included in inventory (other than personal property
leased pursuant to Personal Property Leases) owned, utilized or held for use by
Seller on the Closing Date, including all such property described in Schedule
1.1.6;
1.1.7 ACCOUNTS AND NOTES RECEIVABLE; COMMITMENTS. All
accounts, drafts and notes receivable of Seller and all of Seller's rights under
commitments, customer orders, bids, contracts and other similar agreements;
1.1.8 INVENTORY. All inventories of raw materials,
work-in-process and finished goods (including all such inventory in transit) of
Seller on the Closing Date, together with related packaging materials
(collectively the "INVENTORY");
2.
<PAGE> 3
1.1.9 CONTRACTS. All contracts, contractual rights, purchase
orders and sales orders (hereinafter in this Section 1.1.9, "CONTRACTS") of
Seller listed below:
(a) All Contracts described and set forth in Schedule
1.1.9(a); and
(b) Every other Contract to which Seller is a party which
Buyer elects to assume at any time after the Closing Date, by giving written
notice to Seller as set forth in Section 11.11 hereof.
The Contracts described in subsections 1.1.9(a) and 1.1.9(b) above are
hereinafter collectively described as the "ASSUMED CONTRACTS." It is the intent
of the parties that all of Seller's rights and obligations under the Assumed
Contracts be transferred, assigned and delegated to Buyer pursuant to this
Agreement. To the extent that any Assumed Contract for which assignment to Buyer
is provided herein is not assignable pursuant to such Contract without the
consent of another party, this Agreement shall not constitute an assignment or
an attempted assignment thereof if such assignment or attempted assignment would
constitute a breach thereof. Seller and Buyer agree to use their reasonable best
efforts (without any requirement on the part of Buyer, Seller or Sole
Shareholder to pay any money or agree to any change in the terms of any such
Contract) to obtain the consent of such other party to the assignment of any
such Assumed Contract to Buyer in all cases in which such consent is or may be
required for such assignment. If any such consent shall not be obtained, the
Sole Shareholder and Seller agree to cooperate with Buyer in any reasonable
arrangement designed to provide for Buyer the benefits intended to be assigned
to Buyer under the relevant Assumed Contract, including enforcement at the cost
and for the account of Buyer of any and all rights of Seller against the other
party thereto arising out of the breach or cancellation thereof by such other
party or otherwise. If and to the extent that such arrangement cannot be made,
Buyer, upon written notice to Seller, shall have no obligation pursuant to
Section 2.1 or otherwise with respect to any such Assumed Contract and any such
Assumed Contract shall not be deemed to be a Purchased Asset hereunder.
Notwithstanding the foregoing, however, the Assumed Contracts shall include, in
any event, those contracts identified on Schedule 1.1.9(c) which require
consents to be assigned and for which consents have not been received as of the
Closing;
1.1.10 LITERATURE. All Seller's rights in sales literature,
promotional literature, instructional materials, advertising materials, catalogs
and similar materials of Seller;
1.1.11 RECORDS, FILES AND PROMOTIONAL MATERIALS. All records,
files, invoices, customer lists, blueprints, specifications, designs, drawings,
accounting records, business records, operating data and other data of Seller,
all customer and supplier lists, marketing plans, sketches, drawings,
specifications, work standards, manufacturing and
3.
<PAGE> 4
process information and documentation, bills of material, theories of operation,
repair manuals, service manuals, business planning and financial data and
manuals and other materials of Seller used in the Business or in employee and
management training, and all notebooks, writings, pictures, drawings, magnetic
tapes, computer programs, equipment, prototypes, tools, models and protocols of
Seller;
1.1.12 LICENSES; PERMITS. To the extent assignable by Seller,
all licenses, permits and approvals of Seller;
1.1.13 PRODUCTS. All of Seller's rights to market, license and
sell all products marketed, licensed or sold by Seller in the Business,
including without limitation the products described in Schedule 1.1.13 (the
"PRODUCTS");
1.1.14 CORPORATE NAME. Seller's rights in the name "FALCON
SYSTEMS" and all Seller's rights to use or allow others to use such names;
1.1.15 CASH AND CASH EQUIVALENTS. All cash, cash equivalents
and investments, including without limitation security deposits and other
current assets;
1.1.16 CLAIMS. All of Seller's claims against any parties
relating to any of the Purchased Assets, including without limitation,
unliquidated rights under manufacturers' and vendors' warranties or guarantees;
1.1.17 INSURANCE POLICIES. All rights under policies of
insurance held by Seller (including without limitation rights with respect to
claims and prepayments); and
1.1.18 OTHER ASSETS. All other properties, rights and assets
owned by Seller, whether tangible or intangible, absolute, contingent or
otherwise, in addition to those listed in Sections 1.1.1 through 1.1.17 above
but excluding the Excluded Assets.
1.2 EXCLUDED ASSETS. The provisions of Section 1.1 notwithstanding,
Seller shall not sell, transfer, assign, convey or deliver to Buyer, and Buyer
will not purchase or accept the following assets of Seller (collectively the
"EXCLUDED ASSETS"):
1.2.1 CONSIDERATION. The consideration delivered by Buyer to
Seller for the purchase of the Purchased Assets pursuant to this Agreement;
1.2.2 TAX CREDITS. Federal, state and local income and
franchise tax credits and tax refund claims;
1.2.3 CORPORATE FRANCHISE. Seller's franchise to be a
corporation, its Articles of Incorporation, corporate seal, stock books and
other corporate records having exclusively to do with the corporate organization
and capitalization of Seller. Buyer and
4.
<PAGE> 5
its designated agents shall have reasonable access to such books and records and
may make excerpts therefrom and copies thereof;
1.2.4 TAX RECORDS. Seller's income and franchise tax returns
and tax records. Buyer and its designated agents shall have reasonable access to
such records and may make excerpts therefrom and copies thereof;
1.2.5 CERTAIN CONTRACTS. Any and all contracts and agreements
of Seller other than the Assumed Contracts;
1.2.6 SPECIFIED ASSETS. The assets listed on Schedule 1.2.6;
1.2.7 MISCELLANEOUS ASSETS. The miscellaneous assets not
integral to the Business listed on Schedule 1.2.7; and
1.2.8 TECHNOLOGY ASSETS. The "Purchased Assets" as defined in
the Technology Purchase Agreement of even date herewith among Seller, the Sole
Shareholder and Founding Partners (the "Technology Purchase Agreement").
2. ASSUMPTION OF LIABILITIES
2.1 LIABILITIES TO BE ASSUMED. Subject to the terms and conditions of
this Agreement, on the Closing Date, Buyer shall assume and agree to perform and
discharge to the extent indicated below the following, and only the following,
specific debts, liabilities and obligations of Seller (collectively the "ASSUMED
LIABILITIES"):
2.1.1 EMPLOYEE OBLIGATIONS. Employee severance and employment
obligations expressly described in Schedule 2.1.1 and health benefits with
respect to any employee of Seller hired by Buyer following the Closing or
employed by Seller immediately prior to the Closing, and employee compensation
obligations of Seller appropriately reflected or reserved against on the Recent
Balance Sheet (as hereinafter defined), as modified on Schedule 2.1.1 to reflect
the period from the date of the Recent Balance Sheet to the Closing Date,
including accrued vacation and sick leave and any other compensation or benefits
provided under any Seller employee contract, bonus or commission plan, but only
in the amounts so reflected or reserved (as modified by Schedule 2.1.1);
2.1.2 RECENT BALANCE SHEET LIABILITIES. (A) The accounts
payable and other accrued liabilities (excluding the tax liabilities described
in Section 2.2.2) ("Accounts Payable") reflected or reserved against on the
Recent Balance Sheet, as modified on Schedule 2.1.2 to reflect the period from
the date of the Recent Balance Sheet to the Closing Date, but only in the
amounts so reflected or reserved (as modified
5.
<PAGE> 6
by Schedule 2.1.2) and (B) any other Accounts Payable and accrued liabilities
incurred in the ordinary course of business following the Recent Balance Sheet
date;
2.1.3 TECHNICAL SUPPORT OBLIGATIONS. Seller's contractual
obligations incurred prior to the Closing Date for technical and product support
pursuant to the Assumed Contracts described on Schedule 2.1.3 (the "TECHNICAL
SUPPORT OBLIGATIONS");
2.1.4 CONTRACTUAL LIABILITIES. Seller's liabilities and
obligations arising from and after the Closing Date under and pursuant to the
Assumed Contracts;
2.1.5 LIABILITIES UNDER PERMITS AND LICENSES. Seller's
obligations arising from and after the Closing Date under any permits or
licenses listed in Schedule 5.14.2 of the Disclosure Schedule and assigned to
Buyer at the Closing;
2.1.6 TAXES ARISING FROM TRANSACTION. Any United States,
foreign, state or other sales, use or similar taxes applicable to, imposed upon
or arising out of the sale or transfer of the Purchased Assets to Buyer and the
other transactions contemplated by this Agreement, provided that in no event
shall Buyer have any obligation or responsibility for any income, profit, value
added or franchise taxes (or any penalties or interest thereon);
2.1.7 CERTAIN PRODUCT LIABILITIES. Product liability claims
with respect to the Products arising after May 1994.
Buyer hereby agrees to assume and substantially perform and discharge
in all material respects in accordance with their terms the Assumed Liabilities,
and Buyer agrees to indemnify, defend and hold harmless Seller, its affiliates,
agents, officers, directors and employees from and against all losses, damages,
liabilities, expenses, costs, assessments and taxes (including, without
limitation, interest, penalties and attorneys' fees) relating to, arising from
or in connection with Buyer's failure to perform its obligations under this
paragraph.
2.2 LIABILITIES NOT TO BE ASSUMED. Except as and to the extent
specifically set forth in Section 2.1, Buyer is not assuming any debts,
liabilities, obligations or contracts of Seller and all such debts, liabilities,
obligations and contracts shall be and remain the responsibility of Seller.
Notwithstanding the provisions of Section 2.1 and without limiting the
generality of the foregoing, Buyer is not assuming and Seller shall not be
deemed to have transferred to Buyer the following debts, liabilities,
obligations and contracts of Seller:
2.2.1 CERTAIN CONTRACTS. The obligations of Seller under and
pursuant to any and all contracts and agreements other than the Assumed
Contracts;
6.
<PAGE> 7
2.2.2 INCOME AND FRANCHISE TAXES. Any liability or obligation
of Seller for Federal income taxes and any state, local or foreign income,
profit, value added or franchise taxes (and any penalties or interest due on
account thereof);
2.2.3 INSURED CLAIMS. Except to the extent Buyer receives
payments from the insurer relating thereto, any liability of Seller insured
against, to the extent such liability is paid by an insurer;
2.2.4 PRODUCT LIABILITY. Any liability or obligation of Seller
arising out of or in any way relating to or resulting from any product
manufactured, assembled or sold prior to May 1994 (including any liability or
obligation of Seller for claims made for injury to person, damage to property or
other damage, whether made in product liability, tort, breach of warranty or
otherwise);
2.2.5 LITIGATION MATTERS. Any liability or obligation of
Seller with respect to any suits, actions, claims or proceedings, whether or not
described in Schedule 5.13 of the Disclosure Schedule;
2.2.6 INFRINGEMENTS. Any liability of Seller to a third party
under its intellectual property or other proprietary rights, including, but not
limited to, claims arising out of the manufacture, use or sale of goods or
apparatus, the performance of services, or the copying, modifying, distributing,
performing or displaying of any work or mask work;
2.2.7 LIABILITY FOR BREACH. Liabilities and obligations of
Seller for any breach or failure to perform any of Seller's covenants and
agreements to any third party, or, prior to the Closing, any other contract,
whether or not assumed hereunder, including any breach arising from assignment
of contracts hereunder, other than those identified on Schedule 1.1.9(c),
without consent of third parties;
2.2.8 CERTAIN SEVERANCE OBLIGATIONS. Employee severance
obligations to employees of Seller except as expressly set forth in Schedule
2.1.1;
2.2.9 LIABILITIES TO AFFILIATES. Liabilities and obligations
of Seller to its present or former Affiliates (as defined in Section 5.21.3)
except for, and only to the extent of, obligations of Seller to employees
pursuant to Section 2.1.1;
2.2.10 VIOLATION OF LAW. Liabilities and obligations of Seller
for any violation of or failure to comply with any statute, law, rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, which violation would result in a breach of the representation set
forth in Section 5.14.
7.
<PAGE> 8
2.2.11 TRANSACTION EXPENSES. All liabilities, costs,
obligations or expenses incurred by Seller in connection with this Agreement and
the transactions contemplated herein;
2.2.12 INVENTORY ON CONSIGNMENT. All liabilities, costs,
obligations or expenses in connection with any inventory on consignment;
2.2.13 INTEREST EXPENSE. Any interest expense on any liability
of Seller not assumed by Buyer hereunder; and
2.2.14 EXCLUDED ASSETS. Liabilities or obligations of Seller
related to any Excluded Assets.
3. PURCHASE PRICE
3.1 PURCHASE PRICE. Subject to the terms and conditions of this
Agreement, the following shall be the sole consideration paid by Buyer for the
Purchased Assets (the "PURCHASE PRICE"):
3.1.1 The assumption of the Assumed Liabilities; and
3.1.2 The sum of two million two hundred fifty thousand
dollars ($2,250,000) to be delivered by Buyer to Seller at the Closing, one
million two hundred fifty thousand dollars ($1,250,000) of which is payable in
the form of a Promissory Note in substantially the form attached hereto as
Exhibit A.
3.2 METHOD OF PAYMENT. All payments under this Section 3, other than
the amount that is to be paid with the Promissory Note, shall be made in the
form of certified or official bank check payable to the order of the recipient
or, at Buyer's option, by wire transfer of immediately available funds to an
account designated by the recipient.
3.3 ALLOCATION OF PURCHASE PRICE. The aggregate Purchase Price
(including the assumption by Buyer of the Assumed Liabilities) shall be
allocated among the Purchased Assets for tax purposes in accordance with
Schedule 3.3. Seller and Buyer will follow and use such allocation in all
income, sales registration and other tax returns, filings or other related
reports made by them to any governmental agencies. To the extent that
disclosures of this allocation are required to be made by the parties to the
Internal Revenue Service ("IRS") under the provisions of Section 1060 of the
Internal Revenue Code of 1986, as amended (the "CODE"), or any regulations
thereunder, Buyer and Seller will disclose such reports to the other prior to
filing with the IRS.
4. CLOSING
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4.1 THE CLOSING. The closing of the purchase and sale of the Purchased
Assets pursuant to this Agreement (the "CLOSING") shall take place at 4365
Executive Drive, Suite 1100, San Diego, California 92121 at 10:00 A.M. (local
time) on the date hereof or at such other time and place as the parties hereto
shall agree upon. Such date is referred to in this Agreement as the "CLOSING
DATE".
4.2 DOCUMENTS TO BE DELIVERED BY SELLER AND THE SOLE SHAREHOLDER. At
the Closing, Seller and the Sole Shareholder shall deliver to Buyer the
following documents, in each case duly executed or otherwise in proper form:
4.2.1 DEEDS, BILLS OF SALE. General warranty bills of sale and
such other instruments of assignment, transfer, conveyance and endorsement as
will be sufficient in the reasonable opinion of Buyer and its counsel to
transfer, assign, convey and deliver to Buyer the Purchased Assets as
contemplated hereby.
4.2.2 COMPLIANCE CERTIFICATE. A certificate signed by the Sole
Shareholder certifying that, to Sole Shareholder's knowledge, each of the
representations and warranties made by Seller and the Sole Shareholder in this
Agreement is true and correct in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made or given on and as of the Closing Date (except for any changes permitted by
the terms of this Agreement or consented to in writing by Buyer), and that
Seller and the Sole Shareholder have performed and complied in all material
respects with all of Seller's and the Sole Shareholder's respective obligations
under this Agreement which are to be performed or complied with on or prior to
the Closing Date.
4.2.3 OPINION OF COUNSEL. A written opinion of Downey, Brand,
Seymour & Rohwer, counsel to Seller, dated as of the Closing Date and addressed
to Buyer in the form of Exhibit B hereto.
4.2.4 NON-COMPETITION AGREEMENT. The Sole Shareholder shall
have duly executed and delivered to Buyer a non-competition agreement in the
form attached hereto as Exhibit C.
4.2.5 CERTIFIED RESOLUTIONS. A certified copy of the
resolutions adopted by the Board of Directors of Seller and by the Sole
Shareholder authorizing and approving this Agreement and the consummation of the
transactions contemplated by this Agreement.
4.2.6 INDEMNITY AGREEMENT. The Indemnity Agreement, in the
form attached hereto as Exhibit D (the "INDEMNITY AGREEMENT"), duly executed by
Seller and the Sole Shareholder.
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4.2.7 ARTICLES; BYLAWS. A copy of (i) the Bylaws of Seller
certified by the secretary of Seller and (ii) a copy of the Articles of
Incorporation of Seller certified by the Secretary of State of the State of
California.
4.2.8 GENERAL RELEASE. The Sole Shareholder shall deliver, and
Seller shall cause the Sole Shareholder to deliver, a general release to Buyer,
in form and substance satisfactory to Buyer and its counsel, releasing Seller
and the directors, officers, agents and employees of Seller from all claims to
the Closing Date, except (i) as may be described in written contracts disclosed
in the Disclosure Schedule and expressly described and excepted from such
release, (ii) compensation for current periods expressly described and excepted
from such release and (iii) claims based on or arising out of any breach or
failure to perform any of Buyer's covenants and agreements contained in,
referred to, or made pursuant to this Agreement.
4.2.9 WAIVER AND RELEASE. A waiver and release, in form and
substance satisfactory to Buyer and its counsel, executed by Thomas A. McCreery,
Jr., waiving his rights pursuant to that certain letter agreement, dated March
6, 1997, between Seller and Mr. McCreery, and releasing Sole Shareholder,
Seller, Buyer and their respective directors, officers, agents and employees
from any and all claims relating thereto.
4.2.10 OTHER DOCUMENTS. All other documents, instruments or
writings required to be delivered to Buyer at or prior to the Closing pursuant
to this Agreement and such other certificates of authority and documents as
Buyer may reasonably request.
4.3 DOCUMENTS TO BE DELIVERED BY BUYER. At the Closing, Buyer shall
deliver the following documents, in each case duly executed or otherwise in
proper form:
4.3.1 PURCHASE PRICE. To Seller a certified or bank cashier's
check (or wire transfer) and the Promissory Note as required by Section 3.1.2
hereof.
4.3.2 ASSUMPTION OF LIABILITIES. Such undertakings and
instruments of assumption as will be reasonably sufficient in the opinion of
Seller and its counsel to evidence the assumption by Buyer of the Assumed
Liabilities pursuant to this Agreement.
4.3.3 COMPLIANCE CERTIFICATE. A certificate signed by an
officer of Buyer that, to such officer's knowledge, the representations and
warranties made by Buyer in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as though such
representations and warranties had been made or given on and as of the Closing
Date (except for any changes permitted by the terms of this Agreement or
consented to in writing by Seller), and that Buyer has performed and complied in
all material respects with all of Buyer's obligations under this Agreement which
are to be performed or complied with on or prior to the Closing Date.
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4.3.4 CERTIFIED RESOLUTIONS. A certified copy of the
resolutions of the Board of Directors of Buyer authorizing and approving this
Agreement and the consummation of the transactions contemplated by this
Agreement.
4.3.5 INDEMNITY AGREEMENT. The Indemnity Agreement duly
executed by Buyer.
4.3.6 GENERAL RELEASE. Buyer shall deliver a general release
to Seller, the Sole Shareholder and Thomas A. McCreery, Jr., releasing such
persons from all claims to the Closing Date, except pursuant to this Agreement
and as otherwise excepted from such release.
4.3.7 SECURITY AGREEMENT. The Security Agreement, in the form
attached hereto as Exhibit E, duly executed by Buyer.
4.3.8 IMPERIAL BANK INDEBTEDNESS. Evidence of payment in full
of Seller's indebtedness to Imperial Bank.
4.3.9 OTHER DOCUMENTS. All other documents, instruments or
writings required to be delivered to Seller at or prior to the Closing pursuant
to this Agreement and such other certificates of authority and documents as
Seller may reasonably request.
5. REPRESENTATIONS AND WARRANTIES OF SELLER AND SOLE SHAREHOLDER
Sole Shareholder (to his knowledge) and Seller, jointly and severally,
make the following representations and warranties to Buyer, each of which is
true and correct on the date hereof, shall remain true and correct to and
including the Closing Date and shall be unaffected by any investigation
heretofore or hereafter made by Buyer, or any knowledge of Buyer other than as
specifically disclosed in the Disclosure Schedule and all schedules (and
accompanying documentation) delivered by Seller to Buyer at the time of the
execution of this Agreement (the "DISCLOSURE SCHEDULE").
5.1 CORPORATE MATTERS
5.1.1 Except as set forth on Schedule 5.1.2, seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California. Seller has all requisite corporate power and
authority to own, operate and lease its properties, to carry on its business as
and where such is now being conducted, to enter into this Agreement and the
other documents and instruments to be executed and delivered by Seller pursuant
hereto and to carry out the transactions contemplated hereby and thereby.
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5.1.2 Except as set forth on Schedule 5.1.2, seller is duly
licensed or qualified to do business as a foreign corporation, and is in good
standing, in each jurisdiction where, by reason of the character of the
properties owned or leased by it, or the nature of its business, the failure to
be so licensed or qualified would have a material adverse effect on the
business, financial condition, operations or prospects of Seller.
5.1.3 The authorized capital stock of Seller consists, and on
the Closing Date will consist, of 100,000 shares, .01 par value per share, of
which 2000 shares are issued and outstanding. All of the issued and outstanding
shares of Seller are owned by the Sole Shareholder, are validly issued, fully
paid and nonassessable, and the issuance of such shares were not subject to any
preemptive rights. Except as set forth above, there are not as of the date
hereof, and on the Closing Date there will not be, any capital shares of Seller
authorized, issued or outstanding or any authorized or outstanding
subscriptions, options, warrants, stock appreciation rights, calls, rights,
convertible securities or other agreements or commitments of any character
relating to issued or unissued capital shares or other securities of Seller, or
otherwise obligating Seller to issue, transfer or sell any capital shares of
Seller, or other securities convertible into, exchangeable for, or evidencing
the right to subscribe for, any capital shares of Seller. Seller does not own
any interest in any corporation, partnership or other entity.
5.1.4 Neither the Board of Directors of Seller nor the Sole
Shareholder has adopted any resolution or taken any other action with respect to
dissolution, liquidation or winding up of Seller, no such resolution or other
action is proposed, under consideration or contemplated, and there is no
proceeding or other action pending or, to the knowledge of Seller and the Sole
Shareholder, threatened, proposed or contemplated by any court, administrative
or governmental agency, instrumentality, commission, authority, board or body
with respect to any dissolution, liquidation or winding up of Seller, nor is
there any basis for any such proceeding or other action.
5.1.5 Schedule 5.1.5 contains a true and correct list showing
for any time period during the last seven years: (i) all names under which
Seller or any predecessor to Seller (a "PREDECESSOR") has conducted business,
together with the type of entity of each Predecessor, (ii) the domicile of
Seller and each Predecessor, and the location of the chief executive office of
Seller and each Predecessor, (iii) each location at which Seller or any
Predecessor conducted business, and (iv) each location where the records of
accounts receivable of Seller or any Predecessor were maintained.
5.2 AUTHORITY; APPROVAL; ENFORCEABILITY; CONFLICTS.
5.2.1 The execution and delivery of this Agreement and the
other documents and instruments to be executed and delivered by Seller and Sole
Shareholder pursuant hereto and the consummation of the transactions
contemplated hereby and
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thereby have been duly authorized by the Board of Directors of Seller and the
Sole Shareholder. No other or further corporate act or proceeding on the part of
Seller, its Board of Directors or any of its shareholders is necessary to
authorize this Agreement or the other documents and instruments to be executed
and delivered by Seller and Sole Shareholder pursuant hereto or the consummation
of the transactions contemplated hereby and thereby. This Agreement constitutes,
and when executed and delivered, the other documents and instruments to be
executed and delivered by Seller and Sole Shareholder pursuant hereto will
constitute, valid binding agreements of Seller and Sole Shareholder,
respectively, enforceable in accordance with their respective terms, except as
such may be limited by bankruptcy, insolvency, reorganization or other laws
affecting creditors' rights generally, and by general equitable principles.
5.2.2 The execution and delivery of this Agreement and the
other documents and instruments to be executed and delivered by Seller and Sole
Shareholder pursuant hereto, and the consummation by Seller and Sole Shareholder
of the transactions contemplated hereby and thereby (1) to the knowledge of
Seller and Sole Shareholder, (a) will not violate any statute or law or any
rule, regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will not require any authorization, consent, approval, exemption
or other action by or notice to any court, administrative or governmental
agency, instrumentality, commission, authority, board or body (including,
without limitation, under any "plant-closing" or similar law), and (c) subject
to obtaining the consents referred to in Schedule 5.2.2 of the Disclosure
Schedule, will not violate or conflict with, or constitute a material default
(or an event which, with notice or lapse of time, or both, would constitute a
material default) under, or result in the termination of, or accelerate the
performance required by, or result in the creation of any Lien (as defined
below) upon any of the assets of Seller under, any term or provision of any
contract, commitment, understanding, arrangement, agreement or restriction of
any kind or character to which Seller or the Sole Shareholder is a party or by
which Seller, the Sole Shareholder or any of Seller's assets or properties may
be bound or affected, and (2) will not violate or conflict with any term or
provision of the Articles of Incorporation or By-laws of Seller. Notwithstanding
the foregoing, Seller and Sole Shareholder shall not be deemed to have breached
this Section 5.2.2 by reason of any claim by EMC Corporation, a Massachusetts
corporation ("EMC"), that the execution and delivery of this Agreement
constitutes a violation of that certain Settlement and License Agreement dated
August 16, 1996 by and between EMC and Seller (the "EMC Agreement").
5.3 FINANCIAL STATEMENTS; BOOKS AND RECORDS
5.3.1 Included as Schedule 5.3.1 of the Disclosure Schedule
are true and complete copies of the financial statements of Seller consisting of
(i) an unaudited balance sheet as of July 31, 1997 (the "RECENT BALANCE SHEET"),
and the related unaudited statements of income and cash flow for the seven (7)
month period preceding
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July 31, 1997, (ii) the audited balance sheet of Seller as of December 31, 1996
and the related statements of income and cash flow for the year ended December
31, 1996 (including the notes contained therein or annexed thereto), together
with the report thereon of Arthur Anderson, independent certified public
accountants, and (iii) the unaudited balance sheets as at December 31 in each of
the years 1993 through 1995, and the related unaudited statements of income and
cash flow for each of the fiscal years then ended (collectively, the "FINANCIAL
STATEMENTS"). Except as noted in Schedule 5.3.1, the Financial Statements
(including all notes and schedules contained therein or annexed thereto) have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except, with respect to unaudited financial
statements, for the absence of footnotes and subject to normal year-end audit
adjustments applicable to the unaudited financial statements), and fairly
present, in accordance with generally accepted accounting principles (except,
with respect to unaudited financial statements, for the absence of footnotes and
subject to normal year-end audit adjustments applicable to the unaudited
financial statements), the assets, liabilities and financial position, the
results of operations and the cash flows of Seller as of the dates and for the
periods indicated.
5.3.2 All of the books of account and other financial records
of Seller have been made available to Buyer and its counsel and are complete and
correct.
5.3.3 Seller maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(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.
5.4 NO UNDISCLOSED LIABILITIES. Without in any way limiting the other
provisions set forth in this Agreement, except as and to the extent specifically
disclosed in Schedule 1.1.9, 2.1.3, 5.4, 5.14.2 or 5.18.1 or the Recent Balance
Sheet (including any modification pursuant to Schedules 2.1.1 and 2.1.2), to the
knowledge of Seller and Sole Shareholder, Seller has no liabilities, commitments
or obligations (secured or unsecured, and whether accrued, absolute, contingent,
direct, indirect or otherwise), other than commercial liabilities and
obligations incurred since the date of the Recent Balance Sheet in the ordinary
course of business and consistent with past practice which in the aggregate have
not and will not have a material adverse effect on the business, financial
condition or operations of Seller. Except as and to the extent specifically
reflected in the Recent Balance Sheet, neither Seller nor Sole Shareholder is
aware of any facts that could reasonably be expected to give rise to any basis
for the assertion against Seller of any
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liability, and there are no circumstances, conditions, happenings, events or
arrangements, contractual or otherwise, which may give rise to liabilities,
except commercial liabilities and obligations incurred in the ordinary course of
Seller's business and consistent with past practice.
5.5 ABSENCE OF CERTAIN CHANGES. Except as and to the extent disclosed
in Schedule 5.5 of the Disclosure Schedule, since the date of the Recent Balance
Sheet, there has not been:
5.5.1 Any material adverse change in the financial condition,
assets, liabilities, business, prospects or operations of Seller;
5.5.2 Any material loss, damage or destruction, whether
covered by insurance or not, affecting Seller's business or properties;
5.5.3 Any increase in the salaries, wages or other
remuneration or compensation, or in any benefits payable or to become payable to
any employee or agent of Seller (including, without limitation, any increase or
change pursuant to any bonus, pension, profit sharing, retirement or other plan
or commitment), or any bonus or other employee benefit granted, made or accrued
to any such person;
5.5.4 Any labor dispute or disturbance;
5.5.5 Any material commitment or transaction by Seller
(including, without limitation, any borrowing or capital expenditure) other than
in the ordinary course of business consistent with past practice;
5.5.6 Any declaration, setting aside, or payment of any
dividend or any other distribution in respect of Seller's capital stock; any
redemption, purchase or other acquisition by Seller of any capital stock of
Seller, or any security relating thereto; or any other payment to any
shareholder of Seller as such a shareholder;
5.5.7 Any sale, lease or other transfer or disposition of any
properties or assets of Seller, except for the sale of inventory items in the
ordinary course of business;
5.5.8 Any indebtedness for borrowed money incurred, assumed or
guaranteed by Seller;
5.5.9 Any Lien (as defined below) on any of the properties or
assets of Seller;
5.5.10 Any entering into, amendment or termination by Seller
of any material contract, or any waiver of material rights thereunder, other
than in the ordinary course of business;
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<PAGE> 16
5.5.11 Any waiver of rights under any Contract listed on
Schedule 1.1.9;
5.5.12 Any loan or advance (other than advances to employees
in the ordinary course of business for travel in accordance with past practice)
to any person including, but not limited to, any officer, director or employee
of Seller or the Sole Shareholder or any Affiliate;
5.5.13 Any entering into of any type of license agreement or
other agreement regarding intellectual property rights involving fees of $30,000
or more;
5.5.14 Any grant of credit to any customer or distributor on
terms or in amounts more favorable than those which have been extended to such
customer or distributor in the past, any other change in the terms of any credit
heretofore extended, or any other change of Seller's policies or practices with
respect to the granting of credit; or
5.5.15 Any other event or condition not in the ordinary course
of business of Seller.
5.6 TAX MATTERS
5.6.1 The provision made for taxes on the Recent Balance Sheet
(as modified pursuant to Schedules 2.1.1 and 2.1.2) is sufficient for the
payment of all federal, state, foreign, county, local and other income, ad
valorem, excise, profits, franchise, occupation, property, payroll, sales, use,
gross receipts and other taxes (and any interest and penalties) and assessments,
whether or not disputed at the date of the Recent Balance Sheet, and for all
years and periods prior thereto. Since the date of the Recent Balance Sheet,
Seller has not incurred any taxes other than taxes incurred in the ordinary
course of business consistent in type and amount with Seller's past experiences.
5.6.2 Except as set forth on Schedule 5.6, all federal, state,
foreign, county, local and other tax returns required to be filed by or on
behalf of Seller, including information returns, have been timely filed and when
filed were true, correct and complete, and the taxes shown as due thereon were
paid or adequately accrued. Seller has duly withheld and paid all taxes which it
is required to withhold and pay relating to salaries, wages and other
compensation, remuneration or benefits paid to the employees of Seller (other
than solely with respect to such taxes applicable to salaries accrued during the
pay period commencing immediately prior to the Closing and accrued vacation as
of the Closing).
5.6.3 No federal or state income tax returns of Seller have
been audited by the Internal Revenue Service or appropriate state taxing
authorities since inception, and Seller has not received from the Internal
Revenue Service or from the tax authorities of any state, county, local or other
jurisdiction any notice of underpayment of taxes or other
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deficiency which has not been paid nor any objection to any return or report
filed by Seller. There are outstanding no agreements or waivers extending the
statutory period of limitations applicable to any tax return or report.
5.6.4 Seller has never been a member of an affiliated group
that filed a consolidated tax return on which the statute of limitations does
not bar a federal tax assessment.
5.6.5 Seller has never (i) filed any consent or agreement
under Section 341(f) of the Code, (ii) applied for any tax ruling, (iii) entered
into a closing agreement with any taxing authority, (iv) filed an election under
Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election
under Section 338(e) of the Code occurred), (v) made any payments, or been a
party to an agreement (including this Agreement) that under any circumstances
could obligate it to make payments that will not be deductible because of
Section 280G of the Code, or (vi) been a party to any tax allocation or tax
sharing agreement.
5.7 ACCOUNTS RECEIVABLE. Schedule 5.7 contains a complete and accurate
report showing all accounts receivable of the Business ("ACCOUNTS") outstanding
as of the close of business on July 31, 1997, including an aging of such
Accounts that is true and complete, subject to a reasonable reserve for doubtful
accounts consistent with past practices. Except as specifically set forth on
Schedule 5.7, all Accounts arose in the ordinary course of business, are
collectible (except as provided for in the reserve for doubtful accounts) and
are carried at values determined in accordance with generally accepted
accounting principles consistently applied. Except as specifically set forth on
Schedule 5.7, there is no Account that is contingent upon the future performance
of services or any contract or obligation or the future delivery of products.
5.8 INVENTORY. All Inventory purchased since the Recent Balance Sheet
consists of inventory of a quantity usable and saleable in the ordinary course
of business. All Inventory as of the Closing is listed on Schedule 5.8.
Work-in-process Inventories are now and will be valued on the Closing Date
according to generally accepted accounting principles consistently applied.
5.9 TITLE TO AND CONDITION OF PROPERTIES.
5.9.1 Seller has good and marketable title to all the
Purchased Assets, free and clear of all mortgages, liens (statutory or
otherwise), security interests, claims, pledges, licenses, equities, options,
conditional sales contracts, lease purchase agreements, financing leases,
assessments, levies, easements, covenants, reservations, restrictions,
rights-of-way, exceptions, limitations, charges or encumbrances of any nature
whatsoever (collectively, "LIENS") except those described in Schedule 5.9.1 of
the
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Disclosure Schedule. Except with respect to the Assumed Contracts listed on
Schedule 1.1.9(c) and Schedule 5.2.2, none of the Purchased Assets are subject
to any restrictions with respect to the transferability thereof. Except with
respect to the Assumed Contracts listed on Schedule 1.1.9(c) and Schedule 5.2.2,
Seller has complete and unrestricted power and right to sell, assign, convey and
deliver the Purchased Assets to Buyer as contemplated hereby. At Closing, Buyer
will receive good and valid title to all the Purchased Assets, free and clear of
all Liens of any nature whatsoever except those described in Schedule 5.9.1 of
the Disclosure Schedule.
5.9.2 All tangible assets (real and personal) constituting
Purchased Assets hereunder are in good operating condition and repair, free from
any defects (except such minor defects as do not interfere with the continuing
and safe use thereof in the conduct of the normal operations of Seller), have
been maintained consistent with the standards generally followed in the industry
and, to the knowledge of Seller and Sole Shareholder, applicable legal
standards, and are sufficient to carry on the business of Seller as conducted
during the preceding 12 months. To the knowledge of Seller and Sole Shareholder,
all buildings, plants and other structures utilized by Seller are in good
condition and repair and have no structural defects or defects affecting the
plumbing, electrical, sewerage, or heating, ventilating or air conditioning
systems.
5.9.3 Except as set forth on Schedule 1.1.3 of the Disclosure
Schedule, Seller owns no real property. Schedules 1.1.3 and 1.1.4 set forth all
real property used or occupied by Seller (the "REAL PROPERTY"). To the knowledge
of Seller and Sole Shareholder, no portion of any of the Real Property has been
used as a landfill or for storage or landfill of hazardous or toxic materials.
Neither Seller nor the Sole Shareholder has notice or knowledge of any (i)
governmental agency or court order requiring repair, alteration or correction of
any existing condition affecting any Real Property or the systems or
improvements thereat, (ii) condition or defect which could give rise to an order
of the sort referred to in "(i)" above, or (iii) underground storage tanks, or
any structural, mechanical, or other defects of material significance affecting
any Real Property or the systems or improvements thereat (including, but not
limited to, inadequacy for normal use of mechanical systems or disposal or water
systems at or serving the Real Property).
5.9.4 To the knowledge of Seller and Sole Shareholder, neither
the whole nor any portion of the property or any other assets of Seller is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor to Seller's and the Sole Shareholder's knowledge
has any such condemnation, expropriation or taking been proposed.
5.10 INTELLECTUAL PROPERTY RIGHTS
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5.10.1 Schedule 1.1.2 sets forth an accurate and complete list
identifying all of the following Intellectual Property Rights as of the Closing
Date: (i) all patents and patent applications owned by Seller or any Affiliate,
including the country of filing, filing number, date of issue, expiration date,
title and inventors; (ii) all registered trademarks and servicemarks and
trademark and servicemark applications, including country of filing, filing
number, date of issue and expiration date; (iii) all common law trademarks,
service marks, trade names and copyright registrations; (iv) all material
license agreements pursuant to which Seller or any Affiliate acquired any
Intellectual Property Rights and all material agreements, oral or written,
pursuant to which Seller or any Affiliate is obligated to pay royalties to third
parties with respect to such Intellectual Property Rights; and (v) all material
license agreements, oral or written, including site licenses, pursuant to which
Seller or any Affiliate has granted any person any rights to any of the
Intellectual Property Rights. Complete and accurate copies of all written
agreements (and complete and accurate descriptions of all oral agreements)
referred to in the foregoing clauses (iv) and (v) have been provided to Buyer.
The entire right, title and interest in the Intellectual Property Rights reside
solely with Seller. To the knowledge of Seller and the Sole Shareholder after
due inquiry thereof, there are no actual or claimed infringements, violations or
misappropriations existing by any third party with respect to the Intellectual
Property Rights.
5.10.2 To the knowledge of Seller and the Sole Shareholder,
the operation of the Business as currently conducted, including, but not limited
to, the operation and use of the Purchased Assets and the manufacture, sale or
use of the Products, does not and will not infringe, violate or misappropriate
any patent, trade secret, copyright or other intellectual property rights of any
third party or entity.
5.10.3 Except to the extent set forth in Schedule 1.1.2, no
material licenses, sub-licenses or other agreements relating to the Intellectual
Property Rights exist which would limit or restrict the rights of Buyer to
operate the Business following the Closing, including, without limitation, the
operation and use of the Assets and the manufacture, sale or use of the
Products.
5.10.4 To the knowledge of Seller and the Sole Shareholder,
except as set forth on Schedule 5.10.4, all trademarks, servicemarks, and
related applications and registrations thereof and all copyrights and
registrations thereof related to the Business (collectively the "TRADEMARKS AND
COPYRIGHTS") are valid and enforceable, Seller has the exclusive right to use
the Trademarks and Copyrights in connection with the Business and there are no
oppositions, cancellations or governmental, arbitral or other proceedings
currently pending or threatened that protest the rights of Seller to use and/or
register the Trademarks and Copyrights. Neither Seller nor the Sole Shareholder
has, by act or failure to act, including without limitation, by failure to
attach any required notice, transferred any rights to the Intellectual Property
Rights into the public domain.
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5.10.5 Neither Seller nor any Affiliate is making use of any
patentable or unpatentable invention or any confidential information in the
Business in which any present or past employee of Seller has or has claimed an
interest, and neither Seller nor the Sole Shareholder is aware of facts that
could reasonably be expected to give rise to such a claim. Neither Seller nor
the Sole Shareholder has any knowledge (after due inquiry thereof) of the
assertion against Seller of any conflicting rights to any Intellectual Property
Rights. Each employee of Seller has entered into, and no employee of Seller has
failed or refused to execute and deliver an agreement between such employee and
Seller in substantially the form attached hereto as Schedule 5.10.5, and no such
employee has failed or refused to take any action required under such agreement.
5.11 TRADE SECRETS
5.11.1 The Purchased Assets include all documentation relating
to all of Seller's trade secrets, if any, which, if they exist, may include
customer lists, processes, know-how, computer programs and routines and other
technical data used in the Products or in the Business (collectively, the "TRADE
SECRETS") that is current, accurate, and sufficient in detail and content to
identify and explain such trade secrets, and to allow their full and proper use
by Buyer; provided, however, that the trade secrets do not include the
specialized knowledge and experience of Seller's employees.
5.11.2 To the knowledge of Seller and the Sole Shareholder,
Seller is the sole owner of each of the trade secrets, free and clear of any
liens, encumbrances, restrictions, or legal or equitable claims of others.
5.11.3 To the knowledge of Seller and the Sole Shareholder,
the trade secrets have not been used, divulged, or appropriated for the benefit
of any past or present employees or other persons or to the detriment of Seller.
5.12 PRODUCTS; WARRANTY POLICIES
5.12.1 A true and complete list and description of all
Products marketed, licensed or sold by Seller since April 1993 is set forth on
Schedule 1.1.13, which Schedule indicates each such product currently
manufactured, sold or marketed by Seller.
5.12.2 Schedule 5.12.2 contains a summary of all of the
product warranty and service policies and obligations of Seller relating to the
Products.
5.13 NO LITIGATION. Except as specifically described in Schedule 5.13,
there is no action, suit, arbitration or other proceeding, investigation or
inquiry pending or, to the knowledge of Seller and the Sole Shareholder,
threatened against Seller, its directors (in such capacity), the Sole
Shareholder or Seller's business or any of its assets, nor is Seller or the Sole
Shareholder aware of any facts that could reasonably be expected to give rise
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to any basis for any such proceedings, investigations or inquiries. Schedule
5.13 also identifies all such actions, suits, proceedings, investigations and
inquiries to which Seller, any of its directors (in such capacity) or the Sole
Shareholder have been parties since inception. Except as set forth in Schedule
5.13, neither Seller nor its business or assets is subject to any judgment,
order, writ or injunction of any court, arbitrator or federal, state, foreign,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality.
5.14 COMPLIANCE WITH LAWS
5.14.1 Except as set forth in Schedule 5.14.1, to the
knowledge of Seller and Sole Shareholder, Seller (including each and all of its
operations, practices, properties and assets) is in compliance with all
applicable federal, state, local and foreign laws, ordinances, orders, rules and
regulations (collectively, "LAWS"), including, without limitation, those
applicable to discrimination in employment, occupational safety and health,
trade practices, competition and pricing, product warranties, zoning, building
and sanitation, employment, retirement and labor relations, product advertising
and the Environmental Laws (as hereinafter defined). Except as set forth in
Schedule 5.14.1 of the Disclosure Schedule, Seller has not received notice of
any violation or alleged violation of, and to the knowledge of Seller and the
Sole Shareholder (after due inquiry thereof) is subject to no liability (whether
accrued, absolute, contingent, direct or indirect) for past or continuing
violation of, any Laws. All reports and returns required to be filed by Seller
with any governmental authority have been filed, and were accurate and complete
when filed. Without limiting the generality of the foregoing:
(a) Seller has made all required payments to its unemployment
compensation reserve accounts with the appropriate governmental departments of
the states where it is required to maintain such accounts; and
(b) Seller has delivered to Buyer copies of all records of
Seller required for the past five years under the federal Occupational Safety
and Health Act of 1970, as amended, and under all other applicable health and
safety laws and regulations, and all correspondence relating thereto. The
deficiencies, if any, noted in such records and correspondence have been
corrected.
5.14.2 Seller has all licenses, permits, approvals,
authorizations and consents ("PERMITS") of all governmental and regulatory
authorities and all certification organizations required for the conduct of the
Business (as presently conducted and as proposed to be conducted) and operation
of the Facilities, except for any Permits the failure to possess which would not
have a material adverse effect on the financial condition, assets, liabilities,
business, prospects or operations of the Business. All such Permits are
described in Schedule 5.14.2 of the Disclosure Schedule, are in full force and
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effect and are, except as expressly set forth on Schedule 5.14.2, assignable to
Buyer in accordance with the terms hereof. Except as set forth in Schedule
5.14.2 of the Disclosure Schedule, Seller (including its operations, properties
and assets) is and has been in compliance with all such Permits.
5.14.3 The applicable Laws relating to pollution or protection
of the environment, including Laws relating to emissions, discharges,
generation, storage, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic, hazardous or petroleum or
petroleum-based substances or wastes ("WASTE") into the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of Waste
including, without limitation, the Clean Water Act, the Clean Air Act, the
Resource Conservation and Recovery Act, the Toxic Substances Control Act and the
Comprehensive Environmental Response Compensation Liability Act ("CERCLA"), as
amended, and their state and local counterparts, are herein collectively
referred to as the "ENVIRONMENTAL LAWS." Without limiting the generality of the
foregoing provisions of this Section 5.14.3, to the knowledge of Seller and Sole
Shareholder, Seller is in compliance with all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws or contained in any regulations,
code, plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder. Except as set forth in Schedule
5.13 of the Disclosure Schedule, there is no civil, criminal or administrative
action, suit, demand, claim, hearing, notice of violation, investigation,
proceeding, notice or demand letter pending or, to the knowledge of Seller and
the Sole Shareholder, threatened against Seller relating in any way to the
Environmental Laws or any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder. Except as set forth in Schedule 5.13 of the Disclosure Schedule, to
the knowledge of Seller and Sole Shareholder, there are no past or present
events, conditions, circumstances, activities, practices, incidents, actions or
omissions which could reasonably be expected to interfere with or prevent
compliance or continued compliance with the Environmental Laws or with any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, or which may give
rise to any liability, including, without limitation, liability under CERCLA or
similar state or local Laws, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, notice of violation, study or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling, or the emission, discharge,
release or threatened release into the environment, of any Waste.
5.15 INSURANCE. Set forth in Schedule 5.15 of the Disclosure Schedule
is a complete and accurate list and description of all policies of fire,
casualty, general liability,
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product liability, workers compensation, health and other forms of insurance
presently in effect with respect to the business and properties of Seller, true
and correct copies of which have heretofore been delivered to Buyer. Schedule
5.15 of the Disclosure Schedule includes, without limitation, the carrier, the
description of coverage, the limits of coverage, retention or deductible
amounts, amount of annual premiums, date of expiration and the date through
which premiums have been paid with respect to each such policy, and any pending
claims in excess of $10,000. All such policies are valid, outstanding and
enforceable policies and provide insurance coverage for the properties, assets
and operations of Seller, of the kinds (except for product liability and D&O
insurance), in the amounts and against the risks customarily maintained by
organizations similarly situated; and no such policy (nor any previous policy)
provides for or is subject to any currently enforceable retroactive rate or
premium adjustment, loss sharing arrangement or other actual or contingent
liability arising wholly or partially out of events arising prior to the date
hereof. Schedule 5.15 of the Disclosure Schedule indicates each policy as to
which (a) the coverage limit has been reached in the current year of coverage or
(b) the total incurred losses in the current year of coverage equal 75% or more
of the coverage limit in the current year of coverage. No notice of cancellation
or termination has been received with respect to any such policy, and neither
Seller nor the Sole Shareholder has knowledge of any act or omission of Seller
which could result in cancellation of any such policy prior to its scheduled
expiration date. Seller has not been refused any insurance with respect to any
aspect of the operations of the business nor has its coverage been limited by
any insurance carrier to which it has applied for insurance or with which it has
carried insurance during the last three years. Seller has duly and timely made
all claims it has been entitled to make under each policy of insurance. There is
no claim by Seller pending under any such policies as to which coverage has been
denied or disputed by the underwriters of such policies, and neither Seller nor
the Sole Shareholder knows of any basis for denial of any claim under any such
policy. Seller has not received any written notice from or on behalf of any
insurance carrier issuing any such policy that insurance rates therefor will
hereafter be substantially increased (except to the extent that insurance rates
may be increased for all similarly situated risks) or that there will hereafter
be a cancellation or an increase in a deductible (or an increase in premiums in
order to maintain an existing deductible) or nonrenewal of any such policy. Such
policies are sufficient in all material respects for compliance by Seller with
all requirements of law and with the requirements of all contracts to which
Seller is a party.
5.16 CONTRACTS AND COMMITMENTS.
5.16.1 Except as set forth in Schedule 1.1.4 of the Disclosure
Schedule, Seller has no leases of real property.
5.16.2 Schedule 1.1.5 of the Disclosure Schedule sets forth
all leases of personal property.
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5.16.3 Except for Seller's obligations under that certain
Agreement dated April 24, 1997 between Seller and Traaken Software, Inc., Seller
has no material purchase commitments for inventory items or supplies that,
together with amounts on hand, constitute in excess of three months normal
usage, or which are at an excessive price.
5.16.4 Seller has no agreements or commitments to customers or
distributors pursuant to agreements with terms materially different from
Seller's standard form of sales and as to certain products, a license agreement
(which standard forms are attached to Schedule 5.16.4) other than as listed and
described in Schedule 5.16.4, and Seller has no such agreements or commitments
except those made in the ordinary course of business and at arm's length, and no
such agreements or commitments are for a sales price which would result in a
loss to Seller.
5.16.5 Except as disclosed in Schedule 5.16.5, Seller has no
agreement, understanding, contract or commitment (written or oral) with any
Affiliate or any other officer, employee, agent, consultant, distributor, dealer
or franchisee that is not cancelable by Seller on notice of not longer than 30
days without liability, penalty or premium of any nature or kind whatsoever.
5.16.6 Except as set forth on Schedule 5.16.6, seller has not
given a power of attorney, which is currently in effect, to any person, firm or
corporation for any purpose whatsoever.
5.16.7 Seller is not a party to any collective bargaining
agreements with any unions, guilds, shop committees or other collective
bargaining groups.
5.16.8 Except as set forth in Schedule 5.16.8 of the
Disclosure Schedule, Seller is not obligated under any loan agreement,
promissory note, letter of credit, or other evidence of indebtedness as a
signatory, guarantor or otherwise.
5.16.9 Except as set forth on Schedule 5.16.9, Seller has not
guaranteed the payment or performance of any person, firm or corporation, agreed
to indemnify any person or act as a surety, or otherwise agreed to be
continentally or secondarily liable for the obligations of any person.
5.16.10 Except as shown on Schedule 5.16.10, Seller is not a
party to any contract with any national governmental body.
5.16.11 Except as shown on Schedule 5.16.11, Seller is not a
party to nor is it bound by any agreement, deed, lease or other instrument which
is so burdensome as to materially affect or impair the operation of Seller.
Without limiting the generality of the foregoing, Seller is not a party to nor
is it bound by any agreement requiring Seller to
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assign any interest in any trade secret or proprietary information, or
prohibiting or restricting Seller from competing in any business or geographical
area or soliciting customers or otherwise restricting it from carrying on its
business anywhere in the world.
5.16.12 Schedule 5.16.12 contains a description and summary of
terms of contracts relating to the Business involving consideration or other
expenditures in excess of $10,000 or more negotiated or discussed by Seller or
the Sole Shareholder at any time within sixty (60) days prior to the Closing but
not finalized.
5.16.13 Seller has no lease, contract or commitment of any
nature involving consideration or other expenditures in excess of $10,000 by or
from Seller, or involving performance over a period of more than three months,
or which is otherwise individually material to the operations of Seller, except
as explicitly described in Schedule 5.16.13 or in any other Schedule of the
Disclosure Schedule.
5.16.14 A complete and accurate copy of each written agreement
and other document identified on the Schedules referred to in Sections 5.16.1
through 5.16.13, as amended to date, has been delivered to Buyer. Except as set
forth on Schedule 5.16.14, each lease, contract and commitment referred to in
Sections 5.16.1 through 5.16.13 is, except to the extent fully performed on the
date hereof, in full force and effect and valid and binding on Seller in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and subject to general equity principles and to limitations on
the availability of equitable relief. Seller has performed all material
obligations required to be performed by it and is not in default under any
lease, contract or commitment (except any default arising as a result of the
transfer to Buyer of the Assumed Contracts described on Schedule 5.2.2 as
requiring the consent of the other party), nor has any event or omission
occurred which through the passage of time or the giving of notice, or both,
would constitute a default thereunder or cause the acceleration of any of
Seller's obligations or result in the creation of any Lien on any of the assets
owned, used or occupied by Seller. Neither Seller nor the Sole Shareholder has
received any notice that it is in default thereunder, and neither Seller nor the
Sole Shareholder is aware of any facts that could reasonably be expected to give
rise to such a default. No third party is in default under any lease, contract
or commitment to which Seller is a party, nor has any event or omission occurred
which, through the passage of time or the giving of notice, or both, would
constitute a default thereunder or give rise to an automatic termination, or the
right of discretionary termination, thereof.
5.17 LABOR MATTERS. Except to the extent set forth in Schedule
5.17 of the Disclosure Schedule, (a) within the last five years Seller has not
experienced any labor disputes, union organization attempts or work stoppage due
to labor disagreements in connection with its business; (b) to the knowledge of
Seller and Sole Shareholder, Seller
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is in compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and is not
engaged in any unfair labor practice; (c) there is no unfair labor practice
charge or complaint against Seller pending or, to Seller's and the Sole
Shareholder's knowledge, threatened; (d) there is no labor strike, dispute,
request for representation, slowdown or stoppage actually pending or threatened
against or affecting Seller nor any secondary boycott with respect to products
of Seller; (e) no question concerning representation has been raised or is, to
the knowledge of Seller and Sole Shareholder, threatened respecting the
employees of Seller; (f) no grievance and no arbitration proceeding arising out
of or under collective bargaining agreements, is pending and no such claim
therefor exists; and (g) there are no administrative charges or court complaints
against Seller concerning alleged employment discrimination or other employment
related matters pending or, to Seller's and the Sole Shareholder's knowledge,
threatened before the U.S. Equal Employment Opportunity Commission or any state
or federal court or agency.
5.18 EMPLOYEE BENEFIT PLANS.
5.18.1 Seller has no "defined benefit" plan as defined in
ERISA. Schedule 5.18.1 of the Disclosure Schedule sets forth all pension,
thrift, savings, profit sharing, retirement, incentive bonus or other bonus,
medical, dental, life, accident insurance, benefit, employee welfare,
disability, group insurance, stock purchase, stock option, stock appreciation,
stock bonus, executive or deferred compensation, hospitalization and other
similar fringe or employee benefit plans, programs and arrangements, and any
employment or consulting contracts, "golden parachutes," collective bargaining
agreements, severance agreements or plans, vacation and sick leave plans,
programs, arrangements and policies, including, without limitation, all
"employee benefit PLANS" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")). No such employee benefit
plan is a "multiemployer plan" (as defined in Section 4001 of ERISA), and Seller
has never contributed nor been obligated to contribute to any such multiemployer
plan. Schedule 5.18.1 also lists those provisions of all employee manuals, and
all written or binding oral statements of policies, practices or understandings
relating to employment, which are provided to, for the benefit of, or relate to,
any persons employed by Seller ("SELLER EMPLOYEES") with respect to intellectual
property developed by Seller or Seller Employees, or with respect to obligations
of confidentiality related to Seller's affairs or property.
5.18.2 With respect to each employee benefit plan that is
subject to the provisions of Title IV of ERISA and with respect to which Seller
or any of its assets may, directly or indirectly, be subject to any liability,
contingent or otherwise, or the imposition of any lien (whether by reason of the
complete or partial termination of any such plan, the funded status of any such
plan, any "complete withdrawal" (as defined in Section 4203 of
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ERISA) or "partial withdrawal" (as defined in Section 4205 of ERISA) by any
person from any such plan, or otherwise):
(a) no such plan has been terminated so as to subject,
directly or indirectly, any assets of Seller to any liability, contingent or
otherwise, or the imposition of any lien under Title IV of ERISA;
(b) no proceeding has been initiated or threatened by any
person (including the Pension Benefit Guaranty Corporation ("PBGC")) to
terminate any such plan;
(c) no condition or event currently exists or currently is
expected to occur that could subject, directly or indirectly, any assets of
Seller to any liability, contingent or otherwise, or the imposition of any lien
under Title IV of ERISA, whether to the PBGC or to any other person or otherwise
on account of the termination of any such plan;
(d) if any such plan were to be terminated as of the Closing
Date, no assets of Seller would be subject, directly or indirectly, to any
liability, contingent or otherwise, or the imposition of any lien under Title IV
of ERISA;
(e) no "reportable event" (as defined in Section 4043 of
ERISA) has occurred with respect to any such plan;
(f) no such plan which is subject to Section 302 of ERISA or
Section 412 of the Code has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code, respectively),
whether or not waived; and
(g) no such plan is a multiemployer plan or a plan described
in Section 4064 of ERISA.
5.18.3 There have been no "prohibited transactions" within the
meaning of Section 406 or 407 of ERISA or Section 4975 of the Code for which a
statutory or administrative exemption does not exist with respect to any
employee benefit plan, and no event or omission has occurred in connection with
which Seller or any of its assets or any employee benefit plan, directly or
indirectly, could be subject to any liability under ERISA, the Code or any other
law, regulation or governmental order applicable to any employee benefit plan,
including, without limitation, Section 406, 407, 409, 501, 502, 510, 511, 601,
4062, 4063, 4069, 4071, or 4201 of ERISA, or Section 4971, 4972, 4975, 4976,
4977, 4979 or 4980B of the Code, or under any agreement, instrument, statute,
rule of law or regulation pursuant to or under which Seller has agreed to
indemnify or is
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required to indemnify any person against liability incurred under, or for a
violation or failure to satisfy the requirements of, any such statute,
regulation or order.
5.18.4 The funds available under each employee benefit plan
which is intended to be a funded plan equal or exceed the amounts required to be
paid, or which would be required to be paid if such Plan were terminated, on
account of rights vested or accrued as of the Closing Date (using the actuarial
methods and assumptions then used by Seller's actuaries in connection with the
funding of such Plan).
5.18.5 Seller is not and never has been a member of a
controlled group as defined in Section 414(b) of the Code or in common control
with any unincorporated trade or business as determined under Section 414(c) of
the Code. Seller is not and never has been a member of an "affiliated service
group" within the meaning of Section 414(m) of the Code. Except as set forth on
Schedule 5.18.5, there are not and never have been any leased employees within
the meaning of Section 414(n) of the Code who perform services for Seller, and
no individuals are expected to become leased employees.
5.18.6 With respect to each employee benefit plan, (i) all
payments due from Seller to date have been made and all amounts properly accrued
to date as liabilities of Seller which have not been paid have been properly
recorded on the books of Seller and are reflected in the Recent Balance Sheet;
(ii) Seller has materially complied with, and each such employee benefit plan
conforms in all material respects in form and operation to, all applicable laws
and regulations, including but not limited to ERISA and the Code, and all
reports and information relating to such employee benefit plan required to be
filed with any governmental entity have been timely filed; (iii) to Seller's and
Sole Shareholder's knowledge all reports and information relating to each such
employee benefit plan required to be disclosed or provided to participants or
their beneficiaries have been timely disclosed or provided; (iv) to Seller's and
Sole Shareholder's knowledge each such employee benefit plan which is intended
to qualify under Section 401 of the Code has received a favorable determination
letter from the Internal Revenue Service with respect to such qualification, its
related trust has been determined to be exempt from taxation under Section
501(a) of the Code, and nothing has occurred since the date of such letter that
has or is likely to adversely affect such qualification or exemption; (v) there
are no actions, suits or claims pending (other than routine claims for benefits)
or, to Seller's and the Sole Shareholder's knowledge, threatened with respect to
such employee benefit plan or against the assets of such employee benefit plan;
and (vi) no employee benefit plan is a plan which is established and maintained
outside the United States primarily for the benefit of individuals substantially
all of whom are nonresident aliens.
5.18.7 Except as set forth on Schedule 5.18.7, the
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former
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employee of Seller to severance pay, unemployment compensation or any other
payment, except as expressly provided in this Agreement, (ii) accelerate the
time of payment or vesting, or increase the amount of compensation due to any
such employee or former employee or (iii) result in any prohibited transaction
described in Section 406 of ERISA or Section 4975 of the Code for which an
exemption is not available or (iv) result in Buyer being or becoming liable to
any Seller Employee or liable for any amount owed to any employee benefit plan.
5.19 EMPLOYMENT COMPENSATION. Schedule 5.19 of the Disclosure Schedule
contains a true and correct list of all employees to whom Seller is paying
compensation, including bonuses and incentives, at an annual rate in excess of
$60,000 for services rendered or otherwise; and in the case of salaried
employees such list identifies the current annual rate of compensation for each
employee and in the case of hourly or commission employees identifies certain
reasonable ranges of rates and the number of employees falling within each such
range.
5.20 MAJOR CUSTOMERS AND SUPPLIERS.
5.20.1 Schedule 5.20.1 of the Disclosure Schedule contains a
list of the ten largest customers of Seller for each of the two most recent
fiscal years (determined on the basis of the total dollar amount of net sales)
showing the total dollar amount of net sales to each such customer during each
such year. Neither Seller nor the Sole Shareholder has any knowledge of any
facts indicating that any of the customers listed on Schedule 5.20.1 of the
Disclosure Schedule will not continue to be customers of the business of Seller
after the Closing at substantially the same level of purchases as heretofore.
5.20.2 Schedule 5.20.2 of the Disclosure Schedule contains a
list of the ten largest suppliers to Seller for each of the two most recent
fiscal years (determined on the basis of the total dollar amount of purchases)
showing the total dollar amount of purchases from each such supplier during each
such year. Neither Seller nor the Sole Shareholder has any knowledge or
information of any facts indicating that any of the suppliers listed on Schedule
5.20.2 of the Disclosure Schedule will not continue to be suppliers to the
business of Seller after the Closing and will not continue to supply the
business with substantially the same quantity and quality of goods at
competitive prices.
5.20.3 Schedule 5.20.3 of the Disclosure Schedule contains a
list by product line of all dealers, distributors and franchisees of Seller.
5.21 AFFILIATES' RELATIONSHIPS TO SELLER.
5.21.1 All leases, contracts, agreements or other arrangements
between Seller and any Affiliate are described on Schedule 5.21.1 of the
Disclosure Schedule. Except as shown on Schedule 5.21.1, Seller has no business
relationship with any
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Affiliate (other than the direct employment of an individual Affiliate as an
employee, officer or director) where such Affiliate is a customer, supplier,
vendor, licensor, lessor, landlord, distributor, sales representative, lender or
borrower. Schedule 5.21.1 contains a complete list of all business relationships
of Seller with any Affiliate.
5.21.2 Except as set forth on Schedule 5.21.2, no Affiliate
has any direct or indirect interest in (i) any entity which does business with
Seller or is competitive with Seller's business, or (ii) any property, asset or
right which is used by Seller in the conduct of its business (other than an
interest constituting less than 1% of the outstanding voting stock of a company
whose Common Stock is traded on a national securities exchange or traded in the
national over-the-counter market).
5.21.3 For purposes of this Agreement "AFFILIATE" means:
(i) any current or former shareholder, director or officer of
the Seller;
(ii) any sibling, uncle, aunt, niece or nephew of any person
described in clause (i);
(iii) any ancestor or lineal descendant of any person
described in clauses (i) or (ii);
(iv) any current or former spouse of any person described in
clauses (i), (ii) or (iii) or any person who is a member of the same household
of the person described in clauses (i), (ii) or (iii) or who has resided with
such person for more than 10 days in any calendar year;
(v) any ancestor or lineal descendant of any person described
in clauses (i), (ii), (iii) or (iv);
(vi) any entity or person in which any of the foregoing have a
direct or indirect interest (except through ownership of less than 1% of the
outstanding shares of any entity whose securities are listed on a national
securities exchange or traded in the national over-the-counter market).
5.22 ASSETS NECESSARY TO BUSINESS. Except as disclosed in Schedule
5.22, the Purchased Assets include all property and assets (except for the
Excluded Assets), tangible and intangible, and all leases, licenses and other
agreements, which are necessary to permit Buyer to carry on, or currently used
or held for use in, the business of Seller as presently conducted.
5.23 NO BROKERS OR FINDERS. Except for arrangements with Thomas A.
McCreery, Jr. in connection with the letter agreement and waiver and release
referenced
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in Section 4.2.10 of this Agreement, neither Seller nor any of its directors,
officers, employees, shareholders or agents have retained, employed or used any
broker or finder in connection with the transaction provided for herein or in
connection with the negotiation thereof.
5.24 AS-IS. Buyer acknowledges that Buyer is acquiring the Purchased
Assets and the Business "As-Is, Where-Is, With All Faults," in its current
condition subject to the terms of this Agreement, and that, with the exception
of the representations and warranties contained in this Agreement, no
representations or warranties of any kind whatsoever, express or implied, have
been made by the Seller, Sole Shareholder or Seller's employees, agents or
representatives with regard to the Purchased Assets or the Business, the
condition or quality of either, or the ability of Buyer to develop the Purchased
Assets or the Business.
5.25 SALES REPRESENTATIVE, DISTRIBUTORSHIP AND LICENSE AGREEMENTS.
Schedule 5.25 contains a true and complete list of all distributorship, sales
representative and manufacturing license agreements (if any material term
thereof is oral, Schedule 5.25 contains a complete description of such oral term
or provision). There are no other agreements, oral or written, with any
distributor, sales representative or other party except as set forth in Schedule
5.25.
6. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the Sole Shareholder that,
as of the date of this Agreement:
6.1 ORGANIZATION AND STANDING. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of California, and has all
requisite corporate power and authority to own, operate and lease its properties
and carry on its business as now conducted.
6.2 AUTHORITY AND ENFORCEABILITY.
6.2.1 Buyer has full power and authority to execute, deliver
and perform its obligations under this Agreement and all documents to be
executed by Buyer in connection with the transactions contemplated hereby and
all corporate and other action of Buyer necessary for such execution, delivery
and performance has been duly taken.
6.2.2 No approval of this Agreement or the transactions
contemplated hereby is required by the shareholders of Buyer under the Articles
of Incorporation or Bylaws of Buyer, the corporate laws of the State of
California or otherwise; or if such approval is required, it shall be obtained
by the Closing Date.
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6.2.3 This Agreement and all documents to be executed by Buyer
in connection with the transactions contemplated hereby is, and upon due
execution and delivery by the parties thereto will be, a legal, valid and
binding obligation of Buyer, enforceable against Buyer in accordance with its
respective terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditor's rights and by rules of law governing
specific performance, injunctive relief or other equitable remedies.
6.2.4 The execution and delivery by Buyer of this Agreement
and all documents to be executed by Buyer in connection with the transactions
contemplated hereby do not, and the performance and consummation by Buyer of the
transactions contemplated by this Agreement and such other documents will not,
result in any conflict with, breach or violation of or default, termination,
forfeiture or lien under (or upon the failure to give notice or the lapse of
time, or both, result in any conflict with, breach or violation of or default,
termination, forfeiture or lien under) any terms or provisions of Buyer's
Articles of Incorporation or Bylaws, each as amended to date, or any statute,
rule, regulation, judicial or governmental decree, order or judgment, or any
agreement, lease or other instrument, to which Buyer is a party or to which it
or its assets are subject that has or is likely to have a material adverse
effect on Buyer's ability to carry out its obligations under this Agreement or
such other documents.
6.3 FINANCIAL STATEMENTS. Buyer has delivered to Seller true
and complete copies of the financial statements of Buyer (the "BUYER FINANCIAL
STATEMENTS") consisting of (i) an unaudited balance sheet as of June 30, 1997
(the "RECENT BUYER BALANCE SHEET"), and the related unaudited statements of
income and cash flow for the three (3) month period preceding June 30, 1997 and
(ii) the audited balance sheet of Seller as of March 29, 1997 and the related
statements of income and cash flow for the year ended March 29, 1997 (including
the notes contained therein or annexed thereto), together with the report
thereon of Delloite & Touche, independent certified public accountants. The
Buyer Financial Statements (including all notes and schedules contained therein
or annexed thereto) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except, with respect to
unaudited financial statements, for the absence of footnotes and subject to
normal year-end audit adjustments applicable to the unaudited financial
statements), and fairly present, in accordance with generally accepted
accounting principles (except, with respect to unaudited financial statements,
for the absence of footnotes and subject to normal year-end audit adjustments
applicable to the unaudited financial statements), the assets, liabilities and
financial position, the results of operations and the cash flows of Buyer as of
the dates and for the periods indicated.
6.4 NO UNDISCLOSED LIABILITIES. Except as and to the extent
specifically disclosed in the Recent Buyer Balance Sheet, to the knowledge of
Buyer, Buyer has no
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liabilities, commitments or obligations (secured or unsecured, and whether
accrued, absolute, contingent, direct, indirect or otherwise), other than
commercial liabilities and obligations incurred since the date of the Recent
Buyer Balance Sheet in the ordinary course of business and consistent with past
practice which in the aggregate have not and will not have a material adverse
effect on the business, financial condition or operations of Seller and other
than liabilities, commitments and/or obligations arising out of or relating to
this Agreement or any related agreement. Except as referred to above in this
Section 6.4 and except to the extent specifically reflected in the Recent
Balance Sheet, Buyer is not aware of any facts that could reasonably be expected
to give rise to any basis for the assertion against Buyer of any liability, and
there are no circumstances, conditions, happenings, events or arrangements,
contractual or otherwise, which may give rise to liabilities, other than
commercial liabilities and obligations incurred since the date of the Recent
Buyer Balance Sheet in the ordinary course of business and consistent with past
practice which in the aggregate have not and will not have a material adverse
effect on the business, financial condition or operations of Seller and other
than liabilities, commitments and/or obligations arising out of or relating to
this Agreement or any related agreement.
6.5 ABSENCE OF CERTAIN CHANGES. Except as and to the extent disclosed
in Schedule 6.5, since the date of the Recent Buyer Balance Sheet, there has not
been:
6.5.1 Any material adverse change in the financial condition,
assets, liabilities, business, prospects or operations of Buyer;
6.5.2 Any material loss, damage or destruction, whether
covered by insurance or not, affecting Buyer's business or properties;
6.5.3 Any increase in the salaries, wages or other
remuneration or compensation, or in any benefits payable or to become payable to
any employee or agent of Buyer (including, without limitation, any increase or
change pursuant to any bonus, pension, profit sharing, retirement or other plan
or commitment), or any bonus or other employee benefit granted, made or accrued
to any such person;
6.5.4 Any labor dispute or disturbance;
6.5.5 Any material commitment or transaction by Buyer
(including, without limitation, any borrowing or capital expenditure) other than
in the ordinary course of business consistent with past practice and other than
transactions and commitments arising out of or relating to this Agreement or any
related agreement;
6.5.6 Any declaration, setting aside, or payment of any
dividend or any other distribution in respect of Buyer's capital stock; any
redemption, purchase or other
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acquisition by Buyer of any capital stock of Buyer, or any security relating
thereto; or any other payment to any shareholder of Buyer as such a shareholder;
6.5.7 Any sale, lease or other transfer or disposition of any
properties or assets of Buyer, except in the ordinary course of business;
6.5.8 Any indebtedness for borrowed money incurred, assumed or
guaranteed by Buyer, except indebtedness arising out of or relating to this
Agreement or any related agreement;
6.5.9 Any Lien on any of the properties or assets of Buyer,
except indebtedness arising out of or relating to this Agreement or any related
agreement;
6.5.10 Any entering into, amendment or termination by Buyer of
any material contract, or any waiver of material rights thereunder, other than
in the ordinary course of business;
6.5.11 Any loan or advance (other than advances to employees
in the ordinary course of business for travel in accordance with past practice)
to any person including, but not limited to, any officer, director or employee
of Buyer;
6.5.12 Any entering into of any type of license agreement or
other agreement regarding intellectual property rights involving fees of $30,000
or more, except in the ordinary course of business and except agreements arising
out of or relating to this Agreement or any related agreement;
6.5.13 Any grant of credit to any customer or distributor on
terms or in amounts substantially more favorable than those which have been
extended to such customer or distributor in the past, any other material change
in the terms of any credit heretofore extended, or any other change of Buyer's
policies or practices with respect to the granting of credit; or
6.5.14 Any other material event or condition not in the
ordinary course of business of Buyer.
7. EMPLOYEES - EMPLOYEE BENEFITS
7.1 AFFECTED EMPLOYEES. "Affected Employees" shall mean employees of
Seller, if any, who are employed by Buyer immediately after the Closing. Buyer
may, but shall have no obligation to, employ any employees of Seller.
7.2 PAYROLL TAX. Seller agrees to make a clean cut-off of payroll and
payroll tax reporting with respect to the Affected Employees paying over to the
federal, state and city governments those amounts respectively withheld or
required to be withheld for
34.
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periods ending on or prior to the Closing Date. Seller also agrees to issue, by
the date prescribed by IRS Regulations, Forms W-2 for salaries, wages and other
compensation paid through the Closing Date. Except as set forth in this
Agreement, Buyer shall be responsible for all payroll and payroll tax
obligations with respect to employment compensation accruing after the Closing
Date for Affected Employees.
7.3 TERMINATION BENEFITS. Buyer shall be solely responsible for, and
shall pay or cause to be paid, severance payments and other termination
benefits, if any, to Affected Employees who may become entitled to such benefits
by reason of any events occurring on or after Closing.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated by
this Agreement shall be subject, at its option, to the fulfillment at or prior
to Closing of each of the following conditions:
8.1 DELIVERY OF CLOSING ITEMS. Seller and the Sole Shareholder, as
applicable, shall have duly executed and delivered to Buyer each of the
documents, certificates and other items provided for in Section 4.2 of this
Agreement to the reasonable satisfaction of Buyer and its counsel.
8.2 INDEMNITY AGREEMENT. The Indemnity Agreement shall have been duly
executed and delivered by Seller and the Sole Shareholder.
8.3 WAIVER AND RELEASE. The waiver and release contemplated by Section
4.2.10 of this Agreement shall have been executed by Thomas A. McCreery, Jr. and
delivered to Buyer.
8.4 TECHNOLOGY PURCHASE AGREEMENT. The Technology Purchase Agreement
shall have been executed and delivered by Seller and the Sole Shareholder.
8.5 APPROVAL. The Board of Directors of Buyer shall have approved this
Agreement and authorized Buyer to enter into this Agreement and to effect the
transactions contemplated hereunder.
8.6 COMPLETION OF DUE DILIGENCE. Buyer shall have completed to its
satisfaction its legal and financial due diligence investigations concerning
Seller.
8.7 SELLER CONSENTS. Buyer shall have received evidence, in form and
substance reasonably satisfactory to Buyer and its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of governmental
35.
<PAGE> 36
authorities as are necessary and appropriate in connection with the consummation
of the transactions contemplated hereby have been obtained.
8.8 ACCURACY OF REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
AGREEMENTS. Each of the representations and warranties made by Seller and the
Sole Shareholder in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as though such
representations and warranties had been made or given on and as of the Closing
Date (except for any changes permitted by the terms of this Agreement or
consented to in writing by Buyer), and Seller and the Sole Shareholder shall
have performed and complied in all material respects with all of Seller's and
the Sole Shareholder' respective obligations under this Agreement which are to
be performed or complied with on or prior to the Closing Date.
8.9 ACTIONS OR PROCEEDINGS; COURT ORDERS. No action, suit or other
proceeding before a court, tribunal or other governmental agency or body shall
have been instituted or threatened to restrain or prohibit the consummation of
the transactions contemplated by this Agreement, or seeking to obtain
substantial damages in respect thereof, or involving a claim that consummation
thereof would result in the violation of any law, decree or regulation of
governmental authority having appropriate jurisdiction, or in connection with
any material claim against Seller and the Sole Shareholder not disclosed on the
Schedules hereto, and no preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a government,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect which would (a) make the acquisition or holding by
Buyer of the Purchased Assets illegal or impose material limitations on its
ability to exercise full rights of ownership with respect to such Purchased
Assets or (b) otherwise prevent the consummation of the transaction contemplated
hereby.
8.10 NO ADVERSE CHANGE. There shall have been no event which has
occurred or which has been disclosed to Buyer which has had or could be
reasonably expected to have a material adverse effect on the financial
condition, assets, liabilities, business, prospects or operations of Seller.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND SOLE SHAREHOLDER
The obligations of Seller and the Sole Shareholder to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment,
at or prior to Closing, of each of the following conditions:
9.1 DELIVERY OF CLOSING ITEMS. Buyer shall have delivered the Purchase
Price to be delivered to Seller at the Closing and shall have duly executed and
delivered to
36.
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Seller each of the documents, certificates and other items provided for in
Section 4.3 of this Agreement to the reasonable satisfaction of Seller and its
counsel.
9.2 INDEMNITY AGREEMENT. The Indemnity Agreement shall have been duly
executed and delivered by Buyer.
9.3 TECHNOLOGY PURCHASE AGREEMENT. The Technology Purchase Agreement
shall have been duly executed and delivered by Founding Partners.
9.4 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by Buyer in this Agreement shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made or given on
and as of the Closing Date (except for any changes permitted by the terms of
this Agreement or consented to in writing by Seller), and Buyer shall have
performed and complied in all material respects with all of Buyer's obligations
under this Agreement which are to be performed or complied with on or prior to
the Closing Date.
9.5 APPROVAL. The Board of Directors of Buyer shall have approved this
Agreement and authorized Buyer to enter into this Agreement and to effect the
transactions contemplated hereunder.
9.6 ACTIONS OR PROCEEDINGS; COURT ORDERS. No action, suit or other
proceeding before a court, tribunal or other governmental agency or body shall
have been instituted or threatened to restrain or prohibit the consummation of
the transactions contemplated by this Agreement, or seeking to obtain
substantial damages in respect thereof, or involving a claim that consummation
thereof would result in the violation of any law, decree or regulation of
governmental authority having appropriate jurisdiction, or in connection with
any material claim against Buyer not disclosed on the Schedules hereto, and no
preliminary or permanent injunction or other order, decree or ruling issued by a
court of competent jurisdiction or by a government, regulatory or administrative
agency or commission nor any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority shall be in effect which
would (a) make the acquisition or holding by Buyer of the Purchased Assets
illegal or (b) otherwise prevent the consummation of the transaction
contemplated hereby.
10. ADDITIONAL AGREEMENTS
10.1 INCORPORATION OF SCHEDULES AND EXHIBITS. All schedules and
exhibits are incorporated into this Agreement by this reference and are
warranted by the party or parties which deliver the same to be accurate and
complete. In the event that any change shall occur with respect to any
information disclosed in any schedule furnished by Seller or the Sole
Shareholder hereunder following the date of the delivery thereof and prior to
37.
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the Closing Date, Seller and the Sole Shareholder shall promptly notify Buyer
thereof in writing.
10.2 COOPERATION. Each party will take all reasonable actions necessary
to comply promptly with all legal requirements which may be imposed on it with
respect to the consummation of the transactions contemplated by this Agreement.
Each party will take all reasonable actions necessary to obtain (and will
cooperate with the other party in obtaining) any consent, approval, order or
authorization of, or any registration, declaration or filing with, any
governmental entity, domestic or foreign, or other person, required to be
obtained or made by such party (or by the other party) in connection with the
taking of any action contemplated by this Agreement. Without limiting the
foregoing, Seller and Sole Shareholder shall cooperate with Buyer in complying
with all provisions of the bulk sales or bulk transfer statutes of all states
having jurisdiction, including the provisions of Section 6106.2 of the
California Uniform Commercial Code.
10.3 CONFIDENTIALITY. For a period of five (5) years from the date of
this Agreement, Seller and Sole Shareholder will hold in confidence and use
their respective best efforts to have all of each of their respective employees,
agents, representatives and affiliates, as applicable, hold in confidence all
documents and other written material containing information of a confidential
nature relating to the Buyer's business or which is disclosed to such person by
Buyer in connection with the transactions contemplated by this Agreement
(including, but not limited to, customer lists and Intellectual Property
Rights), and not disclose, publish, use or permit others to use the same;
provided, however, that the foregoing restriction shall not apply to any portion
of the foregoing which (i) becomes generally available to the public in any
manner or form through no fault of any such party, or their respective
employees, agents or representatives, or (ii) is released for disclosure by one
party with the consent of Buyer, or (iii) when such disclosure is required by a
court or a governmental agency or is otherwise required by law or is necessary
in order to establish rights under this Agreement or any other agreements
referred to herein.
10.4 EFFECTIVE TRANSFER. Buyer, Seller and the Sole Shareholder shall
each use its best efforts to ensure a quick and effective transfer to Buyer of
the Purchased Assets. Effective as of the Closing, the Sole Shareholder shall
cause Seller to cease doing business under the name "Falcon Systems" and
promptly thereafter the Sole Shareholder shall cause Seller to change Seller's
name to a name that is not confusingly similar to "Falcon Systems."
11. MISCELLANEOUS
11.1 EXPENSES. Each party shall bear and pay his or its own expenses
incurred in connection with the transactions referred to in this Agreement.
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11.2 KNOWLEDGE.
11.2.1 KNOWLEDGE AFTER "DUE INQUIRY." An individual shall be
deemed to have "knowledge" of a particular fact or other matter "after due
inquiry thereof" if such individual is actually aware of such fact or other
matter or if a prudent individual could be expected to be aware thereof after
making reasonable inquiry thereof and exercising due diligence with respect
thereto. An entity shall be deemed to have "knowledge" of a particular fact or
other matter "after due inquiry thereof" if any officer of such entity who is
involved in the management of such entity is actually aware of such fact or
other matter or would have knowledge of such fact or other matter after due
inquiry thereof.
11.2.2 KNOWLEDGE WITHOUT INQUIRY. Except as provided for in
Section 11.2.1 where an individual has made due inquiry thereof, an individual
shall be deemed to have "knowledge" of a particular fact or other matter if such
individual is actually aware of such fact or other matter or if a prudent
individual could be expected to be aware thereof after making inquiry of the
officers of Seller. Seller shall be deemed to have "knowledge" of a particular
fact or other matter if any officer of Seller who is involved in the management
of Seller is actually aware of such fact or matter or would have knowledge of
such fact or other matter after making inquiry of the officers of Seller.
11.3 PUBLIC ANNOUNCEMENTS. Buyer and Seller shall have joint
responsibility for the content, timing and other matters relating to the
issuance of any and all press releases or trade releases and the making of such
other public statements (collectively, "PUBLIC STATEMENTS") with respect to the
Closing and the transactions contemplated hereby as may be necessary or
appropriate in Buyer's judgment. Neither Buyer nor Seller shall disclose the
Purchase Price in any Public Statements unless such disclosure is either (i)
required by law, governmental regulation or valid legal process or (ii) in
connection with any governmental filing.
11.4 ENTIRE AGREEMENT; MODIFICATIONS; WAIVER. This Agreement,
together with the schedules and exhibits hereto and agreements referenced
herein, constitutes the final, exclusive and complete understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior agreements, understandings and discussions with respect thereto including,
without limitation, that certain letter agreement, dated June 30, 1997, among
Buyer, Seller and the Sole Shareholder. No variation or modification of this
Agreement and no waiver of any provision or condition hereof, or granting of any
consent contemplated hereby, shall be valid unless in writing and signed by the
party or parties against whom enforcement of any such variation, modification,
waiver or consent is sought.
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made by any party to this Agreement or pursuant
hereto shall survive until one
39.
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year after the Closing. The representations and warranties hereunder shall not
be affected or diminished by any investigation at any time by or on behalf of
the party or parties for whose benefit such representations and warranties were
made. All statements contained herein or in any schedule, exhibit or certificate
delivered pursuant hereto shall be deemed to be representations and warranties.
11.6 FURTHER ASSURANCES. The parties hereto shall use their best
efforts, and shall cooperate with each other, to secure all necessary consents,
approvals, authorizations, exemptions and waivers from third parties as shall be
required in order to consummate the transactions contemplated hereby, and shall
otherwise use their best efforts to cause such transactions to be consummated in
accordance with the terms and conditions hereof. At any time or from time to
time after the Closing Date, each party hereto shall execute and deliver any
further instruments or documents and take all such further action as such
requesting party may reasonably request in order to consummate and document the
transactions contemplated hereby.
11.7 CAPTIONS. The captions in this Agreement are for convenience only
and shall not be considered a part of or affect the constructing or
interpretation of any provision of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one agreement.
11.9 SUCCESSORS AND ASSIGNS. No party shall assign this Agreement to
any third party without the prior written consent of the other parties, except
that after the Closing Buyer may assign this Agreement to any transferee of the
business of Buyer without seeking such consent from Seller or the Sole
Shareholder. This Agreement shall be binding upon, inure to the benefit of and
be enforceable by the respective successors and permitted assigns of the parties
hereto.
11.10 PARTIES IN INTEREST. Nothing in this Agreement, whether express
or implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
11.11 NOTICES. All notices, requests, demands and other communications
hereunder ("NOTICES") shall be in writing and shall be deemed to have been duly
given if delivered by hand or by registered or certified mail, postage prepaid,
return receipt requested, but only upon receipt of such return receipt, as
follows:
40.
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To Buyer: James L. Lambert
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
with a copy to:
Thomas A. Coll, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
To Seller or the Craig Caudill
Sole Shareholder: Falcon Systems, Inc.
3951 Performance Drive
Sacramento, California 95838
with a copy to:
Jeffrey M. Koewler, Esq.
Downey, Brand, Seymour & Rohwer LLP
555 Capitol Mall, Suite 1050
Sacramento, California 95814
or to such other address as either any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt. All Notices shall be deemed received on the date
of delivery or, if mailed, on the date appearing on the return receipt therefor.
11.12 LAW GOVERNING. This agreement shall be governed by, and construed
and enforced in accordance with the laws of the State of California, without
regard to its choice-of-laws or conflicts-of-law rules.
11.13 ATTORNEY'S FEES. In any judicial action or proceeding or
arbitration proceeding between the parties hereto to enforce any of the
provisions of this Agreement, to seek damages on account of the breach hereof,
to seek injunctive relief to prevent the breach or continued breach hereof, to
seek a determination of the rights and obligations of the parties hereunder, or
in which this Agreement is raised as a defense, regardless of whether the action
or proceeding is prosecuted to judgment and in addition to any other remedy, the
unsuccessful party shall pay the successful party all costs and expenses,
including reasonable attorneys' fees, incurred therein by the successful party.
41.
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[remainder of this page intentionally left blank]
42.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, all as of the day and year first above written.
SELLER: FALCON SYSTEMS, INC.
By: /s/ CRAIG CAUDILL
-------------------------------------
Craig Caudill
President
BUYER: ARTECON, INC.
By: /s/ James L. Lambert
-------------------------------------
James L. Lambert
President
SOLE SHAREHOLDER: /s/ Craig Caudill
----------------------------------------
Craig Caudill
43.
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EXHIBIT A
PROMISSORY NOTE
$1,250,000 August 21, 1997
San Diego, California
For value received, the undersigned (collectively "Payor") promises to
pay to FALCON SYSTEMS, INC. ("FALCON"), a California corporation, or order
("Holder"), in lawful money of the United States of America and in immediately
available funds, the principal sum of one million two hundred fifty thousand
dollars ($1,250,000) (the "Principal Amount") together with interest thereon at
the times and in the manner set forth below.
This note (the "Note") is executed and delivered as part of the Purchase Price
pursuant to that certain Asset Purchase Agreement of even date herewith among
Payor, Holder and the sole shareholder of Holder (the "Purchase Agreement").
Notwithstanding any other provision of this Note, this Note shall be subject in
all respects to the provisions of that certain Indemnity Agreement of even date
herewith among Payor, Founding Partners, a California general partnership (the
"Partnership"), each Partner of the Partnership, Falcon and Craig Caudill (the
"Indemnity Agreement"), including but not limited to Section 1(d), 1(e) and 2 of
the Indemnity Agreement.
1. REPAYMENT OF PRINCIPAL AND INTEREST. Subject to the terms of this Note, the
outstanding Principal Amount shall be repaid, together with accrued interest
thereon as provided below, in equal monthly combined principal and interest
payment of twenty-six thousand five hundred fifty eight dollars and eighty-one
cents $26,558.81, with the first payment due on the date that is one (1) month
from the date hereof and subsequent payments due each monthly anniversary
thereafter for a period of five years following the date hereof.
2. INTEREST RATE. Subject to the terms of this Note, Payor promises to pay
interest on the outstanding principal amount hereof from the date hereof until
payment in full in accordance with paragraph 1, which interest shall be payable
at the rate of ten percent (10%) per annum or the maximum rate permissible by
law (which under the laws of California shall be deemed to be the laws relating
to permissible rates of interest on commercial loans), whichever is less.
3. DEFAULT RATE. If the undersigned fails to pay any of the principal or accrued
interest when due, then all unpaid amounts, including all accrued but unpaid
interest, shall
<PAGE> 45
bear interest at 18% per annum, or the maximum rate permissible by law in the
event of a default of a promissory note of this type and nature, whichever is
less.
4. PLACE OF PAYMENT. Payments on this Note shall be payable at Holder's office
located at 485 Crocker Road, Sacramento, California 95864, unless another place
of payment shall be specified in writing by Holder.
5. SECURITY. This note is subject to the security and subordination provisions
of that certain Security Agreement by and between Artecon, Inc., a California
corporation, and Holder of even date herewith (the "Security Agreement"), as
well as the security provisions of that certain Subordination Agreement by and
among Payor and Holder of as of the date hereof.
6. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first to
accrued interest, and thereafter to the outstanding principal balance thereof.
7. PREPAYMENTS. This Note may be prepaid in whole or in part at any time without
premium or penalty.
8. MISCELLANEOUS.
(a) This Note will be considered in default if, after fifteen (15) days
following written notice to Payor of Payor's failure to make any payment of
principal or accrued interest hereunder, such failure remains uncured (provided
that such notice shall not be required more than three times in any calendar
year). In such event, at Holder's option, all outstanding principal and accrued
interest and any other amounts payable under this Note will become due and
payable.
(b) Except as otherwise provided in this Note, Payor, all endorsers,
guarantors and sureties of this Note, and each of them, and their successors and
assigns, hereby waive demand, presentment for payment, notice of non-payment,
protest and notice of protest, and notice of dishonor, and expressly agree that
without notice, this Note or any payment due date hereunder may be extended from
time to time, and consent to acceptance of additional or substitute parties or
both, or the release of any party liable with respect to this Note, all without
affecting in any way their liability.
(c) If Payor fails to make any interest or installment payment when
due, Payor promises to pay all costs and expenses of collection and reasonable
attorneys' fees incurred by Holder to enforce the terms of this Note and/or the
Security Agreement including, without limitation, those expenses and fees which
may be incurred in connection with the appointment of a receiver and all
appearances in bankruptcy or insolvency proceedings. In any action brought under
or arising out of this Note, Payor
<PAGE> 46
hereby consents to the jurisdiction of any competent court within the State of
California and to service of process by any means authorized by California law.
(d) Holder shall, at all times, have the right to proceed against any
portion of the security for this Note in such order and in such manner as Holder
may consider appropriate without waiving any rights with respect to any such
security. Any delay or omission on the part of Holder in exercising any right
hereunder shall not operate as a waiver of such right, or any other right under
this Note.
(e) This Note may not be terminated or amended orally, but only by a
termination or amendment in writing signed by Holder.
(f) Governing Law. This Note shall be governed by, and construed and
entered in accordance with, the laws of the State of California, as applied to
contracts entered into by California residents within the State of California,
which contracts are to be performed entirely within the State of California.
(g)The provisions of this Note shall inure to the benefit of and be
binding on any successor to Payor and shall extend to any holder hereof.
ARTECON, INC.
By:
-------------------------------------
James L. Lambert, President
<PAGE> 47
EXHIBIT B
NON-COMPETITION AGREEMENT
This NON-COMPETITION AGREEMENT ("AGREEMENT") is entered into this 21 day
of August, 1997 ("EFFECTIVE DATE"), by and between Craig Caudill, an individual
residing at ____________________________ ("PARTICIPANT"), and Artecon, Inc., a
California corporation, with its principal place of business at 6305 El Camino
Real, Carlsbad, California 92009 (the "COMPANY").
WHEREAS, Participant is a founder and the sole shareholder of Falcon
Systems, Inc., a California corporation ("FALCON"), and has been actively
involved in the manufacture, marketing and/or distribution of computer storage,
workstation and/or peripheral equipment on behalf of Falcon (the "PRODUCTS").
WHEREAS, the Company, Falcon and Participant have entered into an Asset
Purchase Agreement dated as of August 21, 1997 (the "PURCHASE AGREEMENT"),
whereby Falcon and Participant have agreed to sell, and the Company has agreed
to purchase, substantially all of the assets of Falcon as provided for therein
(the "ACQUISITION").
WHEREAS, Participant plans to vote in favor of the Acquisition and
receive all the benefits of the Acquisition; and in connection therewith,
Participant has agreed pursuant to and to the extent permitted by Section 16601
of the Business and Professions Code of the State of California to enter into
this Agreement. Participant is entering into this Agreement as an inducement to
the Company to consummate the Acquisition, with all of the attendant financial
benefits to Participant as sole shareholder of Falcon.
NOW, THEREFORE, in consideration of the foregoing premises and the
Company's entering into the Purchase Agreement, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement hereby agree as follows:
TERMS
1. Participant acknowledges that by virtue of his position with Falcon
he has developed considerable expertise in the Products and has had access to
extensive confidential information with respect to Falcon and the Products.
Participant recognizes that the Company would be irreparably damaged, and its
substantial investment in the Acquisition materially impaired, if Participant
were to engage in activity involving products similar to or competitive with the
Products in violation of the terms of this Agreement or if Participant were to
disclose or make unauthorized use of any confidential information concerning the
Products. Accordingly, Participant expressly acknowledges
<PAGE> 48
that he is voluntarily entering into this Agreement and that the terms and
conditions of this Agreement are fair and reasonable to Participant in all
respects.
2. (a) During the Term (as defined below) of this Agreement, Participant
agrees that he will not directly or indirectly (whether for compensation or
without compensation):
(i) As an individual proprietor, partner, corporation,
stockholder, officer, employee, consultant, director, joint venturer, investor,
lender, or in any other capacity whatsoever (other than as the holder of not
more than one percent (1%) of the total outstanding stock of a publicly held
company), engage in any business activity that involves the development,
production, marketing or selling of products, processes, techniques or
technology which are identical to, substantially similar to, or competitive with
the Products, whether for use on alternative computing platforms or environments
or otherwise; or
(ii) solicit, divert or take away, or attempt to divert or
to take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, if any, of the Company
that is in any way related to the activities, technology, items or information
described in (i) above or induce or attempt to induce any employee of the
Company to leave the employ of the Company.
(b) The restrictions set forth in Section 2(a) are considered by
the parties to be reasonable for the purposes of protecting the business of the
Company. However, if any such restriction is found by any court of competent
jurisdiction to be unenforceable because it extends for too long a period of
time or over too great a range of activities or in too broad a geographic area,
it shall be interpreted to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
3. Notwithstanding anything to the contrary in Section 2(a), Participant
shall be permitted to engage in the distribution or sale of raw disk drives.
4. Participant acknowledges and agrees that all Confidential Information
(defined below) is the property of the Company. Therefore, Participant agrees
that during the term of this Agreement Participant will maintain all
Confidential Information in trust and confidence and shall not disclose to any
third party or use any Confidential Information for any unauthorized purpose,
without the prior express written consent of the Company, whether Participant
has such information in Participant's memory or embodied in writing or
electronic form or otherwise. For purposes of this Agreement the term
"CONFIDENTIAL INFORMATION" shall mean all confidential and proprietary
information relating to the Company's and/or Falcon's business practices,
strategies and technologies, including but not limited to confidential and
proprietary information bearing the legend
<PAGE> 49
"Company Confidential and Proprietary" or equivalent and any trade secret,
information, process, technique, algorithm, computer program (source and object
code), design, drawing, formula or test data relating to any research project,
work in process, future development, engineering, manufacturing, marketing,
servicing, financing or personnel matter relating to the Company and/or Falcon,
their present or future products, sales, suppliers, clients, customers,
employees, investors or business, whether in oral, written, graphic or
electronic form. Notwithstanding the forgoing, the term "Confidential
Information" shall not include information which (i) is now, or hereafter
becomes, through no act or failure to act on the part of Participant, generally
known or available or (ii) is hereafter furnished to Participant by a third
party, as a matter of right and without restriction on disclosure.
5. The term of this Agreement ("TERM") shall commence and take effect on
the Effective Date and shall remain in effect until three (3) years following
the Effective Date.
6. Participant expressly acknowledges that damages alone will not be an
adequate remedy for any breach by Participant of the covenants set forth in
Sections 2 and 4 hereof and that the Company, in addition to any other remedies
which it may have, shall be entitled, as a matter of right, to injunctive
relief, including specific performance, in any court of competent jurisdiction
with respect to any actual or threatened breach by Participant of any of said
covenants.
7. This Agreement shall be governed and construed in accordance with the
laws of the State of California without regard to its choice-of-law rules. Any
attempted assignment of rights or delegation of duties by Participant shall be
void without the prior written consent of the Company; provided that Participant
shall be entitled to conduct activities permitted under paragraph 3 through an
entity majority owned by Participant. This Agreement is the entire, final and
exclusive agreement between the Company and Participant concerning its subject
matter, and may be amended only in a writing duly signed by both parties.
[remainder of this page intentionally left blank]
<PAGE> 50
IN WITNESS WHEREOF, the parties have executed this Agreement
(counterparts permitted) as of the date first above written.
PARTICIPANT, ARTECON, INC.
an individual
- ------------------------------- -------------------------------
Craig Caudill James L. Lambert, President
<PAGE> 51
EXHIBIT C
[LETTERHEAD OF DOWNEY, BRAND, SEYMOUR & ROHWER]
August 21, 1997
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Ladies and Gentlemen:
We have acted as counsel to Falcon Systems, Inc., a California
corporation ("Falcon"), in connection with the Asset Purchase Agreement, dated
as of August 21, 1997, between Falcon, Craig Caudill and you (the "Agreement).
This opinion is furnished to you pursuant to Section 4.2.4 of the Agreement.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned to them in the Agreement, the Accord, the California Provisions and the
California Generic Exception, as defined below.
As counsel to Falcon, we have examined originals or copies, certified or
otherwise identified to our satisfaction, each of the documents identified on
Exhibit A, which is attached hereto and incorporated herein (the "Seller's
Documents"). We have also examined the original or certified copies of Falcon's
Constituent Documents.
We are not licensed to practice in any state other than the State of
California and do not hold ourselves out as experts in the laws of any other
state. The law covered by the opinions expressed herein is limited to the law of
the State of California and the federal law of the United States.
Based upon and subject to the foregoing and the assumptions and
qualifications set forth below, we are of the opinion that:
1. Falcon has been duly incorporated and is a validly existing corporation
in good standing under the laws of the State of California
2. Falcon has all requisite power and authority to own, lease and operate
its properties and conduct its business as it is currently being conducted and
is duly qualified to do business and is in good standing in each jurisdiction in
which the character of the business conducted by it or the location of the
properties owned of record or leased by it makes such qualification necessary,
except with respect to being duly qualified in the following states: Maryland,
New York, Texas, Virginia, and Washington.
3. Falcon has all requisite corporate power and authority to enter into the
Seller's Documents and to perform the obligations thereunder. The Seller's
Documents have been duly
<PAGE> 52
and validly authorized, executed and delivered by Falcon and each constitutes a
legal, valid, and binding agreement of Falcon enforceable against Falcon in
accordance with its terms, except as rights to indemnity under that certain
Indemnity Agreement dated August 21, 1997, by and among Artecon, Inc., Falcon
Systems, Inc. and Craig Caudill.
4. There are no recorded Liens in effect against the Purchased Assets
except those described in Schedule 5.9.1 of the Disclosure Schedule. To our
knowledge, the transfer and assignment of the Purchased Assets at the Closing
pursuant to the Agreement is not subject to any right of first refusal, right of
first offer, or any similar right of any party which has not been waived.
5. The execution, delivery and performance of the Seller's Documents and
the consummation of the transactions contemplated thereby will not result in a
violation of, or constitute a default under (i) Falcon's Articles of
Incorporation or Bylaws, (ii) to our knowledge, any governmental statute, rule
or regulation applicable to Falcon, or (iii) to our knowledge, any order, writ,
judgment, injunction, decree, determination or award that has been entered
against Falcon.
6. To our knowledge, except as identified in Schedule 5.13, there is no
action, proceeding, or investigation pending against Falcon before any court or
administrative agency that questions the validity of the Seller's Documents or
that might result, either individually or in the aggregate, in any material
adverse change in the Purchased Assets, the Assumed Liabilities or the Business.
7. To our knowledge, all consents, approvals, authorizations, orders of and
filings, registrations and qualifications with any regulatory authority or
governmental body required for the consummation by Falcon of the transactions
contemplated by the Seller's Documents have been made or obtained.
In rendering this opinion, we have assumed: the accuracy of the factual
representations made to us by Falcon and its employees and agents; the
genuineness and authenticity of all signatures on original documents; the
authenticity of all documents submitted to us as originals; the conformity to
originals of all documents submitted to us as copies; the accuracy,
completeness, and authenticity of certificates of public officials; and the due
authorization, execution, and delivery of all documents (other than those
Seller's Documents within the scope of this opinion) where authorization,
execution, and delivery are prerequisites to the effectiveness of such
documents.
We have also assumed: that all individuals executing and delivering
documents have the legal capacity to so execute and deliver; that the Seller's
Documents are binding upon all signatories thereto (other than the Seller and
Sole Shareholder); that parties to the Seller's Documents consummated the
transactions contemplated by the Seller's Documents; that any certificates or
other documents upon which we have relied that were given or dated earlier than
the date of this letter continue to remain accurate insofar as relevant to our
opinion, from such earlier date through and including the date of this letter;
that there has not been any mutual mistake of fact or misunderstanding, fraud,
duress, or undue influence; that if either party is a corporation or other
entity, that it has filed any required California franchise or income tax
returns and has paid any required California franchise or income taxes; and that
there are no
<PAGE> 53
extrinsic agreements or understandings among the parties to the Seller's
Documents that would modify or interpret the terms of the Seller's Documents or
the respective rights or obligations of the parties thereunder.
In addition to the foregoing and without limiting the foregoing, this
opinion is governed by, and shall be interpreted in accordance with, the Legal
Opinion Accord (the "Accord") of the ABA Section of Business Law. This opinion
is also governed by, and shall be interpreted in accordance with the "California
Provisions" and the "California Generic Exception" as defined in the Business
Law Section of the California State Bar Report on the Third Party Legal Opinion
Report of the ABA Section of Business Law (draft dated May 14, 1992). Without
limiting the foregoing, this opinion does not address the enforceability of the
Non-Competition Agreement and is limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and is subject to general equity principles and to
limitations on availability of equitable relief, including specific performance.
The General Qualifications apply to the opinions set forth in paragraphs
1, 2, 4, 5, 6 and 7 above, as well as our opinion in paragraph 3.
With respect to our opinion in paragraph 4, we have relied solely upon a
Uniform Commercial Code search of the records of the California Secretary of
State and have conducted no further investigation for purposes of this opinion.
This search was conducted on August 20, 1997, and identifies filings up to and
including August 1, 1997.
Our opinions are rendered as of the date set forth above. We have no
duty or obligation, nor do we undertake any such duty or obligation, to advise
you or any third party of changes of law or fact that occur after that date even
though the change may affect the legal analysis, legal conclusion or an
informational confirmation contained herein.
Where our opinion refers to our "knowledge," it is based solely on the
actual knowledge of the attorneys in this office working directly on Falcon
matters as shown in the firm's billing records and the information provided to
us by Mr. Craig Caudill in an Officer's Certificate provided to us.
This letter and the opinions expressed herein are solely for your
benefit in connection with the Seller's Documents, and may neither be used,
circulated, quoted or otherwise referred to for any other purposes, nor filed
with or made available to any governmental agency or other person or entity
without our prior written consent.
Very truly yours,
DOWNEY, BRAND, SEYMOUR & ROHWER, LLP
- -------------------------------
<PAGE> 54
EXHIBIT A
TO
OPINION OF COUNSEL
SELLER'S DOCUMENTS
Asset Purchase Agreement, and each agreement identified in Section 4.2
of the Asset purchase Agreement executed and delivered by the Seller and/or
Selling Shareholder.
<PAGE> 55
EXHIBIT D
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT ("AGREEMENT") is made and entered as of August
21, 1997, by and among ARTECON, INC., a California corporation ("BUYER"),
Founding Partners, a California general partnership ("PARTNERSHIP"), each
Partner of the Partnership (each, a "PARTNER" and collectively, "PARTNERS"),
FALCON SYSTEMS, INC., a California corporation ("SELLER") and CRAIG CAUDILL, the
sole shareholder of Seller (the "SOLE SHAREHOLDER").
R E C I T A L S
A. Buyer, Seller and the Sole Shareholder have entered in that certain
Asset Purchase Agreement of even date herewith (the "ASSET PURCHASE AGREEMENT")
which provides for the purchase of substantially all of Seller's assets
(excluding the assets purchased pursuant to the Technology Purchase Agreement,
defined below) by Buyer pursuant to the terms thereof (the "ASSET ACQUISITION").
A portion of the consideration for such assets (excluding the assets purchased
pursuant to the Technology Purchase Agreement, defined below) is in the form of
a promissory note dated August 21, 1997 (the "BUYER NOTE"). Except where the
context requires otherwise, capitalized terms used but not defined herein shall
have the meanings assigned to them in the Asset Purchase Agreement.
B. Partners, Seller and Sole Shareholder have entered in that certain
Technology Purchase Agreement of even date herewith (the "TECHNOLOGY PURCHASE
AGREEMENT" and, together with the Asset Purchase Agreement, the "PURCHASE
AGREEMENTS") which provides for the purchase of specified technology assets of
Seller by Partners pursuant to the terms thereof (the "TECHNOLOGY ACQUISITION"
and, together with the Asset Acquisition, the "ACQUISITIONS").
C. Seller and Sole Shareholder have agreed to indemnify and hold Buyer,
Partnership and Partners', and their respective affiliates, etc., harmless as
more fully set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements contained in the
Purchase Agreements and herein, the parties agree as follows:
<PAGE> 56
1. INDEMNIFICATION
(a) BUYER. Notwithstanding any investigation of the business, financial
condition, prospects or assets of Seller by or on behalf of Buyer prior to the
Closing Date, but subject to the indemnification limitations set forth in
Section 1(d), Seller and Sole Shareholder (collectively, the "INDEMNIFYING
PARTIES") shall, jointly and severally, indemnify, defend and hold harmless
Buyer, its affiliates, agents, officers, directors and employees (collectively,
the "ARTECON INDEMNIFIED PARTIES"), from and against any and all losses,
damages, liabilities, expenses, costs, assessments and taxes (including, without
limitation, interest, penalties and attorneys' fees) ("DAMAGES"), and to pay
each Artecon indemnified party on demand the full amount of any and all of the
same that such party may pay or become obligated to pay relating to, arising
from or in connection with:
(i) The breach of any representation or warranty of Seller or
Sole Shareholder or of any agreement or covenant of Seller or Sole Shareholder
contained in the Asset Purchase Agreement or any other agreement, certificate or
other document delivered by Seller or Sole Shareholder pursuant to the Asset
Purchase Agreement;
(ii) Any action, claim or legal proceeding by any present or
former officer, director or shareholder of Seller for any action of Seller or
Sole Shareholder on or prior to Closing (other than the Assumed Liabilities);
(iii) Any debts, liabilities, obligations or contracts of Seller
other than the Assumed Liabilities; or
(iv) Any liability arising from the failure of Seller to comply
with any provision of the EMC Agreement.
(b) PARTNERS AND PARTNERSHIP. Notwithstanding any investigation of the
business, financial condition, prospects or assets of Seller by or on behalf of
Partners prior to the Closing Date, but subject to the indemnification
limitations set forth in Section 1(d), the indemnifying parties shall, jointly
and severally, indemnify, defend and hold harmless the Partnership, each
Partner, and each of their respective affiliates, agents, officers, directors
and employees (collectively, the "PARTNER INDEMNIFIED PARTIES") (the Artecon
indemnified parties and the Partner indemnified parties are hereinafter
collectively referred to as the "INDEMNIFIED PARTIES"), from and against any and
all Damages, and to pay each Partner indemnified party on demand the full amount
of any and all of the same that such party may pay or become obligated to pay
relating to, arising from or in connection with:
(i) The breach of any representation or warranty of Seller or
Sole Shareholder or of any agreement or covenant of Seller or Sole Shareholder
contained in the Technology Purchase Agreement or any other agreement,
certificate or other
<PAGE> 57
document delivered by Seller or Sole Shareholder pursuant to the Technology
Purchase Agreement;
(ii) Any action, claim or legal proceeding by any present or
former officer, director or shareholder of Seller for any action of Seller or
Sole Shareholder on or prior to Closing (other than the Assumed Liabilities);
(iii) Any debts, liabilities, obligations or contracts of Seller
other than the Assumed Liabilities; or
(iv) Any liability arising from the failure of Seller to comply
with any provision of the EMC Agreement.
(c) PROCEDURE. All claims (other than fraud) by Buyer, Partners and
Partnership against Seller and Sole Shareholder, including all claims under the
foregoing indemnity, shall be made at the time and in the manner provided for in
this Agreement.
(d) INDEMNIFICATION LIMITATIONS. Notwithstanding Section 1(a) and 1(b):
(iii) The indemnifying parties shall have no liability to the
indemnified parties pursuant to this Agreement unless and until the aggregate
Damages claimed, paid or incurred pursuant to this Agreement by one or more
indemnified parties shall exceed $100,000 (the "100,000 Threshold"), in which
event the indemnifying parties shall become fully liable as provided for above
up to, but not exceeding, an additional aggregate amount of $400,000.
Notwithstanding anything to the contrary in this Agreement, the Purchase
Agreements, or any other agreement, certificate, or other document delivered by
either Seller or Sole Shareholder pursuant to the Purchase Agreements, under no
circumstances will Seller and/or Sole Shareholder (individually or collectively)
be obligated under this Agreement or otherwise to the indemnified parties
(individually or collectively) in an amount in excess of $400,000; and
(iv) Neither Seller nor sole Shareholder shall have any
indemnification obligation with respect to any claim by EMC that the
negotiation, execution and/or delivery of the Asset Purchase Agreement and/or
the Technology Purchase Agreement constitutes a breach of Seller's or Sole
Shareholder's obligations, or a default, under the EMC Contract, or interference
with contract, or interference by Buyer, the Partners and/or the Partnership
with economic advantage, or an inducement by Buyer, the Partners and/or the
Partnership of breach of the EMC Agreement, or similar claim.
(e) PURCHASE PRICE OFFSET. Subject to the terms of this Agreement, (i)
Buyer shall have an express right of offset such that any indemnification
payments payable to Buyer pursuant to this Agreement shall reduce the aggregate
Purchase Price payable by Buyer pursuant to Section 3.1 of the Asset Purchase
Agreement and (ii) the Partners shall
<PAGE> 58
have an express right of offset such that any indemnification payments payable
to Partners pursuant to this Agreement shall reduce the aggregate Purchase Price
payable by Partners pursuant to Section 3.1 of the Technology Purchase
Agreement, all as set forth in Section 2(b) below.
2. INDEMNIFICATION PROCEDURE. The indemnified parties shall be indemnified
in accordance with the following:
(a) NOTICE BY INDEMNIFIED PARTY. If any indemnified party has incurred
or suffered Damages for which it is or may be entitled to indemnification
pursuant to this Agreement, such indemnified party shall, on or prior to the
Termination Date (defined below), give written notice of such claim (a "CLAIM
NOTICE") to Buyer (if such indemnified party is other than Buyer) and the
indemnifying parties. Each Claim Notice shall state (i) the amount of claimed
Damages (the "CLAIMED AMOUNT"), (ii) the basis for such claim (iii) a
description of any Damages which, so long as the $100,000 Threshold has not been
reached as a result of Damages claimed by other indemnified parties, may be
subject to the $100,000 Threshold and (iv) a reasonable description of the basis
for such claim. The date that is one (1) year following the Closing Date shall
be referred to herein as the "TERMINATION DATE." Notwithstanding any other
provision of this Agreement, no indemnified party may make any claim for Damages
pursuant to this Agreement or otherwise (except for fraud) after the Termination
Date.
(b) PAYMENT TO INDEMNIFIED PARTY.
(i) Subject to the terms of this Agreement, if any Artecon
indemnified party delivers a Claim Notice pursuant to Section 2(a), Buyer shall
be entitled to withhold payment of amounts otherwise due pursuant to the certain
Promissory Note of even date herewith payable by Buyer the form of which is
attached as Exhibit A to the Asset Purchase Agreement (the "Buyer Note") as set
forth in this paragraph (i). Subject to the terms of this Agreement, if any
Partner indemnified party delivers a Claim Notice pursuant to Section 2(a), the
Partners shall be entitled to withhold payment of amounts otherwise due pursuant
to that certain Promissory Note of even date herewith payable by the Partners
the form of which is attached as Exhibit A to the Technology Purchase Agreement
(the "Partners' Note") as set forth in this paragraph (i).
The amount that may be so withheld from any such Note, as applicable,
shall be determined as follows: Such Note shall be reamortized by (i)
subtracting from the original initial principal amount thereof (prior to any
payment thereon) (the "Original Initial Principal Amount") an amount equal to
the applicable Claimed Amount (excluding in any event any amount subject to the
$100,000 Threshold) (the resulting amount being hereinafter referred to as the
"Recomputed Initial Principal Amount") and (ii) determining the monthly payment
under such Note pursuant to its terms assuming that the
<PAGE> 59
Recomputed Principal Amount was the Original Initial Principal Amount thereof.
The resulting monthly payment amount is hereinafter referred to as the
"Recomputed Monthly Payment."
Subject to the provisions of this Section 2 and notwithstanding any
other provision of the Buyer Note or the Partners' Note, as applicable, or the
Security Agreement of even date herewith, (A) the Recomputed Initial Principal
Amount thereafter shall be deemed to the initial principal amount of such Note,
(B) payments previously made on such Note shall be deemed to have been applied
against such Recomputed Initial Principal Amount pursuant to the terms of such
Note and (C) the Recomputed Monthly Payment thereafter shall be deemed to be the
amount payable monthly pursuant to paragraph 1 of such Note.
In addition, Buyer or the Partners, as applicable, shall determine the
"Excess Payment Amount," defined as the difference, if any, between (X) the sum
of the monthly payments actually made pursuant to such Note prior to the date of
such Claim Notice and (Y) the sum of monthly payments that would have been
payable pursuant to such Note through the date of such Claim Notice based on the
Recomputed Monthly Payment amount. Subject to the provisions of this Section 2
and notwithstanding any other provision of the Buyer Note or the Partners' Note,
as applicable, or the Security Agreement of even date herewith, Buyer and/or the
Partners', as applicable, thereafter shall be entitled to withhold further
payments under such Note until such Excess Payment Amount has been fully
recovered by Buyer and/or the Partners', as applicable.
Notwithstanding any other provision of this paragraph (i), however, in
no event shall the aggregate reduction of the Original Initial Principal Amount
of the Buyer Note and the Partners' Note combined exceed $400,000. Buyer may not
settle or compromise any claim by a third party without the prior written
approval of seller and sole shareholder, which consent shall not be unreasonably
withheld.
(ii) If, within 30 days after delivery of a Claim Notice, the
indemnifying parties provide written notice to the indemnified parties to the
effect that all or part of the Claimed Amount is to be contested (the "CONTESTED
AMOUNT"), the matter shall be resolved through binding and nonappealable
arbitration administered by American Arbitration Association ("AAA") in San
Diego County, California. Any such arbitration shall be conducted before a
single arbitrator to be appointed by the parties from AAA's roster. If the
parties fail to agree as to identity of the single arbitrator, AAA shall have
the right to make such appointment. The conduct of the arbitration hearing and
discovery prior thereto shall be in accordance with the California Code of Civil
Procedure, California Rules of Court, and California Rules of Evidence. There
shall be limited discovery prior to the arbitration hearing, subject to the
discretion of the arbitrator, as follows: (a) exchange of witness lists and
copies of documentary evidence and documents related to or arising out of the
issues to be arbitrated, (b) depositions of all party
<PAGE> 60
witnesses, and (c) such other depositions and discovery as may be allowed by the
arbitrator upon a showing of good cause. Each party shall pay its own costs and
expenses (including counsel fees) of any such arbitration. The indemnifying
parties and the indemnified parties shall bear equally the fees and expenses of
the arbitrator. The arbitrator shall decide the matter to be arbitrated pursuant
hereto within 60 days after the appointment of the arbitrator.
The arbitrator's decision shall relate solely to whether the indemnified
party is entitled to receive the Contested Amount (or a portion thereof)
pursuant to the applicable terms of the Purchase Agreements and this Agreement.
The final decision of the arbitrator shall be furnished to the Sole Shareholder,
Seller, Buyer, Partners and Partnership in writing and shall constitute a
conclusive determination of the issue in question, binding upon the Sole
Shareholder, Seller, Buyer, Partners and Partnership and all other indemnified
parties and shall not be contested by any of them. Such decision may be used in
a court of law only for the purpose of seeking enforcement of the arbitrator's
award.
(v) Upon either (i) the execution of a settlement agreement
between the indemnified parties and the indemnifying parties or (ii) delivery of
a copy of the final award of the arbitrator, then (A) the portion (if any) of
the Contested Amount not payable to the indemnified parties pursuant to such
settlement agreement or final arbitration award immediately shall be added back
to the Original Initial Principal Amount under the Buyer Note and/or the
Partners' Note, as applicable, the monthly payment shall be redetermined in
accordance with the procedures set forth in paragraph (i) (which shall
thereafter be deemed the monthly payment under such Note) and Buyer and/or the
Partners', as applicable, shall immediately remit to the Holder of such Note the
aggregate amount improperly withheld based on such settlement agreement or final
award with interest accrued from, with respect to each payment withheld, the
date such payment was withheld at the rate provided for pursuant to such Note
(using the applicable default rate or, if such rate exceeds the maximum
permissible rate, then using the maximum permissible rate) and (B) the
provisions of paragraph (i) as applied with respect to the portion (if any) of
the Contested Amount that is payable to the indemnified parties pursuant to such
settlement agreement or final arbitration award and such application shall be
final with respect to such Note.
<PAGE> 61
3. NOTICES. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered three business days after it is sent prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service.
To Buyer, Partners James L. Lambert
or Partnership: Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
with a copy to:
Thomas A. Coll, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
To Seller or the Craig Caudill
Sole Shareholder: Falcon Systems, Inc.
3951 Performance Drive
Sacramento, California 95838
with a copy to:
Jeffrey M. Koewler, Esq.
Downey, Brand, Seymour & Rohwer LLP
555 Capitol Mall, Suite 1050
Sacramento, California 95814
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 3.
<PAGE> 62
4. GENERAL
(a) GOVERNING LAW: ASSIGNS; FORUM. This Agreement shall be governed by
and construed in accordance with the laws of the State of California without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(c) ENTIRE AGREEMENT. This Agreement, the Purchase Agreements and the
Buyer Note constitute the entire understanding and agreement of the parties with
respect to the subject matter hereof and supersede all prior agreements or
understandings, written or oral, between the parties with respect to the subject
matter hereof.
(d) WAIVERS. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement shall be effective unless in writing.
No waiver by any party of any such condition or breach, in any one instance,
shall be deemed to be a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other provision
contained herein.
(e) AMENDMENT. This Agreement may be amended only with the written
consent of Buyer, Partners, Partnership, Seller and the Sole Shareholder (or
their duly designated successors).
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<PAGE> 63
IN WITNESS HEREOF, the parties have signed this Agreement on the day
and year first above written.
SELLER: FALCON SYSTEMS, INC.
By:
------------------------------------------
Craig Caudill
President
SOLE SHAREHOLDER:
------------------------------------------
Craig Caudill
BUYER: ARTECON, INC.
By:
------------------------------------------
James L. Lambert
President
PARTNERS: By:
------------------------------------------
James L. Lambert
By:
------------------------------------------
W. R. Sauey
By:
------------------------------------------
Dana W. Kammersgard
PARTNERSHIP: FOUNDING PARTNERS
By:
------------------------------------------
James L. Lambert,
a general partner
<PAGE> 1
EXHIBIT 10.12
TECHNOLOGY PURCHASE AGREEMENT
This Technology Purchase Agreement ("AGREEMENT") is made and entered
into as of August 21, 1997, by and among FOUNDING PARTNERS, a California general
partnership ("BUYER"), FALCON SYSTEMS, INC., a California corporation ("SELLER")
and CRAIG CAUDILL, the sole shareholder of Seller (the "SOLE SHAREHOLDER").
RECITALS
A. Seller is engaged and has been engaged in a variety of activities,
including the manufacture and distribution of computer peripheral equipment (the
Seller's activities and operations being herein referred to as the "BUSINESS").
B. Buyer desires to purchase from Seller, Seller desires to sell to
Buyer, and the Sole Shareholder desires to cause Seller to sell to Buyer, the
Purchased Assets (as defined below) pursuant to the terms of this Agreement.
NOW, THEREFORE, In consideration of the foregoing premises, and the
mutual covenants set forth below, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties to this Agreement agree
as follows.
1. Purchase And Sale of Assets
1.1 ASSETS TO BE TRANSFERRED. Subject to the terms and conditions of
this Agreement, on the Closing Date (as hereinafter defined) Seller shall, and
the Sole Shareholder shall cause Seller to, sell, transfer, convey, assign and
deliver to Buyer, and Buyer shall purchase and accept, all right, title and
interest in and to the Purchased Assets. The "PURCHASED ASSETS" shall be defined
as all of Seller's interest in: (i) all United States, state and foreign
trademark rights, trade dress, service marks, trade names, and brand names,
including all claims for infringement, and all registrations thereof and
applications therefor and all goodwill associated with the foregoing accruing
from the dates of first use thereof; (ii) all United States and foreign
copyrights, copyright registrations and copyright applications, including all
claims for infringement, and all other rights associated with the foregoing and
the underlying works of authorship; (iii) all United States and foreign patents
and patent applications, including all claims for infringement and all
international proprietary rights associated therewith; (iv) all contracts or
agreements granting any right, title, license or privilege under the
intellectual property rights of any third party; and (iv) all inventions,
invention disclosures (internal or otherwise), mask works and mask work
registrations, know-how, discoveries, improvements, designs, trade secrets, shop
and royalty rights, source code, object code, product rights, employee covenants
and agreements respecting intellectual property and non-competition and all
other types of intellectual property, including but not limited to
1.
<PAGE> 2
any and all records, files, specifications, designs, drawings, data, plans,
sketches, drawings, specifications, work standards, manufacturing and process
information, documentation, theories of operation, repair manuals, service
manuals, notebooks, writings, pictures, drawings, magnetic tapes, computer
programs, equipment, prototypes, tools, models and protocols relating to any of
the foregoing. Notwithstanding the foregoing, Purchased Assets shall not include
rights under any contract which requires the consent of any third party for the
transfer thereof to Buyer hereunder which consent of any third party for the
transfer thereof to Buyer hereunder which consent has not been obtained as of
the date hereof (which rights shall reside with Artecon pursuant to the Asset
Purchase Agreement of even date herewith).
1.1.1 [This Section Intentionally Left Blank]
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2.
<PAGE> 3
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2. LIABILITIES
2.1 LIABILITIES NOT TO BE ASSUMED. Notwithstanding any other provision
of this Agreement, Buyer is not assuming any debts, liabilities, obligations or
contracts of Seller and all such debts, liabilities, obligations and contracts
shall be and remain the responsibility of Seller. Without limiting the
generality of the foregoing, Buyer is not assuming and Seller shall not be
deemed to have transferred to Buyer the following debts, liabilities,
obligations and contracts of Seller:
2.1.1 LITIGATION MATTERS. Any liability or obligation of Seller
with respect to any suits, actions, claims or proceedings, whether or not
described in Schedule 5.10 of the Disclosure Schedule;
2.1.2 INFRINGEMENTS. Any liability of Seller to a third party
under its intellectual property or other proprietary rights, including, but not
limited to, claims arising out of the manufacture, use or sale of goods or
apparatus, the performance of services, or the copying, modifying, distributing,
performing or displaying of any work or mask work;
2.1.3 LIABILITY FOR BREACH. Liabilities and obligations of Seller
for any breach or failure to perform any of Seller's covenants and agreements to
any third party, or, prior to the Closing, any other contract, whether or not
assumed hereunder, including any breach arising from assignment of contracts
hereunder, other than those identified on Schedule 1.1.9(c), without consent of
third parties;
3.
<PAGE> 4
2.1.4 LIABILITIES TO AFFILIATES. Liabilities and obligations of
Seller to its present or former Affiliates (as defined in Section 5.18.3);
2.1.5 VIOLATION OF LAW. Liabilities and obligations of Seller for
any violation of or failure to comply with any statute, law, rule, regulation,
order, writ, injunction or decree of any court or governmental authority, which
violation would result in a breach of the representation set forth in Section
5.11; and
2.1.6 TRANSACTION EXPENSES. All liabilities, costs, obligations
or expenses incurred by Seller in connection with this Agreement and the
transactions contemplated herein.
2.1.7 [This Section Intentionally Left Blank]
2.2 [THIS SECTION INTENTIONALLY LEFT BLANK]
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3. PURCHASE PRICE
4.
<PAGE> 5
3.1 PURCHASE PRICE. Subject to the terms and conditions of this
Agreement, the following shall be the sole consideration paid by Buyer for the
Purchased Assets (the "PURCHASE PRICE"):
3.1.1 The sum of one million seven hundred fifty thousand dollars
($1,750,000) to be delivered by Buyer to Seller at the Closing, all of which is
payable in the form of a Promissory Note in substantially the form attached
hereto as Exhibit A.
3.2 [THIS SECTION INTENTIONALLY LEFT BLANK]
3.3 ALLOCATION OF PURCHASE PRICE. The aggregate Purchase Price shall be
allocated among the Purchased Assets for tax purposes in accordance with
Schedule 3.3. Seller and Buyer will follow and use such allocation in all
income, sales registration and other tax returns, filings or other related
reports made by them to any governmental agencies. To the extent that
disclosures of this allocation are required to be made by the parties to the
Internal Revenue Service ("IRS") under the provisions of Section 1060 of the
Internal Revenue Code of 1986, as amended (the "CODE"), or any regulations
thereunder, Buyer and Seller will disclose such reports to the other prior to
filing with the IRS.
4. CLOSING
4.1 THE CLOSING. The closing of the purchase and sale of the Purchased
Assets pursuant to this Agreement (the "CLOSING") shall take place at 4365
Executive Drive, Suite 1100, San Diego, California 92121 at 10:00 A.M. (local
time) on the date hereof or at such other time and place as the parties hereto
shall agree upon. Such date is referred to in this Agreement as the "CLOSING
DATE".
4.2 DOCUMENTS TO BE DELIVERED BY SELLER AND THE SOLE SHAREHOLDER. At the
Closing, Seller and the Sole Shareholder shall deliver to Buyer the following
documents, in each case duly executed or otherwise in proper form:
4.2.1 DEEDS, BILLS OF SALE. General warranty bills of sale and
such other instruments of assignment, transfer, conveyance and endorsement as
will be sufficient in the reasonable opinion of Buyer and its counsel to
transfer, assign, convey and deliver to Buyer the Purchased Assets as
contemplated hereby.
4.2.2 COMPLIANCE CERTIFICATE. A certificate signed by the Sole
Shareholder certifying that, to Sole Shareholder's knowledge, each of the
representations and warranties made by Seller and the Sole Shareholder in this
Agreement is true and correct in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made or given on and as of the Closing Date (except for any changes permitted by
the terms of this Agreement or
5.
<PAGE> 6
consented to in writing by Buyer), and that Seller and the Sole Shareholder have
performed and complied in all material respects with all of Seller's and the
Sole Shareholder's respective obligations under this Agreement which are to be
performed or complied with on or prior to the Closing Date.
4.2.3 INTELLECTUAL PROPERTY DELIVERABLES. Copies in electronic
form of any source code listed on Schedule 1.1., together with copies of such
other tangible manifestations of the Purchased Assets as may be requested in
writing by Buyer prior to the Closing, whether in electronic or printed format,
including without limitation all documentation, algorithms, source code, object
code, memoranda, descriptions, specifications, drawings, schematics and
notebooks, to the reasonable satisfaction of Buyer. It is expressly understood
that neither Seller nor any Affiliate (defined below) shall be entitled to
retain any copies of any of the foregoing items following the Closing, and the
Sole Shareholder shall cause any copies of the foregoing items in his possession
or control that are not delivered to Buyer as aforesaid to be destroyed
immediately following the Closing.
4.2.4 [This Section Intentionally Left Blank.]
4.2.5 CERTIFIED RESOLUTIONS. A certified copy of the resolutions
adopted by the Board of Directors of Seller and by the Sole Shareholder
authorizing and approving this Agreement and the consummation of the
transactions contemplated by this Agreement.
4.2.6 [This Section Intentionally Left Blank.]
4.2.7 ARTICLES; BYLAWS. A copy of (i) the Bylaws of Seller
certified by the secretary of Seller and (ii) a copy of the Articles of
Incorporation of Seller certified by the Secretary of State of the State of
California.
4.2.8 GENERAL RELEASE. The Sole Shareholder shall deliver, and
Seller shall cause the Sole Shareholder to deliver, a general release to Buyer,
in form and substance satisfactory to Buyer and its counsel, releasing Seller
and the directors, officers, agents and employees of Seller from all claims to
the Closing Date, except (i) as may be described in written contracts disclosed
in the Disclosure Schedule and expressly described and excepted from such
release, (ii) compensation for current periods expressly described and excepted
from such release and (iii) claims based on or arising out of any breach or
failure to perform any of Buyer's covenants and agreements contained in,
referred to, or made pursuant to this Agreement.
4.2.9 [This Section Intentionally Left Blank.]
6.
<PAGE> 7
4.2.10 OTHER DOCUMENTS. All other documents, instruments or
writings required to be delivered to Buyer at or prior to the Closing pursuant
to this Agreement and such other certificates of authority and documents as
Buyer may reasonably request.
4.3 DOCUMENTS TO BE DELIVERED BY BUYER. At the Closing, Buyer shall
deliver the following documents, in each case duly executed or otherwise in
proper form:
4.3.1 PURCHASE PRICE. To Seller the Promissory Note as required
by Section 3.1.1 hereof.
4.3.2 [THIS SECTION INTENTIONALLY LEFT BLANK.]
4.3.3 COMPLIANCE CERTIFICATE. A certificate signed by an officer
of Buyer that, to such officer's knowledge, the representations and warranties
made by Buyer in this Agreement are true and correct in all material respects on
and as of the Closing Date with the same effect as though such representations
and warranties had been made or given on and as of the Closing Date (except for
any changes permitted by the terms of this Agreement or consented to in writing
by Seller), and that Buyer has performed and complied in all material respects
with all of Buyer's obligations under this Agreement which are to be performed
or complied with on or prior to the Closing Date.
4.3.4 [This Section Intentionally Left Blank.]
4.3.5 [This Section Intentionally Left Blank.]
4.3.6 [This Section Intentionally Left Blank.]
4.3.7 [This Section Intentionally Left Blank.]
4.3.8 [This Section Intentionally Left Blank.]
4.3.9 OTHER DOCUMENTS. All other documents, instruments or
writings required to be delivered to Seller at or prior to the Closing pursuant
to this Agreement and such other certificates of authority and documents as
Seller may reasonably request.
5. REPRESENTATIONS AND WARRANTIES OF SELLER AND SOLE SHAREHOLDER
Sole Shareholder (to his knowledge) and Seller, jointly and severally,
make the following representations and warranties to Buyer, each of which is
true and correct on the date hereof, shall remain true and correct to and
including the Closing Date and shall be unaffected by any investigation
heretofore or hereafter made by Buyer, or any knowledge of Buyer other than as
specifically disclosed in the Disclosure Schedule and all schedules (and
accompanying documentation) delivered by Seller to Buyer at the time of the
execution of this Agreement (the "DISCLOSURE SCHEDULE").
7.
<PAGE> 8
5.1 CORPORATE MATTERS
5.1.1 Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of California. Seller has all
requisite corporate power and authority to own, operate and lease its
properties, to carry on its business as and where such is now being conducted,
to enter into this Agreement and the other documents and instruments to be
executed and delivered by Seller pursuant hereto and to carry out the
transactions contemplated hereby and thereby.
5.1.2 Except as set forth on Schedule 5.1.2, seller is duly
licensed or qualified to do business as a foreign corporation, and is in good
standing, in each jurisdiction where, by reason of the character of the
properties owned or leased by it, or the nature of its business, the failure to
be so licensed or qualified would have a material adverse effect on the
business, financial condition, operations or prospects of Seller.
5.1.3 The authorized capital stock of Seller consists, and on the
Closing Date will consist, of 100,000 shares, .01 par value per share, of which
2,000 shares are issued and outstanding. All of the issued and outstanding
shares of Seller are owned by the Sole Shareholder, are validly issued, fully
paid and nonassessable, and the issuance of such shares were not subject to any
preemptive rights. Except as set forth above, there are not as of the date
hereof, and on the Closing Date there will not be, any capital shares of Seller
authorized, issued or outstanding or any authorized or outstanding
subscriptions, options, warrants, stock appreciation rights, calls, rights,
convertible securities or other agreements or commitments of any character
relating to issued or unissued capital shares or other securities of Seller, or
otherwise obligating Seller to issue, transfer or sell any capital shares of
Seller, or other securities convertible into, exchangeable for, or evidencing
the right to subscribe for, any capital shares of Seller. Seller does not own
any interest in any corporation, partnership or other entity.
5.1.4 Neither the Board of Directors of Seller nor the Sole
Shareholder has adopted any resolution or taken any other action with respect to
dissolution, liquidation or winding up of Seller, no such resolution or other
action is proposed, under consideration or contemplated, and there is no
proceeding or other action pending or, to the knowledge of Seller and the Sole
Shareholder, threatened, proposed or contemplated by any court, administrative
or governmental agency, instrumentality, commission, authority, board or body
with respect to any dissolution, liquidation or winding up of Seller, nor is
there any basis for any such proceeding or other action.
5.1.5 Schedule 5.1.5 contains a true and correct list showing for
any time period during the last seven years: (i) all names under which Seller or
any predecessor to Seller (a "PREDECESSOR") has conducted business, together
with the type of entity of each Predecessor, (ii) the domicile of Seller and
each Predecessor, and the location of the chief
8.
<PAGE> 9
executive office of Seller and each Predecessor, (iii) each location at which
Seller or any Predecessor conducted business, and (iv) each location where the
records of accounts receivable of Seller or any Predecessor were maintained.
5.2 AUTHORITY; APPROVAL; ENFORCEABILITY; CONFLICTS.
5.2.1 The execution and delivery of this Agreement and the other
documents and instruments to be executed and delivered by Seller and Sole
Shareholder pursuant hereto and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Seller and the Sole Shareholder. No other or further corporate act
or proceeding on the part of Seller, its Board of Directors or any of its
shareholders is necessary to authorize this Agreement or the other documents and
instruments to be executed and delivered by Seller and Sole Shareholder pursuant
hereto or the consummation of the transactions contemplated hereby and thereby.
This Agreement constitutes, and when executed and delivered, the other documents
and instruments to be executed and delivered by Seller and Sole Shareholder
pursuant hereto will constitute, valid binding agreements of Seller and Sole
Shareholder, respectively, enforceable in accordance with their respective
terms, except as such may be limited by bankruptcy, insolvency, reorganization
or other laws affecting creditors' rights generally, and by general equitable
principles.
5.2.2 The execution and delivery of this Agreement and the other
documents and instruments to be executed and delivered by Seller and Sole
Shareholder pursuant hereto, and the consummation by Seller and Sole Shareholder
of the transactions contemplated hereby and thereby (1) to the knowledge of
Seller and Sole Shareholder, (a) will not violate any statute or law or any
rule, regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will not require any authorization, consent, approval, exemption
or other action by or notice to any court, administrative or governmental
agency, instrumentality, commission, authority, board or body (including,
without limitation, under any "plant-closing" or similar law), and (c) subject
to obtaining the consents referred to in Schedule 5.2.2 of the Disclosure
Schedule, will not violate or conflict with, or constitute a material default
(or an event which, with notice or lapse of time, or both, would constitute a
material default) under, or result in the termination of, or accelerate the
performance required by, or result in the creation of any Lien (as defined
below) upon any of the assets of Seller under, any term or provision of any
contract, commitment, understanding, arrangement, agreement or restriction of
any kind or character to which Seller or the Sole Shareholder is a party or by
which Seller, the Sole Shareholder or any of Seller's assets or properties may
be bound or affected, and (2) will not violate or conflict with any term or
provision of the Articles of Incorporation or By-laws of Seller. Notwithstanding
the foregoing, Seller and Sole Shareholder shall not be deemed to have breached
this Section 5.2.2 by reason of any claim by EMC Corporation, a Massachusetts
corporation ("EMC"), that the execution and delivery of this Agreement
9.
<PAGE> 10
constitutes a violation of that certain Settlement and License Agreement dated
August 16, 1996 by and between EMC and Seller (the "EMC Agreement").
5.3 FINANCIAL STATEMENTS; BOOKS AND RECORDS
5.3.1 Included as Schedule 5.3.1 of the Disclosure Schedule are
true and complete copies of the financial statements of Seller consisting of (i)
an unaudited balance sheet as of July 31, 1997 (the "RECENT BALANCE SHEET"), and
the related unaudited statements of income and cash flow for the seven (7) month
period preceding July 31, 1997, (ii) the audited balance sheet of Seller as of
December 31, 1996 and the related statements of income and cash flow for the
year ended December 31, 1996 (including the notes contained therein or annexed
thereto), together with the report thereon of Arthur Anderson, independent
certified public accountants, and (iii) the unaudited balance sheets as at
December 31 in each of the years 1993 through 1995, and the related unaudited
statements of income and cash flow for each of the fiscal years then ended
(collectively, the "FINANCIAL STATEMENTS"). Except as noted in Schedule 5.3.1,
the Financial Statements (including all notes and schedules contained therein or
annexed thereto) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except, with respect to
unaudited financial statements, for the absence of footnotes and subject to
normal year-end audit adjustments applicable to the unaudited financial
statements), and fairly present, in accordance with generally accepted
accounting principles (except, with respect to unaudited financial statements,
for the absence of footnotes and subject to normal year-end audit adjustments
applicable to the unaudited financial statements), the assets, liabilities and
financial position, the results of operations and the cash flows of Seller as of
the dates and for the periods indicated.
5.3.2 All of the books of account and other financial records of
Seller have been made available to Buyer and its counsel and are complete and
correct.
5.3.3 Seller maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (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.
5.4 NO UNDISCLOSED LIABILITIES. Without in any way limiting the other
provisions set forth in this Agreement, except as and to the extent specifically
disclosed in Schedule 1.1.9, 2.1.3, 5.4, 5.14.2 or 5.18.1 or the Recent Balance
Sheet (including any
10.
<PAGE> 11
modification pursuant to Schedules 2.1.1 and 2.1.2), to the knowledge of Seller
and Sole Shareholder, Seller has no liabilities, commitments or obligations
(secured or unsecured, and whether accrued, absolute, contingent, direct,
indirect or otherwise), other than commercial liabilities and obligations
incurred since the date of the Recent Balance Sheet in the ordinary course of
business and consistent with past practice which in the aggregate have not and
will not have a material adverse effect on the business, financial condition or
operations of Seller. Except as and to the extent specifically reflected in the
Recent Balance Sheet, neither Seller nor Sole Shareholder is aware of any facts
that could reasonably be expected to give rise to any basis for the assertion
against Seller of any liability, and there are no circumstances, conditions,
happenings, events or arrangements, contractual or otherwise, which may give
rise to liabilities, except commercial liabilities and obligations incurred in
the ordinary course of Seller's business and consistent with past practice.
5.5 ABSENCE OF CERTAIN CHANGES. Except as and to the extent disclosed in
Schedule 5.5 of the Disclosure Schedule, since the date of the Recent Balance
Sheet, there has not been:
5.5.1 Any material adverse change in the financial condition,
assets, liabilities, business, prospects or operations of Seller;
5.5.2 Any material loss, damage or destruction, whether covered
by insurance or not, affecting Seller's business or properties;
5.5.3 Any increase in the salaries, wages or other remuneration
or compensation, or in any benefits payable or to become payable to any employee
or agent of Seller (including, without limitation, any increase or change
pursuant to any bonus, pension, profit sharing, retirement or other plan or
commitment), or any bonus or other employee benefit granted, made or accrued to
any such person;
5.5.4 Any labor dispute or disturbance;
5.5.5 Any material commitment or transaction by Seller
(including, without limitation, any borrowing or capital expenditure) other than
in the ordinary course of business consistent with past practice;
5.5.6 Any declaration, setting aside, or payment of any dividend
or any other distribution in respect of Seller's capital stock; any redemption,
purchase or other acquisition by Seller of any capital stock of Seller, or any
security relating thereto; or any other payment to any shareholder of Seller as
such a shareholder;
5.5.7 Any sale, lease or other transfer or disposition of any
properties or assets of Seller, except for the sale of inventory items in the
ordinary course of business;
11.
<PAGE> 12
5.5.8 Any indebtedness for borrowed money incurred, assumed or
guaranteed by Seller;
5.5.9 Any Lien (as defined below) on any of the properties or
assets of Seller;
5.5.10 Any entering into, amendment or termination by Seller of
any material contract, or any waiver of material rights thereunder, other than
in the ordinary course of business;
5.5.11 Any waiver of rights under any Contract listed on Schedule
1.1.9;
5.5.12 Any loan or advance (other than advances to employees in
the ordinary course of business for travel in accordance with past practice) to
any person including, but not limited to, any officer, director or employee of
Seller or the Sole Shareholder or any Affiliate;
5.5.13 Any entering into of any type of license agreement or
other agreement regarding intellectual property rights involving fees of $30,000
or more;
5.5.14 Any grant of credit to any customer or distributor on
terms or in amounts more favorable than those which have been extended to such
customer or distributor in the past, any other change in the terms of any credit
heretofore extended, or any other change of Seller's policies or practices with
respect to the granting of credit; or
5.5.15 Any other event or condition not in the ordinary course of
business of Seller.
5.6 TAX MATTERS
5.6.1 The provision made for taxes on the Recent Balance Sheet
(as modified pursuant to Schedules 2.1.1 and 2.1.2) is sufficient for the
payment of all federal, state, foreign, county, local and other income, ad
valorem, excise, profits, franchise, occupation, property, payroll, sales, use,
gross receipts and other taxes (and any interest and penalties) and assessments,
whether or not disputed at the date of the Recent Balance Sheet, and for all
years and periods prior thereto. Since the date of the Recent Balance Sheet,
Seller has not incurred any taxes other than taxes incurred in the ordinary
course of business consistent in type and amount with Seller's past experiences.
5.6.2 All federal, state, foreign, county, local and other tax returns
required to be filed by or on behalf of Seller, including information returns,
have been timely filed and when filed were true, correct and complete, and the
taxes shown as due thereon were paid or adequately accrued. Seller has duly
withheld and paid all taxes which it is
12.
<PAGE> 13
required to withhold and pay relating to salaries, wages and other compensation,
remuneration or benefits paid to the employees of Seller (other than solely with
respect to such taxes applicable to salaries accrued during the pay period
commencing immediately prior to the Closing and accrued vacation as of the
Closing).
5.6.3 No federal or state income tax returns of Seller have been
audited by the Internal Revenue Service or appropriate state taxing authorities
since inception, and Seller has not received from the Internal Revenue Service
or from the tax authorities of any state, county, local or other jurisdiction
any notice of underpayment of taxes or other deficiency which has not been paid
nor any objection to any return or report filed by Seller. There are outstanding
no agreements or waivers extending the statutory period of limitations
applicable to any tax return or report.
5.6.4 Seller has never been a member of an affiliated group that
filed a consolidated tax return on which the statute of limitations does not bar
a federal tax assessment.
5.6.5 Seller has never (i) filed any consent or agreement under
Section 341(f) of the Code, (ii) applied for any tax ruling, (iii) entered into
a closing agreement with any taxing authority, (iv) filed an election under
Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election
under Section 338(e) of the Code occurred), (v) made any payments, or been a
party to an agreement (including this Agreement) that under any circumstances
could obligate it to make payments that will not be deductible because of
Section 280G of the Code, or (vi) been a party to any tax allocation or tax
sharing agreement.
5.7 [THIS SECTION INTENTIONALLY LEFT BLANK.]
5.8 [THIS SECTION INTENTIONALLY LEFT BLANK.]
5.9 TITLE TO AND CONDITION OF PROPERTIES.
5.9.1 Seller has good and marketable title to all the Purchased
Assets, free and clear of all mortgages, liens (statutory or otherwise),
security interests, claims, pledges, licenses, equities, options, conditional
sales contracts, lease purchase agreements, financing leases, assessments,
levies, easements, covenants, reservations, restrictions, rights-of-way,
exceptions, limitations, charges or encumbrances of any nature whatsoever
(collectively, "LIENS") except those described in Schedule 5.9.1 of the
Disclosure Schedule. Except with respect to the Assumed Contracts listed on
Schedule 1.9(c), none of the Purchased Assets are subject to any restrictions
with respect to the transferability thereof. Except with respect to the Assumed
Contracts listed on Schedule 1.9(c), Seller has complete and unrestricted power
and right to sell, assign, convey and deliver the Purchased Assets to Buyer as
contemplated hereby. At Closing, Buyer will
13.
<PAGE> 14
receive good and valid title to all the Purchased Assets, free and clear of all
Liens of any nature whatsoever except those described in Schedule 5.9.1 of the
Disclosure Schedule.
5.9.2 [This Section Intentionally Left Blank.]
5.9.3 [This Section Intentionally Left Blank.]
5.9.4 To the knowledge of Seller and Sole Shareholder, neither
the whole nor any portion of the property or any other assets of Seller is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor to Seller's and the Sole Shareholder's knowledge
has any such condemnation, expropriation or taking been proposed.
5.10 PURCHASED ASSETS
5.10.1 Schedule 1.1.2 sets forth an accurate and complete list
identifying all of the following Intellectual Property Rights as of the Closing
Date: (i) all patents and patent applications owned by Seller or any Affiliate,
including the country of filing, filing number, date of issue, expiration date,
title and inventors; (ii) all registered trademarks and servicemarks and
trademark and servicemark applications, including country of filing, filing
number, date of issue and expiration date; (iii) all common law trademarks,
service marks, trade names and copyright registrations; (iv) all material
license agreements pursuant to which Seller or any Affiliate acquired any
Intellectual Property Rights and all material agreements, oral or written,
pursuant to which Seller or any Affiliate is obligated to pay royalties to third
parties with respect to such Intellectual Property Rights; and (v) all material
license agreements, oral or written, including site licenses, pursuant to which
Seller or any Affiliate has granted any person any rights to any of the
Intellectual Property Rights. Complete and accurate copies of all written
agreements (and complete and accurate descriptions of all oral agreements)
referred to in the foregoing clauses (iv) and (v) have been provided to Buyer.
The entire right, title and interest in the Intellectual Property Rights reside
solely with Seller. To the knowledge of Seller and the Sole Shareholder after
due inquiry thereof, there are no actual or claimed infringements, violations or
misappropriations existing by any third party with respect to the Intellectual
Property Rights.
5.10.2 To the knowledge of Seller and the Sole Shareholder, the
operation of the Business as currently conducted, including, but not limited to,
the operation and use of the Purchased Assets and the manufacture, sale or use
of the Products, does not and will not infringe, violate or misappropriate any
patent, trade secret, copyright or other intellectual property rights of any
third party or entity.
14.
<PAGE> 15
5.10.3 Except to the extent set forth in Schedule 1.1.2, no
material licenses, sub-licenses or other agreements relating to the Intellectual
Property Rights exist which would limit or restrict the rights of Buyer to
operate the Business following the Closing, including, without limitation, the
operation and use of the Assets and the manufacture, sale or use of the
Products. 5.10.4 To the knowledge of Seller and the Sole Shareholder, except as
set forth on Schedule
5.10.4, all trademarks, servicemarks, and related applications
and registrations thereof and all copyrights and registrations thereof related
to the Business (collectively the "TRADEMARKS AND COPYRIGHTS") are valid and
enforceable, Seller has the exclusive right to use the Trademarks and Copyrights
in connection with the Business and there are no oppositions, cancellations or
governmental, arbitral or other proceedings currently pending or threatened that
protest the rights of Seller to use and/or register the Trademarks and
Copyrights. Neither Seller nor the Sole Shareholder has, by act or failure to
act, including without limitation, by failure to attach any required notice,
transferred any rights to the Intellectual Property Rights into the public
domain.
5.10.5 Neither Seller nor any Affiliate is making use of any
patentable or unpatentable invention or any confidential information in the
Business in which any present or past employee of Seller has or has claimed an
interest, and neither Seller nor the Sole Shareholder is aware of facts that
could reasonably be expected to give rise to such a claim. Neither Seller nor
the Sole Shareholder has any knowledge (after due inquiry thereof) of the
assertion against Seller of any conflicting rights to any Intellectual Property
Rights. Each employee of Seller has entered into, and no employee of Seller has
failed or refused to execute and deliver an agreement between such employee and
Seller in substantially the form attached hereto as Schedule 5.10.5, and no such
employee has failed or refused to take any action required under such agreement.
5.11 TRADE SECRETS
5.11.1 The Purchased Assets include all documentation relating to
all of Seller's trade secrets, if any, which, if they exist, may include
customer lists, processes, know-how, computer programs and routines and other
technical data used in the Products or in the Business (collectively, the "TRADE
SECRETS") that is current, accurate, and sufficient in detail and content to
identify and explain such trade secrets, and to allow their full and proper use
by Buyer; provided, however, that the trade secrets do not include the
specialized knowledge and experience of Seller's employees.
5.11.2 To the knowledge of Seller and the Sole Shareholder,
Seller is the sole owner of each of the trade secrets, free and clear of any
liens, encumbrances, restrictions, or legal or equitable claims of others.
15.
<PAGE> 16
5.11.3 To the knowledge of Seller and the Sole Shareholder, the
trade secrets have not been used, divulged, or appropriated for the benefit of
any past or present employees or other persons or to the detriment of Seller.
5.12 [THIS SECTION INTENTIONALLY LEFT BLANK.]
5.12.1 [This Section Intentionally Left Blank.]
5.12.2 [This Section Intentionally Left Blank.]
5.13 NO LITIGATION. Except as specifically described in Schedule 5.13,
there is no action, suit, arbitration or other proceeding, investigation or
inquiry pending or, to the knowledge of Seller and the Sole Shareholder,
threatened against Seller, its directors (in such capacity), the Sole
Shareholder or Seller's business or any of its assets, nor is Seller or the Sole
Shareholder aware of any facts that could reasonably be expected to give rise to
any basis for any such proceedings, investigations or inquiries. Schedule 5.13
also identifies all such actions, suits, proceedings, investigations and
inquiries to which Seller, any of its directors (in such capacity) or the Sole
Shareholder have been parties since inception. Except as set forth in Schedule
5.13, neither Seller nor its business or assets is subject to any judgment,
order, writ or injunction of any court, arbitrator or federal, state, foreign,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality.
5.14 COMPLIANCE WITH LAWS
5.14.1 Except as set forth in Schedule 5.14.1, to the knowledge
of Seller and Sole Shareholder, Seller (including each and all of its
operations, practices, properties and assets) is in compliance with all
applicable federal, state, local and foreign laws, ordinances, orders, rules and
regulations (collectively, "LAWS"), including, without limitation, those
applicable to discrimination in employment, occupational safety and health,
trade practices, competition and pricing, product warranties, zoning, building
and sanitation, employment, retirement and labor relations, product advertising
and the Environmental Laws (as hereinafter defined). Except as set forth in
Schedule 5.14.1 of the Disclosure Schedule, Seller has not received notice of
any violation or alleged violation of, and to the knowledge of Seller and the
Sole Shareholder (after due inquiry thereof) is subject to no liability (whether
accrued, absolute, contingent, direct or indirect) for past or continuing
violation of, any Laws. All reports and returns required to be filed by Seller
with any governmental authority have been filed, and were accurate and complete
when filed. Without limiting the generality of the foregoing:
(a) Seller has made all required payments to its
unemployment compensation reserve accounts with the appropriate governmental
departments of the states where it is required to maintain such accounts; and
16.
<PAGE> 17
(b) Seller has delivered to Buyer copies of all records of
Seller required for the past five years under the federal Occupational Safety
and Health Act of 1970, as amended, and under all other applicable health and
safety laws and regulations, and all correspondence relating thereto. The
deficiencies, if any, noted in such records and correspondence have been
corrected.
5.14.2 Seller has all licenses, permits, approvals,
authorizations and consents ("PERMITS") of all governmental and regulatory
authorities and all certification organizations required for the conduct of the
Business (as presently conducted and as proposed to be conducted) and operation
of the Facilities, except for any Permits the failure to possess which would not
have a material adverse effect on the financial condition, assets, liabilities,
business, prospects or operations of the Business. All such Permits are
described in Schedule 5.14.2 of the Disclosure Schedule, are in full force and
effect and are, except as expressly set forth on Schedule 5.14.2, assignable to
Buyer in accordance with the terms hereof. Except as set forth in Schedule
5.14.2 of the Disclosure Schedule, Seller (including its operations, properties
and assets) is and has been in compliance with all such Permits.
5.14.3 The applicable Laws relating to pollution or protection of
the environment, including Laws relating to emissions, discharges, generation,
storage, releases or threatened releases of pollutants, contaminants, chemicals
or industrial, toxic, hazardous or petroleum or petroleum-based substances or
wastes ("WASTE") into the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata) or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Waste including, without limitation,
the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery
Act, the Toxic Substances Control Act and the Comprehensive Environmental
Response Compensation Liability Act ("CERCLA"), as amended, and their state and
local counterparts, are herein collectively referred to as the "ENVIRONMENTAL
LAWS." Without limiting the generality of the foregoing provisions of this
Section 5.14.3, to the knowledge of Seller and Sole Shareholder, Seller is in
compliance with all limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
the Environmental Laws or contained in any regulations, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder. Except as set forth in Schedule 5.13 of the
Disclosure Schedule, there is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, investigation, proceeding, notice
or demand letter pending or, to the knowledge of Seller and the Sole
Shareholder, threatened against Seller relating in any way to the Environmental
Laws or any regulation, code, plan, order, decree, judgment, injunction, notice
or demand letter issued, entered, promulgated or approved thereunder. Except as
set forth in Schedule 5.13 of the Disclosure Schedule, to the knowledge of
Seller and Sole Shareholder, there are no past
17.
<PAGE> 18
or present events, conditions, circumstances, activities, practices, incidents,
actions or omissions which could reasonably be expected to interfere with or
prevent compliance or continued compliance with the Environmental Laws or with
any regulation, code, plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved thereunder, or which may
give rise to any liability, including, without limitation, liability under
CERCLA or similar state or local Laws, or otherwise form the basis of any claim,
action, demand, suit, proceeding, hearing, notice of violation, study or
investigation, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling, or the emission,
discharge, release or threatened release into the environment, of any Waste.
5.15 INSURANCE. Set forth in Schedule 5.15 of the Disclosure Schedule is
a complete and accurate list and description of all policies of fire, casualty,
general liability, product liability, workers compensation, health and other
forms of insurance presently in effect with respect to the business and
properties of Seller, true and correct copies of which have heretofore been
delivered to Buyer. Schedule 5.15 of the Disclosure Schedule includes, without
limitation, the carrier, the description of coverage, the limits of coverage,
retention or deductible amounts, amount of annual premiums, date of expiration
and the date through which premiums have been paid with respect to each such
policy, and any pending claims in excess of $10,000. All such policies are
valid, outstanding and enforceable policies and provide insurance coverage for
the properties, assets and operations of Seller, of the kinds (except for
product liability and D&O insurance), in the amounts and against the risks
customarily maintained by organizations similarly situated; and no such policy
(nor any previous policy) provides for or is subject to any currently
enforceable retroactive rate or premium adjustment, loss sharing arrangement or
other actual or contingent liability arising wholly or partially out of events
arising prior to the date hereof. Schedule 5.15 of the Disclosure Schedule
indicates each policy as to which (a) the coverage limit has been reached in the
current year of coverage or (b) the total incurred losses in the current year of
coverage equal 75% or more of the coverage limit in the current year of
coverage. No notice of cancellation or termination has been received with
respect to any such policy, and neither Seller nor the Sole Shareholder has
knowledge of any act or omission of Seller which could result in cancellation of
any such policy prior to its scheduled expiration date. Seller has not been
refused any insurance with respect to any aspect of the operations of the
business nor has its coverage been limited by any insurance carrier to which it
has applied for insurance or with which it has carried insurance during the last
three years. Seller has duly and timely made all claims it has been entitled to
make under each policy of insurance. There is no claim by Seller pending under
any such policies as to which coverage has been denied or disputed by the
underwriters of such policies, and neither Seller nor the Sole Shareholder knows
of any basis for denial of any claim under any such policy. Seller has not
received any written notice from or on behalf of any insurance carrier issuing
any such policy that
18.
<PAGE> 19
insurance rates therefor will hereafter be substantially increased (except to
the extent that insurance rates may be increased for all similarly situated
risks) or that there will hereafter be a cancellation or an increase in a
deductible (or an increase in premiums in order to maintain an existing
deductible) or nonrenewal of any such policy. Such policies are sufficient in
all material respects for compliance by Seller with all requirements of law and
with the requirements of all contracts to which Seller is a party.
5.16 CONTRACTS AND COMMITMENTS.
5.16.1 [This Section Intentionally Left Blank.]
5.16.2 [This Section Intentionally Left Blank.]
5.16.3 Except for Seller's obligations under that certain
Agreement dated April 24, 1997 between Seller and Traaken Software, Inc., Seller
has no material purchase commitments for inventory items or supplies that,
together with amounts on hand, constitute in excess of three months normal
usage, or which are at an excessive price.
5.16.4 Seller has no agreements or commitments to customers or
distributors pursuant to agreements with terms materially different from
Seller's standard form of sales and as to certain products, a license agreement
(which standard forms are attached to Schedule 5.16.4) other than as listed and
described in Schedule 5.16.4, and Seller has no such agreements or commitments
except those made in the ordinary course of business and at arm's length, and no
such agreements or commitments are for a sales price which would result in a
loss to Seller.
5.16.5 Except as disclosed in Schedule 5.16.5, Seller has no
agreement, understanding, contract or commitment (written or oral) with any
Affiliate or any other officer, employee, agent, consultant, distributor, dealer
or franchisee that is not cancelable by Seller on notice of not longer than 30
days without liability, penalty or premium of any nature or kind whatsoever.
5.16.6 Seller has not given a power of attorney, which is
currently in effect, to any person, firm or corporation for any purpose
whatsoever.
5.16.7 Seller is not a party to any collective bargaining
agreements with any unions, guilds, shop committees or other collective
bargaining groups.
5.16.8 Except as set forth in Schedule 5.16.8 of the Disclosure
Schedule, Seller is not obligated under any loan agreement, promissory note,
letter of credit, or other evidence of indebtedness as a signatory, guarantor or
otherwise.
19.
<PAGE> 20
5.16.9 Except as set forth on Schedule 5.16.9, Seller has not
guaranteed the payment or performance of any person, firm or corporation, agreed
to indemnify any person or act as a surety, or otherwise agreed to be
continentally or secondarily liable for the obligations of any person.
5.16.10 Except as shown on Schedule 5.16.10, Seller is not a
party to any contract with any national governmental body.
5.16.11 Except as shown on Schedule 5.16.11, Seller is not a
party to nor is it bound by any agreement, deed, lease or other instrument which
is so burdensome as to materially affect or impair the operation of Seller.
Without limiting the generality of the foregoing, Seller is not a party to nor
is it bound by any agreement requiring Seller to assign any interest in any
trade secret or proprietary information, or prohibiting or restricting Seller
from competing in any business or geographical area or soliciting customers or
otherwise restricting it from carrying on its business anywhere in the world.
5.16.12 Schedule 5.16.12 contains a description and summary of
terms of contracts relating to the Business involving consideration or other
expenditures in excess of $10,000 or more negotiated or discussed by Seller or
the Sole Shareholder at any time within sixty (60) days prior to the Closing but
not finalized.
5.16.13 Seller has no lease, contract or commitment of any nature
involving consideration or other expenditures in excess of $10,000 by or from
Seller, or involving performance over a period of more than three months, or
which is otherwise individually material to the operations of Seller, except as
explicitly described in Schedule 5.16.13 or in any other Schedule of the
Disclosure Schedule.
5.16.14 A complete and accurate copy of each written agreement
and other document identified on the Schedules referred to in Sections 5.16.1
through 5.16.13, as amended to date, has been delivered to Buyer. Each lease,
contract and commitment referred to in Sections 5.16.1 through 5.16.13 is,
except to the extent fully performed on the date hereof, in full force and
effect and valid and binding on Seller in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and subject to general
equity principles and to limitations on the availability of equitable relief.
Seller has performed all material obligations required to be performed by it and
is not in default under any lease, contract or commitment (except any default
arising as a result of the transfer to Buyer of the Assumed Contracts described
on Schedule 5.2.5 as requiring the consent of the other party), nor has any
event or omission occurred which through the passage of time or the giving of
notice, or both, would constitute a default thereunder or cause the acceleration
of any of Seller's obligations or result in the creation of any Lien on any of
the assets owned, used or occupied by Seller. Neither Seller nor the Sole
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<PAGE> 21
Shareholder has received any notice that it is in default thereunder, and
neither Seller nor the Sole Shareholder is aware of any facts that could
reasonably be expected to give rise to such a default. No third party is in
default under any lease, contract or commitment to which Seller is a party, nor
has any event or omission occurred which, through the passage of time or the
giving of notice, or both, would constitute a default thereunder or give rise to
an automatic termination, or the right of discretionary termination, thereof.
5.17 LABOR MATTERS. Except to the extent set forth in Schedule 5.17 of
the Disclosure Schedule, (a) within the last five years Seller has not
experienced any labor disputes, union organization attempts or work stoppage due
to labor disagreements in connection with its business; (b) to the knowledge of
Seller and Sole Shareholder, Seller is in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and is not engaged in any unfair labor practice;
(c) there is no unfair labor practice charge or complaint against Seller pending
or, to Seller's and the Sole Shareholder's knowledge, threatened; (d) there is
no labor strike, dispute, request for representation, slowdown or stoppage
actually pending or threatened against or affecting Seller nor any secondary
boycott with respect to products of Seller; (e) no question concerning
representation has been raised or is, to the knowledge of Seller and Sole
Shareholder, threatened respecting the employees of Seller; (f) no grievance and
no arbitration proceeding arising out of or under collective bargaining
agreements, is pending and no such claim therefor exists; and (g) there are no
administrative charges or court complaints against Seller concerning alleged
employment discrimination or other employment related matters pending or, to
Seller's and the Sole Shareholder's knowledge, threatened before the U.S. Equal
Employment Opportunity Commission or any state or federal court or agency.
5.18 EMPLOYEE BENEFIT PLANS.
5.18.1 Seller has no "defined benefit" plan as defined in ERISA.
Schedule 5.18.1 of the Disclosure Schedule sets forth all pension, thrift,
savings, profit sharing, retirement, incentive bonus or other bonus, medical,
dental, life, accident insurance, benefit, employee welfare, disability, group
insurance, stock purchase, stock option, stock appreciation, stock bonus,
executive or deferred compensation, hospitalization and other similar fringe or
employee benefit plans, programs and arrangements, and any employment or
consulting contracts, "golden parachutes," collective bargaining agreements,
severance agreements or plans, vacation and sick leave plans, programs,
arrangements and policies, including, without limitation, all "employee benefit
plans" (as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")). No such employee benefit plan is a
"multiemployer plan" (as defined in Section 4001 of ERISA), and Seller has never
contributed nor been obligated to contribute to any such multiemployer plan.
Schedule 5.18.1 also lists those provisions of all employee manuals, and all
written or binding oral statements of policies, practices
21.
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or understandings relating to employment, which are provided to, for the benefit
of, or relate to, any persons employed by Seller ("SELLER EMPLOYEES") with
respect to intellectual property developed by Seller or Seller Employees, or
with respect to obligations of confidentiality related to Seller's affairs or
property.
5.18.2 With respect to each employee benefit plan that is subject
to the provisions of Title IV of ERISA and with respect to which Seller or any
of its assets may, directly or indirectly, be subject to any liability,
contingent or otherwise, or the imposition of any lien (whether by reason of the
complete or partial termination of any such plan, the funded status of any such
plan, any "complete withdrawal" (as defined in Section 4203 of ERISA) or
"partial withdrawal" (as defined in Section 4205 of ERISA) by any person from
any such plan, or otherwise):
(a) no such plan has been terminated so as to subject,
directly or indirectly, any assets of Seller to any liability, contingent or
otherwise, or the imposition of any lien under Title IV of ERISA;
(b) no proceeding has been initiated or threatened by any
person (including the Pension Benefit Guaranty Corporation ("PBGC")) to
terminate any such plan;
(c) no condition or event currently exists or currently is
expected to occur that could subject, directly or indirectly, any assets of
Seller to any liability, contingent or otherwise, or the imposition of any lien
under Title IV of ERISA, whether to the PBGC or to any other person or otherwise
on account of the termination of any such plan;
(d) if any such plan were to be terminated as of the
Closing Date, no assets of Seller would be subject, directly or indirectly, to
any liability, contingent or otherwise, or the imposition of any lien under
Title IV of ERISA;
(e) no "reportable event" (as defined in Section 4043 of
ERISA) has occurred with respect to any such plan;
(f) no such plan which is subject to Section 302 of ERISA
or Section 412 of the Code has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code, respectively),
whether or not waived; and
(g) no such plan is a multiemployer plan or a plan
described in Section 4064 of ERISA.
22.
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5.18.3 There have been no "prohibited transactions" within the
meaning of Section 406 or 407 of ERISA or Section 4975 of the Code for which a
statutory or administrative exemption does not exist with respect to any
employee benefit plan, and no event or omission has occurred in connection with
which Seller or any of its assets or any employee benefit plan, directly or
indirectly, could be subject to any liability under ERISA, the Code or any other
law, regulation or governmental order applicable to any employee benefit plan,
including, without limitation, Section 406, 407, 409, 501, 502, 510, 511, 601,
4062, 4063, 4069, 4071, or 4201 of ERISA, or Section 4971, 4972, 4975, 4976,
4977, 4979 or 4980B of the Code, or under any agreement, instrument, statute,
rule of law or regulation pursuant to or under which Seller has agreed to
indemnify or is required to indemnify any person against liability incurred
under, or for a violation or failure to satisfy the requirements of, any such
statute, regulation or order.
5.18.4 The funds available under each employee benefit plan which
is intended to be a funded plan equal or exceed the amounts required to be paid,
or which would be required to be paid if such Plan were terminated, on account
of rights vested or accrued as of the Closing Date (using the actuarial methods
and assumptions then used by Seller's actuaries in connection with the funding
of such Plan).
5.18.5 Seller is not and never has been a member of a controlled
group as defined in Section 414(b) of the Code or in common control with any
unincorporated trade or business as determined under Section 414(c) of the Code.
Seller is not and never has been a member of an "affiliated service group"
within the meaning of Section 414(m) of the Code. Except as set forth on
Schedule 5.18.5, there are not and never have been any leased employees within
the meaning of Section 414(n) of the Code who perform services for Seller, and
no individuals are expected to become leased employees.
5.18.6 With respect to each employee benefit plan, (i) all
payments due from Seller to date have been made and all amounts properly accrued
to date as liabilities of Seller which have not been paid have been properly
recorded on the books of Seller and are reflected in the Recent Balance Sheet;
(ii) Seller has materially complied with, and each such employee benefit plan
conforms in all material respects in form and operation to, all applicable laws
and regulations, including but not limited to ERISA and the Code, and all
reports and information relating to such employee benefit plan required to be
filed with any governmental entity have been timely filed; (iii) to Seller's and
Sole Shareholder's knowledge all reports and information relating to each such
employee benefit plan required to be disclosed or provided to participants or
their beneficiaries have been timely disclosed or provided; (iv) to Seller's and
Sole Shareholder's knowledge each such employee benefit plan which is intended
to qualify under Section 401 of the Code has received a favorable determination
letter from the Internal Revenue Service with respect to such qualification, its
related trust has been determined to be exempt from taxation under Section
501(a) of the Code, and nothing has occurred since the date of
23.
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such letter that has or is likely to adversely affect such qualification or
exemption; (v) there are no actions, suits or claims pending (other than routine
claims for benefits) or, to Seller's and the Sole Shareholder's knowledge,
threatened with respect to such employee benefit plan or against the assets of
such employee benefit plan; and (vi) no employee benefit plan is a plan which is
established and maintained outside the United States primarily for the benefit
of individuals substantially all of whom are nonresident aliens.
5.18.7 The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee of Seller to
severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement, (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due to any such employee or
former employee or (iii) result in any prohibited transaction described in
Section 406 of ERISA or Section 4975 of the Code for which an exemption is not
available or (iv) result in Buyer being or becoming liable to any Seller
Employee or liable for any amount owed to any employee benefit plan.
5.19 EMPLOYMENT COMPENSATION. Schedule 5.19 of the Disclosure Schedule
contains a true and correct list of all employees to whom Seller is paying
compensation, including bonuses and incentives, at an annual rate in excess of
$60,000 for services rendered or otherwise; and in the case of salaried
employees such list identifies the current annual rate of compensation for each
employee and in the case of hourly or commission employees identifies certain
reasonable ranges of rates and the number of employees falling within each such
range.
5.20 MAJOR CUSTOMERS AND SUPPLIERS.
5.20.1 Schedule 5.20.1 of the Disclosure Schedule contains a list
of the ten largest customers of Seller for each of the two most recent fiscal
years (determined on the basis of the total dollar amount of net sales) showing
the total dollar amount of net sales to each such customer during each such
year. Neither Seller nor the Sole Shareholder has any knowledge of any facts
indicating that any of the customers listed on Schedule 5.20.1 of the Disclosure
Schedule will not continue to be customers of the business of Seller after the
Closing at substantially the same level of purchases as heretofore.
5.20.2 Schedule 5.20.2 of the Disclosure Schedule contains a list
of the ten largest suppliers to Seller for each of the two most recent fiscal
years (determined on the basis of the total dollar amount of purchases) showing
the total dollar amount of purchases from each such supplier during each such
year. Neither Seller nor the Sole Shareholder has any knowledge or information
of any facts indicating that any of the suppliers listed on Schedule 5.20.2 of
the Disclosure Schedule will not continue to be
24.
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suppliers to the business of Seller after the Closing and will not continue to
supply the business with substantially the same quantity and quality of goods at
competitive prices.
5.20.3 Schedule 5.20.3 of the Disclosure Schedule contains a list
by product line of all dealers, distributors and franchisees of Seller.
5.21 AFFILIATES' RELATIONSHIPS TO SELLER.
5.21.1 All leases, contracts, agreements or other arrangements
between Seller and any Affiliate are described on Schedule 5.21.1 of the
Disclosure Schedule. Except as shown on Schedule 5.21.1, Seller has no business
relationship with any Affiliate (other than the direct employment of an
individual Affiliate as an employee, officer or director) where such Affiliate
is a customer, supplier, vendor, licensor, lessor, landlord, distributor, sales
representative, lender or borrower. Schedule 5.21.1 contains a complete list of
all business relationships of Seller with any Affiliate.
5.21.2 Except as set forth on Schedule 5.21.2, no Affiliate has
any direct or indirect interest in (i) any entity which does business with
Seller or is competitive with Seller's business, or (ii) any property, asset or
right which is used by Seller in the conduct of its business (other than an
interest constituting less than 1% of the outstanding voting stock of a company
whose Common Stock is traded on a national securities exchange or traded in the
national over-the-counter market)
5.21.3 For purposes of this Agreement "AFFILIATE" means:
(i) any current or former shareholder, director or officer
of the Seller;
(ii) any sibling, uncle, aunt, niece or nephew of any
person described in clause (i);
(iii) any ancestor or lineal descendant of any person
described in clauses (i) or (ii);
(iv) any current or former spouse of any person described
in clauses (i), (ii) or (iii) or any person who is a member of the same
household of the person described in clauses (i), (ii) or (iii) or who has
resided with such person for more than 10 days in any calendar year;
(v) any ancestor or lineal descendant of any person
described in clauses (i), (ii), (iii) or (iv);
(vi) any entity or person in which any of the foregoing
have a direct or indirect interest (except through ownership of less than 1% of
the outstanding
25.
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shares of any entity whose securities are listed on a national securities
exchange or traded in the national over-the-counter market).
5.22 [THIS SECTION INTENTIONALLY LEFT BLANK.]
5.23 NO BROKERS OR FINDERS. Except for arrangements with Thomas A.
McCreery, Jr. in connection with the letter agreement and waiver and release
referenced in Section 4.2.10 of this Agreement, neither Seller nor any of its
directors, officers, employees, shareholders or agents have retained, employed
or used any broker or finder in connection with the transaction provided for
herein or in connection with the negotiation thereof.
5.24 AS-IS. Buyer acknowledges that Buyer is acquiring the Purchased
Assets and the Business "As-Is, Where-Is, With All Faults," in its current
condition subject to the terms of this Agreement, and that, with the exception
of the representations and warranties contained in this Agreement, no
representations or warranties of any kind whatsoever, express or implied, have
been made by the Seller, Sole Shareholder or Seller's employees, agents or
representatives with regard to the Purchased Assets or the Business, the
condition or quality of either, or the ability of Buyer to develop the Purchased
Assets or the Business.
5.25 SALES REPRESENTATIVE, DISTRIBUTORSHIP AND LICENSE AGREEMENTS.
Schedule 5.25 contains a true and complete list of all distributorship, sales
representative and manufacturing license agreements (if any material term
thereof is oral, Schedule 5.25 contains a complete description of such oral term
or provision). There are no other agreements, oral or written, with any
distributor, sales representative or other party except as set forth in Schedule
5.25.
6. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the Sole Shareholder that,
as of the date of this Agreement:
6.1 ORGANIZATION AND STANDING. Buyer is a general partnership duly
organized, validly existing and in good standing under the laws of California,
and has all requisite power and authority to own, operate and lease its
properties and carry on its business as now conducted.
6.2 AUTHORITY AND ENFORCEABILITY.
6.2.1 Buyer has full power and authority to execute, deliver and
perform its obligations under this Agreement and all documents to be executed by
Buyer in
26.
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connection with the transactions contemplated hereby and all partnership and
other action of Buyer necessary for such execution, delivery and performance has
been duly taken.
6.2.2 [This Section Intentionally Left Blank.]
6.2.3 This Agreement and all documents to be executed by Buyer in
connection with the transactions contemplated hereby is, and upon due execution
and delivery by the parties thereto will be, a legal, valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its respective
terms, except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or affecting
enforcement of creditor's rights and by rules of law governing specific
performance, injunctive relief or other equitable remedies.
6.2.4 The execution and delivery by Buyer of this Agreement and
all documents to be executed by Buyer in connection with the transactions
contemplated hereby do not, and the performance and consummation by Buyer of the
transactions contemplated by this Agreement and such other documents will not,
result in any conflict with, breach or violation of or default, termination,
forfeiture or lien under (or upon the failure to give notice or the lapse of
time, or both, result in any conflict with, breach or violation of or default,
termination, forfeiture or lien under) any terms or provisions of Buyer's
partnership agreement, each as amended to date, or any statute, rule,
regulation, judicial or governmental decree, order or judgment, or any
agreement, lease or other instrument, to which Buyer is a party or to which it
or its assets are subject that has or is likely to have a material adverse
effect on Buyer's ability to carry out its obligations under this Agreement or
such other documents.
6.3 FINANCIAL STATEMENTS. The Personal Financial Statements delivered by
each of the general partners of the Partnership dated as of, or about, August 3,
1997 are true and correct in all material respects and there have been no
material changes to the information set forth in those financial statements from
the date thereof.
6.4 [THIS SECTION INTENTIONALLY LEFT BLANK.]
6.5 [THIS SECTION INTENTIONALLY LEFT BLANK.]
6.5.1 [This Section Intentionally Left Blank.]
6.5.2 [This Section Intentionally Left Blank.]
6.5.3 [This Section Intentionally Left Blank.]
6.5.4 [This Section Intentionally Left Blank.]
6.5.5 [This Section Intentionally Left Blank.]
27.
<PAGE> 28
6.5.6 [This Section Intentionally Left Blank.]
6.5.7 [This Section Intentionally Left Blank.]
6.5.8 [This Section Intentionally Left Blank.]
6.5.9 [This Section Intentionally Left Blank.]
6.5.10 [This Section Intentionally Left Blank.]
6.5.11 [This Section Intentionally Left Blank.]
6.5.12 [This Section Intentionally Left Blank.]
6.5.13 [This Section Intentionally Left Blank.]
6.5.14 [This Section Intentionally Left Blank.]
7. EMPLOYEES - EMPLOYEE BENEFITS
7.1 [THIS SECTION INTENTIONALLY LEFT BLANK.]
7.2 [THIS SECTION INTENTIONALLY LEFT BLANK.]
7.3 [THIS SECTION INTENTIONALLY LEFT BLANK.]
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer to consummate the transactions contemplated by
this Agreement shall be subject, at its option, to the fulfillment at or prior
to Closing of each of the following conditions:
8.1 DELIVERY OF CLOSING ITEMS. Seller and the Sole Shareholder, as
applicable, shall have duly executed and delivered to Buyer each of the
documents, certificates and other items provided for in Section 4.2 of this
Agreement to the reasonable satisfaction of Buyer and its counsel.
8.2 [THIS SECTION INTENTIONALLY LEFT BLANK.]
8.3 WAIVER AND RELEASE. The waiver and release contemplated by Section
4.2.10 of this Agreement shall have been executed by Thomas A. McCreery, Jr. and
delivered to Buyer.
8.4 ASSET PURCHASE AGREEMENT. The Asset Purchase Agreement shall have
been executed and delivered by Seller and the Sole Shareholder.
28.
<PAGE> 29
8.5 [THIS SECTION INTENTIONALLY LEFT BLANK.]
8.6 COMPLETION OF DUE DILIGENCE. Buyer shall have completed to its
satisfaction its legal and financial due diligence investigations concerning
Seller.
8.7 SELLER CONSENTS. Buyer shall have received evidence, in form and
substance reasonably satisfactory to Buyer and its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of governmental authorities as are necessary and appropriate in connection with
the consummation of the transactions contemplated hereby have been obtained.
8.8 ACCURACY OF REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
AGREEMENTS. Each of the representations and warranties made by Seller and the
Sole Shareholder in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as though such
representations and warranties had been made or given on and as of the Closing
Date (except for any changes permitted by the terms of this Agreement or
consented to in writing by Buyer), and Seller and the Sole Shareholder shall
have performed and complied in all material respects with all of Seller's and
the Sole Shareholder' respective obligations under this Agreement which are to
be performed or complied with on or prior to the Closing Date.
8.9 ACTIONS OR PROCEEDINGS; COURT ORDERS. No action, suit or other
proceeding before a court, tribunal or other governmental agency or body shall
have been instituted or threatened to restrain or prohibit the consummation of
the transactions contemplated by this Agreement, or seeking to obtain
substantial damages in respect thereof, or involving a claim that consummation
thereof would result in the violation of any law, decree or regulation of
governmental authority having appropriate jurisdiction, or in connection with
any material claim against Seller and the Sole Shareholder not disclosed on the
Schedules hereto, and no preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a government,
regulatory or administrative agency or commission nor any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority shall be in effect which would (a) make the acquisition or holding by
Buyer of the Purchased Assets illegal or impose material limitations on its
ability to exercise full rights of ownership with respect to such Purchased
Assets or (b) otherwise prevent the consummation of the transaction contemplated
hereby.
8.10 NO ADVERSE CHANGE. There shall have been no event which has
occurred or which has been disclosed to Buyer which has had or could be
reasonably expected to have a material adverse effect on the financial
condition, assets, liabilities, business, prospects or operations of Seller.
29.
<PAGE> 30
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND SOLE SHAREHOLDER
The obligations of Seller and the Sole Shareholder to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment,
at or prior to Closing, of each of the following conditions:
9.1 DELIVERY OF CLOSING ITEMS. Buyer shall have delivered the Purchase
Price to be delivered to Seller at the Closing and shall have duly executed and
delivered to Seller each of the documents, certificates and other items provided
for in Section 4.3 of this Agreement to the reasonable satisfaction of Seller
and its counsel.
9.2 [THIS SECTION INTENTIONALLY LEFT BLANK.]
9.3 ASSET PURCHASE AGREEMENT. The Asset Purchase Agreement shall have
been duly executed and delivered by Artecon, Inc.
9.4 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by Buyer in this Agreement shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made or given on
and as of the Closing Date (except for any changes permitted by the terms of
this Agreement or consented to in writing by Seller), and Buyer shall have
performed and complied in all material respects with all of Buyer's obligations
under this Agreement which are to be performed or complied with on or prior to
the Closing Date.
9.5 APPROVAL. The Board of Directors of Buyer shall have approved this
Agreement and authorized Buyer to enter into this Agreement and to effect the
transactions contemplated hereunder.
9.6 ACTIONS OR PROCEEDINGS; COURT ORDERS. No action, suit or other
proceeding before a court, tribunal or other governmental agency or body shall
have been instituted or threatened to restrain or prohibit the consummation of
the transactions contemplated by this Agreement, or seeking to obtain
substantial damages in respect thereof, or involving a claim that consummation
thereof would result in the violation of any law, decree or regulation of
governmental authority having appropriate jurisdiction, or in connection with
any material claim against Buyer not disclosed on the Schedules hereto, and no
preliminary or permanent injunction or other order, decree or ruling issued by a
court of competent jurisdiction or by a government, regulatory or administrative
agency or commission nor any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority shall be in effect which
would (a) make the acquisition or holding by Buyer of the Purchased Assets
illegal or (b) otherwise prevent the consummation of the transaction
contemplated hereby.
30.
<PAGE> 31
10. ADDITIONAL AGREEMENTS
10.1 INCORPORATION OF SCHEDULES AND EXHIBITS. All schedules and exhibits
are incorporated into this Agreement by this reference and are warranted by the
party or parties which deliver the same to be accurate and complete. In the
event that any change shall occur with respect to any information disclosed in
any schedule furnished by Seller or the Sole Shareholder hereunder following the
date of the delivery thereof and prior to the Closing Date, Seller and the Sole
Shareholder shall promptly notify Buyer thereof in writing.
10.2 COOPERATION. Each party will take all reasonable actions necessary
to comply promptly with all legal requirements which may be imposed on it with
respect to the consummation of the transactions contemplated by this Agreement.
Each party will take all reasonable actions necessary to obtain (and will
cooperate with the other party in obtaining) any consent, approval, order or
authorization of, or any registration, declaration or filing with, any
governmental entity, domestic or foreign, or other person, required to be
obtained or made by such party (or by the other party) in connection with the
taking of any action contemplated by this Agreement. Without limiting the
foregoing, Seller and Sole Shareholder shall cooperate with Buyer in complying
with all provisions of the bulk sales or bulk transfer statutes of all states
having jurisdiction, including the provisions of Section 6106.2 of the
California Uniform Commercial Code.
10.3 CONFIDENTIALITY. For a period of five (5) years from the date of
this Agreement, Seller and Sole Shareholder will hold in confidence and use
their respective best efforts to have all of each of their respective employees,
agents, representatives and affiliates, as applicable, hold in confidence all
documents and other written material containing information of a confidential
nature relating to the Buyer's business or which is disclosed to such person by
Buyer in connection with the transactions contemplated by this Agreement
(including, but not limited to, customer lists and Intellectual Property
Rights), and not disclose, publish, use or permit others to use the same;
provided, however, that the foregoing restriction shall not apply to any portion
of the foregoing which (i) becomes generally available to the public in any
manner or form through no fault of any such party, or their respective
employees, agents or representatives, or (ii) is released for disclosure by one
party with the consent of Buyer, or (iii) when such disclosure is required by a
court or a governmental agency or is otherwise required by law or is necessary
in order to establish rights under this Agreement or any other agreements
referred to herein.
10.4 EFFECTIVE TRANSFER. Buyer, Seller and the Sole Shareholder shall
each use its best efforts to ensure a quick and effective transfer to Buyer of
the Purchased Assets. Effective as of the Closing, the Sole Shareholder shall
cause Seller to cease doing business under the name "Falcon Systems" and
promptly thereafter the Sole Shareholder
31.
<PAGE> 32
shall cause Seller to change Seller's name to a name that is not confusingly
similar to "Falcon Systems."
11. MISCELLANEOUS
11.1 EXPENSES. Each party shall bear and pay his or its own expenses
incurred in connection with the transactions referred to in this Agreement.
11.2 KNOWLEDGE.
11.2.1 KNOWLEDGE AFTER "DUE INQUIRY." An individual shall be
deemed to have "knowledge" of a particular fact or other matter "after due
inquiry thereof" if such individual is actually aware of such fact or other
matter or if a prudent individual could be expected to be aware thereof after
making reasonable inquiry thereof and exercising due diligence with respect
thereto. An entity shall be deemed to have "knowledge" of a particular fact or
other matter "after due inquiry thereof" if any officer of such entity who is
involved in the management of such entity is actually aware of such fact or
other matter or would have knowledge of such fact or other matter after due
inquiry thereof.
11.2.2 KNOWLEDGE WITHOUT INQUIRY. Except as provided for in
Section 11.2.1 where an individual has made due inquiry thereof, an individual
shall be deemed to have "knowledge" of a particular fact or other matter if such
individual is actually aware of such fact or other matter or if a prudent
individual could be expected to be aware thereof after making inquiry of the
officers of Seller. Seller shall be deemed to have "knowledge" of a particular
fact or other matter if any officer of Seller who is involved in the management
of Seller is actually aware of such fact or matter or would have knowledge of
such fact or other matter after making inquiry of the officers of Seller.
11.3 PUBLIC ANNOUNCEMENTS. Buyer and Seller shall have joint
responsibility for the content, timing and other matters relating to the
issuance of any and all press releases or trade releases and the making of such
other public statements (collectively, "PUBLIC STATEMENTS") with respect to the
Closing and the transactions contemplated hereby as may be necessary or
appropriate in Buyer's judgment. Neither Buyer nor Seller shall disclose the
Purchase Price in any Public Statements unless such disclosure is either (i)
required by law, governmental regulation or valid legal process or (ii) in
connection with any governmental filing.
11.4 ENTIRE AGREEMENT; MODIFICATIONS; WAIVER. This Agreement, together
with the schedules and exhibits hereto and agreements referenced herein,
constitutes the final, exclusive and complete understanding of the parties with
respect to the subject matter hereof and supersedes any and all prior
agreements, understandings and discussions with respect thereto including,
without limitation, that certain letter agreement, dated June 30, 1997, among
Buyer, Seller and the Sole Shareholder. No
32.
<PAGE> 33
variation or modification of this Agreement and no waiver of any provision or
condition hereof, or granting of any consent contemplated hereby, shall be valid
unless in writing and signed by the party or parties against whom enforcement of
any such variation, modification, waiver or consent is sought.
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by any party to this Agreement or pursuant hereto shall survive
until one year after the Closing. The representations and warranties hereunder
shall not be affected or diminished by any investigation at any time by or on
behalf of the party or parties for whose benefit such representations and
warranties were made. All statements contained herein or in any schedule,
exhibit or certificate delivered pursuant hereto shall be deemed to be
representations and warranties.
11.6 VALUATION. Buyer hereby represents and acknowledges that the Buyer
has made its own assessment of the commercial value in the Purchased Assets and
that Seller and Sole Shareholder have made no representation or warranties with
respect to the commercial value of the Purchased Assets. Except for any claims
arising out of the representations and warranties of Seller and Sole Shareholder
hereunder, Buyer agrees not to sue, and hereby waives its right to sue Seller
and/or Sole Shareholder based on the commercial value of the Purchased Assets or
the Purchase Price paid for the Purchased Assets. Notwithstanding any other
provision of this Section 11.6, however, nothing in this Section 11.6 shall
modify, limit or otherwise alter the representations, warranties, covenants
and/or conditions set forth elsewhere in this Agreement. Buyer and each of its
general partners agree that it, and they, will not make any claims inconsistent
with the foregoing sentence. Artecon, solely for the purpose of this section,
agrees to indemnify, defend and hold harmless Seller, its affiliates, agents,
officers, directors and employees from and against all losses, damages,
liabilities, expenses, costs, assessments and taxes (including, without
limitation, interest, penalties and attorneys' fees) relating to, arising from
or in connection with Buyer or any of its general partners' breach of its, or
their, obligations under this paragraph. Notwithstanding anything to the
contrary contained herein or in the Promissory Note, Buyer and each of the
Partners of Buyer hereby acknowledge and agree that the Seller and Sole
Shareholder may enforce their rights under the Promissory Note, by means of a
lawsuit, action, or any other proceeding, against any one or more of the
Partners directly with or without bringing such lawsuit, action, or other
proceeding against the Buyer or any other Partner. The Partners further
acknowledge that each of their signatures on this Agreement binds them
individually (as well as partners) with respect to this Section 11.6.
11.7 FURTHER ASSURANCES. The parties hereto shall use their best
efforts, and shall cooperate with each other, to secure all necessary consents,
approvals, authorizations, exemptions and waivers from third parties as shall be
required in order to consummate the transactions contemplated hereby, and shall
otherwise use their best
33.
<PAGE> 34
efforts to cause such transactions to be consummated in accordance with the
terms and conditions hereof. At any time or from time to time after the Closing
Date, each party hereto shall execute and deliver any further instruments or
documents and take all such further action as such requesting party may
reasonably request in order to consummate and document the transactions
contemplated hereby.
11.8 CAPTIONS. The captions in this Agreement are for convenience only
and shall not be considered a part of or affect the constructing or
interpretation of any provision of this Agreement.
11.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one agreement.
11.10 SUCCESSORS AND ASSIGNS. No party shall assign this Agreement to
any third party without the prior written consent of the other parties, except
that after the Closing Buyer may assign this Agreement to any transferee of the
business of Buyer without seeking such consent from Seller or the Sole
Shareholder. This Agreement shall be binding upon, inure to the benefit of and
be enforceable by the respective successors and permitted assigns of the parties
hereto.
11.11 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
11.12 NOTICES. All notices, requests, demands and other communications
hereunder ("NOTICES") shall be in writing and shall be deemed to have been duly
given if delivered by hand or by registered or certified mail, postage prepaid,
return receipt requested, but only upon receipt of such return receipt, as
follows:
To Buyer: James L. Lambert
Founding Partners
6305 El Camino Real
Carlsbad, California 92009
with a copy to:
Thomas A. Coll, Esq.
Cooley Godward LLP
4365 Executive Drive, Suite 1100
34.
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San Diego, California 92121
To Seller or the Craig Caudill
Sole Shareholder: Falcon Systems, Inc.
3951 Performance Drive
Sacramento, California 95838
with a copy to:
Jeffrey M. Koewler, Esq.
Downey, Brand, Seymour & Rohwer LLP
555 Capitol Mall, Suite 1050
Sacramento, California 95814
or to such other address as either any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt. All Notices shall be deemed received on the date
of delivery or, if mailed, on the date appearing on the return receipt therefor.
11.13 LAW GOVERNING. This agreement shall be governed by, and construed
and enforced in accordance with the laws of the State of California, without
regard to its choice-of-laws or conflicts-of-law rules.
11.14 ATTORNEY'S FEES. In any judicial action or proceeding or
arbitration proceeding between the parties hereto to enforce any of the
provisions of this Agreement, to seek damages on account of the breach hereof,
to seek injunctive relief to prevent the breach or continued breach hereof, to
seek a determination of the rights and obligations of the parties hereunder, or
in which this Agreement is raised as a defense, regardless of whether the action
or proceeding is prosecuted to judgment and in addition to any other remedy, the
unsuccessful party shall pay the successful party all costs and expenses,
including reasonable attorneys' fees, incurred therein by the successful party.
[remainder of this page intentionally left blank]
35.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
SELLER: FALCON SYSTEMS, INC.
By: /s/ Craig Caudill
-------------------------------
Craig Caudill
President
BUYER: FOUNDING PARTNERS
By: /s/ James L. Lambert
-------------------------------
James L. Lambert
General Partner
By: /s/ Dana W. Kammersgard
-------------------------------
Dana W. Kammersgard
General Partner
By: /s/ W.R. Sauey
-------------------------------
W.R. Sauey
General Partner
SOLE SHAREHOLDER: /s/ Craig Caudill
----------------------------------
Craig Caudill
ARTECON, INC.: /s/ James L. Lambert
----------------------------------
Signing solely for James L. Lambert
the purposes of President
Section 11.6
36.
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EXHIBIT A
PROMISSORY NOTE
$1,750,000 August 21, 1997
San Diego, California
For value received, the undersigned (collectively, "Payor"), jointly and
severally, promise to pay to FALCON SYSTEMS, INC. ("FALCON"), a California
corporation, or order ("Holder"), in lawful money of the United States of
America and in immediately available funds, the principal sum of one million
seven hundred fifty thousand dollars ($1,750,000) (the "Principal Amount")
together with interest thereon at the times and in the manner set forth below.
This note (the "Note") is executed and delivered as part of the Purchase Price
pursuant to that certain Technology Purchase Agreement of even date herewith
among Payor, Holder and the sole shareholder of Holder (the "Purchase
Agreement"). Notwithstanding any other provision of this Note, this Note shall
be subject in all respects to the provisions of that certain Indemnity Agreement
of even date herewith Artecon, Inc., a California corporation, Founding
Partners, a California general partnership (the "Partnership"), each Partner of
the Partnership, Falcon and Craig Caudill (the "Indemnity Agreement"), including
but not limited to Sections 1(d), 1(e) and 2 of the Indemnity Agreement.
1. REPAYMENT OF PRINCIPAL AND ACCRUED INTEREST. Subject to the terms of
this Note, the outstanding Principal Amount shall be repaid, together with
accrued interest thereon as provided below, in equal monthly combined principal
and interest payments of thirty-seven thousand, one hundred eighty-two dollars
and thirty-three cents $37,182.33, with the first payment due on the date that
is one (1) month from the date hereof and subsequent payments due each monthly
anniversary thereafter for a period of five years following the date hereof.
2. INTEREST RATE. Subject to the terms of this Note, Payor promises to pay
interest on the outstanding principal amount hereof from the date hereof until
payment in full, in accordance with Paragraph 1, which interest shall be payable
at the rate of ten percent (10%) per annum or the maximum rate permissible by
law (which under the laws of California shall be deemed to be the laws relating
to permissible rates of interest on commercial loans), whichever is less.
<PAGE> 38
3. DEFAULT RATE. If the undersigned fails to pay any of the principal or
accrued interest when due, then all unpaid amounts, including all accrued but
unpaid interest, shall bear interest at 18% per annum, or the maximum rate
permissible by law in the event of a default of a promissory note of this type
and nature, whichever is less.
4. PLACE OF PAYMENT. Payments on this Note shall be payable at Holder's
office located at 485 Crocker Road, Sacramento, California 95864, unless another
place of payment shall be specified in writing by Holder.
5. SECURITY. This note is subject to the security and subordination
provisions of that certain Security Agreement by and between Artecon, Inc., a
California corporation, and Holder of even date herewith (the "Security
Agreement") as well as the security provisions of that certain Subordination
Agreement by and among Payor and Holder as of the date hereof.
6. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first to
accrued interest, and thereafter to the outstanding principal balance hereof.
7. PREPAYMENTS. This Note may be prepaid in whole or in part at any time
without premium or penalty.
8. MISCELLANEOUS.
(a) This Note will be considered in default, if after fifteen (15) days
following written notice to Payor of Payor's failure to make any payment of
principal or accrued interest hereunder, such failure remains uncured (provided
that such notice shall not be required more than three times in any calendar
year). In such event, at Holder's option, all outstanding principal and accrued
interest and any other amounts payable under this Note will become due and
payable.
(b) Except as otherwise provided in this Note, Payor, all endorsers,
guarantors and sureties of this Note, and each of them, and their successors and
assigns, hereby waive demand, presentment for payment, notice of non-payment,
protest and notice of protest, and notice of dishonor, and expressly agree that
without notice, this Note or any payment due date hereunder may be extended from
time to time, and consent to acceptance of additional or substitute parties or
both, or the release of any party liable with respect to this Note, all without
affecting in any way their liability.
(c) If Payor fails to make any interest or installment payment when due,
Payor promises to pay all costs and expenses of collection and reasonable
attorneys' fees incurred by Holder to enforce the terms of this Note and/or the
Security Agreement including, without limitation, those expenses and fees which
may be incurred in connection with the appointment of a receiver and all
appearances in bankruptcy or
<PAGE> 39
insolvency proceedings. In any action brought under or arising out of this Note,
Payor hereby consents to the jurisdiction of any competent court within the
State of California and to service of process by any means authorized by
California law.
(d) Holder shall, at all times, have the right to proceed against any
portion of the security for this Note in such order and in such manner as Holder
may consider appropriate without waiving any rights with respect to any such
security. Any delay or omission on the part of Holder in exercising any right
hereunder shall not operate as a waiver of such right, or any other right under
this Note.
(e) This Note may not be terminated or amended orally, but only by a
termination or amendment in writing signed by Holder.
(f) This Note shall be governed by, and construed and entered in
accordance with, the laws of the State of California, as applied to contracts
entered into by California residents within the State of California, which
contracts are to be performed entirely within the State of California.
(g) The provisions of this Note shall inure to the benefit of and be
binding on any successor to Payor and shall extend to any holder hereof
including without limitation, Craig Caudill.
/s/ Jim Lambert
----------------------------------------
Jim Lambert, individually and as a general
partner of Founding Partners
/s/ W.R. Sauey
----------------------------------------
W.R. Sauey, individually and as a general
partner of Founding Partners
/s/ Dana W. Kammersgard
----------------------------------------
Dana W. Kammersgard, individually and as
a general partner of Founding Partners
<PAGE> 1
EXHIBIT 10.13
PROMISSORY NOTE
$1,250,000 August 21, 1997
San Diego, California
For value received, the undersigned (collectively "Payor") promises to
pay to FALCON SYSTEMS, INC. ("FALCON"), a California corporation, or order
("Holder"), in lawful money of the United States of America and in immediately
available funds, the principal sum of one million two hundred fifty thousand
dollars ($1,250,000) (the "Principal Amount") together with interest thereon at
the times and in the manner set forth below.
This note (the "Note") is executed and delivered as part of the Purchase
Price pursuant to that certain Asset Purchase Agreement of even date herewith
among Payor, Holder and the sole shareholder of Holder (the "Purchase
Agreement"). Notwithstanding any other provision of this Note, this Note shall
be subject in all respects to the provisions of that certain Indemnity Agreement
of even date herewith among Payor, Founding Partners, a California general
partnership (the "Partnership"), each Partner of the Partnership, Falcon and
Craig Caudill (the "Indemnity Agreement"), including but not limited to Section
1(d), 1(e) and 2 of the Indemnity Agreement.
1. REPAYMENT OF PRINCIPAL AND INTEREST. Subject to the terms of this
Note, the outstanding Principal Amount shall be repaid, together with accrued
interest thereon as provided below, in equal monthly combined principal and
interest payment of twenty-six thousand five hundred fifty eight dollars and
eighty-one cents $26,558.81, with the first payment due on the date that is one
(1) month from the date hereof and subsequent payments due each monthly
anniversary thereafter for a period of five years following the date hereof.
2. INTEREST RATE. Subject to the terms of this Note, Payor promises to
pay interest on the outstanding principal amount hereof from the date hereof
until payment in full in accordance with paragraph 1, which interest shall be
payable at the rate of ten percent (10%) per annum or the maximum rate
permissible by law (which under the laws of California shall be deemed to be the
laws relating to permissible rates of interest on commercial loans), whichever
is less.
3. DEFAULT RATE. If the undersigned fails to pay any of the principal or
accrued interest when due, then all unpaid amounts, including all accrued but
unpaid interest, shall bear interest at 18% per annum, or the maximum rate
permissible by law in the event of a default of a promissory note of this type
and nature, whichever is less.
1.
<PAGE> 2
4. PLACE OF PAYMENT. Payments on this Note shall be payable at Holder's
office located at 485 Crocker Road, Sacramento, California 95864, unless another
place of payment shall be specified in writing by Holder.
5. SECURITY. This note is subject to the security and subordination
provisions of that certain Security Agreement by and between Artecon, Inc., a
California corporation, and Holder of even date herewith (the "Security
Agreement"), as well as the security provisions of that certain Subordination
Agreement by and among Payor and Holder of as of the date hereof.
6. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first
to accrued interest, and thereafter to the outstanding principal balance
thereof.
7. PREPAYMENTS. This Note may be prepaid in whole or in part at any time
without premium or penalty.
8. MISCELLANEOUS.
(a) This Note will be considered in default if, after fifteen
(15) days following written notice to Payor of Payor's failure to make any
payment of principal or accrued interest hereunder, such failure remains uncured
(provided that such notice shall not be required more than three times in any
calendar year). In such event, at Holder's option, all outstanding principal and
accrued interest and any other amounts payable under this Note will become due
and payable.
(b) Except as otherwise provided in this Note, Payor, all
endorsers, guarantors and sureties of this Note, and each of them, and their
successors and assigns, hereby waive demand, presentment for payment, notice of
non-payment, protest and notice of protest, and notice of dishonor, and
expressly agree that without notice, this Note or any payment due date hereunder
may be extended from time to time, and consent to acceptance of additional or
substitute parties or both, or the release of any party liable with respect to
this Note, all without affecting in any way their liability.
(c) If Payor fails to make any interest or installment payment
when due, Payor promises to pay all costs and expenses of collection and
reasonable attorneys' fees incurred by Holder to enforce the terms of this Note
and/or the Security Agreement including, without limitation, those expenses and
fees which may be incurred in connection with the appointment of a receiver and
all appearances in bankruptcy or insolvency proceedings. In any action brought
under or arising out of this Note, Payor hereby consents to the jurisdiction of
any competent court within the State of California and to service of process by
any means authorized by California law.
2.
<PAGE> 3
(d) Holder shall, at all times, have the right to proceed against
any portion of the security for this Note in such order and in such manner as
Holder may consider appropriate without waiving any rights with respect to any
such security. Any delay or omission on the part of Holder in exercising any
right hereunder shall not operate as a waiver of such right, or any other right
under this Note.
(e) This Note may not be terminated or amended orally, but only
by a termination or amendment in writing signed by Holder.
(f) Governing Law. This Note shall be governed by, and construed
and entered in accordance with, the laws of the State of California, as applied
to contracts entered into by California residents within the State of
California, which contracts are to be performed entirely within the State of
California.
(g) The provisions of this Note shall inure to the benefit of and
be binding on any successor to Payor and shall extend to any holder hereof.
ARTECON, INC.
By: /s/ James L. Lambert
-------------------------------
James L. Lambert, President
3.
<PAGE> 1
EXHIBIT 10.14
PROMISSORY NOTE
$1,750,000 August 21, 1997
San Diego, California
For value received, the undersigned (collectively, "Payor"), jointly and
severally, promise to pay to FALCON SYSTEMS, INC. ("FALCON"), a California
corporation, or order ("Holder"), in lawful money of the United States of
America and in immediately available funds, the principal sum of one million
seven hundred fifty thousand dollars ($1,750,000) (the "Principal Amount")
together with interest thereon at the times and in the manner set forth below.
This note (the "Note") is executed and delivered as part of the Purchase
Price pursuant to that certain Technology Purchase Agreement of even date
herewith among Payor, Holder and the sole shareholder of Holder (the "Purchase
Agreement"). Notwithstanding any other provision of this Note, this Note shall
be subject in all respects to the provisions of that certain Indemnity Agreement
of even date herewith Artecon, Inc., a California corporation, Founding
Partners, a California general partnership (the "Partnership"), each Partner of
the Partnership, Falcon and Craig Caudill (the "Indemnity Agreement"), including
but not limited to Sections 1(d), 1(e) and 2 of the Indemnity Agreement.
1. REPAYMENT OF PRINCIPAL AND ACCRUED INTEREST. Subject to the terms of
this Note, the outstanding Principal Amount shall be repaid, together with
accrued interest thereon as provided below, in equal monthly combined principal
and interest payments of thirty-seven thousand, one hundred eighty-two dollars
and thirty-three cents $37,182.33, with the first payment due on the date that
is one (1) month from the date hereof and subsequent payments due each monthly
anniversary thereafter for a period of five years following the date hereof.
2. INTEREST RATE. Subject to the terms of this Note, Payor promises to
pay interest on the outstanding principal amount hereof from the date hereof
until payment in full, in accordance with Paragraph 1, which interest shall be
payable at the rate of ten percent (10%) per annum or the maximum rate
permissible by law (which under the laws of California shall be deemed to be the
laws relating to permissible rates of interest on commercial loans), whichever
is less.
3. DEFAULT RATE. If the undersigned fails to pay any of the principal or
accrued interest when due, then all unpaid amounts, including all accrued but
unpaid interest, shall bear interest at 18% per annum, or the maximum rate
permissible by law in the event of a default of a promissory note of this type
and nature, whichever is less.
4. PLACE OF PAYMENT. Payments on this Note shall be payable at Holder's
office located at 485 Crocker Road, Sacramento, California 95864, unless another
place of payment shall be specified in writing by Holder.
1.
<PAGE> 2
5. SECURITY. This note is subject to the security and subordination
provisions of that certain Security Agreement by and between Artecon, Inc., a
California corporation, and Holder of even date herewith (the "Security
Agreement") as well as the security provisions of that certain Subordination
Agreement by and among Payor and Holder as of the date hereof.
6. APPLICATION OF PAYMENTS. Payments on this Note shall be applied first
to accrued interest, and thereafter to the outstanding principal balance hereof.
7. PREPAYMENTS. This Note may be prepaid in whole or in part at any time
without premium or penalty.
8. MISCELLANEOUS.
(a) This Note will be considered in default, if after fifteen (15) days
following written notice to Payor of Payor's failure to make any payment of
principal or accrued interest hereunder, such failure remains uncured (provided
that such notice shall not be required more than three times in any calendar
year). In such event, at Holder's option, all outstanding principal and accrued
interest and any other amounts payable under this Note will become due and
payable.
(b) Except as otherwise provided in this Note, Payor, all endorsers,
guarantors and sureties of this Note, and each of them, and their successors and
assigns, hereby waive demand, presentment for payment, notice of non-payment,
protest and notice of protest, and notice of dishonor, and expressly agree that
without notice, this Note or any payment due date hereunder may be extended from
time to time, and consent to acceptance of additional or substitute parties or
both, or the release of any party liable with respect to this Note, all without
affecting in any way their liability.
(c) If Payor fails to make any interest or installment payment when due,
Payor promises to pay all costs and expenses of collection and reasonable
attorneys' fees incurred by Holder to enforce the terms of this Note and/or the
Security Agreement including, without limitation, those expenses and fees which
may be incurred in connection with the appointment of a receiver and all
appearances in bankruptcy or insolvency proceedings. In any action brought under
or arising out of this Note, Payor hereby consents to the jurisdiction of any
competent court within the State of California and to service of process by any
means authorized by California law.
(d) Holder shall, at all times, have the right to proceed against any
portion of the security for this Note in such order and in such manner as Holder
may consider appropriate without waiving any rights with respect to any such
security. Any delay or omission on the part of Holder in exercising any right
hereunder shall not operate as a waiver of such right, or any other right under
this Note.
(e) This Note may not be terminated or amended orally, but only by a
termination or amendment in writing signed by Holder.
(f) This Note shall be governed by, and construed and entered in
accordance with, the laws of the State of California, as applied to contracts
entered into by California residents
2.
<PAGE> 3
within the State of California, which contracts are to be performed entirely
within the State of California.
(g) The provisions of this Note shall inure to the benefit of and be
binding on any successor to Payor and shall extend to any holder hereof
including without limitation, Craig Caudill.
/s/ Jim Lambert
------------------------------------------
Jim Lambert, individually and as a general
partner of Founding Partners
/s/ W.R. Sauey
------------------------------------------
W.R. Sauey, individually and as a general
partner of Founding Partners
/s/ Dana W. Kammersgard
------------------------------------------
Dana W. Kammersgard, individually and as
a general partner of Founding Partners
3.
<PAGE> 1
EXHIBIT 10.15
TECHNOLOGY LICENSE AGREEMENT
This Technology License Agreement ("Agreement") is entered into by and
between Founding Partners, a California general partnership ("Licensor") and
Artecon, Inc., a California corporation ("Licensee"), as of August 21, 1997
("the Effective Date").
WHEREAS, Licensor is a party to that certain Technology Purchase
Agreement of even date herewith between Licensor and Falcon Systems, Inc. (the
"Technology Purchase Agreement") providing for, among other things, the purchase
by Licensor of all right, title and interest in and to the technology assets
described on Exhibit A hereto (the "Assets").
WHEREAS, Licensee desires to exploit the Assets by, among other things
making, having made, using and selling products incorporating the Assets (the
"Products");
WHEREAS, Licensor is willing to license all of its right, title and
interest in and to the Assets to Licensee upon the terms and conditions provided
herein.
AGREEMENT
NOW THEREFORE, in connection of the mutual promises contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, IT IS HEREBY AGREED AS FOLLOWS:
1. LICENSE. Licensor grants to Licensee an exclusive (even as to
Licensor), worldwide, fully paid-up, royalty-free, perpetual right and license,
with the right to sublicense (at any level), to make, have made, reproduce,
sell, have sold, distribute, modify, alter and/or improve, and/or otherwise use
or exploit in any manner whatsoever, all of Licensor's right, title and interest
in and to (now owned or hereafter acquired), the Assets.
2. CONSIDERATION. In full consideration of the grant of license herein,
Licensee agrees to make monthly payments to Licensor in the amount of $39,000,
with the first payment due on the date that is one (1) month from the date
hereof and subsequent payments due each monthly anniversary thereafter for a
period of five years following the date hereof.
3. MISCELLANEOUS.
3.1 IMPROVEMENTS; SUPPORT; DILIGENCE. Any and all modifications,
alterations and improvements of or to, and any and all derivative works based
on, the Assets shall be, as between Licensor and Licensee, the sole property of
Licensee.
1.
<PAGE> 2
Licensor shall have no obligation to provide any support, maintenance, upgrades
or the like with respect to the Assets. Licensee shall have no obligation to
commercialize the Assets.
3.2 WARRANTY DISCLAIMER. The rights licensed by Licensor to
Licensee hereunder are limited solely to the right, title and interest in and to
the Assets purchased by Licensor pursuant to the Technology Purchase Agreement.
LICENSOR DISCLAIMS ALL WARRANTIES AND REPRESENTATIONS, WHETHER EXPRESSED OR
IMPLIED, WITH RESPECT TO THE ASSETS INCLUDING, WITHOUT LIMITATION, WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WARRANTIES ARISING FROM A
COURSE OF DEALING, USAGE OR TRADE PRACTICE, AND WARRANTIES CONCERNING THE
NON-INFRINGEMENT OF THIRD PARTY RIGHTS.
3.3 LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE
LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES OF ANY KIND
OR NATURE WHATSOEVER, SUFFERED BY THE OTHER PARTY, ANY END USER, CUSTOMER,
VENDOR OR ANY DISTRIBUTOR, INCLUDING, WITHOUT LIMITATION, LOST PROFITS, BUSINESS
INTERRUPTIONS OR OTHER ECONOMIC LOSS ARISING OUT OF THE PERFORMANCE OR
NON-PERFORMANCE HEREUNDER OR ANY USE OF OR FAILURE TO BE ABLE TO USE THE
LICENSED DELIVERABLES.
3.4 TERM OF THE AGREEMENT. This Agreement shall commence on the
Effective Date and shall remain in full force and effect in perpetuity.
3.5 INDEPENDENT CONTRACTORS. Performance by the parties under
this Agreement shall be as independent contractors. Nothing contained herein or
done in pursuance of this Agreement shall constitute the parties entering upon a
joint venture or partnership, or shall constitute either party the agent for the
other for any purpose or in any sense whatsoever.
3.6 ENTIRE AGREEMENT. This Agreement represents the complete and
exclusive statement of the agreements concerning this license between the
parties and supersedes all prior representations between them concerning this
license.
3.7 AMENDMENTS. This Agreement may only be amended by written
agreement or other written instruments executed by both parties hereto.
3.8 SEVERABILITY. If any part of this Agreement is found invalid
or unenforceable, this Agreement will be enforceable to the maximum extent
permitted by law, and all other parts of the Agreement will remain in force.
2.
<PAGE> 3
3.9 ASSIGNMENT. Licensor shall not be able to assign this
Agreement without the written consent of Licensee. During the period which
Licensee is a party to that certain Revolving Line of Credit and Term Loan of
even date herewith by and between Licensee and Sanwa Bank, Licensee shall not be
able to assign this Agreement without the written consent of Sanwa Bank.
3.10 MUTUAL COOPERATION. Each party to this Agreement agrees to
perform all acts necessary to permit the other party to obtain the full benefits
of this Agreement, which acts may include executing documents or assisting or
cooperating in legal proceedings.
3.11 GOVERNING LAW. This Agreement shall be governed and
interpreted in accordance with the laws of the State of California.
3.12 BANKRUPTCY. The Partners agree that the rights herein
licensed constitute "intellectual property" as defined in 11 U.S.C. Section
365(n), and Licensee shall be entitled, at its election, to the protections
provided therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Effective Date.
"Licensor" Founding Partners
By:
/s/ James L. Lambert
----------------------------------------
James L. Lambert, General Partner
/s/ Dana W. Kammersgard
----------------------------------------
Dana W. Kammersgard, General Partner
/s/ W.R. Sauey
----------------------------------------
W.R. Sauey, General Partner
"Licensee" Artecon, Inc.
By: /s/ James L. Lambert
-------------------------------------
Title: President
----------------------------------
<PAGE> 4
EXHIBIT A
All inventions, inventions disclosures, mask works and mask registrations,
know-how, discoveries, improvements, designs, trade secrets, shop and royalty
rights, source code, object code, product rights, employee covenants and all
other types of intellectual property including but not limited to any and all
records, files, specifications, designs, drawings, data, plans, sketches, work
standards, manufacturing and process information, documentation, theories of
operation, repair manuals, service manuals, notebooks, writings, pictures,
drawings, magnetic tapes, computer programs and protocols relating to the Falcon
network file server product line called FastfilePro.
4.
<PAGE> 1
EXHIBIT 10.16
AMENDMENT TO
TECHNOLOGY LICENSE AGREEMENT
This AMENDMENT TO TECHNOLOGY LICENSE AGREEMENT (the "Amendment") is made
as of December 22, 1997 by and between FOUNDING PARTNERS, a California general
partnership ("Licensor") and ARTECON, INC., a California corporation
("Licensee")
RECITALS
A. The Licensor and Licensee entered into a Technology License
Agreement, dated as of August 21, 1997 (the "Agreement").
B. Licensor is a party to that certain Technology Purchase Agreement,
dated August 21, 1997 between Licensor, Falcon Systems, Inc. and Craig Caudill
(the "Technology Purchase Agreement") providing for, among other things, the
purchase by Licensor of all right, title and interest in and to the Purchased
Assets (as defined in Section 1.1 of the Technology Purchase Agreement).
C. Pursuant to Section 3.7 of the Agreement the Parties desire to amend
the Agreement as set forth herein.
AGREEMENT
1. AMENDMENT TO EXHIBIT A (THE "ASSETS") OF THE AGREEMENT. Exhibit A to
the Agreement is hereby amended and restated to read in its entirety as follows:
"The Assets shall be defined as all of Licensor's interest in:
(i) all United States, state and foreign trademark rights, trade dress,
service marks, trade names, and brand names, including all claims for
infringement, and all registrations thereof and applications therefor
and all goodwill associated with the foregoing accruing from the dates
of first use thereof; (ii) all United States and foreign copyrights,
copyright registrations and copyright applications, including all claims
for infringement, and all other rights associated with the foregoing and
the underlying works of authorship; (iii) all United States and foreign
patents and patent applications, including all claims for infringement
and all international proprietary rights associated therewith; (iv) all
contracts or agreements granting any right, title, license or privilege
under the intellectual property rights of any third party, and (v) all
inventions, invention disclosures (internal or otherwise), mask works
and mask work registrations, know-how, discoveries, improvements,
designs, trade secrets, shop and royalty rights, source code, object
code, product rights, employee covenants and agreements respecting
intellectual property and non-competition and all other types of
intellectual property, including but not limited to any and all records,
files, specifications, designs, drawings, data, plans, sketches, work
standards, manufacturing and process information, documentation,
theories of operation, repair manuals, service manuals, notebooks,
writings, pictures, magnetic tapes, computer programs, equipment,
prototypes, tools, models and protocols relating to any of the
1.
<PAGE> 2
foregoing and any other Purchased Assets (as defined in the Technology
Purchase Agreement)."
2. AMENDMENT TO SECTION 3 OF THE AGREEMENT. A new Section 3.4, reading
in its entirety as follows, is hereby added to Section 3 of the Agreement:
"3.4 TERM OF AGREEMENT. This Agreement shall commence on August
21, 1997 and shall remain in full force and effect until such time as
the Assets are transferred to Licensee pursuant to Section 3.14 of this
Agreement."
3. AMENDMENT TO SECTION 3 OF THE AGREEMENT. A new Section 3.13, reading
in its entirety as follows, is hereby added to the Agreement:
"3.13 REPRESENTATIONS AND WARRANTIES. Licensor represents and
warrants that Licensor has not defaulted on any payments pursuant to
that certain Promissory Note, dated August 21, 1997, in the amount of
$1,750,000 entered into by Jim Lambert, W.R. Sauey, Dana W. Kammersgard
and Licensor in favor of Falcon Systems, Inc. (the "Promissory Note")."
4. AMENDMENT TO SECTION 3 OF THE AGREEMENT. A new Section 3.14, reading
in its entirety as follows, is hereby added to the Agreement:
"3.14 COVENANT OF LICENSOR.
(a) Licensor covenants to use any and all proceeds
received from Licensee pursuant to Section 2 of this Agreement (other than
reasonable amounts necessary for administrative expenses of Licensor such as
photocopying and mailing expenses) to satisfy its obligations under the
Promissory Note.
(b) At such time as Licensor has satisfied its obligations
in full under the Promissory Note, Licensor covenants and agrees to sign,
execute and deliver, or cause to be signed, executed and delivered, and to do or
make, or cause to be done or made, any and all agreements, instruments, papers,
deeds, acts or things, supplemental, confirmatory or otherwise, to transfer all
of Licensor's right, title and interest in and to the Assets to Licensee free
and clear of any liens or encumbrances."
5. GOVERNING LAW. This Amendment shall be construed in accordance with
and governed by the laws of the State of California.
6. ENTIRE AGREEMENT. The Technology License Agreement, as amended
hereby, constitutes the full and entire understanding among the parties
regarding the subject matter herein. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7. FULL FORCE AND EFFECT. Except as amended hereby, the Technology
License Agreement shall remain in full force and effect.
2.
<PAGE> 3
8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be
duly executed as of the date set forth above.
FOUNDING PARTNERS
By: /s/ James L. Lambert
-------------------------------------------
James L. Lambert, General Partner
By: /s/ Dana W. Kammersgard
-------------------------------------------
Dana W. Kammersgard, General Partner
By: /s/ W.R. Sauey
-------------------------------------------
W.R. Sauey, General Partner
ARTECON, INC.
By: /s/ James L. Lambert
-------------------------------------------
James L. Lambert, President
3.
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE AGREEMENT made as of December 26,1992,
between STORAGE DIMENSIONS, INC., a Delaware corporation (the "Employer"), and
DAVID A. EEG (the "Employee"), is made as of this 9th day of March, 1998.
WITNESSETH:
WHEREAS, Employer and Employee entered into an Employment Agreement on
December 22, 1992 (the "Agreement") by which Employee currently serves as
President and Chief Executive Officer of Employer;
WHEREAS, Employer and Employee now desire to amend the Agreement to
change the benefits payable to Employee in the event of termination of
Employee's employment or consulting relationship with Employer.
NOW, THEREFORE, in consideration of the premises, the covenants
contained herein, and other good and valuable consideration, the Employer and
the Employee hereby amend the Agreement as follows:
1. AMENDMENT TO SECTION 2.1 OF THE AGREEMENT. Section 2.1 of the
Agreement is hereby amended to add the following sentence as a new penultimate
sentence to Section 2.1 of the Agreement:
"Notwithstanding the foregoing, effective as of the closing date (the
"Closing Date") of the merger contemplated pursuant to that certain
Agreement and Plan of Merger and Reorganization dated as of December 22,
1997 among Employer, Storage Acquisition Corp. and Artecon, Inc. (the
"Merger Agreement"), Employee shall serve as a consultant to Employer."
2. AMENDMENT TO SECTION 3.2 OF THE AGREEMENT. Section 3.2 of the
Agreement is hereby amended to read as follows:
"(a) MANAGEMENT BONUS PLAN. Employee shall no longer be entitled
to receive any bonuses under the terms of Employer's Management Bonus
Plan, a copy of which is attached hereto as Exhibit A."
3. AMENDMENT TO SECTION 4.1(b) OF THE AGREEMENT. Section 4.1(b) of the
Agreement is hereby amended to read in its entirety as follows:
"(b) In addition, for so long as Employee continues to be
engaged by Employer or any subsidiary thereof as an employee or a
consultant and for the period during which Employer or any subsidiary
thereof makes severance payments to Employee pursuant to Section 5.3(a),
Employee will not, without the express written consent of Employer,
directly or indirectly engage, participate or invest in or assist, as
owner, part owner, shareholder, partner, director, officer, trustee,
employee, agent or consultant, or in any other capacity, any business
organization other than Employer
1.
<PAGE> 2
whose activities or products are competitive with activities or products
of Employer or any subsidiary thereof in which activities Employee shall
have participated or as to which products Employee shall have had
responsibility either in their development, marketing or otherwise,
provided that Employee may make passive investments in a competitive
enterprise the shares of which are publicly traded if Employee's
investment constitutes less than 5% of the outstanding shares of such
enterprise. The foregoing agreement not to compete shall apply in any
and all cities and counties of each state of the United States of
America in which the activities of Employer or any subsidiary thereof
shall have been conducted, or the products of any of them sold, on or
before the date upon which Employee's employment by Employer or any
subsidiary thereof ceases."
4. AMENDMENT TO SECTION 4.2 OF THE AGREEMENT. Section 4.2 of the
Agreement is hereby amended to add the following sentence to the end of Section
4.2 of the Agreement:
"For purposes of this Section 4.2, the term "Employer" shall be deemed
to include Storage Dimensions, Inc. or its successor and any entity
which is a subsidiary of the foregoing during the period in which the
noncompetition agreement set forth in Section 4.1 is in effect."
5. AMENDMENT TO SECTION 5.1 OF THE AGREEMENT. Section 5.1 of the
Agreement is hereby amended to add the following language to the end thereof:
"or until terminated pursuant to Section 5.2 of this Agreement, as
amended."
6. AMENDMENT OF SECTION 5.2 OF THE AGREEMENT.
(a) Section 5.2(b) is hereby amended to delete the phrase "thirty
(30) days" from the first sentence thereof.
(b) Section 5.2(b) of the Agreement is hereby amended to add the
following language to the end of Section 5.2(b):
"Any termination of Employee's status as an employee or
consultant of the Employer (but not a change in status from employee to
consultant) following a "Change in Control", whether at Employer's or
Employee's option (other than a termination by Employer under Section
5.2(c)), shall be deemed to be a termination by Employer pursuant to
this Section 5.2(b) and Employer shall make severance payments as
provided in Section 5.3(a). "Change of Control" shall mean any merger or
sale of substantially all of the assets of the Employer or other
transaction pursuant to which the stockholders of Employer before such
transaction no longer hold at least 50% of the voting securities of the
Employer after such transaction. In no event, however, shall the change
in Employee's title contemplated under Section 2.1 of this Agreement, as
amended, or any commensurate change in Employee's duties be a
termination pursuant to this Section 5.2(b) or trigger Employer's
obligation to make severance payments under Section 5.3(a)."
(c) Section 5.2 of the Agreement is hereby amended to add a new
subsection (d), as follows:
2.
<PAGE> 3
"(d) If, following termination of Employee's employment with
Employer by either Employee or Employer, the parties mutually determine that
Employee should be retained as a consultant to Employer, the parties will
execute the Consulting Agreement attached hereto as Exhibit B."
7. AMENDMENT OF SECTION 5.3(a) OF THE AGREEMENT. Section 5.3(a) of the
Agreement is hereby amended to read in its entirety as follows:
"(a) Upon a termination described in Section 5.2(b), Employer
shall pay to Employee for a period of 66 weeks following such
termination one hundred percent (100%) of Employee's regular weekly base
salary in effect on the date of termination of Employee's employment or
consulting relationship hereunder (less applicable income tax
withholding), such amount to be payable in equal installments on the
Company's normal payment date for employees beginning on the payment
date next following the date of such termination. In the event of such
termination, the stock option referred to in Section 3.2(b), and any
subsequently granted stock options, shall be exercisable only to the
extent vested as of such termination in accordance with their terms;
provided, however, that such options shall be amended by the Company in
order to provide that they may be exercised, to the extent exercisable
at the time of such termination, for a period of two years from the date
of such termination."
8. AMENDMENT OF SECTION 6.2 OF THE AGREEMENT. Section 6.2 shall be
amended to add the following as a new paragraph immediately following the
paragraph which begins "To Employer":
"provided, however, that notwithstanding the foregoing, following the
Closing Date, any notice to be delivered hereunder to Employer shall
instead be sent to the following address:
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Attn: James L. Lambert, President and CEO"
9. NO OTHER AMENDMENT. Except as expressly amended hereby, all
provisions of the Agreement shall remain in full force and effect.
3.
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Employment Agreement as of the day and year first above written.
STORAGE DIMENSIONS, INC.
By: /s/ Brian Fitzgerald
----------------------------------------
Brian Fitzgerald, Chairman of the Board
/s/ David A. Eeg
-------------------------------------------
David A. Eeg
The foregoing amendment is consented to pursuant to Section 5.2 of the Merger
Agreement.
ARTECON, INC.
/s/ James L. Lambert
- -------------------------------
James L. Lambert
President and CEO
4.
<PAGE> 1
EXHIBIT 10.19
AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE AGREEMENT made as of December 26,1992,
between STORAGE DIMENSIONS, INC., a Delaware corporation (the "Employer"), and
ROBERT BYLIN (the "Employee"), is made as of this 9th day of March, 1998.
WITNESSETH:
WHEREAS, Employer and Employee entered into an Employment Agreement on
December 22, 1992 (the "Agreement") by which Employee currently serves as Vice
President and Chief Financial Officer of Employer;
WHEREAS, Employer and Employee now desire to amend the Agreement to
change the benefits payable to Employee in the event of termination of
Employee's employment or consulting relationship with Employer.
NOW, THEREFORE, in consideration of the premises, the covenants
contained herein, and other good and valuable consideration, the Employer and
the Employee hereby amend the Agreement as follows:
1. AMENDMENT TO SECTION 4.1(b) OF THE AGREEMENT. Section 4.1(b) of the
Agreement is hereby amended to read in its entirety as follows:
"(b) In addition, for so long as Employee continues to be
engaged by Employer or any subsidiary thereof as an employee or a
consultant and for the period during which Employer or any subsidiary
thereof makes severance payments to Employee pursuant to Section 5.3(a),
Employee will not, without the express written consent of Employer,
directly or indirectly engage, participate or invest in or assist, as
owner, part owner, shareholder, partner, director, officer, trustee,
employee, agent or consultant, or in any other capacity, any business
organization other than Employer whose activities or products are
competitive with activities or products of Employer or any subsidiary
thereof in which activities Employee shall have participated or as to
which products Employee shall have had responsibility either in their
development, marketing or otherwise, provided that Employee may make
passive investments in a competitive enterprise the shares of which are
publicly traded if Employee's investment constitutes less than 5% of the
outstanding shares of such enterprise. The foregoing agreement not to
compete shall apply in any and all cities and counties of each state of
the United States of America in which the activities of Employer or any
subsidiary thereof shall have been conducted, or the products of any of
them sold, on or before the date upon which Employee's employment by
Employer or any subsidiary thereof ceases."
2. AMENDMENT TO SECTION 4.2 OF THE AGREEMENT. Section 4.2 of the
Agreement is hereby amended to add the following sentence to the end of Section
4.2 of the Agreement:
"For purposes of this Section 4.2, the term "Employer" shall be deemed
to include Storage Dimensions, Inc. or its successor and any entity
which is a subsidiary of the
<PAGE> 2
foregoing during the period in which the noncompetition agreement set
forth in Section 4.1 is in effect."
3. AMENDMENT TO SECTION 5.1 OF THE AGREEMENT. Section 5.1 of the
Agreement is hereby amended to add the following language to the end thereof:
or until terminated pursuant to Section 5.2 of this Agreement, as
amended."
4. AMENDMENT OF SECTION 5.2 OF THE AGREEMENT.
(a) Section 5.2(b) is hereby amended to delete the phrase "thirty
(30) days" from the first sentence thereof.
(b) Section 5.2(b) of the Agreement is hereby amended to add the
following language to the end of Section 5.2(b):
"Any termination of Employee's status as an employee or
consultant of the Employer (but not a change in status from employee to
consultant) following a "Change in Control", whether at Employer's or
Employee's option (other than a termination by Employer under Section
5.2(c)), shall be deemed to be a termination by Employer pursuant to
this Section 5.2(b) and Employer shall make severance payments as
provided in Section 5.3(a). "Change of Control" shall mean any merger or
sale of substantially all of the assets of the Employer or other
transaction pursuant to which the stockholders of Employer before such
transaction no longer hold at least 50% of the voting securities of the
Employer after such transaction. In no event, however, shall the change
in Employee's title contemplated under Section 2.1 of this Agreement, as
amended, or any commensurate change in Employee's duties be a
termination pursuant to this Section 5.2(b) or trigger Employer's
obligation to make severance payments under Section 5.3(a)."
(c) Section 5.2 of the Agreement is hereby amended to add a new
subsection (d), as follows:
"(d) If, following termination of Employee's employment with
Employer by either Employee or Employer, the parties mutually determine
that Employee should be retained as a consultant to Employer, the
parties will execute the Consulting Agreement attached hereto as Exhibit
B."
5. AMENDMENT OF SECTION 5.3(a) OF THE AGREEMENT. Section 5.3(a) of the
Agreement is hereby amended to read in its entirety as follows:
"(a) Upon a termination described in Section 5.2(b), Employer
shall pay to Employee for a period of 47 weeks following such
termination one hundred percent (100%) of Employee's regular weekly base
salary in effect on the date of termination of Employee's employment or
consulting relationship hereunder (less applicable income tax
withholding), such amount to be payable in equal installments on the
Company's normal payment date for employees beginning on the payment
date next following the date of such termination. In the event of such
termination, the stock option referred to in Section 3.2(b), and any
subsequently granted stock options, shall
<PAGE> 3
be exercisable only to the extent vested as of such termination in
accordance with their terms; provided, however, that such options shall
be amended by the Company in order to provide that they may be
exercised, to the extent exercisable at the time of such termination,
for a period of one year from the date of such termination (provided,
however, that the extension of time in which the options may be
exercised shall only be triggered if the termination is at the
Employer's option or is mutually agreed to by Employer and Employee)."
6. AMENDMENT OF SECTION 6.2 OF THE AGREEMENT. Section 6.2 shall be
amended to add the following as a new paragraph immediately following the
paragraph which begins "To Employer":
"provided, however, that notwithstanding the foregoing,
following the Closing Date, any notice to be delivered hereunder to
Employer shall instead be sent to the following address:
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Attn: James L. Lambert, President and CEO"
7. NO OTHER AMENDMENT. Except as expressly amended hereby, all
provisions of the Agreement shall remain in full force and effect.
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Employment Agreement as of the day and year first above written.
STORAGE DIMENSIONS, INC.
By: /s/ Brian Fitzgerald
----------------------------------------
Brian Fitzgerald, Chairman of the Board
/s/ Robert Bylin
-------------------------------------------
Robert Bylin
The foregoing amendment is consented to pursuant to Section 5.2 of the Merger
Agreement.
ARTECON, INC.
/s/ James L. Lambert
- -------------------------------
James L. Lambert
President and CEO
4
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME (LOSS)
Basic net (loss) income per share is computed using the weighted average
number of common shares outstanding during the periods presented.
Diluted net (loss) income per share is computed using the weighted average
number of common and common stock equivalent shares outstanding during the
periods presented assuming the conversion of all shares of the Company's
Convertible preferred stock into common stock. Common stock equivalent shares
have not been included where inclusion would be antidilutive.
The following is a reconciliation between the components of the basic and
diluted net income per share calculations (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
March 31, 1998 March 28, 1997 March 30,1996
---------------------------------- ----------------------------- ------------------------------
Weighted Per share Net Weighted Per share Net Weighted Per share
Net loss shares amount income shares amount income shares amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net (loss) income
per share $ (19,288) 5,841 $ (3.30) $ 641 5,202 $ -- $1,590 5,218 $ 0.30
Effect of dilutive
securities-preferred
stock 3,208 3,314
--------- -------- --------- ------ -------- --------- ------ -------- ---------
Diluted net (loss) income
per share plus assumed
conversions $ (19,288) 5,841 $ (3.30) $ 641 8,410 $ -- $1,590 8,532 $ 0.19
========= ======== ========= ====== ======== ========= ====== ======== =========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
1. SDI Foreign Operations, Inc., a Delaware corporation
2. SDI GmbH, a company organized under the laws of Germany
3. Artecon Japan Ltd., a Japanese corporation
4. Artecon Foreign Sales Corporation, a Barbados corporation
5. Artecon Europe B.V., a Netherlands corporation
1.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-56281 and in the Post Effective Amendment No. 1 to Registration Statement
No. 333-29129 on Form S-8 of our report dated May 15, 1998 appearing in this
Annual Report on Form 10-K of Artecon, Inc. for the three years in the period
ended March 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
June 29, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement No.
333-56281 and in the Post-Effective Amendment No. 1 to Registration Statement
No. 333-29129 on Form S-8 of our report dated June 12, 1996, with respect to the
consolidated financial statements of Artecon, Inc. included in this Annual
Report (Form 10-K) for the year ended March 31, 1998.
/s/ ERNST & YOUNG
San Diego, California
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1995 APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997 MAR-31-1998
<CASH> 793 746 7,992
<SECURITIES> 0 0 0
<RECEIVABLES> 6,310 6,065 19,216
<ALLOWANCES> (180) (170) (801)
<INVENTORY> 4,593 6,372 12,354
<CURRENT-ASSETS> 12,483 13,810 43,925
<PP&E> 1,983 2,581 6,084
<DEPRECIATION> (916) (1,558) (2,358)
<TOTAL-ASSETS> 13,583 15,194 57,345
<CURRENT-LIABILITIES> 5,711 7,000 27,106
<BONDS> 0 0 0
0 0 0
5,229 5,029 12
<COMMON> 586 601 107
<OTHER-SE> (1,095) (533) 19,560
<TOTAL-LIABILITY-AND-EQUITY> 13,583 15,194 57,345
<SALES> 47,172 55,317 66,340
<TOTAL-REVENUES> 47,172 55,317 66,340
<CGS> 34,717 42,782 52,120
<TOTAL-COSTS> 34,717 43,782 52,120
<OTHER-EXPENSES> 10,207 11,307 35,230
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (228) (282) (820)
<INCOME-PRETAX> 1,350 981 (22,095)
<INCOME-TAX> (240) 340 (2,807)
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,590 641 (19,288)
<EPS-PRIMARY> 0.30 0.12 (3.30)
<EPS-DILUTED> 0.19 0.08 (3.30)
</TABLE>
