<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APEX PC SOLUTIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 3577 91-1577634
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
------------------------
20031 142ND AVENUE, N.E.
WOODINVILLE, WASHINGTON 98072
(206) 402-9393
(Address and telephone number of principal executive offices and principal place
of business)
------------------------
KEVIN J. HAFER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20031 142ND AVENUE, N.E.
WOODINVILLE, WASHINGTON 98072
(206) 402-9393
(Name, address, and telephone number of agent for service)
------------------------
COPIES TO:
SAMUEL F. SARACINO, ESQ. JEFFREY D. SAPER, ESQ.
KAREN A. ANDERSEN, ESQ. PATRICK J. SCHULTHEIS, ESQ.
DAVIS WRIGHT TREMAINE LLP WILSON SONSINI GOODRICH & ROSATI,
2600 CENTURY SQUARE -- 1501 FOURTH PROFESSIONAL CORPORATION
AVENUE
SEATTLE, WASHINGTON 98101-1688 650 PAGE MILL ROAD
(206) 622-3150 PALO ALTO, CALIFORNIA 94304-1050
(415) 493-9300
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value................. 4,025,000 $11.00 $44,275,000 $13,417
</TABLE>
(1) Includes 525,000 shares which may be sold upon exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457 promulgated under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1996
3,500,000 SHARES
[APEX LOGO]
COMMON STOCK
ALL OF THE 3,500,000 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING ISSUED
AND SOLD BY APEX PC SOLUTIONS, INC. ("APEX" OR THE "COMPANY").
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
WILL BE BETWEEN $9.00 AND $11.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION
OF CERTAIN FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE. APPLICATION HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "APEX."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE................................ $ $ $
TOTAL (3)................................ $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $800,000.
(3) CERTAIN OF THE COMPANY'S SHAREHOLDERS (THE "SELLING SHAREHOLDERS") HAVE
GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 525,000
ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY.
IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL
TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , AND THE
PROCEEDS TO SELLING SHAREHOLDERS WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT , 1997.
-------------------
MONTGOMERY SECURITIES DAIN BOSWORTH
INCORPORATED
, 1997
<PAGE>
FOR INSIDE FRONT COVER:
Beginning at the top of this page, the following text cascades from right to
left down the page:
"The proliferation of distributed network computing using a
client/server architecture of interconnected PCs has created significant
network administration and space problems for the organizations that
rely on them. International Data Corporation projects that annual
shipments of PC servers and superservers will reach approximately 2.6
million units through the year 2000.
Apex's product line combines sophisticated switching technology and
customized cabinet systems to aid network administrators in managing
their organizations' complex and growing server populations."
The Company's logo ("Company Logo") appears beneath the foregoing text on
the left side of the page.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR GATEFOLD:
This page consists of a two-page gatefold (the "Gatefold"). Centered across
the top is the phrase "THE APEX PRODUCT SOLUTIONS." The Company Logo appears in
the upper right-hand corner of the right page of the Gatefold.
On the left half of the left page of the Gatefold, three different graphical
images (the "Problem Graphics") are organized top to bottom underneath the
phrase "Client/Server Problems". The top Problem Graphic consists of a depiction
of approximately eight different desktop and tower server computers ("servers"),
each with its own video monitor and keyboard, cabled together. The middle
Problem Graphic consists of a depiction of approximately thirty-two servers,
each with its own video monitor and keyboard, cabled together. The bottom
Problem Graphic consists of a depiction of numerous servers computers, each with
its own video monitor and keyboard, cabled together and stored on large tables.
A dotted-lined arrow flows from left to right from each Problem Graphic to
its corresponding Apex Solution Graphic described below.
On the right half of the left page of the Gatefold are the following six
paragraphs superimposed over a large half-toned Mountain Image:
"Client/server networks typically utilize multiple servers designed to
operate as stand-alone systems each with a console consisting of a
keyboard, video monitor and mouse.
Apex switching systems consolidate the control and monitoring of
multiple network servers to a centralized command center consisting of
one or more console positions. Apex switching products provide
connectivity to virtually all major server platforms.
When a network fails, an administrator's ability to quickly and
efficiently diagnose and correct the problem is often hampered because
the administrator is not able to access the software tools that reside
on the network which are normally used to rectify network failures.
Apex switching systems provide direct connections to network servers,
enabling network administrators to monitor and access individual servers
from up to a thousand feet away as if they were physically present, even
if the network is down.
Without efficient storage and configuration, network hardware consumes
substantial and often expensive floor space and creates clutter that
hampers network administration.
Apex integrated cabinet solutions consolidate servers and other hardware
in a single location to facilitate more efficient physical access for
hardware maintenance tasks. Apex provides customized solutions for the
storage of heterogeneous server populations."
On the left half of the right page of the Gatefold, three different
graphical images (the "Apex Solution Graphics") are organized top to bottom. The
top Apex Solution Graphic (which is paired with the top Problem Graphic
described above) consists of a graphical representation of an Apex switch (over
which the words "OutLook or OutLook(4)" are superimposed), to the left of which
is a column of eight attached servers and to the right of which is a column of
four attached keyboard, video monitor and mouse consoles (with the top console
in full-tone to depict a configuration using an OutLook switch and the bottom
three consoles shaded to depict a configuration using an OutLook(4) switch). The
middle Apex Solution Graphic (which is paired with the middle Problem Graphic)
is similar to the top Apex Solution Graphic described above, except that the
word "ViewPoint" is superimposed over the graphical representation of the Apex
switch and that the words "Up to 32 Networked Servers" are above the column of
attached servers and the words "Up to 16 Users" are above the column of attached
consoles. The bottom Apex Solution Graphic depicts four DensePack cabinets with
the same graphical representation of an Apex switch in front of the middle two
cabinets and the word "DensePack" superimposed over the top of that
representation. The DensePack cabinet depictions in the bottom Apex Solution
Graphic represent different physical configurations of different types of
servers, and over the DensePack cabinet depictions, from left to right, are the
phrases "Rack Mount Systems", "Tower Systems", "Desktop Systems" and
"Combination".
On the right half of the right page of the Gatefold, three photographs
depicting actual uses of the Company's products (the "Apex Solution
Photographs") are organized from top to bottom. Each Apex Solution Photograph is
paired (by means of a dotted-lined arrow) with the corresponding Apex Solution
Graphic. The top Apex Solution Photograph is accompanied by the following text:
"OutLook and OutLook(4) can be expanded to provide centralized control of up to
64 servers from either one or four console positions." The middle Apex Solution
Photograph is accompanied by the following text: "ViewPoint addresses the needs
of very large server-intensive organizations with large network administrative
staffs. A single ViewPoint, integrated with multiple OutLook switches, can
access as many as 256 servers from as many as 16 consoles." The bottom Apex
Solution Photograph is accompanied by the following text: "DensePack cabinets
are designed to house network servers, related peripherals and communication
equipment. DensePack cabinets are typically customized and are pre-cabled to
allow quick hardware installs and connections."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE
ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Apex PC Solutions, Inc. (the "Company" or "Apex") designs, manufactures and
markets stand-alone switching systems and integrated server cabinet solutions
for the client/server computing market. The Company's switching systems enable
client/server network administrators to manage multiple servers from a single
keyboard, video monitor and mouse configuration (a "console"). Designed to
address space, cost, administration and maintenance issues that organizations
increasingly face when adopting client/server architecture, the Company's
sophisticated switching and integrated cabinet systems enable network
administrators to manage more efficiently their organizations' complex and
growing server populations.
The desire of many organizations to decentralize computing power while
sharing technology resources and providing broad access to enterprise data has
resulted in the widespread adoption of distributed network computing
environments using a client/server architecture of interconnected PCs. According
to International Data Corporation, a market research firm, worldwide shipments
of PC servers and super servers are expected to grow 21.8% on a compounded
annual basis, reaching approximately 2.6 million units shipped through the year
2000.
The growing adoption of client/server architecture has created significant
network administration and space problems for organizations. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console. Thus, to perform network administration and
management tasks, network administrators must deal with an unwieldy number of
consoles, whether centrally located or dispersed throughout the organization. In
addition, constant availability of the network has become increasingly
important. When a network fails, an administrator's ability to quickly and
efficiently diagnose and correct the problem is often hampered because the
administrator is not able to access the software tools that reside on the
network which would otherwise be relied upon to rectify network failures. As
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates, creating storage and configuration problems.
The increased use of "heterogeneous" server configurations using different
platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC
Alpha and Sun Sparc, and different operating systems, such as Windows NT, Unix,
NetWare and OS/2, compounds the administration and storage problems faced by
network administrators.
The Company provides "plug and play" switching systems and integrated server
cabinet solutions for many of the network administration, management and storage
problems faced by organizations using client/server architecture. The Company's
switching products, including OUTLOOK, OUTLOOK(4) and VIEWPOINT, enable network
administrators to access multiple servers from one or more centralized consoles,
consolidate hardware requirements, and provide direct hardwired connections
between the console and the attached servers through the switch which facilitate
access to servers even when the network is down. In addition, the Company's
switching systems are able to work with heterogeneous server populations. All of
the Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface. OSCAR allows network
administrators to immediately identify and access servers according to the
administrators' own naming conventions. The Company also offers server
3
<PAGE>
cabinet solutions to consolidate and store heterogeneous servers and related
hardware in a single cabinet that facilitates more efficient physical access for
hardware maintenance tasks.
The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems to
Compaq Computer Corporation and Hewlett-Packard Company for integration into
their product offerings. Sales to Compaq and Hewlett-Packard represented
approximately 25% and 10%, respectively, of the Company's net sales for the nine
months ended September 30, 1996 and 54% and 6% of net sales, respectively, for
1995. According to International Data Corporation, Compaq and Hewlett-Packard
shipped 43% of all PC servers and 66% of all super servers shipped worldwide in
1995. Customers of the Company's branded products in 1996 included Microsoft
Corporation, Wells Fargo Bank, Owens Corning, Peoplesoft and the National
Association of Securities Dealers.
The Company's objective is to become the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. Key elements to the Company's strategy
for achieving this objective are to (i) continue to develop innovative products
and enhancements to existing products, (ii) leverage its OEM experience to enter
into new relationships with other server manufacturers in the U.S. and Europe,
(iii) increase market penetration for its branded products through direct sales
and reseller channels, and (iv) create an international distribution network for
the Company's branded switching products.
The executive office of the Company is located at 20031 142nd Avenue, N.E.,
Woodinville, Washington 98072, and its telephone number is (206) 402-9393.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 3,500,000 shares
Common Stock to be outstanding after this offering.......... 12,160,016 shares (1)
Use of proceeds............................................. To repay indebtedness, redeem
preferred stock and for
general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol...................... APEX
</TABLE>
- ------------------------
(1) Excludes (i) 707,864 shares of Common Stock reserved for issuance upon the
exercise of options outstanding at December 10, 1996, at a weighted average
exercise price of $0.2168 per share, (ii) 1,453,896 additional shares
reserved for future issuance pursuant to the Company's 1995 Employee Stock
Plan, and (iii) 250,000 shares reserved for future issuance pursuant to the
Company's Employee Stock Purchase Plan. See "Capitalization,"
"Management--Employee Stock Plan; -- Employee Stock Purchase Plan" and
"Description of Capital Stock."
- ------------------------
APEX PC SOLUTIONS, OSCAR, OUTLOOK, OUTLOOK(4), SUNDIAL, VIEWPOINT AND
SWITCHBACK ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS ALSO INCLUDES
TRADEMARKS OF OTHER COMPANIES.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO A TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN
JANUARY 1996 AND A FOUR-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN
DECEMBER 1996 AND ASSUMES (I) THE CONVERSION OF ALL OUTSTANDING SHARES OF SERIES
A CONVERTIBLE PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON CONSUMMATION OF
THIS OFFERING, (II) THE REDEMPTION OF ALL OUTSTANDING SHARES OF SERIES B
REDEEMABLE PREFERRED STOCK UPON CONSUMMATION OF THIS OFFERING AND (III) NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN YEARS ENDED NINE MONTHS
MONTHS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, -------------------- ------------------------
1993 (1) 1994 1995 1995 1996
--------------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales.............................................. $ 2,945 $ 7,310 $ 19,671 $ 11,793 $ 23,267
Gross profit........................................... 1,309 2,817 9,035 5,603 9,751
Income from operations................................. 430 933 3,737 3,152 5,634
Interest income (expense), net......................... 2 7 (186) (33) (1,419)
Income from continuing operations before taxes......... 432 940 3,551 3,119 4,215
Income from continuing operations...................... 432 940 3,603 3,119 2,780
Income from discontinued service operations............ 245 601 -- -- --
Net income............................................. $ 677 $ 1,541 $ 3,603 $ 3,119 $ 2,780
PRO FORMA DATA (2):
Pro forma net income................................... 447 1,017 $ 2,344 $ 2,059 $ 2,780
Pro forma income per share............................. $ 0.20 $ 0.18 $ 0.30
Weighted average shares used in computing pro forma
income per share (3)................................. 11,520 11,520 9,120
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 1,563 $ 6,713
Working capital...................................................................... 7,382 12,532
Total assets......................................................................... 10,158 15,308
Subordinated debt.................................................................... 20,000 --
Long-term debt, less current portion................................................. 5,616 16
Series B Redeemable Preferred Stock.................................................. 1,000 --
Shareholders' equity (deficit)....................................................... (18,619) 13,130
</TABLE>
- ------------------------------
(1) The assets of the Company were spun off from Apex Computer Company (the
"Predecessor") in February 1993 and were used to capitalize the Company.
(2) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflects an
estimate of income tax expense as if the Company were taxable as a C
Corporation for the nine months ended September 30, 1995, each of the years
ended December 31, 1995 and 1994 and the eleven months ended December 31,
1993. See Notes 1 and 10 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements.
(4) Adjusted to reflect the sale and issuance by the Company of the 3,500,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $10.00 per share, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED HEREBY.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from original equipment manufacturer ("OEM") customers; the timing
of shipments; the timing of new product introductions and enhancements by the
Company and its competitors; changes in product or distribution channel mixes;
changes in pricing policies or price reductions by the Company or its
competitors; the availability and cost of supplies and components; sales and
marketing expenses related to entering into new markets, introducing new
products and retaining current OEM and other large customers; seasonal customer
demand; and fluctuations in sales of servers due to changes in economic
conditions or capital spending levels.
In general, the Company's sales cycle varies substantially and may be
lengthy, making net sales difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales as a
percentage of net sales, the Company's quarterly sales and operating results
will become more dependent upon the volume and timing of branded product orders
received during the quarter. Because customers of the Company's branded products
(including resellers) typically place orders shortly before their requested
shipment date, revenues from branded sales are difficult to forecast. The
failure of the Company to accurately forecast the timing and volume of orders
for branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.
Gross margins may vary significantly from period to period depending on a
number of factors, including: the ratio of OEM sales to branded sales, as OEM
sales typically have lower gross margins than branded sales; product mix,
including the percentage of cabinet system sales, which generally have lower
gross margins than sales of stand-alone switching systems; raw materials and
labor costs; new product introductions by the Company and its competitors; and
the level of outsourcing of manufacturing and assembly services by the Company.
The Company expects that its gross margins will decline in the future primarily
due to increased competition and the introduction of new technologies which may
affect the prices of the Company's products. The Company expects that its
operating results will be affected by seasonal trends and by general conditions
in the server market. The Company believes that it has experienced and will
continue to experience some degree of seasonality due to customer buying cycles.
The Company believes that the fourth quarter has generally higher net sales
levels due to customer budgeting and procurement cycles, which correspondingly
may depress net sales in other quarters. Because the Company's business and
operating results depend to a significant extent on the general conditions in
the server market, any adverse change in the server market due to adverse
economic conditions, declining capital spending levels or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
6
<PAGE>
DEPENDENCE UPON A LIMITED NUMBER OF OEM CUSTOMERS
A substantial portion of the Company's sales is concentrated among a limited
number of OEM customers. For 1994, and 1995 and the nine months ended September
30, 1996, sales to OEMs represented approximately 38%, 69% and 68% of the
Company's net sales, respectively. For 1994 and 1995, sales to Compaq Computer
Corporation ("Compaq") represented approximately 36% and 54%, respectively, of
the Company's net sales. For the nine months ended September 30, 1996, sales to
Compaq and Hewlett-Packard Company ("Hewlett-Packard") represented 25% and 10%,
respectively, of the Company's net sales. The Company's OEM business is subject
to risks such as contract termination, reduced or delayed orders, adoption of
competing products developed by third parties for the OEM or by the OEM's
internal development team, and change in corporate ownership, financial
condition, business direction or product mix by the OEM, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company has experienced, and may continue to
experience, significant reductions or delays in orders from its OEM customers,
which have had and may in the future have a material adverse effect on the
Company's quarterly sales and operating results. See "--Fluctuations in
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." For example, in late 1995, one of the
Company's OEM customers determined that its orders in the last half of 1995
exceeded its needs and, accordingly, reduced its ordering in the first half of
1996. The loss of any one of the Company's OEM customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in October 1995, the Company entered into an OEM
arrangement with International Business Machines Corporation ("IBM") for the
production of an integrated server cabinet system incorporating the Company's
switching products. While the products supplied by the Company met IBM's
requirements, IBM concluded that its program had not achieved IBM's desired
results and sought to terminate the arrangement in mid-1996 after the Company
had expended significant financial, product development and operational
resources in connection with this OEM arrangement. Although the Company
negotiated a settlement with IBM that reimbursed the Company for its direct
costs, the Company's branded product development efforts were delayed as a
result of the Company's commitment of substantial product development resources
to the IBM arrangement in the third and fourth quarters of 1995 and the first
quarter of 1996. For the nine months ended September 30, 1996, sales to IBM
represented 24% of the Companys' net sales. While the Company has contracts with
certain of its existing OEM customers, none of the Company's OEM customers is
obligated to purchase products from the Company except pursuant to binding
purchase orders. Consequently, any OEM customer could cease doing business with
the Company at any time. The Company's dependence upon its OEMs also results in
a significant concentration of credit risk, as a substantial portion of the
Company's trade receivables outstanding from time to time is concentrated among
a limited number of customers. See Note 1 of Notes to Financial Statements.
INTENSE COMPETITION
The markets for the Company's products are highly fragmented and intensely
competitive. The Company's business is becoming increasingly sensitive to new
product introductions, price changes and marketing efforts by its competitors.
Accordingly, the Company's future success will be highly dependent upon timely
completion and introduction of new products and product features at competitive
price and performance levels which address the evolving needs of the Company's
customers. The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinets and expects that pricing pressures will increase in the future.
Increased competition could result in price reductions and loss of market share,
which would adversely affect the Company's business, financial condition and
results of operations. In the market for integrated switching systems, the
Company competes with independent third parties such as Cybex Computer Products
Corporation, Raritan Computer Inc., Rose Electronics, Elsner ComputerTechnik
GmbH and StarTech Computer Accessories Ltd. In addition, certain of the
Company's OEM customers, such as Hewlett-Packard and Compaq, could choose to
internally manufacture switch products or offer those supplied by the Company's
7
<PAGE>
competitors. In the market for server cabinets, the Company competes with a
significant number of regional manufacturers. Moreover, each of the Company's
current OEM customers sells its own branded integrated server cabinets. The
Company's server cabinets also compete with other types of lower density,
unenclosed technology storage systems. The market for enclosed server cabinets
and other technology storage systems is characterized by intense price
competition and low barriers to entry, and many of the Company's competitors in
this market offer products at significantly lower price points. The Company's
ability to compete successfully in this market will depend in part upon the
Company's ability to continue to differentiate its cabinet systems from
competing products. See "Business--Competition."
The Company's current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
the Company, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties that enhance the ability of
their products to address the needs of the Company's prospective customers.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressure faced by the
Company will not have a material adverse effect on the Company's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; NEED FOR NEW PRODUCT INTRODUCTIONS
The market for the Company's switching products is characterized by rapid
technological advances, frequent new product introductions and enhancements, and
significant price competition. The introduction of products incorporating
superior or alternative technologies, the emergence of new industry standards or
changes in the market's pricing structure could render the Company's existing
products and products under development obsolete or unmarketable. The Company's
switching systems combine components, such as printed circuit boards,
connectors, cable assemblies, power supplies and enclosures, that are
manufactured by other companies and are generally available to the Company's
competitors and potential competitors. The Company's future success will depend
in large part upon its continued innovative application of such commercially
available components to the expansion and enhancement of its existing products
and the development and introduction of new products which address changing
customer needs on a cost-effective and timely basis. The Company's failure to
respond on a timely basis to technological developments, changes in industry
standards or customer requirements, or any significant delay in product
development or introduction could have a material adverse effect on the
Company's business, financial condition and results of operations. Due to the
Company's significant reliance on OEM relationships, the Company's product
development efforts are often focused on developing new products or enhancements
for OEM customers. At times, these new products or enhancements may not be
readily marketable to other customers without significant modification. The
termination or significant disruption of the Company's relationship with any OEM
or other customer for whom the Company has devoted significant product
development resources is likely to result in lost opportunities with respect to
the development of other products or enhancements. See "--Dependence Upon a
Limited Number of OEM Customers."
DEPENDENCE UPON SUPPLIERS AND OUTSOURCED MANUFACTURING
The principal components of the Company's switching products are power
supplies, cable assemblies, line filters, enclosures and printed circuit boards,
all of which are purchased from outside vendors. The Company buys components
under purchase orders and generally does not have long-term agreements with its
suppliers. Any termination of or significant disruption in the Company's
relationship with suppliers of its switching product components may prevent the
Company from filling customer orders in a timely manner, as the Company
generally does not maintain large inventories of its products or components. The
Company purchases a number of the components for its switching products from
sole or a limited number of suppliers. For example, the Company currently
obtains printed circuit boards included in, and the partial assembly of,
concentrator switches from a single source. In addition, the frames for the
Company's
8
<PAGE>
server cabinet systems are obtained from a single source and the sheet metal
components are purchased locally from a small number of manufacturers. The
Company has occasionally experienced and may in the future experience delays in
delivery of such components. Although alternate suppliers are available for most
of the components and services needed to produce the Company's products, the
number of suppliers of some components is limited, and qualifying a replacement
supplier and receiving components from alternate suppliers could take several
months. The Company depends upon its suppliers to deliver components that are
free from defects, competitive in functionality and cost and in compliance with
the Company's specifications and delivery schedules. Disruption in supply, a
significant increase in the cost of one or more components, failure of a third
party supplier to remain competitive in functionality or price, or the failure
of a supplier to comply with any of the Company's procurement needs could delay
or interrupt the Company's ability to manufacture and deliver its products to
customers on a timely basis, thereby adversely affecting the Company's business,
financial condition and results of operations.
The Company relies on third party manufacturers for subassembly of the
Company's products. These outsourcing arrangements, and any future outsourcing
arrangements involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields and costs. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains primarily
responsible to its customers for warranty obligations.
RELIANCE ON CLIENT/SERVER MARKET; IMPROVING NETWORK RELIABILITY AND TOOLS
The Company's business is dependent upon the continued acceptance of the
PC-based client/server model of network computing. Although distributed network
computing utilizing client/server architecture has gained increasing acceptance,
there can be no assurance that use of this networking model will continue to
grow or that it will not be replaced by new technologies for network computing,
thereby rendering the Company's products obsolete. In addition, the market for
the Company's switching products is driven in part by the inherent unreliability
of client/server networks. As client/server networks continue to proliferate,
however, server manufacturers and software providers may develop greater
reliability and better tools for managing networks. To the extent that greater
reliability and better network management tools are successfully developed, the
Company's switching products could be rendered obsolete, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATING TO DEVELOPMENT OF EXPANDED RESELLER CHANNEL
The Company expects to rely increasingly on resellers, including value added
resellers and systems integrators, to sell its branded products, and the
Company's strategy contemplates the expansion of its reseller channel both
domestically and internationally. The Company's future success will depend in
part on its ability to attract, train and motivate such resellers. There can be
no assurance that the Company will be successful in expanding its reseller
channel. The Company will be required to invest significant additional resources
in order to expand its reseller channel, and there can be no assurance that the
cost of the Company's investment in further developing this channel will not
exceed the revenues generated from such investment. The Company provides and
expects to continue providing discounts and other special pricing arrangements
to its resellers. As a result of such discounts and other arrangements, the
Company's gross margins on sales through resellers are expected to be lower than
gross margins on direct sales. Although the Company's existing reseller
arrangements generally do not afford material rights of return, as the Company
expands its reseller channel, the Company expects that certain resellers will
have significant rights of return. There can be no assurance that actual returns
in the future will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Product Returns and
Warranty Claims." The Company's agreements with its resellers generally are
nonexclusive and may be terminated on short notice by either party without
cause. The Company's resellers are not within the control of the Company, are
not obligated to purchase products from the Company and frequently offer
products of several different manufacturers, including products competitive with
the Company's products. There can be no
9
<PAGE>
assurance that these resellers will not give higher priority to the sale of such
other products. A reduction in sales efforts by the Company's resellers could
lead to reduced sales by the Company and could materially adversely affect the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent in large part upon its ability to retain its key
management and technical personnel, including Kevin Hafer, President and Chief
Executive Officer, and Chris Sirianni, Vice President, Sales and Marketing. The
future success of the Company will be highly dependent upon the personal efforts
of Mr. Hafer, Mr. Sirianni and other key management and technical personnel, and
the loss of services of any one of them could have a material adverse effect on
the Company's business, financial condition and results of operations. Mr. Hafer
is the only executive officer or employee with whom the Company has entered into
an employment agreement. The Company's success will also be dependent in part
upon its ability to attract, retain and motivate highly skilled employees.
Competition for employees with the skills required by the Company, particularly
engineering and other technical personnel, is intense, and there can be no
assurance that the Company will be able to attract and retain highly skilled
employees in sufficient numbers to sustain its current business or to support
future growth.
MANAGEMENT OF GROWTH
In recent periods, the Company has experienced rapid revenue and customer
growth and expansion in the number of its employees, its product offerings and
the scope and complexity of its financial systems. This growth has placed
significant strain on the Company's management, operational and financial
resources and has resulted in new and increased responsibilities for management
personnel. The Company's officers have had limited or no experience in managing
companies larger than the Company, and, in addition, the Company's Chief
Financial Officer was hired in September 1996. There can be no assurance that
the Company's management, personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. The Company's
ability to effectively manage its recent growth and any future growth will
require the Company to continue to implement and improve its operational,
financial and information systems and will likely require additional management
personnel. In addition, the Company believes that it must develop greater
engineering, marketing, sales and customer support capabilities in order to
develop new products and product enhancements, secure new customers at a rate
necessary to achieve desired growth and effectively serve the evolving needs of
present and future customers. There can be no assurance that the Company will be
successful in strengthening these capabilities. Without adequate management,
engineering, product development, marketing and sales and customer support
capabilities, the Company's ability to effectively manage its growth, expand and
enhance its product line, further penetrate its existing markets and develop new
markets will be significantly limited. If the Company's management is unable to
effectively manage the Company's growth, the business, financial condition and
results of operations of the Company will be materially adversely affected.
PRODUCT RETURNS AND WARRANTY CLAIMS
The Company's products carry warranties for parts and service. Although the
Company's historical product return and warranty claims have not been
significant, the Company's business, financial condition and results of
operations could be materially adversely affected should the rate of product
returns or warranty claims increase in the future. In addition, the Company may
change its warranty policies in the future as a result of competitive pressures.
LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS OF THIRD PARTY INFRINGEMENTS
The Company's future success will depend in part upon its ability to protect
its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application
10
<PAGE>
and a corresponding application under the provisions of the Patent Cooperation
Treaty (which permits the filing of corresponding foreign patent applications in
numerous foreign countries within a limited time period) with respect to certain
aspects of its products. There can be no assurance that patents will issue from
any of the Company's pending applications or that any claims allowed from
pending applications will be of sufficient scope or strength, or be issued in
all countries where the Company's products can be sold, or provide meaningful
protection or any commercial advantage to the Company. Moreover, competitors of
the Company may be able to design around the Company's patents if any are
issued. The laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus increase the likelihood of piracy of the Company's
technology and products. Although the Company is not aware of any current
infringement of its intellectual property rights, or any violation of its trade
secrets or nondisclosure or licensing arrangements, there can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. Although to date the Company has received no notification from other
companies of intellectual property rights held by those companies upon which the
Company's products may infringe, the Company may from time to time be subject to
proceedings alleging infringement by the Company of intellectual property rights
owned by third parties. If necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can be
no assurance that licenses will be offered or that the terms of any offered
license will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend or cease the manufacture of
products requiring such technology.
Further, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in any such litigation, the Company could be required to pay
substantial damages, suspend or cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, the Company's business, financial condition and results of
operations would be adversely affected. See "Business--Proprietary Technology."
INCREASED DEMANDS ON CUSTOMER SUPPORT OPERATIONS
Growth of the Company's branded sales, should it occur, is likely to be
accompanied by increasing demands on the Company's customer support operations.
As a result of the Company's commitment to a high level of customer support, the
Company is likely to need to invest significant resources in the maintenance and
improvement of its customer support resources. Any failure to maintain adequate
customer support could cause customer dissatisfaction, result in reduced sales
of the Company's products and, accordingly, materially adversely affect the
Company's business, financial condition and results of operations.
11
<PAGE>
RISKS RELATING TO DEVELOPMENT OF INTERNATIONAL DISTRIBUTION NETWORK AND
INTERNATIONAL SALES
The Company's strategy contemplates the development of an international
distribution network in an effort to increase international sales of its branded
switching products. See "Business--The Apex Strategy"; --Sales and Marketing."
There can be no assurance that the Company will be successful in creating an
international distribution network or in marketing and selling its products in
foreign markets. If the revenues generated by international sales are not
adequate to recover the expense of establishing, expanding and maintaining an
international distribution network, the Company's business, financial condition
and results of operations will be materially adversely affected. If
international sales become a more significant component of the Company's net
sales, the Company's business will become more vulnerable to the risks inherent
in doing business on an international level, including difficulties in managing
foreign resellers, longer payment cycles and problems in collecting accounts
receivable, the effects of seasonal customer demand, changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
fluctuations in currency exchange rates, potentially adverse tax consequences
and political instability. The existence or occurrence of any one of these
factors could have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED INDEPENDENT OPERATING HISTORY
The business of the Company was operated as a division of, and was provided
financial and operational support by, Apex Computer Company (the "Predecessor")
through January 1993. In February 1993, the net assets of that division were
spun off as a dividend to the sole shareholder of the Predecessor, who
contributed those assets to the Company as its initial capital. The historical
core business of the Company, computer maintenance services, was discontinued in
mid-1994. As a company with limited independent operating history, the Company
is subject to the risks inherent in a new business enterprise, including limited
predictability of future operating results, competition from more established
businesses, limited financial resources, limited management resources, limited
sales and distribution capabilities, limited technical personnel resources and
vulnerability to adverse economic conditions. Although the Company achieved
profitability for the eleven months ended December 31, 1993 and was profitable
in 1994 and 1995 and the nine months ended September 30, 1996, there can be no
assurance that growth in net sales will continue or that the Company will be
able to achieve or sustain profitability on a quarterly or annual basis in the
future.
CONTROL BY EXISTING SHAREHOLDERS
Following this offering, the Company's executive officers, directors and
their affiliates will beneficially own approximately 70% of the Company's
outstanding shares of Common Stock (66% if the Underwriters' over-allotment
option is exercised in full). As a result of their securities ownership and
positions with the Company, such shareholders, acting in concert, will be in a
position to elect all of the members of the Board of Directors and to control
the approval of substantially all matters requiring approval by the shareholders
of the Company. This concentration of ownership under certain circumstances
could have the effect of preventing or delaying a change in control of the
Company. See "Principal Shareholders."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Restated Articles of Incorporation, the Company's
Board of Directors has the authority to issue shares of preferred stock
("Preferred Stock") and to determine the designations, preferences and rights
and the qualifications and restrictions of those shares without any further vote
or action by the shareholders. The issuance of Preferred Stock, as well as
certain provisions of Washington law and the Company's bylaws, could have the
effect of making it more difficult or expensive for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. See "Description of Capital Stock."
12
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in this offering will incur immediate,
substantial dilution of $8.87 per share, assuming an initial public offering
price of $10.00 per share. In addition, investors purchasing shares in this
offering will incur additional dilution to the extent that outstanding options
are exercised. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market after
this offering could adversely affect the market price of the Common Stock. Upon
consummation of this offering, there will be 12,160,016 shares of Common Stock
outstanding. Of that number, the 3,500,000 shares offered hereby (4,025,000
shares if the Underwriters' over-allotment option is exercised in full) will be
immediately eligible for sale in the public market without restriction unless
acquired by an "affiliate" of the Company as that term is defined in Rule 144
("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act")
and the remaining 8,660,016 shares (8,135,016 shares if the Underwriters'
over-allotment option is exercised in full) are "restricted securities" (the
"Restricted Shares") under the Securities Act. All of the holders of Restricted
Shares have agreed not to sell their shares without the consent of the
Underwriters for a period of 180 days from the date of this Prospectus.
1,860,016 Restricted Shares will be eligible for sale in the public market after
expiration of these lock-up agreements, and the remaining 6,800,000 (6,275,000
if the Underwriters' over-allotment option is exercised in full) Restricted
Shares will become eligible for sale in the public market from time to time in
the future, in each case subject to the provisions of Rule 144. Moreover,
holders of approximately 4,000,000 (3,774,000 if the Underwriters' over-
allotment option is exercised in full) Restricted Shares are entitled to certain
rights with respect to registration of such shares for offer or sale to the
public. In addition, following the date of this Prospectus, the Company intends
to register approximately 2,869,624 and 250,000 shares of Common Stock reserved
for issuance under its 1995 Employee Stock Plan and under an Employee Stock
Purchase Plan that will become effective upon consummation of this offering. See
"Management--Employee Stock Plan; -- Employee Stock Purchase Plan"," "Shares
Eligible for Future Sale" and "Description of Capital Stock-- Registration
Rights."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market for
the Common Stock will develop or be sustained in the future. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the Underwriters and may have no relationship to the price at
which the Common Stock will trade after completion of this offering. See
"Underwriting."
The stock market has from time to time experienced extreme price and volume
fluctuations, and such fluctuations have been particularly acute with respect to
the securities of companies in the computer and other technology industries,
especially those with small and middle market capitalizations. The market price
for the Common Stock may be highly volatile as a result of a number of factors,
including, but not limited to, fluctuations in operating results by the Company
and its competitors, any failure by the Company or its competitors to meet
analysts' expectations, changes in analysts' estimates, the state of the
national economy, stock market conditions, actions by governmental agencies,
litigation involving the Company, announcements of technological innovations or
product introductions or delays by the Company or its competitors, and general
conditions in the client/server industry. Many of such factors are beyond the
Company's control.
13
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be $31,750,000, assuming an initial
public offering price of $10.00 per share and after deduction of the
underwriting discount and estimated offering expenses payable by the Company.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders if the Underwriters' over-allotment option is
exercised.
Approximately $20.0 million of the net proceeds will be used to repay
outstanding indebtedness under its Class A and Class B Subordinated Promissory
Notes (the "Subordinated Notes"). The Subordinated Notes were issued in December
1995 to various affiliates of the Company. The Subordinated Notes bear interest
at a rate of 7% per annum and, pursuant to their terms, are due and payable upon
consummation of certain events, including this offering. The proceeds from the
sale and issuance of the Class A Subordinated Notes were used by the Company to
redeem shares from an affiliate of the Company, Britannia Holdings Limited, and
the Class B Subordinated Note was issued by the Company to such affiliate in
connection with such redemption. See "Certain Transactions." Approximately $5.6
million of the net proceeds will be used to repay long-term bank debt of the
Company incurred in December 1995, and $600,000 will be used to redeem all
120,000 outstanding shares of the Company's Series B Redeemable Preferred Stock.
The Series B Redeemable Preferred Stock was issued to the Company's President
and Chief Executive Officer in December 1995 and is required to be redeemed upon
the occurrence of certain events, including consummation of this offering. See
"Certain Transactions."
The remaining approximately $5.2 million of net proceeds will be used for
general corporate purposes. Pending the uses described above, the Company
intends to invest the net proceeds from this offering in short-term, interest
bearing, investment-grade securities.
DIVIDEND POLICY
For the foreseeable future, the Company expects to retain earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements and operating and financial condition of the
Company, among other factors.
From its inception through October 31, 1995, the Company was treated for
federal income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended. As a result, the Company's earnings
from its inception through October 31, 1995 (the "Termination Date") were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. Subsequent
to the Termination Date, the Company was no longer treated as an S Corporation
and, accordingly, has been subject to federal and state income taxes on its
earnings after October 31, 1995. In 1995, prior to the Termination Date, the
Company's Board of Directors declared dividends in the aggregate amount of
$4,614,322. See "Certain Transactions."
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1996, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding shares of Series A Convertible
Preferred Stock into Common Stock upon consummation of this offering, and (iii)
the capitalization of the Company as adjusted to give effect to the sale of the
3,500,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $10.00 per share, after deduction of the
underwriting discount and estimated offering expenses and after the anticipated
application of the estimated net proceeds therefrom. The information in the
table below is qualified in its entirety by, and should be read in conjunction
with, the financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt (1):
Note payable to bank............................................................ $ 6,000 $ 6,000 $ 400
Class A Subordinated Promissory Notes........................................... 10,000 10,000 --
Class B Subordinated Promissory Notes........................................... 10,000 10,000 --
Other long-term debt............................................................ 16 16 16
---------- ----------- -----------
Total long-term debt.......................................................... 26,016 26,016 416
---------- ----------- -----------
Series B Redeemable Preferred Stock, no par value; 200,000 shares authorized,
200,000 shares issued and outstanding, actual; 120,000 shares issued and
outstanding, pro forma; no shares authorized or outstanding, as adjusted (2)..... 1,000 1,000 --
---------- ----------- -----------
Shareholders' equity:
Series A Convertible Preferred Stock, no par value; 300,000 shares authorized,
300,000 shares issued and outstanding, actual; no shares authorized or
outstanding, pro forma or as adjusted......................................... 2,205 -- --
Preferred Stock, no par value, no shares authorized or outstanding, actual or
pro forma; 1,000,000 shares authorized, no shares outstanding, as adjusted....
Common Stock, no par value; 10,000,000 shares authorized actual and pro forma;
5,691,368 shares outstanding actual; 8,091,368 shares outstanding pro forma;
100,000,000 authorized, 11,591,368 shares outstanding as adjusted (3)......... 344 2,549 34,299
Deferred compensation........................................................... (906) (906) (906)
Accumulated deficit............................................................. (20,263) (20,263) (20,263)
---------- ----------- -----------
Total shareholders' equity.................................................... (18,620) (18,620) 13,130
---------- ----------- -----------
Total capitalization............................................................ $ 8,396 $ 8,396 $ 13,546
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------
(1) See Notes 4 and 5 of Notes to Financial Statements. The Company intends to
repay an additional $400,000 of the note payable to bank on December 31,
1996.
(2) The Company intends to redeem 80,000 shares of Series B Redeemable Preferred
Stock, at a price of $5.00 per share, on January 1, 1997. See "Certain
Transactions." Upon consummation of this offering, all then outstanding
shares of Series B Redeemable Preferred Stock will be redeemed at a price of
$5.00 per share.
(3) Excludes (i) 707,864 shares of Common Stock reserved for issuance upon the
exercise of options outstanding at December 10, 1996, at a weighted average
exercise price of $0.2168 per share, (ii) 1,453,896 additional shares
reserved for future issuance pursuant to the Company's 1995 Employee Stock
Plan and (iii) 250,000 shares reserved for future issuance pursuant to the
Company's Employee Stock Purchase Plan. See "Management--Employee Stock
Plan; --Employee Stock Purchase Plan."
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DILUTION
The pro forma net tangible book value (deficit) of the Company as of
September 30, 1996 was ($18,619,395), or $(2.30) per share of Common Stock,
after giving effect to the automatic conversion of all outstanding shares of
Series A Convertible Preferred Stock upon the consummation of this offering.
"Pro forma net tangible book value (deficit) per share" represents the amount of
total tangible assets of the Company less total liabilities and Series B
Redeemable Preferred Stock divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 3,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial offering price of $10.00 per
share (and deducting the underwriting discount and estimated offering expenses
payable by the Company), the pro forma net tangible book value of the Company as
of September 30, 1996 would have been approximately $13,130,605 or $1.13 per
share. This represents an immediate increase in net tangible book value of $3.43
per share to existing shareholders and an immediate dilution of $8.87 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share............. $ 10.00
<S> <C> <C>
Pro forma net tangible book value (deficit) per share before
this offering.............................................. $ (2.30)
Increase in net tangible book value per share attributable
to new investors........................................... 3.43
---------
Pro forma net tangible book value per share after this
offering................................................... 1.13
---------
Dilution per share to new investors......................... $ 8.87
---------
---------
</TABLE>
The following table summarizes as of December 10, 1996 the differences
between existing shareholders and new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid, assuming an initial offering price of
$10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 8,660,016 71.2% $ 3,210,148 8.4% $ 0.37
New investors.................. 3,500,000 28.8 35,000,000 91.6 $ 10.00
------------ ----- ------------- -----
Total.................... 12,160,016 100.0% $ 38,210,148 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing tables assume no exercise of the Underwriters' over-allotment
option or of any outstanding stock options to purchase Common Stock. As of
December 10, 1996, there were outstanding stock options to purchase an aggregate
of 707,864 shares of Common Stock with a weighted average exercise price of
$0.2168 per share. To the extent such outstanding options are exercised, there
will be further dilution to new investors. See "Management--Employee Stock
Plan."
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Selling Shareholders in this offering will reduce the number of shares
held by existing shareholders to 8,135,016 shares or 66.9% of the total
number of shares of Common Stock to be outstanding after this offering, and
will increase the number of shares held by the new investors to 4,025,000
shares or 33.1% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal Shareholders."
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
financial statements of the Company and the related notes thereto. The selected
financial data for the eleven months ended December 31, 1993, the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996 are
derived from the financial statements of the Company, which have been audited by
Coopers & Lybrand L.L.P., independent accountants, and which are contained
elsewhere in this Prospectus. The selected financial data for the nine months
ended September 30, 1995 are unaudited but, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data. The results of operations for
the nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the entire year. The following selected financial
data should be read in conjunction with the Company's financial statements and
the related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
ELEVEN YEARS ENDED NINE MONTHS ENDED
MONTHS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- ----------------------
1993 (1) 1994 1995 1995 1996
--------------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $ 2,945 $ 7,310 $ 19,671 $ 11,793 $ 23,267
Cost of sales......................................... 1,636 4,493 10,636 6,190 13,516
------ --------- --------- ----------- ---------
Gross profit.......................................... 1,309 2,817 9,035 5,603 9,751
------ --------- --------- ----------- ---------
Operating expenses:
Research and development............................ 226 278 913 645 655
Sales and marketing................................. 123 370 1,631 1,003 1,758
General and administrative.......................... 530 1,236 2,754 803 1,704
------ --------- --------- ----------- ---------
Total operating expenses........................ 879 1,884 5,298 2,451 4,117
------ --------- --------- ----------- ---------
Income from operations................................ 430 933 3,737 3,152 5,634
------ --------- --------- ----------- ---------
Interest income (expense), net........................ 2 7 (186) (33) (1,419)
------ --------- --------- ----------- ---------
Income from continuing operations before taxes........ 432 940 3,551 3,119 4,215
Provision (benefit) for income taxes.................. -- -- (52) -- 1,435
------ --------- --------- ----------- ---------
Income from continuing operations..................... 432 940 3,603 3,119 2,780
Income from discontinued service operations........... 245 601 -- -- --
------ --------- --------- ----------- ---------
Net income............................................ $ 677 $ 1,541 $ 3,603 $ 3,119 $ 2,780
------ --------- --------- ----------- ---------
------ --------- --------- ----------- ---------
PRO FORMA DATA (2):
Historical income from operations before provision for
income taxes......................................... $ 677 $ 1,541 $ 3,551 $ 3,119 $ 4,215
Pro forma provision for income taxes.................. 230 524 1,207 1,060 1,435
------ --------- --------- ----------- ---------
Pro forma net income.................................. $ 447 $ 1,017 $ 2,344 $ 2,059 $ 2,780
------ --------- --------- ----------- ---------
------ --------- --------- ----------- ---------
Pro forma income per share............................ $ 0.20 $ 0.18 $ 0.30
--------- ----------- ---------
--------- ----------- ---------
Weighted average shares used in computing pro forma
income per share (3)................................. 11,520 11,520 9,120
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 10 $ 388 $ 2,676 $ 1,563
Working capital (deficit)........................................... 1,082 1,603 4,650 7,382
Total assets........................................................ 1,577 2,338 9,048 10,158
Subordinated debt................................................... 0 0 20,000 20,000
Long-term debt, less current portion................................ 230 225 5,615 5,615
Series A Convertible Preferred Stock................................ 0 0 2,205 2,205
Series B Redeemable Preferred Stock................................. 0 0 1,000 1,000
Shareholders' equity (deficit)...................................... 957 1,462 (21,543) (18,619)
</TABLE>
- ------------------------
(1) The assets of the Company were spun off from the Predecessor in February
1993 and were used to capitalize the Company.
(2) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflects an
estimate of income tax expense as if the Company were taxable as a C
Corporation for the nine months ended September 30, 1995, each of the years
ended December 31, 1995 and 1994 and the eleven months ended December 31,
1993. See Notes 1 and 10 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for calculation of weighted
average shares used in computing pro forma income per share.
18
<PAGE>
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 FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company operated as a division of Apex Computer Company (the "Predecessor")
through January 1993, providing computer maintenance services to Microsoft
Corporation ("Microsoft") and selling integrated server cabinets and, to a
limited extent, stand-alone switching systems, primarily to Microsoft. In
February 1993, the assets of that division were spun off as a dividend to the
sole shareholder of the Predecessor, who contributed those assets as the initial
capital of the Company. See "Certain Transactions." Throughout 1993, the Company
derived revenue primarily from the provision of computer maintenance services to
Microsoft. In May 1994, the Company began selling stand-alone switching systems
to Compaq for integration into server cabinets. In June 1994, the Company
discontinued its computer maintenance service business and determined to
concentrate on sales of stand-alone switching products and server cabinets,
including server cabinets with integrated switching systems.
In December 1995, the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization") pursuant to which the Company sold Common Stock
and Series A Convertible Preferred Stock to a group of investors for
approximately $12.5 million and issued to such investors Class A Subordinated
Promissory Notes in the aggregate principal amount of $10.0 million. In
connection therewith, the Company redeemed Common Stock from one of its
shareholders for approximately $12.5 million in cash and the issuance of a Class
B Subordinated Promissory Note in the aggregate principal amount of $10.0
million. The subordinated promissory notes issued by the Company in connection
with the Leveraged Recapitalization bear interest at a rate of 7% per annum,
provide for quarterly interest payments and require the repayment of all
principal and any accrued and unpaid interest on the consummation of certain
liquidity events, including this offering. See "Certain Transactions."
From its inception through October 31, 1995 (the "Termination Date"), the
Company was treated for federal income tax purposes as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result, the
Company's earnings from its inception through the Termination Date were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. The pro
forma provision for income taxes reflects an estimate of income tax expense at
federal statutory rates as if the Company were taxable as a C Corporation for
the nine months ended September 30, 1995, each of the years ended December 31,
1995 and 1994, and the eleven months ended December 31, 1993. See Notes 1 and 10
of Notes to Financial Statements.
A significant portion of the Company's sales are concentrated among a
limited number of OEM customers. For 1994, 1995 and the nine months ended
September 30, 1996, sales to the Company's OEM customers, represented
approximately 38%, 69% and 68% of the Company's net sales, respectively. The
Company's OEM business is subject to risks such as contract termination, reduced
or delayed orders, adoption of competing products developed by third parties for
the OEM or by the OEM's internal development team, and change in corporate
ownership, financial condition, business direction or product mix by the OEM,
any of which could have a material adverse effect on the Company's results of
19
<PAGE>
operations. The Company has experienced, and may continue to experience,
significant reductions or delays in orders from its OEM customers which have had
and may in the future have a material adverse effect on the Company's quarterly
sales and operating results. See "Risk Factors--Fluctuations in Operating
Results." In December 1995, one of the Company's OEM customers determined that
its orders of Company switches in late 1995 exceeded its needs and, accordingly,
reduced its orders for delivery of additional switches in the first half of
1996. While the Company has contracts with certain of its existing OEM
customers, none of the Company's OEM customers is obligated to purchase products
from the Company except pursuant to binding purchase orders. The failure of any
of the Company's OEMs to continue to place orders at current or anticipated
levels would likely have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
Upon a Limited Number of OEM Customers."
In 1995, the Company entered into an OEM arrangement with IBM for the
production of an integrated server cabinet system incorporating the Company's
switching products. While the products supplied by the Company met IBM's
requirements, after the Company had expended significant product development and
operational resources in connection with the IBM arrangement, IBM concluded that
its program had not achieved desired results and sought to terminate shipments
in mid-1996. Although the Company negotiated a settlement that covered its
direct costs, the Company's branded product development efforts were delayed as
a result of the Company's commitment of substantial product development
resources to the IBM arrangement in the third and fourth quarters of 1995 and
the first quarter of 1996. IBM accounted for only 1% of the Company's net sales
in 1995, but accounted for 24% of the Company's net sales in the nine months
ended September 30, 1996.
The Company is currently experiencing increased price competition in both
the market for stand-alone switching systems and the market for integrated
server cabinet systems and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of market
share which would adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors--Intense Competition."
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
ELEVEN YEARS ENDED NINE MONTHS
MONTHS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------ ------------------------
1993 1994 1995 1995 1996
--------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 55.6 61.5 54.1 52.5 58.1
----- ----- ----- ----- -----
Gross margin........................................... 44.4 38.5 45.9 47.5 41.9
----- ----- ----- ----- -----
Operating expenses:
Research and development............................. 7.7 3.8 4.6 5.5 2.8
Sales and marketing.................................. 4.2 5.0 8.3 8.5 7.6
General and administrative........................... 18.0 16.9 14.0 6.8 7.3
----- ----- ----- ----- -----
Total operating expenses........................... 29.9 25.7 26.9 20.8 17.7
----- ----- ----- ----- -----
Income from operations................................. 14.5 12.8 19.0 26.7 24.2
----- ----- ----- ----- -----
Interest income (expense), net......................... 0.1 0.1 (0.9) (0.2) (6.1)
----- ----- ----- ----- -----
Income from continuing operations before provision for
income taxes......................................... 14.6 12.9 18.1 26.5 18.1
Provision for income taxes (pro forma through December
31, 1995)............................................ 4.9 4.4 6.2 9.0 6.2
----- ----- ----- ----- -----
Income from continuing operations (pro forma through
December 31, 1995)................................... 9.7 8.5 11.9 17.5 11.9
Income from discontinued service operations (net of pro
forma taxes)......................................... 5.5 5.4
----- ----- ----- ----- -----
Net income (pro forma through December 31, 1995)....... 15.2% 13.9% 11.9% 17.5% 11.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated server cabinets. Net sales increased 97% to
$23.3 million for the nine months ended September 30, 1996 from $11.8 million
for the nine months ended September 30, 1995. This increase was due primarily to
increased sales of stand-alone switching systems to OEMs, sales of integrated
server cabinet systems to IBM in the first half of 1996, and, to a lesser
extent, sales of branded switching systems to resellers in 1996.
GROSS MARGIN. Gross margin is affected by a variety of factors, including:
the ratio of OEM sales to branded sales, as OEM sales typically have lower gross
margins than branded sales; product mix, including the percentage of cabinet
system sales which generally have lower gross margins than sales of stand-alone
switching systems; raw materials and labor costs; new product introductions by
the Company and its competitors; and the level of outsourcing of manufacturing
and assembly services by the Company. Gross margin declined to 41.9% for the
nine months ended September 30, 1996 from 47.5% for the nine months ended
September 30, 1995, due to increased OEM sales as a percentage of net sales,
including sales of cabinet systems to IBM in the first half of 1996, as well as
increased outsourcing by the Company of component assembly to meet customer
demand. In addition the Company accrued $490,000 in warranty and inventory
reserves in the nine months ended September 30, 1996. The Company expects that
increased competition may affect pricing and therefore erode the Company's gross
margins in the future. See "Risk Factors--Intense Competition."
21
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs and are expensed as they
are incurred. Research and development expenses increased to $656,000 for the
nine months ended September 30, 1996 from $645,000 for the nine months ended
September 30, 1995, but declined as a percentage of net sales to 2.8% for the
nine months ended September 30, 1996 from 5.5% for the nine months ended
September 30, 1995. The Company believes that the timely development of
innovative products and enhancements to existing products is essential to
maintaining its competitive position and, therefore, expects research and
development expenditures to increase in absolute dollars and as a percentage of
net sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include
promotional material, trade show expenses and sales and marketing personnel
costs, including sales commissions and travel. Sales and marketing expenses
increased to $1.8 million for the nine months ended September 30, 1996 from $1.0
million for the nine months ended September 30, 1995, but declined as a
percentage of net sales to 7.6% for the nine months ended September 30, 1996
from 8.5% for the nine months ended September 30, 1995. The increase in absolute
dollars was primarily due to increased advertising and trade show expenses,
including travel, and, to a lesser extent, increased personnel costs. The
Company expects these expenditures to increase in absolute dollars as it seeks
to increase its branded sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs for administration, finance, human resources and general
management, as well as rent, utilities and legal and accounting expenses, and
provision for Washington State's gross receipts tax. General and administrative
expenses increased to $1.7 million for the nine months ended September 30, 1996
from $803,000 for the nine months ended September 30, 1995. As a percentage of
net sales, general and administrative expenses increased to 7.3% for the nine
months ended September 30, 1996 from 6.8% for the nine months ended September
30, 1995. The increase in absolute dollars and as a percentage of net sales was
primarily due to the move to larger facilities by the Company in September 1995
which increased rent, state tax increases associated with increased net sales,
compensation expense associated with the Series B Redeemable Preferred Stock
(see Note 8 of Notes to Financial Statements) and, to a lesser extent, increased
legal and accounting costs and the addition of corporate infrastructure to
support the Company's growth in net sales. The addition of personnel in the
Company's finance and administration departments, together with expenses such as
legal and accounting fees associated with being a public company, are expected
to increase general and administrative costs in the future. The Company expects
to incur compensation expense of approximately $875,000 due to the acceleration
of the vesting of the shares of Series B Redeemable Preferred Stock issued to
the Company's President and Chief Executive Officer in connection with the
Leveraged Recapitalization. See "Certain Transactions."
NET INTEREST EXPENSE (INCOME). Net interest expense increased to $1.4
million for the nine months ended September 30, 1996 from $32,000 for the nine
months ended September 30, 1995. The increase in net interest expense resulted
from indebtedness incurred in the Leveraged Recapitalization.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $1.4 million for the nine months ended September 30, 1996. The
effective federal tax rate for the nine months ended September 30, 1996 was
approximately 34%.
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND ELEVEN MONTHS ENDED DECEMBER 31, 1993
NET SALES. Net sales increased 169% to $19.7 million for 1995 from $7.3
million for 1994 and increased 148% in 1994 from $2.9 million for the eleven
months ended December 31, 1993 ("Fiscal 1993"). These increases were primarily
due to the initiation and growth of sales of stand-alone switching systems to
OEM customers in 1994 and 1995, and, to a lesser extent, an increase in sales of
branded stand-alone switching systems in 1995.
22
<PAGE>
GROSS MARGIN. Gross margin increased to 45.9% for 1995 from 38.5% for 1994,
primarily due to greater sales of stand-alone switching systems, which generally
have higher gross margins than server cabinets, and, to a lesser extent,
increases in branded sales with higher gross margins and economies of scale
gained from volume increases. Gross margin decreased to 38.5% for 1994 from
44.4% for Fiscal 1993, primarily due to the Company's entry into the OEM market,
with its lower margins, as well as the costs associated with building the
programs necessary to reach efficiencies in OEM production.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $913,000 for 1995 from $278,000 for 1994 and from $226,000 for
Fiscal 1993. As a percentage of net sales, research and development expenses
increased to 4.6% in 1995 from 3.8% in 1994 and declined from 7.7% in Fiscal
1993. The increases in absolute dollars during the periods and as a percentage
of net sales from 1994 to 1995 were primarily due to the addition of new
engineers and the development of OUTLOOK and VIEWPOINT prototypes in 1994 and
1995.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$1.6 million for 1995 from $370,000 for 1994 and from $122,000 for Fiscal 1993.
As a percentage of net sales, sales and marketing expenses increased to 8.3% in
1995 from 5.0% in 1994 and 4.2% in Fiscal 1993. The increases in absolute
dollars and as a percentage of net sales were primarily due to increased
advertising and tradeshow expenses and, to a lesser extent, sales commissions
and personnel costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.8 million for 1995 from $1.2 million for 1994 and from $530,000
in Fiscal 1993. As a percentage of net sales, general and administrative
expenses declined to 14.0% in 1995 from 16.9% in 1994 and 18.0% in Fiscal 1993.
The increase in absolute dollars from 1994 to 1995 was primarily due to
approximately $1.4 million incurred in December 1995 for transaction costs and
bonuses associated with the Leveraged Recapitalization. The increase in absolute
dollars from Fiscal 1993 to 1994 was primarily due to increased personnel costs
associated with the increased infrastructure necessary to support increased
growth.
NET INTEREST EXPENSE (INCOME). Net interest expense was $186,000 in 1995.
The Company earned interest income of $7,000 and $2,000 in 1994 and Fiscal 1993,
respectively. The increase in interest expense from 1994 to 1995 resulted from
certain loans made to the Company by its founder and former sole shareholder.
23
<PAGE>
QUARTERLY INFORMATION
The following tables set forth certain unaudited statement of operations
data for the seven quarters ended September 30, 1996, as well as such data
expressed as a percentage of net sales for the periods indicated. Such data have
been derived from unaudited condensed financial statements that, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. Such data should be
read in conjunction with the Company's audited financial statements and the
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 3,166 $ 4,011 $ 4,606 $ 7,888 $ 7,916 $ 6,086
Cost of sales............................. 1,681 2,121 2,385 4,449 4,668 3,675
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.............................. 1,485 1,890 2,221 3,439 3,248 2,411
Operating expenses:
Research and development................ 158 189 298 268 258 206
Sales and marketing..................... 295 316 392 628 577 540
General and administrative.............. 248 242 307 1,957 449 482
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 701 747 997 2,853 1,284 1,228
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.................... 784 1,143 1,224 586 1,964 1,183
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net............ 4 (10) (26) (154) (472) (475)
Income from continuing operations before
income taxes............................ 788 1,133 1,198 432 1,492 708
Provision for income taxes (pro forma
through December 1995).................. 268 385 408 146 508 241
----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through December
1995)................................... $ 520 $ 748 $ 790 $ 286 $ 984 $ 467
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Income per share (pro forma through
December 1995).......................... $ 0.05 $ 0.06 $ 0.07 $ 0.02 $ 0.11 $ 0.05
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding....... 11,520 11,520 11,520 11,520 9,120 9,120
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 53.1 52.9 51.8 56.4 59.0 60.4
----------- ----------- ----------- ----------- ----------- -----------
Gross margin.............................. 46.9 47.1 48.2 43.6 41.0 39.6
Operating expenses:
Research and development................ 5.0 4.7 6.5 3.4 3.3 3.4
Sales and marketing..................... 9.3 7.9 8.5 8.0 7.3 8.9
General and administrative.............. 7.8 6.0 6.6 24.8 5.6 7.9
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 22.1 18.6 21.6 36.2 16.2 20.2
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.................... 24.8 28.5 26.6 7.4 24.8 19.4
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net............ 0.1 (0.3) (0.6) (1.9) (6.0) (7.8)
Income from continuing operations before
income taxes............................ 24.9 28.2 26.0 5.5 18.8 11.6
Provision for income taxes (pro forma
through December 1995).................. 8.5 9.6 8.8 1.9 6.4 4.0
----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through December
1995)................................... 16.4% 18.6% 17.2% 3.6% 12.4% 7.6%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
SEPT. 30,
1996
-----------
<S> <C>
Net sales................................. $ 9,265
Cost of sales............................. 5,173
-----------
Gross profit.............................. 4,092
Operating expenses:
Research and development................ 191
Sales and marketing..................... 641
General and administrative.............. 773
-----------
Total operating expenses.............. 1,605
-----------
Income from operations.................... 2,487
-----------
Interest income (expense), net............ (472)
Income from continuing operations before
income taxes............................ 2,015
Provision for income taxes (pro forma
through December 1995).................. 686
-----------
Net income (pro forma through December
1995)................................... $ 1,329
-----------
-----------
Income per share (pro forma through
December 1995).......................... $ 0.14
-----------
-----------
Weighted average shares outstanding....... 9,120
SEPT. 30,
1996
-----------
<S> <C>
Net sales................................. 100.0%
Cost of sales............................. 55.8
-----------
Gross margin.............................. 44.2
Operating expenses:
Research and development................ 2.1
Sales and marketing..................... 6.9
General and administrative.............. 8.4
-----------
Total operating expenses.............. 17.4
-----------
Income from operations.................... 26.8
-----------
Interest income (expense), net............ (5.1)
Income from continuing operations before
income taxes............................ 21.7
Provision for income taxes (pro forma
through December 1995).................. 7.4
-----------
Net income (pro forma through December
1995)................................... 14.3%
-----------
-----------
</TABLE>
24
<PAGE>
Net sales for the second quarter of 1996 decreased from the first quarter of
1996 primarily as a result of a reduction in orders of switches by one of the
Company's OEM customers, which had determined that its orders for the Company's
switches in late 1995 had exceeded its needs.
The fluctuations in gross margin from quarter to quarter in 1996 resulted
from shifts in the Company's product mix between stand-alone switching systems
and integrated cabinets. The reductions in research and development expenses as
a percentage of net sales from the last quarter of 1995 to the first and
subsequent quarters of 1996 resulted from a significant increase in the
Company's net sales for 1996 as compared to 1995. The significant increase in
general and administrative expenses as a percentage of net sales in the fourth
quarter of 1995 was attributable to the transactional expenses of the Leveraged
Recapitalization and the compensation expenses associated with Mr. Hafer's 1995
bonus. See "Certain Transactions."
The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from OEM customers; the timing of shipments; the timing of new
product introductions and enhancements by the Company and its competitors;
changes in product or distribution channel mixes; changes in pricing policies or
price reductions by the Company or its competitors; the availability and cost of
supplies and components; sales and marketing expenses related to entering into
new markets, introducing new products and retaining current OEM and other large
customers; seasonal customer demand; and fluctuations in sales of servers due to
changes in economic conditions or capital spending levels.
In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales as a
percentage of net sales, the Company's quarterly sales and operating results
will become more dependent upon the volume and timing of branded product orders
received during the quarter. Because customers of the Company's branded products
(including resellers) typically place orders shortly before their requested
shipment date, revenues from branded sales are difficult to forecast. The
failure of the Company to accurately forecast the timing and volume of orders
for branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.
The Company believes that it has experienced and expects it will continue to
experience some degree of seasonality due to customer buying cycles. The Company
believes that the fourth quarter has generally higher net sales levels due to
customer budgeting and procurement cycles, which correspondingly may depress net
sales in other quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996 the Company's principal sources of liquidity
consisted of approximately $1.6 million in cash and cash equivalents. In
addition, the Company has a line of credit with a bank that allows it to borrow
up to a specified amount based upon its accounts receivable. The Company also
has a letter of credit arrangement pursuant to which the bank will issue
commercial letters of credit up to an
25
<PAGE>
aggregate of $3.0 million (less any amounts outstanding under the line of
credit) at prime plus 1.5%. The combined line of credit and letter of credit
facility expires April 15, 1997. There were no borrowings under the line of
credit and the letter of credit facility throughout 1996, and therefore, all
$3.0 million was available.
The Company used cash in operating activities of $594,000 for the nine
months ended September 30, 1996, and generated cash from operating activities of
$2.2 million for 1995, $1.4 million for 1994 and $27,000 for Fiscal 1993. Cash
used in operating activities for the nine months ended September 30, 1996 was
primarily due to payment of bonuses accrued in December 1995 and increases in
accounts receivable. See Note 1 of Notes to Financial Statements and "Certain
Transactions." At September 30, 1996, the Company's OEM customers (including
IBM) accounted for 66% of the accounts receivable. See "Risk Factors--Dependence
Upon a Limited Number of OEM Customers" and Note 1 of Notes to Financial
Statements.
In December 1995, the Company effected the Leveraged Recapitalization
pursuant to which the Company sold 1.6 million shares of Common Stock for a
total price of approximately $294,000, 300,000 shares of Series A Convertible
Preferred Stock for a total price of approximately $2.2 million, and $10.0
million in aggregate principal amount of Class A Subordinated Promissory Notes.
In connection therewith, the Company redeemed from one of its shareholders 4.0
million shares of Common Stock for an aggregate price of approximately $22.5
million, consisting of cash of approximately $12.5 million and the issuance of a
Class B Subordinated Promissory Note in the aggregate principal amount of $10.0
million. The Class A and Class B Subordinated Promissory Notes bear interest at
a rate of 7% per annum, provide for quarterly interest payments and require the
repayment of all principal and any accrued and unpaid interest on the
consummation of certain liquidity events, including this offering. As of
September 30, 1996 the Company had outstanding indebtedness of $20.0 million in
principal amount of Class A and Class B Subordinated Promissory Notes.
As part of the Leveraged Recapitalization, Kevin J. Hafer, the Company's
President and Chief Executive Officer, received 200,000 shares of the Company's
Series B Redeemable Preferred Stock. This Series B Redeemable Preferred Stock
will fully vest on January 1, 1997. The Company is obligated to redeem 80,000
shares of such Series B Redeemable Preferred Stock on January 1, 1997 for $5.00
per share (an aggregate of $400,000) and to redeem the balance of such shares
for $5.00 per share (an aggregate of $600,000) upon the consummation of this
offering.
Approximately $20.0 million of the net proceeds of this offering will be
used to repay outstanding indebtedness pursuant to the Class A and Class B
Subordinated Promissory Notes. Of the remaining net proceeds, approximately $5.6
million will be used to repay long-term bank debt of the Company incurred in
connection with the Leveraged Recapitalization, bearing interest at prime plus
1.5% or IBOR plus 2.75% and requiring a principal payment of $400,000 at
December 31, 1996 and maturing December 2002. An additional $600,000 of net
proceeds will be used to redeem all outstanding shares of the Company's Series B
Redeemable Preferred Stock.
The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities, together with
the proceeds from this offering, will be sufficient to fund its operations
through 1997.
26
<PAGE>
BUSINESS
OVERVIEW
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, video monitor and mouse
configuration (a "console"). Designed to address space, cost, administration and
maintenance issues that organizations increasingly face when adopting
client/server architecture, the Company's sophisticated switching and integrated
cabinet systems enable network administrators to manage more efficiently their
organizations' complex and growing server populations.
The Company provides "plug and play" switching systems and integrated server
cabinet solutions for many of the network administration, management and storage
problems faced by organizations using client/server architecture. The Company's
switching products, including OUTLOOK, OUTLOOK(4) and VIEWPOINT, enable network
administrators to access multiple servers from one or more centralized
(consoles), consolidate hardware requirements, and provide direct hardwired
connections between the switch and the attached server which facilitate access
to servers even when the network is down. In addition, the Company's switching
systems are able to work with heterogeneous server populations. All of the
Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface. OSCAR allows network
administrators to immediately identify and access servers according to the
administrators' own naming conventions. The Company also offers server cabinet
solutions to consolidate and store heterogeneous servers and related hardware in
a single cabinet that facilitates more efficient physical access and safer
performance of hardware maintenance tasks.
The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems to
Compaq and Hewlett-Packard for integration into their product offerings. Sales
to Compaq and Hewlett-Packard represented approximately 25% and 10%,
respectively, of the Company's net sales for the nine months ended September 30,
1996 and 54% and 6% of net sales, respectively, for 1995. According to
International Data Corporation, Compaq and Hewlett-Packard shipped 43% of all PC
servers and 66% of all super servers (servers with one or more processors and
more memory and disk storage than PC servers) shipped worldwide in 1995. The
Company's branded sales customers for 1996 include Microsoft, Wells Fargo Bank,
Owens Corning, Peoplesoft and the National Association of Securities Dealers.
INDUSTRY BACKGROUND
Information technology has become increasingly critical to the operation of
most businesses as computers are utilized to perform multiple and diverse
functions throughout organizations. The desire of many organizations to
decentralize computing power while sharing technology resources and providing
broad access to enterprise data has resulted in the widespread adoption of
distributed network computing environments using a client/server architecture of
interconnected PCs. The typical client/server installation consists of a local
area network ("LAN") with multiple centralized PCs operating as "servers"
dedicated to performing specific functions for the many "client" PCs connected
to the LAN. According to International Data Corporation, worldwide shipments of
PC servers and super servers are expected to grow 21.8% on a compounded annual
basis, reaching approximately 2.6 million units shipped through the year 2000.
The proliferation of PC-based LANs and wide-area networks ("WANs") has
created significant network administration and space problems for the
organizations that rely on them. Network administrators, who may supervise up to
a thousand servers, must identify and access relevant servers to add or delete
users, to add, change or upgrade applications, to tune systems for better
optimization, and to diagnose and correct network failures. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console consisting of a keyboard, video monitor and mouse.
Thus, to perform network administration and management tasks, network
administrators must deal with an
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<PAGE>
unwieldy number of consoles, whether centrally located or dispersed throughout
the organization. In addition, inadvertent access to network servers can be
difficult to prevent when there are many consoles, and, therefore, multiple
access points, available.
As network resources become more critical to organizations, constant
availability of the network becomes increasingly important. The time that a
network is down or degraded can cause significant inconvenience, loss of
productivity and financial loss. Because diagnosis and correction of anomalous
network behavior often requires the network staff to physically access each
affected server through its own console, quick and efficient "fault" management
can be difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.
In addition to these network administration and management problems, as
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates. Without efficient storage and configuration,
network hardware consumes substantial expensive floor space, creates clutter
that hampers network administration and management, and increases the risk of
physical damage to expensive hardware. The typical individual keyboard, monitor
and mouse console architecture of servers exacerbates this space problem, as
multiple consoles consume valuable and costly space. The increased use of
"heterogeneous" server configurations using different platforms, such as Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc, and
different operating systems, such as Windows NT, Unix, NetWare and O/S 2,
compounds the storage and administration problems faced by network
administrators.
The advent of console switching technology has facilitated more effective
network management by giving administrators the ability to control a larger
number of servers through fewer consoles. To date, however, most console
switching solutions have been difficult to install and configure, and many have
used proprietary cabling that has made network administrators reluctant to
embrace a solution that may restrict them from expanding or using a different
solution in the future. In addition, there have been a limited number of
solutions available for those users who want to control computers from a
distance, such as those who need access to computer resources in, but do not
want to expose those expensive resources to, harsh operating environments. The
space management solutions available to network administrators have generally
consisted of racks or cabinets designed to house only one type of server, and
most have not been technically designed for ease of access. Those with
distributed, heterogeneous client/server networks have often been left with no
customized solution.
THE APEX SOLUTION
The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions for many of the network administration,
management and storage problems faced by organizations with client/server
networks. By providing both console switching and cabinet systems, the Company
offers a comprehensive solution to the space and administrative issues related
to client/server networks. The Company's products allow organizations to:
- ACCESS MULTIPLE SERVERS FROM A CENTRAL LOCATION. Apex products allow
network administrators to manage multiple platforms from a centralized
console, to identify and access servers from a single screen according to
the administrator's own naming conventions, and to solve distance problems
by providing end-to-end connections of up to 1,000 feet.
- CONSOLIDATE HARDWARE REQUIREMENTS. Apex products reduce the need for
multiple keyboards, monitors and mice by allowing direct access to
multiple servers from a single console, thereby facilitating more
efficient network management and administration and reducing hardware
costs.
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<PAGE>
- PROVIDE "OUT-OF-BAND" ACCESS TO SERVERS. By providing direct hardwired
connections to network servers, Apex products enable network
administrators to access each server as if they were physically present at
that server, even when the network is down. Moreover, unlike the
connectivity approach of many competitive products, which connect numerous
switches to other switches in a continuous chain, the Company's switching
products are designed so that each server has its own connection to the
master switch in a two-tiered system. This direct linkage makes it easier
for network administrators to isolate problems with individual servers.
- PROVIDE CONNECTIVITY TO ALL MAJOR PLATFORMS. Apex switching products work
in heterogeneous server environments, providing connectivity with Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc
platforms.
- MAXIMIZE SPACE EFFICIENCY. Apex integrated cabinet solutions consolidate
servers and other hardware in a single location to facilitate more
efficient physical access for hardware maintenance tasks. The Company also
provides customized solutions for the storage of heterogeneous server
populations.
The following diagram illustrates how the Company's switching and cabinet
systems solve many of the network administration, management and storage
problems of client/server environments.
There follows a graphic with the heading "The Apex Solution". This graphic
illustrates how 24 dispersed servers, each with its own keyboard, video monitor
and mouse console, are consolidated into six centralized DensePack cabinets. By
combining one primary OutLook switch with three secondary OutLook switches,
access and control of the same number of servers is consolidated into one
keyboard, video monitor and mouse console.
THE APEX STRATEGY
The Company's objective is to become the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. To achieve this objective, the Company is
implementing the following strategies:
- CONTINUE INNOVATIVE PRODUCT DEVELOPMENT. The Company believes that the
continued, timely development of innovative products and enhancements to
existing products is essential to maintaining its competitive position. By
maintaining close contact with key customers who are often early-adopters
of leading technologies, the Company seeks to develop new products, as
well as modifications and improvements to existing products. Many of the
Company's products are designed to accommodate future modifications and
additional features, which the Company believes facilitates the
development and integration of modifications and features if a market need
is perceived.
- LEVERAGE OEM EXPERIENCE TO INCREASE OEM SALES. The Company intends to
leverage its significant experience in working with OEM customers to enter
into new relationships with other manufacturers of servers in the United
States and in Europe. The Company believes that the architecture, quality
and reliability of its products, together with the Company's commitment to
customer support, are attractive to OEMs.
- INCREASE BRANDED SALES. To increase its market penetration, the Company
intends to aggressively market its branded products to end users through a
direct sales force and through a variety of reseller channels. The Company
believes that its comprehensive and customized solutions will appeal to
many organizations that, because of heterogeneous server populations and
for other reasons, have problems that are not effectively solved by
competing switching and cabinet products. For the year ended December 31,
1995 and for the nine months ended September 30, 1996, sales of Apex
branded products represented approximately 32% of the Company's net sales.
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<PAGE>
- CREATE AN INTERNATIONAL DISTRIBUTION NETWORK. The Company intends to
create an international sales distribution network for the Company's
branded switching products, focusing initially on the network computing
market in Europe because of its large installed server base. The Company
is currently shipping its switching systems to OEMs with facilities in
Europe and the Company has begun efforts to build an international
third-party distribution network.
PRODUCTS
The Company provides comprehensive solutions to many of the network
administration, management and storage problems inherent in client/server
network environments by offering a family of stand-alone switching systems
together with integrated cabinet systems designed to store servers efficiently.
SWITCHING SYSTEMS
The Company's switching systems consolidate the control and monitoring of
multiple network servers to a centralized command center consisting of one or
more console positions. The Company's console switching products can work with
heterogeneous server populations that use different platforms, such as Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc, and
different operating systems, such as Windows NT, Unix, NetWare and O/S 2. The
Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface that enables network
administrators to immediately identify and access servers according to the
administrators' own naming conventions, as opposed to predesignated numbers. The
Company's switching products operate on an out-of-band basis, meaning there is a
direct hardwired connection between the console and the attached servers through
the switch. This direct connection enables network administrators to access
network servers and locate the problem server even when the network is down.
OUTLOOK, introduced in September 1995, enables administrators to control up
to eight servers using a single console and, by integrating additional OUTLOOK
switches, can be expanded to provide centralized control of up to 64 servers.
OUTLOOK offers programmable scanning to allow users to vary the frequency and
duration of monitoring individual servers. OUTLOOK also enables network managers
to reduce inadvertent access to the system by eliminating additional consoles.
OUTLOOK provides access to a wide range of network elements such as file
servers, PBX monitors and database engines from a single console.
OUTLOOK(4), introduced in March 1996, includes the same features as OUTLOOK,
except that this multi-user system allows network administrators to administer
up to 64 servers from up to four console positions.
VIEWPOINT, introduced in September 1995 to address the needs of very large
server-intensive organizations with large network administrative staffs,
includes all of the attributes of OUTLOOK except that it enables network
administration staff to control up to 32 servers from as many as 16 console
positions. Total capacity can be expanded to as many as 256 servers by
integrating the VIEWPOINT switch with multiple OUTLOOK switches, and VIEWPOINT's
technology allows access to a server up to 1,000 feet away. VIEWPOINT also
supports remote diagnostics via a serial port.
SUNDIAL, introduced in March 1996, enables administrators to control up to
10 Sun Sparc workstations from a single console and, by integrating additional
SUNDIAL switches, can be expanded to provide centralized control of up to 100
workstations. The SUNDIAL switch maintains communications with attached
workstations and, if power is interrupted, the unit's nonvolatile memory helps
restore the system's established settings. The SUNDIAL switch is designed to
work with the OUTLOOK, OUTLOOK(4) and VIEWPOINT switches.
SWITCHBACK, introduced in March 1995, consists of a local unit and a remote
unit that allow users to control the attached server from either a primary
console position or a remote console position linked by a single cable.
Intelligent circuits in SWITCHBACK enable the transmission of high resolution
video up to 500 feet away from the attached servers. The SWITCHBACK system
includes a lock-out feature that prevents
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<PAGE>
system capture. The SWITCHBACK system can be combined with the OUTLOOK,
OUTLOOK(4) and VIEWPOINT switches.
The U.S. list prices of the Company's switching systems as of November 30,
1996 were as set forth below. The list prices of the Company's products have
changed in the past, and the prices set forth below are likely to change in the
future.
<TABLE>
<CAPTION>
U.S. LIST
PRODUCT PRICE
- ---------------------------------- --------------
<S> <C>
OUTLOOK (4 PORT) $839
OUTLOOK (8 PORT) $995
OUTLOOK(4) $3,725
VIEWPOINT (DEPENDING ON $12,000-$44,000
CONFIGURATION)
SUNDIAL $1,929
SWITCHBACK $895
</TABLE>
<TABLE>
<CAPTION>
The Company's current switching products are described in the table below:
<S> <C> <C>
PRODUCT NAME KEY FEATURES BENEFITS
OutLook - ports: 1 X 4 and 1 X 8 - reduces required space and hardware
- capacity: 64 servers needs by allowing one console to control
- multi-platform compatibility up to four or eight servers per switch
- OSCAR interface - multiple switches can be used to support
up to 64 servers
- supports major server platforms
- OSCAR interface permits easy on-screen
control of switch
OutLook(4) - ports: 4 X 8 - offers the benefits of OUTLOOK as well
- capacity: 64 servers as permits up to four administrator
- multi-platform compatibility consoles to control up to eight servers
- OSCAR interface
ViewPoint - ports: 16 X 32 - in addition to benefits of OUTLOOK and
- capacity: 256 servers OUTLOOK(4), allows up to 16 network
- 1000 ft. extension administrator consoles to access up to
- multi-platform compatibility 32 servers
- OSCAR interface - administrator consoles can be up to 1000
ft. away from server
SunDial - ports: 1 X 10 - enables control of large Sun Sparc
- capacity: 100 servers workstation networks using a single
- OSCAR interface console
- may be combined with OUTLOOK, OUTLOOK(4)
and VIEWPOINT switches
SwitchBack - 500 ft. extension product - allows the addition of a remote console
up to 500 feet away
- remote lock-out feature
- may be combined with OUTLOOK, OUTLOOK(4)
and VIEWPOINT switches
</TABLE>
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<PAGE>
DENSEPACK CABINET SYSTEMS
DENSEPACK cabinets are specifically designed to house network servers and
communication equipment, improve system administration and facilitate CPU
maintenance. DENSEPACK cabinets are typically customized to meet specific
customer needs and are pre-cabled to allow network administrators to quickly
install hardware and connect to their networks. DENSEPACK cabinets incorporate
the Company's OUTLOOK switching technology, as well as built-in ventilator fans,
large rear doors and optional slide-out shelves to facilitate access to cables,
connectors and servers. The DENSEPACK MODEL RS is a scaled-down version of the
Company's DENSEPACK and is designed for small businesses and stand-alone
departments. The DENSEPACK MODEL RS can be used in combination with full-sized
DensePack cabinets.
CUSTOMERS
To date, a substantial portion of the Company's net sales have been
generated from sales of switches to OEMs for integration into their product
offerings. For 1994, 1995 and the nine months ended September 30, 1996, sales to
the Company's OEM customers represented approximately 38%, 69% and 68% of the
Company's net sales, respectively. The following is a list of the Company's OEM
customers and representative branded product customers.
<TABLE>
<CAPTION>
OEM CUSTOMERS BRANDED PRODUCT CUSTOMERS
- --------------------------------- --------------------------------------
<S> <C>
Hewlett-Packard Microsoft
Compaq Wells Fargo Bank
Wright Line Owens Corning
Peoplesoft
National Association of Securities
Dealers
Countrywide Home Loans
Visa International
</TABLE>
For 1994 and 1995, sales to Compaq represented approximately 36% and 54%,
respectively, of the Company's net sales. For the nine months ended September
30, 1996, sales to Compaq, Hewlett-Packard and IBM represented approximately
25%, 10% and 24%, respectively, of the Company's net sales. The loss or material
decline in orders from any of the Company's current OEM customers would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Fluctuations in Operating
Results;--Dependence Upon a Limited Number of OEM Customers."
The Company's backlog was $8.3 million at September 30, 1996 and $6.0
million at December 31, 1995. Backlog consists of purchase orders with delivery
dates scheduled within the next six months. None of the Company's customers is
obligated to purchase products from the Company except pursuant to binding
purchase orders. Because of the timing of orders and the possibility of customer
changes to delivery schedules, the Company's backlog as of any particular date
may not be representative of actual sales for any succeeding period.
SALES AND MARKETING
The Company markets and sells its products through an internal sales force
and various distribution channels, including OEM and reseller arrangements. To
date, the Company has marketed its products primarily through advertisements in
trade publications, participation in major industry trade shows and the
Company's home page on the World Wide Web. The Company maintains a sales and
marketing staff of nine employees. The Company's sales personnel process written
and telephonic orders, support existing customers and respond to telephone
inquiries.
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<PAGE>
The Company currently sells various switching products to Compaq,
Hewlett-Packard and Wright Line pursuant to private label arrangements. These
OEM customers integrate and sell the Company's switches with their own
networking products, including network servers and integrated server cabinets.
The Company devotes significant sales and customer support resources to its OEM
accounts. The Company intends to leverage its significant experience in working
with OEM customers to enter into new relationships with other manufacturers of
servers in the United States and Europe. The Company believes that the
architecture, quality and reliability of its products, together with the
Company's commitment to customer support, are attractive to OEMs. There can,
however, be no assurance that the Company will be successful in its attempts
gain additional OEM customers.
The Company has relationships with a variety of resellers, including
distributors, value-added resellers and systems integrators, for the
distribution and sale of Apex branded switching and cabinet products in the
United States. The Company devotes resources to educating its resellers as to
the benefits of the Company's products and training them in the proper
installation and support of the Company's products. The Company's strategy
contemplates devoting additional resources to increase branded sales, and to
that end the Company intends to pursue additional relationships with resellers
in the United States. The Company has focused and expects to continue to focus
on contracting with local and regional resellers who have the technical
capability and market presence to assist end-user customers in developing
network space management and access and control solutions to meet their
particular needs. There can be no assurance that the Company will be successful
in expanding its reseller channel. See "Risk Factors--Risks Relating to
Development of Expanded Reseller Channel."
Compaq, Hewlett-Packard and, the Company believes, many other manufacturers
of servers market and sell their own branded server cabinets. Accordingly, the
Company believes it has limited opportunities to sell its own server cabinets to
new purchasers of servers. Instead, the Company believes that sales of its
server cabinets have been and will continue to be limited primarily to end-user
customers who have a need to more efficiently configure and manage existing
network systems.
To date, the Company's international sales have not been significant. The
Company's strategy is to create an international sales distribution network for
the Company's branded switching products focusing initially on the network
computing market in Europe because of its large installed server base. The
Company is currently shipping its switching systems to OEMs with facilities in
Europe and has begun efforts to build a third party distribution network. There
can be no assurance that the Company will be successful in creating an
international distribution network or successfully market and sell its products
in foreign markets. In addition, if international sales become a more
significant component of the Company's total sales, the Company's business will
become more vulnerable to the risks inherent in doing business on an
international level, including the effects of seasonality, unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in managing foreign resellers, longer payment cycles and problems
in collecting accounts receivable, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences. See "Risk
Factors--Risks Relating to Development of International Distribution Network and
International Sales."
CUSTOMER SUPPORT
The Company emphasizes customer support by developing innovative, high
quality products, encouraging customer feedback through contact with key
customers, and providing a customer hot-line that offers technical support for
the life of the Company's products. The Company's switches have a "plug and
play" design and do not require extensive configuration. The Company seeks to
respond quickly to customers' requests for technical support and service, and
the Company's engineering department often works with individual customers to
troubleshoot problems and develop custom solutions. The Company offers
warranties for parts and service on all of its products. To date, the Company
has not experienced significant product returns. There can be no assurance,
however, that the Company's rate of product returns will not increase or that
the Company's customer support operations will be sufficient to meet the needs
of the
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<PAGE>
Company's customers. In addition, the Company may change its warranty policies
in the future as a result of competitive pressures. See "Risk Factors--Product
Returns and Warranty Claims; --Increased Demands on Customer Support
Operations."
PRODUCT DEVELOPMENT
The Company believes that the continued, timely development of new products
and enhancements to its existing products is essential to maintaining its
competitive position. The market for the Company's switching products in
particular is characterized by rapid technological advances, frequent new
product introductions and enhancements, and significant price competition. The
introduction of products incorporating superior or alternative technologies, the
emergence of new industry standards or changes in the market's pricing structure
could render the Company's existing products and products under development
obsolete or unmarketable. The Company's switching systems combine components,
such as printed circuit boards, connectors, cable assemblies, power supplies and
enclosures, that are manufactured by other companies and are generally available
to the Company's competitors and potential competitors. The Company's future
success will depend in large part upon its continued innovative application of
such commercially available components to the expansion and enhancement of its
existing products and the development and introduction of new products which
address changing customer needs on a cost-effective and timely basis. The
Company's failure to respond on a timely basis to technological developments,
changes in industry standards or customer requirements, or any significant delay
in product development or introduction could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Rapid Technological Change; Need for New Product Introductions."
The Company's engineering and product development efforts focus on
responding to the needs of its customers by providing practical, marketable
products that have immediate applications in their markets. By maintaining
contact with customers throughout the installation and technical support
process, the Company is able to identify and test potential design modifications
and improvements as well as new applications and extensions for existing
products. The Company anticipates that this process will enable the development
of new product categories and applications based on existing technology
developed to meet specific customer needs. Many of the Company's products are
designed to accommodate future modifications and additional features, which it
believes facilitates the development and integration of modifications and
features if a market need is perceived.
For 1993, 1994, 1995 and the nine months ended September 30, 1996, the
Company's engineering and product development expenditures were $226,000,
$278,000, $913,000 and $656,000, respectively. As of November 30, 1996, the
Company's engineering staff consisted of nine employees. To meet the challenges
of the rapidly changing technology in the computer industry, the Company expects
to make substantial investments in product development in the future.
MANUFACTURING
The Company performs final assembly, quality assurance and testing of its
products. In order to avoid the capital investment required to establish and
maintain in-house manufacturing capabilities, the Company generally relies on
subcontractors in the United States for the assembly of printed circuit board
assemblies, subassemblies, chassis and equipment enclosures. The Company
believes that such assembly can typically be done by subcontractors at a lower
cost than if the Company assembled such items internally. Outsourcing
manufacturing operations allows the Company to concentrate its resources on
research and development, product design, quality assurance, marketing and
customer support. Prior to shipping, the Company subjects its finished products
to quality and regulatory screenings and functional testing to assure quality
and reliability.
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The Company relies on third party manufacturers for subassembly of the
Company's products. These outsourcing arrangements and any future outsourcing
arrangements involve several risks, including reduced control over product
quality, delivery schedules, manufacturing yields and costs. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains primarily
responsible to its customers for warranty obligations. See "Risk
Factors--Dependence Upon Suppliers and Outsourced Manufacturing."
The Company purchases industry-standard parts and components for the
assembly of its products from multiple vendors and suppliers through a worldwide
sourcing program. No custom integrated circuits are currently used in any
product in production, although custom integrated circuits may be used in the
Company's products in the future. Certain of the components for the Company's
switching products are available from a limited number of suppliers. In
addition, the frames for the Company's server cabinet systems are obtained from
a single source and the sheet metal components are purchased locally from a
small number of manufacturers. In the past, the Company has experienced delays
in the receipt of certain of its switching and cabinet components, which have
resulted in delays in related product deliveries. The Company is attempting to
manage such risks by qualifying alternative sources and maintaining quality
relationships and close personal contact with each of its suppliers. Although
the Company believes that
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<PAGE>
there are adequate alternative sources for its components, there can be no
assurance that delays in component and product deliveries will not occur in the
future or that the Company's reliance on sole or limited sources of supply for
its components will not otherwise adversely affect the Company's business. The
inability to obtain sufficient components as required or to develop alternative
sources if and as required in the future could result in delays or reductions in
product shipments, which, in turn, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Dependence Upon Suppliers and Outsourced Manufacturing."
COMPETITION
The market for the Company's products is highly fragmented and competitive,
and the Company expects competition to increase in the future. In the market for
integrated switching systems, the Company competes with independent third
parties such as Cybex Computer Products Corporation, Raritan Computer Inc., Rose
Electronics, Elsner ComputerTechnik GmbH and StarTech Computer Accessories Ltd.,
many of which have substantially greater financial, marketing and technical
resources than the Company. In addition, certain of the Company's OEM customers,
such as Hewlett-Packard and Compaq, could determine to internally manufacture
switch products or offer those supplied by the Company's competitors. In the
market for server cabinets, the Company competes with a significant number of
regional cabinet manufactures including Zero Stantron Cabinets, Ergotron Inc.,
Rittal Corporation, Hergo Corp. and Engineered Data Products Inc., many of which
have substantially greater financial, marketing and technical resources than the
Company. In addition, Compaq, Hewlett-Packard and Wright Line, all of whom are
OEM customers for certain of the Company's switching products, sell their own
branded integrated server cabinets. The Company's cabinet systems also compete
with other types of lower density, unenclosed technology storage systems.
In the market for integrated switches, the Company competes primarily on the
basis of technological advances, performance in relation to price, quality,
reliability, development capabilities and customer support. In the market for
enclosed server cabinets, the Company competes primarily on the basis of
available product features, quality, reliability, development capabilities and
customer support. In addition, the market for enclosed server cabinets and other
technology storage systems is characterized by intense price competition, and
many of the Company's competitors in this market offer products at significantly
lower price points. The Company's ability to compete successfully in this market
will depend in part upon the Company's ability to continue to differentiate its
cabinet systems from competing products.
The Company's future success will be highly dependent upon timely completion
and introduction of new products and product features at competitive price and
performance levels which address the evolving needs of the Company's customers.
The Company is currently experiencing increased price competition in both the
market for stand-alone switching systems and the market for integrated cabinet
systems and expects that pricing pressures will increase in the future.
Increased competition could result in price reduction and loss of market share
which would adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors--Intense Competition."
PROPRIETARY TECHNOLOGY
The Company's future success is dependent in part upon its ability to
protect its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application and a corresponding application under
the provisions of the Patent Cooperation Treaty (which permits the filing of
corresponding foreign patent applications in numerous foreign countries within a
limited time period) with respect to certain aspects of its products. There can
be no assurance that patents will issue from any of the Company's pending
applications or that any claims allowed from pending applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
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<PAGE>
products can be sold, or provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents if any are issued. The laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, may not protect the Company's products or intellectual property rights
to the same extent as do the laws of the United States and thus increase the
likelihood of piracy of the Company's technology and products. Although the
Company is not aware of any current infringement of its intellectual property
rights, or any violation of its trade secrets, nondisclosure or licensing
arrangements, there can be no assurance that the steps taken by the Company to
protect its intellectual property rights will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. Although to date the Company has received no notification from other
companies of intellectual property rights held by those companies upon which the
Company's products may infringe, the Company may from time to time be subject to
proceedings alleging infringement by the Company of intellectual property rights
owned by third parties. If necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can be
no assurance that licenses will be offered or that the terms of any offered
license will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend or cease the manufacture of
products requiring such technology.
Further, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in any such litigation, the Company could be required to pay
substantial damages, suspend or cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, the Company's business, financial condition and results of
operation would be adversely affected.
EMPLOYEES
As of November 30, 1996, the Company employed 49 persons, 15 of whom were in
administration and management, nine of whom were in engineering and product
development, two of whom were in service and technical support, 14 of whom were
in manufacturing and nine of whom were in sales and marketing. The Company's
employees are not covered by any collective bargaining agreements with respect
to their employment by the Company. The Company believes that its employee
relations are good.
FACILITIES
The Company entered into a three-year lease in March 1995 and occupies
approximately 25,000 square feet in an industrial office building in
Woodinville, Washington. The Company believes that its facilities are adequate
for current and near-term future needs.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kevin J. Hafer............................. 39 President, Chief Executive Officer and Director
Douglas A. Bevis........................... 51 Vice President, Chief Financial Officer and Secretary
Christopher L. Sirianni.................... 42 Vice President, Sales and Marketing
Sterling Crum.............................. 42 Director
Jeffrey T. Chambers........................ 41 Director
William McAleer............................ 45 Director
Edwin L. Harper............................ 52 Director
</TABLE>
Kevin J. Hafer has been the President of the Company since June 1995, and
has served as the Chief Executive Officer of the Company since December 1995 and
as a Director of the Company since January 1996. From February 1993 to June
1995, Mr. Hafer served as the General Manager of the Company, and from December
1989 to January 1993 he served as the Manager and Technical Operations Director
of the Predecessor. Prior to joining the Company's predecessor, Mr. Hafer was
employed at Harris Corporation from May 1979 to September 1989, serving in
various management capacities.
Douglas A. Bevis has been the Vice President and Chief Financial Officer of
the Company since September 1996, and Secretary since December 1996. From
September 1990 to February 1996, Mr. Bevis was employed at CH2M HILL, Inc., a
national environmental engineering consulting firm, where he served as Vice
President and Treasurer from September 1990 to April 1993 and as Senior Vice
President and Chief Financial Officer from April 1993 to February 1996.
Christopher L. Sirianni has been the Vice President, Sales and Marketing of
the Company since August 1996. From March 1994 to August 1996, Mr. Sirianni
served as the Company's Director of Sales and Marketing. From August 1992 to
February 1994, Mr. Sirianni served as the Director of Sales of Coastal
Manufacturing, a metal fabrication company. Mr. Sirianni served as a
consultant/sales executive for National Precision Bearing, a distributor, from
November 1991 to June 1992. From September 1982 to October 1991, Mr. Sirianni
served in various capacities, including Vice President of Sales and Marketing
for Augat Communications, a telecommunications company.
Sterling Crum has served as a Director of the Company since its inception.
From the Company's inception until June 1995, Mr. Crum served as the Company's
President. From May 1985 to February 1993 Mr. Crum served in various capacities
for the Predecessor, including as President and as Director. In addition, since
November 1993 Mr. Crum has served as President and sole director of Water
Sports, Inc., a water sports recreation company.
Jeffrey T. Chambers has served as a Director of the Company since January
1996. Mr. Chambers has been employed by TA Associates, Inc., a venture capital
firm, or its predecessor, since 1980, has been a partner of affiliated venture
funds since 1984 and is currently a Managing Director of TA Associates, Inc. Mr.
Chambers is also a director of Diamond Multimedia Systems, Inc., McAfee
Associates, Inc. and Technology Solutions Company.
William McAleer has served as a Director of the Company since June 1996. Mr.
McAleer is currently Managing Director of Voyager Capital, which provides
venture financing and advisory services to information technology companies.
From 1988 through 1994, he was Vice President Finance, Chief Financial Officer
and Secretary with Aldus Corporation, a publicly held software company. Prior to
joining Aldus, he
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was Vice President, Finance and Administration from 1987 to 1988 of Ecova
Corporation and also served as a Vice President with Westin Hotels Company from
1984 through 1987. Mr. McAleer is also a Director of FourGen Software
Technologies, Primus Communications Corporation and Truevision, Inc.
Edwin L. Harper has served as a Director of the Company since October 1996.
Since June 1996 Mr. Harper has served as President and Chief Executive Officer
of SyQuest Technology, a computer hardware company. From July 1993 to June 1996
Mr. Harper was employed as President and Chief Executive Officer of ComByte,
Inc., and from June 1988 to May 1993 Mr. Harper served in various capacities,
including President and Chief Executive Officer, at Colorado Memory Systems,
Inc. Mr. Harper is also a Director of SyQuest Technology and McAfee Associates,
a network security management company.
All members of the Board of Directors are elected to serve until their
respective successors have been elected and qualified or until their earlier
death, resignation or removal in the manner specified in the Company's Bylaws.
The officers are appointed to hold their respective offices until their
respective successors have been elected, or their earlier death, resignation or
removal in the manner specified by the Company's Bylaws.
OTHER KEY EMPLOYEES
In addition to directors and executive officers, the Company has the
following key employees:
Danny L. Beasley has served as the Company's Director of Engineering since
March 1994. From December 1992 to March 1994, Mr. Beasley served as a Research
and Development Engineer for the Company and the Predecessor. Mr. Beasley served
as the Director of Engineering for Spectralogic, Inc., an engineering design and
product development firm, from April 1989 to October 1992.
Stephen J. McCarthy has served as the Company's Director of Product
Development since July 1995. From February 1994 to July 1995, Mr. McCarthy
served as the Company's Research and Development Manager, and from November 1987
to February 1994 he served as the Account Manager for the Company and for the
Predecessor's on-site service division.
COMMITTEES
The Board of Directors has an Audit Committee, currently comprised of
Messrs. McAleer and Chambers, which meets with the Company's independent
auditors and reviews the Company's annual audit, internal controls and financial
management practices. The Board also has a Compensation Committee, currently
comprised of Messrs. Harper, Chambers and Crum, which meets with the Company's
officers and oversees the Company's compensation and benefits practices and
programs.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table summarizes all compensation
earned by or paid to the Company's Chief Executive Officer and to each of the
Company's other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 for services rendered during the fiscal year
ended December 31, 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------------------------
--------------------------- RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK AWARD OPTIONS COMPENSATION(4)
- ---------------------------------------- ---------- --------------- ------------ --------- ----------------
<S> <C> <C> <C> <C> <C>
Kevin J. Hafer,
President and Chief
Executive Officer..................... $ 100,006 $ 1,608,544(1) $ 1,000,000(2) 705,880 $ 5,000
Sterling Crum,
President(3).......................... -- -- -- -- --
Christopher L. Sirianni................. $ 77,770 $ 99,746(5) -- -- $ 3,888
</TABLE>
- ------------------------
(1) Includes $190,392 bonus paid in 1995 and approximately $1.4 million bonus
earned in 1995 and paid in 1996. Prior to the Leveraged Recapitalization,
the Company and Mr. Crum, the founder of the Company, agreed to provide to
Mr. Hafer an equity interest in the Company. At the time of the Leveraged
Recapitalization, the arrangements regarding Mr. Hafer's equity interest had
not been completed, and accordingly, approximately $1.4 million of Mr.
Hafer's bonus and the Series B Redeemable Preferred Stock award represent
compensation to Mr. Hafer in lieu of the agreed upon equity interest.
(2) Represents an award of 200,000 shares of the Company's Series B Redeemable
Preferred Stock, which shares vest on January 1, 1997 and are redeemable at
$5.00 per share upon the occurrence of certain events, including the
consummation of this offering. See "--Employment Agreement" and "Certain
Transactions."
(3) Mr. Crum served as the Company's President until June 1995. He was the
Company's founder and, until October 30, 1995, the Company's sole
shareholder. Mr. Crum received no compensation for his services as President
of the Company in 1995. See "Certain Transactions."
(4) Represents matching contributions made by the Company to its 401(k) Profit
Sharing Plan and Trust on behalf of such employees.
(5) Includes $51,694 bonus paid in 1995 and $48,052 bonus earned in 1995 and
paid in 1996.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information for the Company's Chief Executive Officer with respect to grants of
options to purchase Common Stock of the Company made during the fiscal year
ended December 31, 1995. There were no other grants of options to employees
during such period.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE PER EXPIRATION
NAME GRANTED(#) YEAR SHARE DATE
- -------------------------------------------------- ------------------ ------------------- ---------- -----------
<S> <C> <C> <C> <C>
Kevin J. Hafer(1)................................. 705,880 100% $ 0.18375 12/29/05
</TABLE>
- ------------------------
(1) As of the date of this Prospectus, options to purchase 404,844 shares of
Common Stock have vested and been exercised by Mr. Hafer. Of the remaining
325,036 shares subject to options, options to purchase 666 shares will vest
on January 1, 1998. Options to purchase approximately 16,458 shares will
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<PAGE>
vest on the first day of each month from February 1998 through June 1999,
and options to purchase approximately 6,372 shares will vest on the first
day of each month from July 1999 through January 2000.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information for the Company's Chief
Executive Officer with respect to options to purchase Common Stock of the
Company held as of December 31, 1995.
<TABLE>
<CAPTION>
VALUE
REALIZED NUMBER OF SECURITIES
(MARKET PRICE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF AT EXERCISE OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED LESS EXERCISE END FISCAL YEAR END
NAME ON EXERCISE PRICE) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- -------------------------- --------------- ------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Kevin J. Hafer............ -- -- 0/705,880 --/0(1)
</TABLE>
- ------------------------
(1) There was no difference between the fair market value of the Common Stock as
of December 31, 1995 and the exercise price of $0.18375 for the underlying
options granted on December 27, 1995.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors who are not employees of the
Company currently receive annual cash compensation of $6,000 for their services
as directors. In addition, each of the directors was granted an option in 1996
to purchase 24,000 shares of Common Stock at a per share exercise price equal to
100% of the fair market value of the Common Stock as determined by the Board of
Directors at the time of grant. All directors are reimbursed for travel and
other expenses incurred in attending meetings of the Board of Directors.
EMPLOYEE STOCK PLAN
The Company's 1995 Employee Stock Plan (the "Employee Stock Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company in December 1995. The purposes of the Employee Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility in the Company, to provide additional incentives to officers,
employees and non-employee directors of the Company, and to promote the success
of the Company's business.
The Employee Stock Plan provides for the granting to officers and employees
of the Company of options that qualify as "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and options that do not so qualify ("NQSOs"). Non-employee
directors of the Company are eligible to receive NQSOs. As of the date of this
Prospectus, all grants of options under the Employee Stock Plan have been NQSOs.
The Employee Stock Plan is currently administered by the Board of Directors,
which has the discretion to determine, among other matters, the persons to whom
options will be granted; the number of shares purchasable upon exercise of each
option; whether options will be ISOs or NQSOs; the purchase price of the shares
issuable pursuant to options (which price for ISOs may not be less than 100% of
the fair market value of the Common Stock, as determined in good faith by the
Board of Directors, on the date the option is granted); and the period during
which each option may be exercised (not to exceed ten years for ISOs). The
purchase price of the shares issued pursuant to each option must be paid, as
determined by the Board of Directors, (i) in cash, (ii) by promissory note,
(iii) by surrender of shares of Common Stock held by the participant or a
combination of cash and shares, or (iv) any combination of the foregoing methods
of payment. The aggregate fair market value of the shares of Common Stock for
which ISOs may first be exercisable by a participant during any one calendar
year may not exceed $100,000.
Generally, upon termination of a participant's employment with the Company
by reason of the participant's death or "permanent and total disability" (as
defined in Section 22(e)(3) of the Code), each
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<PAGE>
option held by the participant on the date of termination shall terminate on the
earlier of the fixed expiration date of such option, or the date that is one
year after the date of termination of employment. Upon termination of a
participant's employment with the Company by reason of disability that is not
permanent and total, each option held by the participant on the date of
termination shall terminate on the earlier of the fixed expiration date of such
option, or the date that is ninety (90) days after the date of termination of
employment. Upon termination of a participant's employment with the Company by
any reason other than death or disability, each option held by the participant
on the date of termination shall terminate on the earlier of the date that is
ninety (90) days after the date of termination of employment, or the fixed
expiration date of such option. In the case of Kevin J. Hafer, the Company's
President and Chief Executive Officer, Mr. Hafer continues to vest in options
for a period of one year so long as his termination is without cause (as defined
in his Employment Agreement), and options that vest within such one-year period
must be exercised within ninety (90) days following the end of such one-year
period. See "Certain Transactions."
In the event that the Company enters into an agreement to dispose of all or
substantially all of its assets or if the Company's shareholders dispose or
agree to dispose of 50% or more of the outstanding shares of Common Stock (an
"Acceleration Event"), each outstanding option will be exercisable immediately
preceding such Acceleration Event. Upon consummation of the Acceleration Event,
all outstanding options, whether or not so accelerated, will terminate and cease
to be exercisable, unless assumed by the successor corporation.
In 1996, the Company granted to Messrs. Hafer, Sirianni and Bevis options to
purchase 24,000, 132,000 and 103,000 shares of Common Stock, respectively, and
to each of its non-employee directors options to purchase 24,000 shares of
Common Stock, in all cases at an exercise price of $0.18375 per share. In
October 1996, the Company accelerated the vesting of up to 50% of the options
previously granted by the Company to its employees and non-employee directors.
In 1996, Messrs. Hafer, Sirianni, Bevis, Crum, Harper and McAleer exercised
options for 404,844, 54,424, 25,748, 12,000, 12,000 and 12,000 shares of Common
Stock, respectively.
A total of 2,161,760 shares of Common Stock has been reserved for issuance
under the Employee Stock Plan. As of December 10, 1996, the Company had options
outstanding to purchase an aggregate of 707,864 shares at a weighted average
exercise price of $0.2168 per share pursuant to the Employee Stock Plan. If
options expire without having been exercised, the unused shares revert to the
pool available for future option grants.
EMPLOYMENT AGREEMENT
In December 1995, the Company entered into an Employment Agreement (the
"Employment Agreement") with Mr. Hafer for a term of one year, subject to
automatic one-year renewal thereafter. Under the Employment Agreement, Mr. Hafer
in 1996 received a salary of $160,000 and is eligible to receive certain bonus
payments of up to fifty percent (50%) of his annual salary upon the achievement
by Mr. Hafer and the Company of certain performance objectives. Pursuant to the
Employment Agreement, Mr. Hafer also received a one-time cash bonus in the
aggregate amount of approximately $1.4 million and a one-time stock bonus of
200,000 shares of the Company's Series B Redeemable Preferred Stock, which
shares were to vest and be redeemed upon the occurrence of certain events,
including the consummation of this offering. Mr. Hafer is entitled under the
Employment Agreement to a quarterly performance bonus of $17,500 in each quarter
that the Company makes the required payments of interest on the Company's Class
A and Class B Subordinated Promissory Notes. Pursuant to the Employment
Agreement, Mr. Hafer was also granted options to purchase 705,880 shares of
Common Stock at an exercise price of $0.18375 per share. If Mr. Hafer is
terminated without cause, as defined in the Employment Agreement, he is entitled
to receive his salary, benefits, bonus and accelerated vesting of his stock
options for a period of one year, during which time and for an additional one
year thereafter Mr. Hafer has agreed not to compete, directly or indirectly,
with the Company. See "Certain Transactions." The Company is obligated to
maintain, at its
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<PAGE>
expense, a $1.0 million life insurance policy on Mr. Hafer's life, payable to
his wife or estate (or as otherwise directed by Mr. Hafer), until all shares of
Series B Redeemable Preferred Stock are redeemed.
In December 1996, the Employment Agreement was amended to accelerate the
vesting of all 200,000 shares of Series B Redeemable Preferred Stock to January
1, 1997, and to require the Company to redeem 80,000 shares on January 1, 1997
for $5.00 per share (an aggregate of $400,000). The balance of the shares will
be redeemed for $5.00 per share upon the consummation of this offering.
401(k) PROFIT SHARING PLAN AND TRUST
In February 1993, the Company established the Apex PC Solutions, Inc. 401(k)
Profit Sharing Plan and Trust (the "401(k) Plan") under Section 401(k) of the
Code. Under the 401(k) Plan, employees may contribute up to $9,500 of their
compensation per year subject to the elective limits as defined by guidelines of
the Internal Revenue Service (the "IRS") and the Company may make matching
contributions in amounts not to exceed 5% of each employee's annual
compensation. The Company's contributions to the 401(k) Plan during the years
ended December 31, 1993, 1994 and 1995 aggregated $26,790, $19,603, and $35,217,
respectively. Contributions to the 401(k) Plan during the nine months ended
September 30, 1995 and 1996 aggregated $26,413 and $43,217, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted the Apex PC Solutions, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") in December
1996, to be effective upon consummation of this offering. The Employee Stock
Purchase Plan is subject to approval by a majority of the Company's
shareholders. The Employee Stock Purchase Plan will offer 250,000 shares of the
Company's Common Stock for sale to employees at a discount. The Employee Stock
Purchase Plan is designed to comply with Section 423 of the Code and allows
participating employees to gain certain tax advantages, provided the participant
meets certain holding requirements.
All employees, including officers and employee-directors, will be eligible
to participate in the Employee Stock Purchase Plan if they are regularly
scheduled to work 20 or more hours per week, and customarily work for more than
five months each calendar year. Independent contractors (such as non-employee
directors) and consultants not considered Company "employees" for tax purposes
are not eligible to participate. In addition, the Employee Stock Purchase Plan
will exclude any employee who already owns 5% or more of the Company's stock.
Employees will participate by directing the Company to withhold a specified
amount from each of their regular paychecks (in no event more than 10% of pay).
At the end of each calendar quarter, the Company will use each participant's
withholdings to purchase Company Common Stock on behalf of the participant. The
purchase price for each share will be the lesser of (i) 85% of the fair market
value of a share on the first business day of the calendar quarter, or (ii) 85%
of the fair market value of a share on the last business day of the quarter. In
no event may a participant acquire more than $25,000 worth of Company Common
Stock in a calendar year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of its directors
for monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by Washington law. Such limitation does
not affect the availability of equitable remedies such as injunctive relief or
rescission. The Company's Articles of Incorporation and Bylaws also provide that
the Company will indemnify its directors and officers to the fullest extent
permitted by Washington law. The Company maintains directors' and officers'
insurance. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
43
<PAGE>
CERTAIN TRANSACTIONS
The Company operated as a division of Apex Computer Company through January
1993. In February 1993, the assets and liabilities of that division were spun
off as a dividend to Sterling Crum, who contributed those assets and liabilities
to the Company as its initial capitalization in return for the issuance by the
Company of 8.0 million shares of Common Stock. At that time, the assets were
valued by Mr. Crum, who was the sole director of the Company, at approximately
$776,000, and the liabilities were valued at approximately $189,000, for a net
value of approximately $587,000.
During 1994 and 1995, Mr. Crum advanced funds (by foregoing distributions)
for the operation of the Company in exchange for unsecured promissory notes
totaling approximately $225,000 for 1994 and $4.6 million for 1995. All of these
notes bore interest at the rate of 12% per annum except for two notes totaling
approximately $270,000 that bore interest at a rate equal to 100% of the
discounts taken by the Company for its early payments to suppliers (the "Net-10
Notes"). All principal and accrued and unpaid interest under these notes was
paid at or shortly after the closing of the Leveraged Recapitalization. At the
time of repayment, accrued interest on these notes (other than the Net-10 Notes)
totaled approximately $112,000, and accrued interest on the two Net-10 Notes
totaled less than $20,000.
During 1994 and 1995 when the Company was an S Corporation, the Company
distributed $792,279 and $992,815, respectively, to Mr. Crum as dividends. In
1993 and 1994 Mr. Crum received $101,534 and $3,000, respectively, as
compensation.
In December 1995, the Company sold to several entities affiliated with TA
Associates, Inc. (the "TA Group") 1.6 million shares of Common Stock at a price
of $0.18375 per share, 300,000 shares of Series A Convertible Preferred Stock at
a price of $7.35 per share, and $10.0 million in aggregate principal amount of
Class A Subordinated Promissory Notes, for an aggregate purchase price of
approximately $12.5 million. Jeffrey T. Chambers, a director of the Company, is
a Managing Director of TA Associates, Inc. The shares of Series A Convertible
Preferred Stock issued to the TA Group will convert into 2.4 million shares of
Common Stock upon the closing of this offering. The Class A Subordinated
Promissory Notes issued to the TA Group provide for the quarterly payment of
interest at 7% per annum, and the repayment of the principal amount and any
accrued and unpaid interest upon consummation of certain "Qualified Liquidity
Events," which include this offering. See "Use of Proceeds." In connection with
the Leveraged Recapitalization, the Company, the TA Group, Sterling Crum, Kevin
J. Hafer, the Chief Executive Officer and a director of the Company, and
Britannia Holdings Limited ("Britannia"), a major shareholder of the Company,
entered into a Shareholders' Agreement pursuant to which, among other things,
the TA Group was granted certain preemptive rights, co-sale rights and rights of
refusal on transfers of shares by the other shareholder parties, and the Company
granted the TA Group certain registration rights pursuant to a Registration
Rights Agreement. See "Description of Capital Stock--Registration Rights." The
Shareholders' Agreement will terminate by its terms upon consummation of this
offering.
In connection with the Leveraged Recapitalization, the Company redeemed from
Britannia 4.0 million shares of Common Stock for an aggregate price of
approximately $22.5 million, consisting of cash in the amount of $12.5 million
and the Class B Subordinated Promissory Note in the aggregate principal amount
of $10.0 million. The Class B Subordinated Promissory Note issued to Britannia
provides for the quarterly payment of interest at 7% per annum and the repayment
of the principal amount and any accrued and unpaid interest on the consummation
of certain "Qualified Liquidity Events," which include this offering. See "Use
of Proceeds." Of the approximately $12.5 million payable to Britannia, $2.5
million was placed in escrow by the Company to secure certain representations
and warranties made to the TA Group by the Company, Sterling Crum, the Company's
founder and a director, and Britannia in connection with the Venture
Transaction. This escrow arrangement will expire on the 30th day after audited
financial statements for the year ended December 31, 1996 are provided to the TA
Group.
Simultaneously with the Leveraged Recapitalization, Mr. Crum entered into an
S Corporation Indemnification Agreement with the Company indemnifying the
Company from and against any federal or
44
<PAGE>
state income tax liability resulting from the Company's failure to qualify as an
S Corporation under Internal Revenue Code Section 1361(a)(1) for any taxable
year ending or prior to October 31, 1995, the date on which the Company's status
as an S Corporation was terminated.
In connection with the Leveraged Recapitalization, Kevin J. Hafer, the
Company's President and Chief Executive Officer, entered into an Employment
Agreement with the Company for calendar year 1996, subject to automatic one-year
renewals thereafter. See "Management--Employment Agreement." Pursuant to the
Employment Agreement, Mr. Hafer received, among other things, 200,000 shares of
nonvoting Series B Redeemable Preferred Stock. In December 1996, the Employment
Agreement was amended so that the Series B Redeemable Preferred Stock vests in
Mr. Hafer on January 1, 1997, and the Company is obligated to redeem 80,000 of
such shares on January 1, 1997 for $5.00 per share and to redeem the balance of
such shares for $600,000 upon a "Qualified Public Offering," including this
offering. The Company is obligated to maintain, at its expense, a $1.0 million
life insurance policy on Mr. Hafer's life, payable to his wife or estate (or as
otherwise directed by Mr. Hafer), until all shares of Series B Redeemable
Preferred Stock are redeemed.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of November 30, 1996, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby,
certain information with respect to the ownership of the Common Stock of the
Company (or shares of Common Stock into which the Company's Series A Convertible
Preferred Stock is convertible) by (i) each person (or group of affiliated
persons) known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding Common Stock, (ii) each director of the Company, (iii)
each of the Company's executive officers named under "Management--Executive
Officers and Directors" and (iv) all executive officers and directors of the
Company as a group. Unless otherwise noted, each person or group identified
possesses sole voting and investment power with respect to such shares, subject
to community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- -------------------------
NAME OF BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
- ---------------------------------------------------------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Sterling Crum(2)................................................ 4,012,000 46.3% 4,012,000 33.0%
Jeffrey T. Chambers(3)(4)....................................... 4,012,000 46.3 4,012,000 33.0
TA Group(4) .................................................... 4,000,000 46.2 4,000,000 32.9
c/o TA Associates, Inc.
125 High Street
High Street Tower, Suite 2500
Boston, MA 02110
Britannia Holdings Limited(5) .................................. 2,800,000 32.3 2,800,000 23.0
P.O. Box 556
Main Street
Charleston, Nevis
Kevin J. Hafer(6)............................................... 404,844 4.7 404,844 3.3
Christopher L. Sirianni(7)...................................... 66,000 * 66,000 *
Douglas A. Bevis................................................ 25,748 * 25,748 *
William McAleer................................................. 12,000 * 12,000 *
Edwin L. Harper................................................. 12,000 * 12,000 *
All directors and executive officers as a group (7
persons)(8)................................................... 8,544,592 98.4% 8,544,592 70.1%
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of the Company appearing
elsewhere in this Prospectus.
(2) Includes 2,800,000 shares beneficially owned by Britannia Holdings Limited,
whose sole shareholder is The Duvall Trust, an irrevocable trust for the
benefit of Mr. Crum and certain members of his family. Mr. Crum disclaims
beneficial ownership with respect to all of such 2,800,000 shares. See Note
(5) below.
(3) Includes 12,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share. Also includes 4,000,000
shares beneficially owned by the TA Group. See Note (4) below. Mr. Chambers,
a director of the Company, is a General Partner of TA Venture Investors
Limited Partnership and is a Managing Director of TA Associates, Inc., and
thus directly or indirectly has the right to direct the voting or
disposition of the shares held by each entity in the TA Group. Mr. Chambers
disclaims beneficial ownership to all of the 4,000,000 shares beneficially
owned
46
<PAGE>
by the TA Group, except 5,032 shares beneficially owned by TA Venture
Investors Limited Partnership.
(4) Includes shares beneficially owned by the following entities managed by or
affiliated with the TA Group: Advent VII, L.P., 2,400,976 shares; Advent
Atlantic and Pacific II, L.P., 1,317,040 shares; Advent New York, L.P.,
240,104 shares; and TA Venture Investors Limited Partnership, 41,880 shares.
If the Underwriters' over-allotment option is exercised in full, the TA
Group will sell 226,000 shares of Common Stock and after this offering will
beneficially own 3,774,000 shares or 31.0% of the total number of shares of
Common Stock outstanding.
(5) If the Underwriters' over-allotment option is exercised in full, Britannia
will sell 226,000 shares of Common Stock and after this offering will
beneficially own 2,574,000 shares or 21.2% of the total number of shares of
Common Stock outstanding.
(6) If the Underwriters' over-allotment option is exercised in full, Mr. Hafer
will sell 73,000 shares of Common Stock and after this offering will
beneficially own 331,844 shares or 2.7% of the total number of shares of
Common Stock outstanding.
(7) Includes 11,576 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share.
(8) Includes 23,576 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share. Also includes 4,000,000
shares held by the TA Group and 2,800,000 shares held by Britannia. See
Notes (2), (3) and (7) above. If the Underwriters' over-allotment option is
exercised in full, all directors and executive officers of the Company as a
group will beneficially own 8,019,592 shares or 65.9% of the total number of
shares of Common Stock outstanding after this offering.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, no par value, and 500,000 shares of Preferred Stock, no par value,
of which 300,000 shares are designated Series A Convertible Preferred Stock and
200,000 shares are designated Series B Redeemable Preferred Stock. Upon
consummation of this offering, all outstanding Series A Convertible Preferred
Stock will be converted into 2,400,000 shares of Common Stock and all
outstanding Series B Redeemable Preferred Stock will be redeemed. See "Use of
Proceeds."
COMMON STOCK
As of December 10, 1996, there were 8,660,016 shares of Common Stock
outstanding and held of record by 17 shareholders, after giving effect to the
conversion of all outstanding shares of Series A Convertible Preferred Stock.
Based upon such number of shares deemed outstanding as of that date and giving
effect to the issuance of the 3,500,000 shares of Common Stock offered hereby,
there will be 12,160,016 shares outstanding upon the consummation of this
offering.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the shareholders and do not
have cumulative voting rights. Subject to the preferences that may be applicable
to any outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors of the Company out of funds legally available
therefor. All outstanding shares of Common Stock are, and the shares to be sold
in the offering when issued and paid for will be, fully paid and nonassessable.
In the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to 1,000,000 shares of the Preferred Stock in one or more series. Each
series of Preferred Stock shall have such designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof as the Board of Directors shall determine. The
preferences, powers, rights and restrictions of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for dis-tribution to holders of Common Stock or
affect adversely the rights and powers, including voting rights, of the holders
of Common Stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan or intent to
issue any shares of Preferred Stock. Upon consummation of this offering, there
will be no shares of Preferred Stock outstanding.
REGISTRATION RIGHTS
One hundred eighty (180) days after the closing of this offering, the
holders ("Holders") of an aggregate of approximately 4,000,000 shares of Common
Stock (3,774,000 if the Underwriters' over-allotment option is exercised in
full) (the "Registrable Shares") are entitled to certain rights with respect to
the registration of such shares for offer and sale to the public under the
Securities Act. Under these provisions, the Holders of at least 40% of the
Registrable Shares may request that the Company file up to two registration
statements under the Securities Act with respect to such shares. Upon receipt of
such a request, the Company is required to notify all other Holders and to use
all reasonable efforts to effect such
48
<PAGE>
registration, subject to certain conditions. In addition, upon the request of
holders of at least 20% of the Registrable Shares, the Company may be required
to effect an unlimited number of registrations on Form S-3. Further, whenever
the Company proposes to register any of its securities under the Securities Act
for its own account or for the account of other security holders, the Company is
required to notify each Holder of the proposed registration and include all
Registrable Shares which such Holder may request to be included in such
registration, subject to certain limitations. The Company has obtained a waiver
of these rights to the extent they would have applied to this offering.
Generally, the Company is required to bear all expenses (except underwriting
discounts, selling commissions and stock transfer taxes) of all registrations.
ANTITAKEOVER PROVISIONS
STATUTORY PROVISIONS. Washington law contains certain provisions that may
have the effect of delaying, deterring or preventing a change in control of the
Company. Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA")
prohibits, subject to certain exceptions, a merger, sale of assets or
liquidation of the Company involving an "interested shareholder" (defined as a
person who owns beneficially 20% or more of the Company's voting securities)
unless the transaction is determined to be at a "fair price" or otherwise
approved by a majority of the Company's disinterested directors or is approved
by holders of two-thirds of the Company's outstanding voting securities, other
than those held by the interested shareholder. A Washington corporation may, in
its articles of incorporation, exempt itself from coverage of this provision,
but the Company has not done so. In addition, Chapter 23B.19 of the WBCA
prohibits the Company, with certain exceptions, from engaging in certain
significant business transactions with an "acquiring person" (defined as a
person who acquires 10% or more of the Company's voting securities without the
prior approval of the Company's Board of Directors) for a period of five years
after such acquisition. If the Company moves its principal executive offices
outside Washington State or if neither a majority nor 1,000 of the Company's
employees are residents of Washington State, the protections afforded by Chapter
23B.19 would no longer be available. The prohibited transactions include, among
others, a merger with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, or otherwise allowing the acquiring
person to receive any disproportionate benefit as a shareholder. The Leveraged
Recapitalization pursuant to which the TA Group became a greater-than-10%
shareholder was approved by the Company's Board of Directors, and as a result
the TA Group is not considered an "acquiring person" for purposes of Chapter
23B.19. The Company may not exempt itself from coverage of this statue. These
statutory provisions may have the effect of delaying, deterring or preventing a
change in control of the Company.
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS. The Company's Articles of
Incorporation authorize the Board of Directors to issue up to 1,000,000 shares
of Preferred Stock with such rights and preferences as the Board of Directors
may determine. The issuance of such shares may have the effect of delaying,
deterring or preventing a change in control of the Company. See "--Preferred
Stock."
The Articles of Incorporation provide that holders of the Company's voting
securities are not entitled to cumulate votes in the election of directors. As a
result, holders of a majority of the Company's voting securities may elect the
entire Board of Directors, subject to the voting rights of holders of Preferred
Stock. See "--Common Stock."
In addition, the Company's Amended and Restated Bylaws provide that
shareholders may not raise new matters or nominate directors at a meeting of
shareholders unless certain advance notice requirements are satisfied.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 12,160,016 shares of
Common Stock outstanding. Of these shares, all of the 3,500,000 shares sold in
the offering (4,025,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act, unless acquired by an "affiliate" of the
Company as that term is defined in Rule 144 ("Rule 144") under the Securities
Act, which shares will then be subject to the resale limitations of Rule 144
described below. The remaining 8,660,016 shares (8,135,016 shares if the
Underwriters' over-allotment option is exercised in full) will be "restricted
securities" within the meaning of Rule 144.
Approximately 1,860,016 Restricted Shares will become eligible for sale in
the public market upon the expiration of lock-up agreements between the
Underwriters and the holders of such shares 180 days after the date of this
Prospectus, subject to compliance with certain provisions of Rule 144. The
remaining Restricted Shares will become eligible for resale under Rule 144 at
various times in 1997 and 1998. In addition, beginning 180 days after the date
of this Prospectus, the holders of 4,000,000 shares of Common Stock may require
that a portion of such shares be registered under the Securities Act. See
"Description of Capital Stock--Registration Rights."
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the outstanding shares of
the Common Stock (approximately 121,600 shares immediately after completion of
the offering); or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements relating to the manner and notice of sale
and the availability of current public information about the Company.
The Company and the holders of all of its outstanding securities have agreed
with the Underwriters not to offer, sell or otherwise dispose of any shares of
Common Stock or securities convertible into or exercisable or exchangeable for
such shares for a period of 180 days after the date of this offering without the
prior written consent of Montgomery Securities, except that the Company, without
such consent, may grant options or issue stock upon exercise of new or
outstanding options pursuant to the Employee Stock Plan.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions, in each case commencing
upon the expiration of lock-up agreements between the Underwriters and the
holders of such shares 180 days after the date of this Prospectus.
The Company has reserved 2,161,760 shares of Common Stock for issuance under
the Employee Stock Plan and 250,000 shares of Common Stock for issuance under
the Employee Stock Purchase Plan. At appropriate times subsequent to completion
of the offering, the Company intends to file registration statements under the
Securities Act to register the Common Stock to be issued under the Employee
Stock Plan and the Employee Stock Purchase Plan. After the effective date of
such registration statements, shares issued under the Employee Stock Plan and
the Employee Stock Purchase Plan will be freely tradeable without restriction or
further registration under the Securities Act, unless acquired by affiliates of
the Company.
50
<PAGE>
Prior to this offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the offering. Sales of substantial
amounts of Common Stock in the public market following the offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock or the ability of the Company to raise capital through sales of
its equity securities. See "Risk Factors--Shares Eligible for Future Sale."
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities and Dain Bosworth Incorporated (together, the "Representatives") have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Montgomery Securities.....................................................................
Dain Bosworth Incorporated................................................................
------------
Total............................................................................... 3,500,000
------------
------------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the offering
price and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Selling Shareholders have granted the Underwriters an option exercisable
during the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 525,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 3,500,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
over-allotment option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table.
The Company and the holders of all of its outstanding securities have agreed
that, for a period of 180 days following the date of this Prospectus, they will
not, without the prior written consent of Montgomery Securities, offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock, except that
the Company, without such consent, may grant options or issue stock upon
exercise of new or outstanding options pursuant to the Employee Stock Plan.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
51
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining the initial public offering price of
the Common Stock are prevailing market conditions, the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuations of companies in related
businesses.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the offering, including
liabilities under the Securities Act, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Davis Wright Tremaine LLP, Seattle, Washington. Certain
legal matters relating to this offering will be passed upon for the Underwriters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
The balance sheets as of December 31, 1995 and September 30, 1996 and the
statements of operations, shareholders' equity (deficit) and cash flows for the
eleven months ended December 31, 1993, the years ended December 31, 1994 and
1995 and for the nine months ended September 30, 1996 included in this
Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form SB-2 (together with
any amendments thereto, the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") under the Securities Act with respect to
the Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement and
reference is made to the Registration Statement and the exhibits and schedules
thereto for further information with respect to the Company and the Common Stock
offered hereby. This Prospectus contains summaries of the material terms and
provisions of certain documents and in each instance reference is made to the
copy of such document filed as an exhibit to the Registration Statement. Each
such summary is qualified in its entirety by such reference.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York, and Chicago, Illinois, at prescribed rates.
The Registration Statement and such exhibits and schedules are also available at
the Commission's Web site (http://www.sec.gov).
Upon completion of the offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission. The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
52
<PAGE>
APEX PC SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Report of Independent Accountants.................................................................. F-2
Financial Statements:
Balance Sheets................................................................................... F-3
Statements of Operations......................................................................... F-4
Statement of Changes in Shareholders' Equity (Deficit)........................................... F-5
Statements of Cash Flows......................................................................... F-6
Notes to Financial Statements.................................................................... F-7 to F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Apex PC Solutions, Inc.
We have audited the accompanying balance sheets of Apex PC Solutions, Inc.
(the "Company") as of December 31, 1995 and September 30, 1996 and the related
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the eleven months ended December 31, 1993, each of the years ended
December 31, 1994 and 1995 and for the nine months ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Apex PC Solutions, Inc. as
of December 31, 1995 and September 30, 1996 and the results of its operations
and its cash flows for the eleven months ended December 31, 1993, each of the
years ended December 31, 1994 and 1995, and the nine months ended September 30,
1996, in conformity with generally accepted accounting principles.
Seattle, Washington
December 9, 1996
F-2
<PAGE>
APEX PC SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,676,290 $ 1,563,141
Accounts receivable, net of allowance for doubtful accounts....................... 4,499,404 6,189,012
Inventories....................................................................... 1,257,772 1,417,682
Prepaid expenses.................................................................. 124,047 98,404
Deferred tax assets............................................................... 60,000 263,400
------------- -------------
Total current assets.......................................................... 8,617,513 9,531,639
------------- -------------
Property and equipment, at cost:
Leasehold improvements............................................................ 4,677
Furniture and office equipment.................................................... 125,846 248,599
Computer and other equipment...................................................... 159,330 295,193
------------- -------------
285,176 548,469
Less accumulated depreciation..................................................... 86,089 163,869
------------- -------------
199,087 384,600
------------- -------------
Other assets (primarily financing costs)............................................ 231,400 242,036
------------- -------------
$ 9,048,000 $10,158,275
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt................................................. $ 674,125 $ 401,079
Accounts payable.................................................................. 930,265 489,283
Accrued wages and commissions..................................................... 1,739,703 284,619
Accrued warranty costs............................................................ -- 400,000
Customer deposits................................................................. -- 379,122
Other accrued expenses............................................................ 343,337 195,669
Deferred revenue.................................................................. 280,302 --
------------- -------------
Total current liabilities..................................................... 3,967,732 2,149,772
Subordinated debt................................................................... 20,000,000 20,000,000
Long-term debt, less current portion................................................ 5,614,988 5,614,898
Deferred taxes...................................................................... 8,000 13,000
------------- -------------
Total liabilities............................................................. 29,590,720 27,777,670
------------- -------------
Commitments and contingencies
Preferred stock, Series B redeemable, no par value; 200,000 shares authorized,
issued and outstanding............................................................ 1,000,000 1,000,000
------------- -------------
Shareholders' equity (deficit:)
Preferred stock, Series A convertible, no par value; 300,000 shares authorized,
issued and outstanding.......................................................... 2,205,000 2,205,000
Common stock, no par value; 10,000,000 shares authorized; 5,600,000 and 5,691,368
shares issued and outstanding................................................... 295,000 344,363
Deferred compensation............................................................. (1,000,000) (905,962)
Accumulated deficit............................................................... (23,042,720) (20,262,796)
------------- -------------
Total shareholders' equity (deficit).......................................... (21,542,720) (18,619,395)
------------- -------------
Total liabilities and shareholders' equity (deficit)........................ $ 9,048,000 $10,158,275
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN NINE MONTHS ENDED SEPTEMBER
MONTHS ENDED YEARS ENDED DECEMBER 31, 30,
DECEMBER 31, --------------------------- ----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales.............................. $2,944,827 $ 7,310,565 $ 19,670,619 $ 11,792,904 $ 23,267,118
Cost of sales.......................... 1,636,184 4,493,275 10,635,672 6,189,752 13,515,800
------------ ------------ ------------- ------------- -------------
Gross profit..................... 1,308,643 2,817,290 9,034,947 5,603,152 9,751,318
------------ ------------ ------------- ------------- -------------
Research and development............... 226,354 277,878 913,027 645,317 655,528
Sales and marketing.................... 122,488 370,264 1,631,075 1,003,029 1,757,632
General and administrative............. 529,662 1,235,657 2,753,763 803,178 1,704,078
------------ ------------ ------------- ------------- -------------
Total operating expenses......... 878,504 1,883,799 5,297,865 2,451,524 4,117,238
------------ ------------ ------------- ------------- -------------
Income from operations........... 430,139 933,491 3,737,082 3,151,628 5,634,080
------------ ------------ ------------- ------------- -------------
Interest income (expense), net......... 1,874 7,023 (186,302) (32,277) (1,419,294)
------------ ------------ ------------- ------------- -------------
Income from continuing operations
before income taxes.................. 432,013 940,514 3,550,780 3,119,351 4,214,786
Provision (benefit) for income taxes... -- -- (52,000) -- 1,434,862
------------ ------------ ------------- ------------- -------------
Income from continuing
operations..................... 432,013 940,514 3,602,780 3,119,351 2,779,924
Discontinued operations:
Income from discontinued service
operations......................... 244,712 601,064 -- -- --
------------ ------------ ------------- ------------- -------------
Net income..................... $ 676,725 $ 1,541,578 $ 3,602,780 $ 3,119,351 $ 2,779,924
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Pro forma data (Note 1):
Historical net income................ $ 676,725 $ 1,541,578 $ 3,550,780 $ 3,119,351 $ 4,214,786
Pro forma provision for income
taxes.............................. 230,086 524,137 1,207,265 1,060,579 1,434,862
------------ ------------ ------------- ------------- -------------
Pro forma net income................. $ 446,639 $ 1,017,441 $ 2,343,515 $ 2,058,772 $ 2,779,924
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Pro forma income per share........... $ 0.20 $ 0.18 $ 0.30
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares used in
computing pro forma net income per
share.............................. 11,519,527 11,519,527 9,119,527
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------- COMMON STOCK RETAINED
AMOUNT --------------------- DEFERRED EARNINGS
SHARES SERIES A SHARES AMOUNT COMPENSATION (DEFICIT) TOTAL
--------- ---------- ---------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization, February 1,
1993 (Note 1)........................ -- $ -- 8,000,000 586,075 $ -- $ -- $ 586,075
Net income............................. -- -- -- -- -- 676,725 676,725
Distribution to shareholder............ -- -- -- -- -- (305,617) (305,617)
--------- ---------- ---------- --------- ------------- ------------ ------------
Balances, December 31, 1993............ -- -- 8,000,000 586,075 -- 371,108 957,183
Net income............................. -- -- -- -- -- 1,541,578 1,541,578
Distribution to shareholder............ -- -- -- -- -- (1,037,124) (1,037,124)
--------- ---------- ---------- --------- ------------- ------------ ------------
Balances, December 31, 1994............ -- -- 8,000,000 586,075 -- 875,562 1,461,637
Net income............................. -- -- -- -- -- 3,602,780 3,602,780
Distributions (cash and notes) to
shareholder.......................... -- -- -- (585,075) -- (5,022,062) (5,607,137)
Issuance of Series A convertible
preferred stock...................... 300,000 2,205,000 -- -- -- -- 2,205,000
Deferred compensation related to
issuance of Series B redeemable
preferred stock...................... -- -- -- -- (1,000,000) -- (1,000,000)
Issuance of common stock............... -- -- 1,600,000 294,000 -- -- 294,000
Redemption of common stock............. -- -- (4,000,000) -- -- (22,499,000) (22,499,000)
--------- ---------- ---------- --------- ------------- ------------ ------------
Balances, December 31, 1995............ 300,000 2,205,000 5,600,000 295,000 (1,000,000) (23,042,720) (21,542,720)
Net income............................. -- 2,779,924 2,779,924
Issuance of common stock options....... -- -- -- 32,574 (32,574) -- --
Exercise of stock options.............. -- -- 91,368 16,789 -- -- 16,789
Amortization of deferred compensation.. -- -- -- -- 126,612 -- 126,612
--------- ---------- ---------- --------- ------------- ------------ ------------
Balances, September 30, 1996........... 300,000 $2,205,000 5,691,368 $ 344,363 $ (905,962) $(20,262,796) $(18,619,395)
--------- ---------- ---------- --------- ------------- ------------ ------------
--------- ---------- ---------- --------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN YEARS ENDED DECEMBER NINE MONTHS ENDED
MONTHS ENDED 31, SEPTEMBER 30,
DECEMBER 31, ---------------------- -----------------------
1993 1994 1995 1995 1996
------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income.......................................... $ 676,725 $1,541,578 $3,602,780 $3,119,351 $2,779,924
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 34,762 43,530 60,288 38,185 112,146
Amortization of deferred compensation............. -- -- -- -- 126,612
Loss on disposal of equipment..................... -- 2,583 10,614 10,614 --
Deferred taxes.................................... -- -- (52,000) -- (198,400)
Provision for obsolete and slow moving
inventory....................................... -- -- -- 16,725 90,000
Provision for doubtful accounts................... 8,227 -- 30,000 2,500 100,000
Changes in:
Accounts receivable............................. (911,552) (163,136) (3,052,603) (1,459,997) (1,789,608)
Inventories..................................... 24,997 (197,083) (919,748) (313,682) (249,910)
Prepaid expenses................................ (7,122) (45,346) (71,579) 14,527 25,643
Other assets.................................... -- -- (10,922) -- (45,000)
Accounts payable................................ (50,347) 294,061 543,079 339,540 (440,982)
Accrued wages and commissions................... 91,037 19,796 1,592,713 (2,989) (1,455,084)
Accrued warranty costs.......................... -- -- -- -- 400,000
Customer deposit................................ -- -- -- -- 379,122
Other accrued expenses.......................... 159,986 (52,495) 226,028 (73,556) (147,670)
Deferred revenue................................ -- -- 280,302 -- (280,302)
------------ ---------- ---------- ----------- ----------
Total adjustments............................. (650,012) (98,090) (1,363,828) (1,428,133) (3,373,433)
------------ ---------- ---------- ----------- ----------
Net cash provided by (used in) operating
activities.................................. 26,713 1,443,488 2,238,952 1,691,218 (593,509)
------------ ---------- ---------- ----------- ----------
Cash flows from investing activities:
Proceeds from sale of equipment..................... -- 1,839 -- -- --
Purchases of equipment.............................. (72,264) (25,718) (166,217) (135,119) (263,293)
------------ ---------- ---------- ----------- ----------
Net cash used in investing activities......... (72,264) (23,879) (166,217) (135,119) (263,293)
Cash flows from financing activities:
Distributions paid.................................. -- (792,279) (992,815) (1,567,357) --
Principal payments on notes to shareholder.......... (305,617) (249,845) (4,569,322) -- (270,000)
Proceeds from the issuance of long-term debt........ -- -- 16,000,000 -- (3,136)
Payment of long-term debt........................... -- -- (1,347) -- --
Payment of loan fees................................ -- -- (220,478) -- --
Proceeds from the issuance of notes to
shareholder....................................... 230,000 -- -- 574,543 --
Proceeds from cash contributed in initial
capitalization.................................... 131,200 -- -- -- --
Proceeds from the issuance of Series A preferred and
common stock...................................... -- -- 2,499,000 -- 16,789
Redemption of common stock.......................... -- -- (12,499,000) -- --
------------ ---------- ---------- ----------- ----------
Net cash provided by (used in) financing
activities.................................. 55,583 (1,042,124) 216,038 (992,814) (256,347)
------------ ---------- ---------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents......................................... 10,032 377,485 2,288,773 563,285 (1,113,149)
Cash and cash equivalents at beginning of period...... -- 10,032 387,517 387,517 2,676,290
------------ ---------- ---------- ----------- ----------
Cash and cash equivalents at end of period............ $ 10,032 $ 387,517 $2,676,290 $ 950,802 $1,563,141
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............. $ -- $ 23,295 $ 186,817 $ 44,184 $1,439,333
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
Cash paid for Federal income taxes.................. $ -- $ -- $ -- $ -- $ 82,000
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
Equipment obtained through capital lease............ $ -- $ -- $ 20,460 $ -- $ --
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
Distributions to shareholder evidenced by notes
payable........................................... $ -- $ 244,845 $4,614,322 $ -- $ --
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
Redemption of common stock evidenced by note
payable........................................... $ -- $ -- $10,000,000 $ -- $ --
------------ ---------- ---------- ----------- ----------
------------ ---------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Apex PC Solutions, Inc. (the "Company") was incorporated in December 1992.
Through January of 1993, the Company operated as a division of another entity
owned by the Company's shareholder. In February 1993, $586,075 in net assets
were spun off from the related entity, representing the Company's initial
capitalization. The predecessor bases of assets and liabilities contributed in
the initial capitalization and recorded as contributed capital (common stock)
were as follows:
<TABLE>
<S> <C>
Cash............................................................. $ 131,200
Accounts receivable.............................................. 410,340
Inventories...................................................... 165,938
Plant and equipment.............................................. 68,044
Accounts payable................................................. (143,472)
Accrued liabilities.............................................. (45,975)
---------
$ 586,075
---------
---------
</TABLE>
The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, monitor and mouse configuration,
facilitating more efficient network management and administration. The Company
purchases material component parts for the manufacture of switching systems and
integrated server cabinets from domestic suppliers, and generally contracts with
third parties for the subassembly of products.
RECAPITALIZATION OF THE COMPANY
During 1995, the Company was recapitalized through a series of transactions
whereby a portion of the interest of one of its shareholders was redeemed for
cash and a note. Concurrently, new shareholders purchased shares of common and
preferred stock and provided additional financing to the Company. Immediately
prior to the recapitalization, the Company declared dividends to the shareholder
of $992,815 (including redemption of common stock with a basis of $585,075). The
significant components of the leveraged recapitalization were as follows:
The Company split its common stock 1,000 shares for 1.
A shareholder of the Company received $4,569,322 from the Company for
repayments of existing notes.
The Company redeemed 4,000,000 shares (adjusted for all stock splits)
from a shareholder through payment of $12,499,000 in cash and issuance of a
$10,000,000 subordinated note.
The Company issued 1,600,000 shares (adjusted for all stock splits) of
common stock and 300,000 shares of Series A Convertible Preferred Stock for
$294,000 and $2,205,000, respectively, to a group of investors. At the same
time, the investors loaned the Company $10,000,000 evidenced by Series A
Subordinated Notes.
F-7
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company issued 200,000 shares of Series B Redeemable Preferred Stock
to an officer of the Company (see Note 8).
The new investors did not acquire substantially all of the shares
representing voting interests of the Company. Accordingly, the transaction has
been recorded as a recapitalization with amounts distributed to the sole
shareholder recorded as charges to shareholders' equity (deficit). The
transaction did not result in a new basis of accounting for the assets and
liabilities of the Company because it would not have been appropriate under EITF
Issue No. 88-16, "Basis in Leveraged Buyout Transactions" or pushdown accounting
guidelines of the Securities and Exchange Commission ("SEC").
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited September 30, 1995 financial statements included herein have
been prepared by the Company. The information furnished in the unaudited
financial statements includes all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary for a
fair presentation of such financial statements.
CASH AND CASH EQUIVALENTS
The Company considers cash and short-term investments which are highly
liquid, with maturities of three months or less, to be cash equivalents.
INVENTORIES
Inventories are recorded at the lower of cost (as determined by the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed on the basis of estimated
useful lives ranging from three to seven years using the straight-line method.
Maintenance and repairs are charged to expense as incurred. Significant
betterments are capitalized. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statement of
operations.
OTHER ASSETS
Other assets consist primarily of financing costs which are amortized using
the straight-line method over five to seven years.
REVENUE RECOGNITION
Revenue on equipment sales is recognized upon shipment, net of allowances
for potential returns. Certain customer contracts require equipment installation
at the customer's location and in those circumstances, revenue is recognized
after completion of the installation.
F-8
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
On October 31, 1995, the Company's status as an S Corporation for Federal
income tax purposes was automatically terminated due to a sale of stock to an
entity not eligible to be a shareholder of a subchapter S Corporation. Taxable
income prior to the change in status was taxed directly to the former sole
shareholder and financial statements for periods through this date reflected no
provision for income taxes. Subsequent to October 31, 1995 the Company has been
taxed as a C Corporation for Federal income tax purposes. The Company has
provided for these income taxes under the principles of Statement of Financial
Accounting Standards No. 109 SFAS 109.
PRO FORMA INCOME PER SHARE
The pro forma income per share is based on the weighted average number of
shares of common stock and common equivalent shares outstanding, adjusted for
stock splits retroactively applied to all periods presented (see Note 8).
Pursuant to certain SEC Staff Accounting Bulletins, common stock and common
stock equivalents issued at prices below the assumed initial public offering
("IPO") price of $10.00 during the 12 months immediately preceding the date of
the initial filing of the Registration Statement have been included in the
calculation of income per share, using the treasury stock method based on the
assumed IPO price, as if the common stock equivalents were outstanding for all
periods presented.
PRO FORMA DATA
Pro forma provisions for income taxes, net income and per share data
represent the results of operations for the eleven months ended December 31,
1993, the two years ended December 31, 1994 and 1995 and for the nine months
ended September 30, 1995, adjusted to reflect a provision for income taxes,
calculated as if the Company had been taxed as a C Corporation.
USE OF ESTIMATES
The preparation of the 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 and
assumptions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.
The estimated fair value of notes payable approximates their recorded
amounts because these instruments bear interest either at market rates or at
floating rates which approximate market rates for similar instruments.
F-9
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATIONS OF CUSTOMER BASE AND CREDIT RISK
A major customer accounted for 36%, 54%, 45%, and 25% of the Company's net
sales (excluding service sales) for the years ended December 31, 1994 and 1995
and for the nine months ended September 30, 1995 and 1996, respectively. The
receivable from this customer totaled approximately 67% and 45% of trade
receivables at December 31, 1995 and September 30, 1996, respectively. For the
nine months ended September 30, 1996, the Company had sales to three other major
customers which accounted for 24%, 10% and 8% of net sales. The aggregate
receivables from these three customers totaled 21% of trade accounts receivable
at September 30, 1996. The customer that accounted for 24% of net sales for the
nine months ended September 30, 1996 accounted for 1% of the Company's sales in
1995, and canceled its 1996 OEM arrangement with the Company in mid 1996 (see
Note 11). Another customer accounted for 49% of the Company's net sales,
including revenues from discontinued service operations (which, at that time,
were predominately computer maintenance services), for the eleven months ended
December 31, 1993, and accounted for less than 5% of sales in each subsequent
year.
For the remaining customers, management believes concentrations of credit
risk with respect to trade receivables are limited due to the nature of the
customers comprising the Company's customer base. The Company performs credit
reviews on major new customers, but rarely requires collateral.
The Company maintains its cash in a bank in amounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
MAJOR VENDORS
The Company purchases all server cabinets from one vendor and has another
vendor sub-assemble its switching systems. Although there are a limited number
of vendors able to assemble concentrator switches, management believes that
other vendors could provide similar services on comparable terms. A change in
vendors, however, could cause a delay in manufacturing and possible loss of
sales, which would adversely affect operating results.
WARRANTY COSTS
The Company provides, by a current charge to operations, an amount it
estimates will be needed to cover future warranty obligations for products sold
during the year.
RESEARCH AND DEVELOPMENT
The Company makes significant investments in research for the development of
new technologies and products, including both switching systems and server
cabinets. Research and development costs are charged to expense as incurred.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
$24,130 for the eleven months ended December 31, 1993, $309,936 and $772,484 for
the years ended December 31, 1994 and 1995, respectively, and $429,511 and
$743,035 for the nine months ended September 30, 1995 and 1996, respectively.
F-10
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS
Because redemption of the Series B Preferred Stock is controlled by the
holder, in accordance with certain financial statement requirements of the SEC,
it has been reclassified from shareholders' equity (deficit).
Certain other reclassifications were made to the 1993, 1994 and 1995
financial statements to conform with the 1996 presentation. The
reclassifications do not affect income, stockholder's deficit or cash flows as
previously reported.
2. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Trade receivables............................................... $4,529,404 $ 6,319,012
Less allowance for doubtful accounts............................ (30,000) (130,000)
------------ -------------
$4,499,404 $ 6,189,012
------------ -------------
------------ -------------
</TABLE>
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Raw materials................................................... $ 688,855 $ 959,355
Work-in-process................................................. 243,790 262,127
Finished goods.................................................. 325,127 286,200
------------ -------------
1,257,772 1,507,682
Less reserve for obsolescence................................... -- (90,000)
------------ -------------
$1,257,772 $ 1,417,682
------------ -------------
------------ -------------
</TABLE>
4. LINE OF CREDIT AND LETTERS OF CREDIT:
Under the terms of a credit agreement with a bank (Note 5), the Company has
an operating line of credit allowing it to borrow up to a specified amount based
upon eligible accounts receivable, as defined in the agreement. The agreement
also states that the bank will issue commercial letters of credit on the
Company's behalf such that the aggregate amount of borrowings under the
operating line and letter of credit arrangements does not exceed $3,000,000. The
operating line and letter of credit facility expire on April 15, 1997 and bear
interest at prime (8.25% at September 30, 1996) plus 1.5%. There were no
borrowings on the line of credit facility as of September 30, 1996, nor at any
time during 1996.
F-11
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
5. SUBORDINATED AND LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Note payable to bank, collateralized by substantially all of
the Company's assets, interest payable monthly at prime
(8.25%, at September 30, 1996) plus 1.5%, principal payments
of $400,000 and $500,000 are required at December 31, 1996
and 1997, respectively, matures December 2002................ $ 6,000,000 $ 6,000,000
Uncollateralized notes payable to stockholder, interest payable
monthly at 12%, paid in full in January, 1996................ 270,000 --
Notes payable to shareholders subordinated to borrowings from
the bank under note payable and line of credit and letter of
credit facility, principal payments of $10,000,000 in
December 2000 and $10,000,000 in December 2001, and interest
payable quarterly at 7.0%. Unpaid interest and principal
payable in full on the consummation of a Qualified Liquidity
Event as defined in note agreements.......................... 20,000,000 20,000,000
Capital lease obligation for the purchase of equipment totaling
$20,460, interest at 6.28%, monthly principal and interest
payments of $442, due in 1999................................ 19,113 15,977
------------- -------------
26,289,113 26,015,977
Less current portion........................................... 674,125 401,079
------------- -------------
$ 25,614,988 $ 25,614,898
------------- -------------
------------- -------------
</TABLE>
The aggregate amount of required principal payments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Period Ended December 31:
1996......................................................... $ 674,125 $ 401,079
1997......................................................... 504,577 504,487
1998......................................................... 4,777 4,777
1999......................................................... 5,634 5,634
2000......................................................... 10,000,000 10,000,000
Thereafter................................................... 15,100,000 15,100,000
------------- -------------
$ 26,289,113 $ 26,015,977
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
5. SUBORDINATED AND LONG-TERM DEBT: (CONTINUED)
The Company is party to an agreement with a bank for short-term (Note 4) and
long-term credit facilities, all as described above. Borrowings are
collateralized by substantially all assets of the Company. The agreement
includes various restrictive covenants which, among other things, restrict the
payment of dividends and indebtedness and require the Company to maintain
minimum debt service coverage ratios, minimum working capital amounts and limit
capital expenditures. The agreement also specifies that, so long as there are
amounts outstanding pursuant to the credit facility, on May 1 of each year,
beginning in 1997, the Company will pay the bank 25% of its excess cash flow, as
defined in the agreement, unless the ratio of cash flow to debt service is
greater than 1:1.
6. OPERATING LEASE COMMITMENTS:
The Company leases its facilities for $18,074 per month under an operating
lease expiring September 30, 1998. The Company pays taxes, insurance, normal
maintenance and certain other operating expenses. The lease includes provisions
for rent escalation based on increases in the consumer price index. The Company
has two consecutive two year renewal options on this lease.
Future minimum payments under the non-cancelable operating lease are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Period Ended
1996.......................................................... $ 216,888 $ 54,222
1997.......................................................... 216,888 216,888
1998.......................................................... 216,888 216,888
------------ -------------
$ 650,664 $ 487,998
------------ -------------
------------ -------------
</TABLE>
Rent expense totaled $34,400 for the eleven months ended December 31, 1993,
$53,397 and $125,238 for the years ended December 31, 1994 and 1995,
respectively, and $80,486 and $162,666 for the nine months ended September 30,
1995 and 1996, respectively.
7. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan that covers eligible full-time employees.
Employer matching contributions are made at the discretion of the Board of
Directors. Employer contributions totaled $26,790 for the eleven months ended
December 31, 1993, $19,603 and $35,217 for the years ended December 31, 1994 and
1995, respectively, and $26,413 and $43,217 for the nine months ended September
30, 1995 and 1996, respectively.
8. SHAREHOLDERS' EQUITY (DEFICIT):
The Company is authorized to issue 10,000,000 shares of voting common stock,
no par value. At its discretion, the Board of Directors may declare dividends on
shares of common stock. Upon liquidation or dissolution, holders of common stock
will be paid only after both Series A and Series B Preferred Stock preferences
have been satisfied.
F-13
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
8. SHAREHOLDERS' EQUITY (DEFICIT): (CONTINUED)
On December 27, 1995 all outstanding shares of common stock were split 1,000
for one. On January 22, 1996 all outstanding shares of common stock were split
two for one. On December 9, 1996, all outstanding shares of common stock were
split four for one. All common stock share amounts have been restated to reflect
these stock splits.
During 1995 the Company authorized and issued 300,000 shares of Series A
Convertible Preferred Stock, no par value. All holders of Series A Convertible
Preferred Stock are entitled to vote on all matters with the holders of the
common stock on an "as if converted" basis. Each share of Series A Convertible
Preferred Stock is convertible into that number of shares as is determined by
dividing the original per share purchase price by a conversion price. The
conversion price, at the option of the holder or automatically upon sale of the
Company's common stock as defined in the Articles of Incorporation, is subject
to weighted average anti-dilution protection and proportional adjustments in the
event of stock splits and similar events. Consequently, as a result of the
common stock splits in 1996, the shares of Series A Convertible Preferred Stock
are convertible to 2,400,000 shares of common stock. Upon liquidation or
dissolution, holders of Series A Convertible Preferred Stock will receive
preference over holders of common stock and Series B Redeemable Preferred Stock.
During 1995, the Company authorized and issued 200,000 shares of Series B
Redeemable Preferred Stock, no par value, to an officer as compensation for
future service. The Series B Redeemable Preferred Stock has no voting rights. At
its discretion, the Board of Directors can declare dividends on shares of Series
B Redeemable Preferred Stock. Upon liquidation or dissolution, after payment in
full of the liquidation preferences to holders of Series A Convertible Preferred
stock, the holder of Series B Redeemable Preferred Stock is entitled to the
redemption value of the shares plus all accrued and unpaid dividends. Under the
terms of the officer's employment agreement, the shares vested ratably over a
period of six years. On December 9, 1996, the employment agreement was modified
whereby all 200,000 shares become fully vested on January 1, 1997. Under the
terms of the amendment, 80,000 shares become redeemable at a price of $5 per
share on January 1, 1997. The remaining 120,000 shares become redeemable at a
price of $5 per share on the earlier of the closing of a qualified public
offering of the Company's stock, or if no such qualified public offering has
occurred, 60,000 shares in each of December 2000 and 2001. The Series B
Redeemable Preferred Stock has been recorded at its redemption price of $5 per
share with a corresponding charge to shareholders' equity (deficit) for deferred
compensation. Compensation expense will be recognized on a straight-line basis
from December 9, 1996 through January 1, 1997, resulting in recognition of the
remaining deferred compensation of $874,999 in the fourth quarter of 1996.
Through September 30, 1996, compensation expense was recognized on a
straight-line basis over 6 years.
9. STOCK OPTIONS:
On December 29, 1995 the Company adopted an employee stock option plan (the
"Plan"), which provides for nonqualified and incentive stock options for
officers, directors, employees and consultants, and reserved a total of
1,411,760 shares of common stock for issuance pursuant to the Plan. Options
under the Plan will generally expire 10 years from the date of grant, or 5 years
in the case of an optionee owning more than 10% of the voting power of all
classes of stock. Under the Plan, the Plan administrator will fix the conditions
for the exercise of the options. Purchase prices for common stock subject to
options issued
F-14
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
9. STOCK OPTIONS: (CONTINUED)
under the Plan generally approximate fair market value of the related shares at
the date of grant. Generally, options vest over four years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" for the nine months ended September 30, 1996. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Information regarding activity of the option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- -------------
<S> <C> <C>
Options outstanding, January 1, 1995.............................. -- --
Options granted--December 29, 1995................................ 705,880 $ 0.184
----------
Options outstanding, December 31, 1995............................ 705,880 $ 0.184
Options granted--February 1996.................................... 405,000 $ 0.184
Options granted--June 1996........................................ 106,000 $ 0.184
Options granted--September 1996................................... 103,000 $ 0.184
Options exercised................................................. (91,368) $ 0.184
----------
Options outstanding, September 30, 1996........................... 1,228,512 $ 0.184
----------
----------
Options available for grant at September 30, 1996................. 91,880
----------
----------
Weighted average fair value of options granted in 1996............ $ 0.225
------
------
</TABLE>
No compensation expense has been recorded for options granted in December
1995, February 1996, and June 1996 because the options granted during this
period were for prices equal to the fair value of the related shares, based on
the price of the shares of common stock purchased by investors in December 1995
(see Note 1). For options issued in September, 1996, deferred compensation
expense of $32,574 was recorded in the amount of the excess of the value of the
underlying common stock based on an independent appraisal, over the option
price. Deferred compensation expense is being amortized over four years.
The following table summarizes information about fixed-price options
outstanding at September 30, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE AT 9/20/96 LIFE PRICE AT 9/30/96 PRICE
- ------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.184 1,228,512 9 Years $ 0.184 $ 97,368 $ 0.184
</TABLE>
F-15
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
9. STOCK OPTIONS: (CONTINUED)
The following table presents net income and per share amounts for the year
ended December 31, 1995 and the nine months ended September 30, 1996 and as if
the Company accounted for compensation expense related to stock options under
the fair value method prescribed by SFAS 123:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1995 PRO SEPTEMBER 30,
FORMA 1996
------------ -------------
<S> <C> <C>
Net income--as reported......................................... $2,343,515 $ 2,779,924
------------ -------------
------------ -------------
Net income--pro forma........................................... $2,343,515 $ 2,743,017
------------ -------------
------------ -------------
Earnings per share--as reported................................. $ 0.20 $ 0.30
------------ -------------
------------ -------------
Earnings per share--pro forma................................... $ 0.20 $ 0.30
------------ -------------
------------ -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1995 and 1996:
<TABLE>
<S> <C>
Risk free interest rate............................................ 5.60%
Expected lives..................................................... 5 years
</TABLE>
10. INCOME TAXES:
The Company's status as an S Corporation was automatically terminated on
October 31, 1995 as a result of the sale by the former sole shareholder of stock
to an entity that is not eligible to be a shareholder in a subchapter S
Corporation. For the period from January 1, 1995 through October 31, 1995, the
former sole shareholder was taxed on the Company's taxable income. The sole
stockholder of the Company for the periods in which the Company was taxed as an
S Corporation has indemnified and agreed to hold the Company harmless from any
federal or state income tax liability, including interest and penalties (if
any), resulting from the Company failing to qualify as an S Corporation from
inception through October 31, 1995.
For the income earned after the termination of its status as an S
Corporation, the Company will provide for income taxes under the principles of
SFAS No. 109. This statement requires that income tax be provided for taxes
currently due and for expected future tax effects of the temporary differences
between the book and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Deferred tax assets are reduced by valuation allowances when
management determines that their realization is not likely.
F-16
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
10. INCOME TAXES: (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards........................................ $ 28,000 $ --
Allowance for doubtful accounts............................... 10,200 44,200
Inventory capitalization...................................... 9,500 34,700
Inventory reserve............................................. -- 30,600
Accrued warranty costs........................................ -- 136,000
Other accrued liabilities..................................... 12,300 17,900
------------ -------------
Deferred income tax assets.................................. 60,000 263,400
------------ -------------
Deferred income tax liability:
Depreciation.................................................. 8,000 13,000
------------ -------------
Deferred income tax liability............................... 8,000 13,000
------------ -------------
Net deferred tax asset...................................... $ 52,000 $ 250,400
------------ -------------
------------ -------------
</TABLE>
Although realization is not assured, management believes that it is more
likely than not that all of the net deferred tax asset will be realized through
future taxable income.
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Current......................................................... $ -- $ 1,633,262
Deferred........................................................ (25,000) (198,400)
Change in tax status............................................ (27,000) --
------------ -------------
$ (52,000) $ 1,434,862
------------ -------------
------------ -------------
</TABLE>
F-17
<PAGE>
APEX PC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
10. INCOME TAXES: (CONTINUED)
Reconciliations of the effective income tax rate on income before taxes with
the Federal statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Statutory rate.................................................. 34.0% 34.0%
Change in tax status:
Effect of earnings attributable to S Corporation
shareholder................................................. (35.0) --
Effect of establishment of deferred taxes..................... (0.76) --
Other........................................................... 0.30 --
------------ ------
Effective tax rate.............................................. (1.46)% 34.0
------------ ------
------------ ------
</TABLE>
The 1993 and 1994 statements of operations do not reflect a provision for
income taxes due to the Company's status as an S Corporation. The pro forma
provisions for income taxes were based on the statutory tax rate of 34%.
11. COMMITMENTS AND CONTINGENCIES:
PURCHASE COMMITMENT
In October 1996, the Company signed a 12-month commitment to purchase
certain product components. The total commitment will range from $600,000 to
$950,000. Although future prices and demand for these components cannot be
predicted in advance with certainty, management does not anticipate that this
commitment will result in the recognition of gross losses for the Company.
OEM AGREEMENT
A major OEM customer, after placing a significant OEM order in October 1995,
canceled its OEM agreement with the Company in mid 1996. This OEM customer
accounted for only 1% of the Company's sales in 1995, but accounted for 24% of
sales for the nine months ended September 30, 1996. Cancellation fees and
termination charges are being negotiated with the OEM customer. In connection
with the cancellation, the OEM customer paid the Company $500,000 to begin
termination of the project. Management believes the $500,000 will be adequate to
cover all direct costs related to the cancellation, including cancellation fees,
termination charges, and purchased inventory on hand. At September 30, 1996,
$379,122 of this amount was remaining and included in customer deposits. In
addition, purchases related to the order totaling $190,229 are included in
inventory at September 30, 1996.
12. DISCONTINUED OPERATIONS:
In June 1994, the Company discontinued its computer maintenance service
business. Revenues from the discontinued operation were $2,969,790 for the
eleven months ended December 31, 1993 and $1,776,070 in 1994. There were no net
gains or losses recorded on disposition of the segment.
F-18
<PAGE>
FOR INSIDE BACK COVER:
The phrase "Innovation & Technology by Design" appears at the top of this
page, off center left.
The middle third of this page consists of the Company Logo, beneath which
the following text (the "Apex Value Statement") is centered:
"The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions to many of the network
administration, management and storage problems faced by organizations
with client/server networks."
Photographs depicting the Company's branded products, each with accompanying
text, are on either side of the Company Logo and Apex Value Statement. On the
left side, top, the product name "SunDial" and a photograph of a SunDial switch
with a keyboard, video monitor and mouse console appears, accompanied by the
following text:
"10-port capacity (1 switch)
Operates 2--100 systems from one console (using multiple switches)
Integrates with OutLook and ViewPoint
Sundial allows administrators to control up to 100 Sun Sparc
workstations from a single console."
On the left side, middle, the product name "OutLook" and a photograph of an
OutLook switch with a keyboard, video monitor and mouse console appears,
accompanied by the following text:
"Single-user, PC keyboard, monitor and mouse switch
Multi-platform capability
Operates 2--64 systems from one console (using multiple switches)
OutLook utilizes Apex's proprietary on-screen configuration and
reporting ("OSCAR") interface that allows administrators to use their
own naming conventions for individual servers, as opposed to
predesignated numbers. OutLook can be configured to enable
administrators to control up to 64 servers from a single console."
On the left side, bottom, the product name "OutLook4" and a photograph of an
OutLook4 switch with a keyboard, video monitor and mouse console appears,
accompanied by the following text:
"Multi-user, PC keyboard, monitor and mouse switch
Multi-platform capability
Operates 2--64 systems from one to four consoles
OutLook4 includes the same features as OutLook, except that this
multi-user system allows network administrators to operate up to 64
servers from up to four console positions."
On the right side, top, the product name "ViewPoint" and a photograph of a
ViewPoint switch with a keyboard, video monitor and mouse console and other
hardware appears, accompanied by the following text:
"Sixteen-user, command center switching system
Multi-platform capability
1000 ft. extension
ViewPoint includes all of the attributes of OutLook except that it
enables network administration staff to control as many as 256 servers
by integrating the ViewPoint switch with multiple OutLook switches.
ViewPoint's technology allows 'out of band' access to servers up to a
1,000 feet away."
On the right side, middle, the product name "DensePack" and a photograph of
four integrated DensePack cabinet systems appears, accompanied by the following
text:
"Customized server cabinet systems for network administration
DensePack cabinets incorporate Apex's switching technology, as well as
built-in ventilator fans, large rear doors and optional slide-out
shelves to facilitate access to cables, connectors and
<PAGE>
servers. DensePack Model RS is a scaled-down version of DensePack and
can be used in combination with full-sized DensePack cabinets or on a
stand-alone basis in remote office applications."
On the right side, bottom, the product name "SwitchBack" and a photograph of
a SwitchBack switch, consisting of a remote unit and a local unit, each of which
is paired with a keyboard, video monitor and mouse console, appears, accompanied
by the following text:
"500 ft. extension product
remote lock-out feature
SwitchBack consists of a local unit and a remote unit that allow users
to control the attached server from either a primary or a remote console
position linked by a single cable. The SwitchBack system includes a
lock-out feature that prevents system capture. SwitchBack integrates
with OutLook, OutLook4 and ViewPoint."
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS.THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
RISK FACTORS................................... 6
USE OF PROCEEDS................................ 14
DIVIDEND POLICY................................ 14
CAPITALIZATION................................. 15
DILUTION....................................... 16
SELECTED FINANCIAL DATA........................ 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 19
BUSINESS....................................... 27
MANAGEMENT..................................... 38
CERTAIN TRANSACTIONS........................... 44
PRINCIPAL SHAREHOLDERS......................... 46
DESCRIPTION OF CAPITAL STOCK................... 48
SHARES ELIGIBLE FOR FUTURE SALE................ 50
UNDERWRITING................................... 51
LEGAL MATTERS.................................. 52
EXPERTS........................................ 52
AVAILABLE INFORMATION.......................... 52
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
----------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[APEX LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 23B.08.320 of the Washington Business Corporation Act provides that
a corporation's articles of incorporation may contain provisions that provide
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The Company's Restated Articles of
Incorporation (Exhibit 3.1 hereto) limit the liability of its directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by Washington law. Such limitation does
not affect the availability of equitable remedies such as injunctive relief or
rescission. The Company's Articles of Incorporation and Bylaws (Exhibits 3.1 and
3.2 hereto) also provide that the Company will indemnify its directors and
officers to the fullest extent permitted by Washington law. Reference is also
made to the Underwriting Agreement (Exhibit 1.1 hereto) which provides that the
Underwriters will indemnify officers and directors of the Company against
certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the registration of the Common Stock. To the extent
the Underwriters' over-allotment option is exercised, the Company will pay any
expenses of the Selling Shareholders.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 13,417
NASD Filing Fee................................................. 4,928
Nasdaq Stock Market Fee......................................... 47,900
Legal Fees and Expenses......................................... 160,000
Auditing and Accounting Fees and Expenses....................... 170,000
Blue Sky Fees and Expenses...................................... 3,000
Printing and Engraving Expenses................................. 120,000
Transfer Agent and Registrar Fees and Expenses.................. 14,000
Directors and Officers Insurance Policy Premium................. 250,000
Miscellaneous................................................... 16,755
---------
Total....................................................... $ 800,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued and/or sold the following securities within the past
three years that were not registered under the Securities Act since each such
transaction was, in the opinion of the Company, exempt from registration under
the Securities Act by virtue of Section 4(2) thereof and, where noted, other
exemptions. No underwriters participated in the offer or sale of any of these
securities, and no underwriters' fees or commissions were paid.
The share and per-share numbers presented below have been adjusted to
reflect the 1,000-for-one stock split of the Company's Common Stock effected in
December 1995, the two-for-one stock split of the Company's Common Stock
effected in January 1996, and the four-for-one stock split of the Company's
Common Stock effected in December 1996.
II-1
<PAGE>
COMMON STOCK
(a) On December 29, 1995 the Company issued 1,600,000 shares of Common Stock
to certain accredited investors at a price of $0.18375 per share pursuant to
that certain Stock and Subordinated Note Purchase Agreement dated December 29,
1995. The Company relied on the exemption provided by Rule 506 under Regulation
D and Section 4(2) of the Securities Act.
(b) From February 1996 through November 1996, the Company sold an aggregate
of 660,016 shares of its Common Stock to employees, directors, consultants and
advisors under the Company's 1995 Employee Stock Plan at a weighted average
exercise price of $0.1895 per share. The Company relied on the exemption
provided by Rule 701 of the Securities Act.
SERIES A CONVERTIBLE PREFERRED STOCK
On December 29, 1995 the Company issued 300,000 shares of Series A
Convertible Preferred Stock to certain accredited investors at a price of $7.35
per share pursuant to the Stock and Subordinated Note Purchase Agreement. The
Company relied on the exemption provided by Rule 506 under Regulation D and
Section 4(2) of the Securities Act.
SERIES B REDEEMABLE PREFERRED STOCK
On December 29, 1995 the Company issued 200,000 shares of Series B
Redeemable Preferred to Mr. Hafer subject to certain restrictions pursuant to an
employment agreement dated December 29, 1995. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships or by disclosure by the Company, to
information about the Company.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
4.1 See Article II of Exhibit 3.1 and Articles II, IV and IX of Exhibit 3.2
5.1 Opinion of Davis Wright Tremaine LLP
10.1 Registration Rights Agreement dated December 29, 1995
10.2 S Corporation Indemnification Agreement dated December 29, 1995
10.3 Employment Agreement dated December 29, 1995 by and between the Company and Kevin J. Hafer
10.4 Credit Agreement dated December 28, 1995 by and between the Company and U.S. Bank of Washington,
National Association
10.5 Lease Agreement dated March 22, 1995 by and between the Company and Christopher L. Clark
10.6 Purchase Agreement dated September 19, 1994 by and between the Company and Compaq Computer Corporation*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.7 Private Label Agreement dated September 8, 1994 by and between the Company and Wright Line, Inc.*
10.8 Form of the Company's Proprietary Information and Noncompetition Agreement
10.9 1995 Employee Stock Plan
10.10 Form of Nonstatutory Stock Option Letter Agreement related to 1995 Employee Stock Plan
10.11 Employee Stock Purchase Plan
10.12 Letter Agreements dated October 16, 1996 and October 24, 1996 by and between the Company and Pioneer
Standard Electronics, Inc.*
10.13 Stock and Subordinated Note Purchase Agreement dated December 29, 1995
10.14 Class A Subordinated Promissory Notes dated December 29, 1995
10.15 Class B Subordinated Promissory Note dated December 29, 1995
11.1 Computation of Pro Forma Income Per Share
23.1 Consent of Davis Wright Tremaine LLP (contained in Exhibit 5.1)
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on page II-4 hereto)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
*Confidential treatment requested for portions of these agreements.
ITEM 28. UNDERTAKINGS.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Company hereby undertakes that it will: (1) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective; and (2) for
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and it will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Woodinville, State of Washington, on December 12, 1996.
APEX PC SOLUTIONS, INC.
By: /s/ KEVIN J. HAFER
------------------------------------------
Kevin J. Hafer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Kevin J.
Hafer and Douglas A. Bevis, jointly and severally, as attorney-in-fact, each
with power of substitution, for such person and in any and all capacities, to
sign any amendments to this registration statement and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ KEVIN J. HAFER President, Chief Executive
------------------------------------------- Officer and Director (Principal December 12, 1996
Kevin J. Hafer Executive Officer)
/s/ DOUGLAS A. BEVIS Vice President, Chief Financial
------------------------------------------- Officer (Principal Financial December 12, 1996
Douglas A. Bevis and Accounting Officer)
/s/ JEFFREY T. CHAMBERS
------------------------------------------- Director December 12, 1996
Jeffrey T. Chambers
/s/ STERLING CRUM
------------------------------------------- Director December 12, 1996
Sterling Crum
/s/ EDWIN L. HARPER
------------------------------------------- Director December 12, 1996
Edwin L. Harper
/s/ WILLIAM MCALEER
------------------------------------------- Director December 12, 1996
William McAleer
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement..................................................................
3.1 Restated Articles of Incorporation..............................................................
3.2 Amended and Restated Bylaws.....................................................................
4.1 See Article II of Exhibit 3.1 and Articles II, IV and IX of Exhibit 3.2.........................
5.1 Opinion of Davis Wright Tremaine LLP............................................................
10.1 Registration Rights Agreement dated December 29, 1995...........................................
10.2 S Corporation Indemnification Agreement dated December 29, 1995.................................
10.3 Employment Agreement dated December 29, 1995 by and between the Company and Kevin J. Hafer......
10.4 Credit Agreement dated December 28, 1995 by and between the Company and U.S. Bank of Washington,
National Association..........................................................................
10.5 Lease Agreement dated March 22, 1995 by and between the Company and Christopher L. Clark........
10.6 Purchase Agreement dated September 19, 1994 by and between the Company and Compaq Computer
Corporation*..................................................................................
10.7 Private Label Agreement dated September 8, 1994 by and between the Company and Wright Line,
Inc.*.........................................................................................
10.8 Form of the Company's Proprietary Information and Noncompetition Agreement......................
10.9 1995 Employee Stock Plan........................................................................
10.10 Form of Nonstatutory Stock Option Letter Agreement related to 1995 Employee Stock Plan..........
10.11 Employee Stock Purchase Plan....................................................................
10.12 Letter Agreements dated October 16, 1996 and October 24, 1996 by and between the Company and
Pioneer Standard Electronics, Inc.*...........................................................
10.13 Stock and Subordinated Note Purchase Agreement dated December 29, 1995..........................
10.14 Class A Subordinated Promissory Notes dated December 29, 1995...................................
10.15 Class B Subordinated Promissory Note dated December 29, 1995....................................
11.1 Computation of Pro Forma Income Per Share.......................................................
23.1 Consent of Davis Wright Tremaine LLP (contained in Exhibit 5.1).................................
23.2 Consent of Coopers & Lybrand L.L.P..............................................................
24.1 Power of Attorney (included on page II-4 hereto)................................................
27.1 Financial Data Schedule.........................................................................
</TABLE>
- ------------------------
*Confidential treatment requested for portions of these agreements.
<PAGE>
EXHIBIT 1.1
3,500,000 Shares
Apex PC Solutions, Inc.
Common Stock
UNDERWRITING AGREEMENT
________, 1997
MONTGOMERY SECURITIES
DAIN BOSWORTH INCORPORATED
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies & Gentlemen:
SECTION 1
INTRODUCTORY
Apex PC Solutions, Inc., a Washington corporation (the "Company"),
proposes to issue and sell 3,500,000 shares of its authorized but unissued
Common Stock (the "Common Stock") to the several underwriters named in
SCHEDULE A annexed hereto (the "Underwriters"). Said 3,500,000 shares are
herein called the "Firm Common Shares." In addition, certain shareholders of
the Company named in SCHEDULE B annexed hereto (the "Selling Shareholders")
propose to grant to the Underwriters an option to purchase up to 525,000
additional shares of Common Stock (the "Optional Common Shares"), as provided in
Section 5 hereof. The Firm Common Shares and, to the extent such option is
exercised, the Optional Common Shares are hereinafter collectively referred to
as the "Common Shares."
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Shareholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form SB-2 (File No.
333-___________) with respect to the Common Shares has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement an
amendment or amendments to such registration statement,
<PAGE>
which amendments have been similarly prepared. There have been delivered to you
two signed copies of such registration statement and amendments, together with
two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits) and of the related
preliminary prospectus have been delivered to you in such reasonable quantities
as you have requested for each of the Underwriters. The Company will next file
with the Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of final
prospectus, or (ii) a final prospectus in accordance with Rules 430A and 424(b)
of the Rules and Regulations. As filed, such amendment and form of final
prospectus, or such final prospectus, shall include all Rule 430A Information
and, except to the extent that you shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior to the
date and time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include (i) all Rule 430A Information deemed to be included in
such registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) a
registration statement, if any, filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary Prospectus"
shall mean any preliminary prospectus referred to in the preceding paragraph and
any preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to
Rule 424(b) of the Rules and Regulations is required, shall mean the form of
final prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information"
means information with respect to the Common Shares and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this
subsection 2(b) shall be applicable to information contained in or omitted from
any Preliminary Prospectus, the Registration Statement, the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the subsidiaries listed
in Exhibit 21 of the Registration Statement. The Company and each of its
subsidiaries have been duly incorporated and is validly existing as a
corporation in good standing (where applicable) under the laws of their
respective jurisdictions of incorporation, with full power and authority
(corporate and other) to own and lease their properties and conduct their
respective businesses as described in the Prospectus; the Company and each of
its subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of its subsidiaries are duly qualified to
do business and in good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct of their respective
businesses requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect upon the Company;
and no
-2-
<PAGE>
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification.
(d) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. Except as
disclosed in or specifically contemplated by the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be validly issued, fully paid and nonassessable, and will
conform to the description thereof contained in the Prospectus. No preemptive
rights or other rights to subscribe for or purchase exist with respect to the
issuance and sale of the Common Shares by the Company pursuant to this
Agreement. No shareholder of the Company has any right which has not been
waived to require the Company to register the sale of any shares owned by such
shareholder under the Act in the public offering contemplated by this Agreement.
No further approval or authority of the shareholders or the Board of Directors
of the Company will be required for the transfer and sale of the Common Shares
to be sold by the Selling Shareholders or the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the articles or certificate of incorporation or bylaws, or other
organizational documents, of the Company or its subsidiaries, as amended to
date, and will not conflict with, result in the breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
default under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries any
of their respective properties may be bound or affected, any statute or any
authorization, judgment, decree, order, rule or regulation of any court or any
regulatory body, administrative agency or other governmental body applicable to
the Company or any of its properties. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the consummation of the transactions contemplated by this Agreement, except
for compliance with the Act, the Blue Sky laws applicable to the public offering
of the Common Shares by the several Underwriters and the clearance of such
offering with the National Association of Securities Dealers, Inc. (the "NASD").
(g) Coopers & Lybrand L.L.P., who have expressed their opinion with
respect to the financial statements and schedules filed with the Commission as a
part of the Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act and
the Rules and Regulations.
(h) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the respective dates
of such financial statements and schedules, and the results of operations and
changes in financial position of the Company for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis as certified by the independent accountants named in subsection 2(g). No
other financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the Prospectus
under the captions "Capitalization" and "Selected Financial Data" fairly present
the information set forth therein on the basis stated in the Registration
Statement.
-3-
<PAGE>
(i) The Company maintains a system of internal accounting control
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.
(j) The Company is not in violation or default of any provision of
its articles of incorporation or bylaws, or other organizational documents, and
is not in breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it or
any of its properties are bound except as would not be material to the Company's
business, results of operations or financial condition; and there does not exist
any state of facts which constitutes an event of default on the part of the
Company as defined in such documents or which, with notice or lapse of time or
both, would constitute such an event of default except as would not be material
to the Company's business, results of operations or financial condition.
(k) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement or by the Rules and Regulations which have not been
accurately and completely described or filed as required. The contracts so
described in the Prospectus are in full force and effect on the date hereof; and
neither the Company nor, to the best of the Company's knowledge, any other party
is in breach of or default under any of such contracts except as would not be
material to the Company's business, results of operations or financial
condition.
(l) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened to
which the Company or any of its subsidiaries is or may be a party or of which
property owned or leased by the Company or any of its subsidiaries is or may be
the subject, or related to environmental or discrimination matters, which
actions, suits or proceedings might, individually or in the aggregate, prevent
or adversely affect the transactions contemplated by this Agreement or result in
a material adverse change in the condition (financial or otherwise), properties,
business, results of operations or prospects of the Company; and no labor
disturbance by the employees of the Company exists or is imminent which might be
expected to affect adversely such condition, properties, business, results of
operations or prospects. The Company is not a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body.
(m) The Company has good and marketable title to all the properties
and assets reflected as owned in the financial statements hereinabove described
(or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge
or encumbrance of any kind except (i) those, if any, reflected in such financial
statements (or elsewhere in the Prospectus), or (ii) those which are not
material in amount and do not adversely affect the use made and proposed to be
made of such property by the Company. The Company holds its leased properties
under valid and binding leases, with such exceptions as are not materially
significant in relation to the business of the Company. Except as disclosed in
the Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(n) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, except as specifically disclosed or
contemplated therein: (i) the Company has not incurred any material liabilities
or obligations, indirect, direct or contingent, or entered into any material
verbal or written agreement or other transaction which is not in the ordinary
course of business; (ii) the Company has not sustained any material loss or
interference with its business or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company is not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has not
been any change in the capital stock (other than upon the sale of the Common
Shares hereunder and upon the exercise of options or warrants described in the
Registration Statement) or indebtedness material to the Company (other than in
the ordinary course of business); and (v) there has not been any material
adverse change in the condition (financial or otherwise), business, properties,
results of operations or prospects of the Company.
-4-
<PAGE>
(o) Except as disclosed in or specifically contemplated by the
Prospectus, the Company has sufficient trademarks, trade names, patent rights,
mask works, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted and as proposed to be conducted; and the
Company has no knowledge of any material infringement by it of trademark, trade
name rights, patent rights, mask works, copyrights, licenses, trade secret or
other similar rights of others, and there is no claim being made against the
Company regarding trademark, trade name, patent, mask work, copyright, license,
trade secret or other infringement which could have a material adverse effect on
the condition (financial or otherwise), business, results of operations or
prospects of the Company.
(p) The Company is conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all applicable local, state
and federal environmental laws and regulations; except where failure to be so in
compliance would not materially adversely affect the condition (financial or
otherwise), business, results of operations or prospects of the Company.
(q) The Company has filed all necessary federal, state and foreign
income and franchise tax returns, and all such tax returns are complete and
correct in all material respects, and the Company has paid all taxes shown as
due thereon. The Company has no knowledge of any tax deficiency which has been
or might be asserted or threatened against the Company which could materially
and adversely affect the business, operations or properties of the Company.
(r) The Company is not, and upon the closing of the offering
contemplated hereby will not be, an "investment company" or a company
"controlled by" an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(s) The Company has not distributed and will not distribute prior
to the First Closing Date any offering material in connection with the offering
and sale of the Common Shares other than the Prospectus, the Registration
Statement and the other materials permitted by the Act.
(t) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
The Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), properties, business or results of operations of the
Company.
(u) Neither the Company nor, to the best of the Company's
knowledge, any of its employees or agents has at any time during the last five
years (i) made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States of any jurisdiction
thereof.
(v) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(w) The Company has caused (i) each of its executive officers and
directors and (ii) each other holder of Common Stock (including shares issuable
upon the exercise or conversion of any option, warrant or other security which
is or, at any time within 180 days of the Prospectus, will become exercisable)
to furnish to the Representatives an agreement in the form provided by the
Representatives, pursuant to which each such party has agreed that during the
period of 180 days after the date of the Prospectus, without the prior written
consent of Montgomery Securities, such party will not directly or indirectly,
sell, offer, contract or grant any option to sell or purchase, make any short
sale (including without limitation any "short vs. the box"), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, or otherwise dispose of
any shares of Common Stock, options or warrants
-5-
<PAGE>
to acquire shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently or hereafter owned either
of record or beneficially (as defined in Rule 13d-3 under Securities Exchange
Act of 1934, as amended) by such party, or publicly announce such party's
intention to do any of the foregoing; provided, however, that such party may
sell or otherwise transfer shares of Common Stock (i) pursuant to the
Underwriting Agreement, (ii) as a BONA FIDE gift or gifts, provided that such
party provides prior written notice of such gift or gifts to Montgomery
Securities and the donee or donees thereof agree to be bound by the restrictions
set forth in such agreement or (iii) with the prior written consent of
Montgomery Securities.
(x) The Company has satisfied the conditions for use of Form SB-2,
as set forth in the General Instructions thereto, with respect to the
Registration Statement.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE SELLING SHAREHOLDERS
(a) Each Selling Shareholder represents and warrants, severally and
not jointly, to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the Second
Closing Date hereinafter mentioned will have, good and marketable title to the
Common Shares proposed to be sold by such Selling Shareholder hereunder on such
Second Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver such Common Shares
hereunder, free and clear of all voting trust arrangements, liens, encumbrances,
equities, security interests, restrictions and claims whatsoever; and upon
delivery of and payment for such Common Shares hereunder, the Underwriters will
acquire good and marketable title thereto, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests, voting trusts
or other defects of title whatsoever.
(ii) Such Selling Shareholder has executed and delivered a
Power of Attorney and caused to be executed and delivered on his, or her or its
behalf a Custody Agreement (hereinafter collectively referred to as the
"Shareholders Agreement") and in connection herewith such Selling Shareholder
further represents, warrants and agrees that such Selling Shareholder has
deposited in custody, under the Shareholders Agreement, with the agent named
therein (the "Agent") as custodian, certificates in negotiable form for the
Common Shares to be sold hereunder by such Selling Shareholder, for the purpose
of further delivery pursuant to this Agreement. Such Selling Shareholder agrees
that the Common Shares to be sold by such Selling Shareholder on deposit with
the Agent are subject to the interests of the Company and the Underwriters, that
the arrangements made for such custody are to that extent irrevocable, and that
the obligations of such Selling Shareholder hereunder shall not be terminated,
except as provided in this Agreement or in the Shareholders Agreement, by any
act of such Selling Shareholder, by operation of law, by the death or incapacity
of such Selling Shareholder or by the occurrence of any other event. If the
Selling Shareholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Common Shares hereunder, the documents
evidencing Common Shares then on deposit with the Agent shall be delivered by
the Agent in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether or
not the Agent shall have received notice thereof. This Agreement and the
Shareholders Agreement have been duly executed and delivered by or on behalf of
such Selling Shareholder and the form of such Shareholders Agreement has been
delivered to you.
(iii) The performance of this Agreement and the Shareholders
Agreement and the consummation of the transactions contemplated hereby and by
the Shareholders Agreement will not result in a breach or violation by such
Selling Shareholder of any of the terms or provisions of, or constitute a
default by such Selling Shareholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Shareholder or any of
his, her or its properties.
-6-
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(iv) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Common Shares.
(v) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Shareholder
expressly for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus will, when they are filed with the
Commission or became effective, as the case may be, conform in all material
respects to the requirements of the Act and the rules and regulations of the
Commission thereunder and not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statement therein not misleading.
(vi) The Selling Shareholder has carefully reviewed the
representations and warranties of the Company contained in this Agreement and
the information contained in the Registration Statement. Based on the foregoing,
(1) the Selling Shareholder has no reason to believe and does not believe that
such representations and warranties of the Company contained in this Agreement
are not true and correct in all material respects; (2) the Selling Shareholder
has no knowledge of any fact, condition or information not disclosed in the
Registration Statement which has materially adversely affected or may materially
adversely affect the business of the Company; and (3) the sale of the Common
Shares by the Selling Shareholder pursuant hereto is not prompted by any adverse
information concerning the Company which is not set forth in the Registration
Statement.
(b) Each of the Selling Shareholders agrees with the Company and
the Underwriters not to offer to sell, sell or contract to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable for any shares of Common Stock, for a period of 180 days after the
date of the Prospectus, without the prior written consent of Montgomery
Securities, which consent may be withheld at the sole discretion of Montgomery
Securities.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS
The Representatives, on behalf of several Underwriters, represent and
warrant to the Company and to the Selling Shareholders that the information set
forth (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of offering and (ii) under
"Underwriting" in the Prospectus was furnished to the Company by and on behalf
of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is true and correct in all
material respects. The Representatives represent and warrant that, except as
expressly provided herein, they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement on its behalf
and to act for it in the manner herein provided.
SECTION 5
PURCHASE, SALE AND DELIVERY OF COMMON SHARES
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to the Underwriters the Firm Common Shares. Each
Underwriter agrees, severally and not jointly, to purchase from the Company the
number of Firm Common Shares set forth opposite the name of such Underwriter in
SCHEDULE A hereto. The purchase price per share to be paid by the several
Underwriters to the Company shall be $_____ per share.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
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place as may be agreed upon by the Company and the Underwriters) at such time
and date, not later than the third (or, if the Firm Common Shares are priced as
contemplated by Rule 15c6-1(c) of the Exchange Act after 4:30 p.m. Washington,
D.C. time, the fourth) full business day following the first date that any of
the Common Shares are released by you for sale to the public, as you shall
designate by at least 48 hours' prior notice to the Company (or at such other
time and date, not later than one week after such third or fourth, as the case
may be, full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company to you, for the respective accounts of the
Underwriters against payment by you, for the accounts of the several
Underwriters, of the purchase price therefor by wire transfer of federal funds
to an account designated in writing by the Company. The certificates for the
Firm Common Shares shall be registered in such names and denominations as you
shall have requested at least two full business days prior to the First Closing
Date, and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may be
designated by you. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations of
the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholders, severally and not jointly, hereby grant
options to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 525,000 Optional Common Shares in the respective amounts set
forth opposite the name of each such Selling Shareholder in SCHEDULE B hereto;
in each case at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. In the event that the Underwriters elect to purchase less than all of
the Optional Common Shares, the number of Optional Common Shares to be purchased
from each Selling Shareholder shall be determined by multiplying the aggregate
number of Optional Common Shares to be purchased by a fraction, the numerator of
which is the total number of Optional Common Shares set forth opposite the name
of such Selling Shareholder in SCHEDULE B hereto and the denominator of which is
577,500. The option granted hereunder may be exercised at any time (but not
more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company and said Selling Shareholders setting forth the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the option,
the names and denominations in which the certificates for such shares are to be
registered and the time and place at which such certificates will be delivered.
Such time of delivery (which may not be earlier than the First Closing Date),
being herein referred to as the "Second Closing Date," shall be determined by
you, but if at any time other than the First Closing Date shall not be earlier
than three full business days after delivery of such notice of exercise. The
number of Optional Common Shares to be purchased by each Underwriter shall be
determined by multiplying the number of Optional Common Shares to be sold by the
Selling Shareholders pursuant to such notice of exercise by a fraction, the
numerator of which is the number of Firm Common Shares to be purchased by such
Underwriter as set forth opposite its name in SCHEDULE A and the denominator of
which is 3,500,000 (subject to such adjustments to eliminate any fractional
share purchases as you in your discretion may make). Certificates for the
Optional Common Shares will be made available for checking and packaging on the
business day preceding the Second Closing Date at a location in New York, New
York, as may be designated by you. The manner of payment and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
from the Company as specified in the two preceding paragraphs, except that
payment by you of the purchase price for the Optional Common Shares, for the
accounts of the several Underwriters, shall be by wire transfer of federal funds
to an account designated by the Agent. At any time before lapse of the option,
you may cancel such option by giving written notice of such cancellation to the
Company and said Selling Shareholders. If the option is cancelled or expires
unexercised in whole or in part, the Company will deregister under the Act the
number of Optional Common Shares as to which the option has not been exercised.
You have advised the Company and the Selling Shareholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to give receipt therefor. You may (but shall not be obligated to)
make payment for any Common Shares to be purchased by any Underwriter whose
funds shall not have been received by you by
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the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Underwriters is advisable and at the public offering price set forth on
the cover page of and on the terms set forth in the Prospectus.
SECTION 6
COVENANTS OF THE COMPANY
The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior to such
filing or to which you reasonably object or which is not in compliance with the
Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, a registration statement pursuant to Rule 462(b) of the Rules
and Regulations related to the Common Shares and any amendments or supplements
to the Registration Statement or the Prospectus which in your judgment may be
necessary or advisable to enable the several Underwriters to continue the
distribution of the Common Shares and will use its best efforts to cause the
same to become effective as promptly as possible. The Company will fully and
completely comply with the provisions of Rule 430A of the Rules and Regulations
with respect to information omitted from the Registration Statement in reliance
upon such Rule.
(c) The Company will immediately notify you in writing if, at any
time prior to the earliest of (i) the Second Closing Date on which all remaining
Optional Common Shares are purchased, (ii) the cancellation of the options to
purchase the Optional Common Shares as provided herein, and (iii) of the
expiration of the options to purchase the Optional Common Shares as provided
herein, any representation or warranty of the Company set forth herein shall not
be true and accurate in all material respects or, without limiting the
foregoing, if there shall have been any material adverse change, or a
development involving a material adverse change, in the condition (financial or
otherwise), properties, business, results of operations or prospects of the
Company.
(d) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Prospectus, including
any amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its
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own expense, an amendment or supplement which will correct such statement or
omission or an amendment or supplement which will effect such compliance and
will use its best efforts to cause the same to become effective as soon as
possible; and, in case any Underwriter is required to deliver a prospectus after
such nine-month period, the Company upon request, but at the expense of such
Underwriter, will promptly prepare such amendment or amendments to the
Registration Statement and such Prospectus or Prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act.
(e) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of
Section 11(a) of the Act.
(f) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a) (3)
of the Act, will furnish to you and the Selling Shareholders or mail to your
order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each case
as soon as available and in such quantities as you and the Selling Shareholders
may request, for the purposes contemplated by the Act.
(g) The Company shall cooperate with you and your counsel in order
to qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its best
efforts to obtain the withdrawal thereof.
(h) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon the request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and statements
of operations, shareholders' equity and cash flows for the year then ended and
the opinion thereon of the Company's independent public accountants; (ii) as
soon as practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K or Form 10-KSB, Quarterly Report on Form 10-Q or Form
10-QSB, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as available,
copies of any report or communication of the Company mailed generally to holders
of its Common Stock.
(i) During the period of 180 days after the first date that any of
the Common Shares are released by you for sale to the public, without the prior
written consent of Montgomery Securities (which consent may be withheld at the
sole discretion of Montgomery Securities), the Company will not, other than
pursuant to the Company's stock option or stock purchase plans disclosed in the
Prospectus, issue, offer, sell, grant options to purchase or otherwise dispose
of any of the Company's equity securities or any other securities convertible
into or exchangeable with its Common Stock or other equity security.
(j) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.
(k) The Company will use its best efforts to designate the Common
Stock for listing on the Nasdaq National Market.
(l) The Company will maintain a transfer agent and registrar for
its Common Stock.
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You, on behalf of the Underwriters, may, in your sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
SECTION 7
PAYMENT OF EXPENSES
Whether or not the transactions contemplated hereunder are consummated
or this Agreement becomes effective or is terminated, the Company and, unless
otherwise paid by the Company, the Selling Shareholders agree to pay in such
proportions as they may agree upon among themselves all costs, fees and expenses
incurred in connection with the performance of their obligations hereunder and
in connection with the transactions contemplated hereby, including without
limiting the generality of the foregoing, (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing and engraving
costs), (ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Common Shares to the Underwriters,
(iv) all fees and expenses of the Company's counsel and the Company's
independent accountants, (v) all costs and expenses incurred in connection with
the printing, filing, shipping and distribution of the Registration Statement,
each Preliminary Prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
any registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations related to the Common Shares, this Agreement, the Agreement Among
Underwriters, the Selected Dealers Agreement, the Underwriters' Questionnaire,
the Underwriters' Power of Attorney and the Blue Sky memorandum, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state or Canadian Blue Sky laws and in obtaining the
clearance of the underwriting arrangements with the National Association of
Securities Dealers, Inc. and (vii) all other fees, costs and expenses referred
to in Item 25 of the Registration Statement. The Underwriters may deem the
Company to be the primary obligor with respect to all costs, fees and expenses
to be paid by the Company and by the Selling Shareholders. Except as provided
in this Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay
all of their own expenses, including the fees and disbursements of their counsel
(excluding those relating to qualification, registration or exemption under the
Blue Sky laws and the Blue Sky memorandum referred to above). This Section 7
shall not affect any agreements relating to the payment of expenses between the
Company and the Selling Shareholders to the extent that such agreements do not
impair the obligation of the Company and the Selling Shareholders hereunder to
the several Underwriters.
The Selling Shareholders will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for such Selling
Shareholders; (ii) any fees and expenses of the Agent; and (iii) all expenses
and taxes incident to the sale and delivery of the Common Shares to be sold by
such Selling Shareholders to the Underwriters hereunder.
SECTION 8
CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS
The obligations of the several Underwriters to purchase and pay for
the Firm Common Shares on the First Closing Date and the Optional Common Shares
on the Second Closing Date shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders herein set forth as of the date hereof and as of the First Closing
Date or the Second Closing Date, as the case may be, to the accuracy of the
statements of Company officers and the Selling Shareholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m.(or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later
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than 10:00 p.m.), Washington, D.C. time, on the date of this Agreement, or at
such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, the Selling Shareholders or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in the
Prospectus of the Company or any material change in the indebtedness of the
Company, (ii) except as set forth or contemplated by the Registration Statement
or the Prospectus, no material verbal or written agreement or other transaction
shall have been entered into by the Company, which is not in the ordinary course
of business, (iii) no loss or damage (whether or not insured) to the property of
the Company shall have been sustained which materially and adversely affects the
condition (financial or otherwise), business, results of operations or prospects
of the Company, (iv) no legal or governmental action, suit or proceeding
affecting the Company which is material to the Company or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company which makes it impractical or inadvisable
in the judgment of the Representatives to proceed with the public offering or
purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you on each Closing Date, in
form and substance satisfactory to you, except as otherwise expressly provided
below:
(i) An opinion of Davis Wright Tremaine LLP, counsel for
the Company, addressed to the Underwriters and dated the First Closing Date, or
the Second Closing Date, as the case may be, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation under the laws of the State
of Washington to such counsel's knowledge, is duly qualified to
do business as a foreign corporation and is in good standing in
all other jurisdictions where the ownership or leasing of
properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to
so qualify would not have a material adverse effect on the
Company, has full corporate power and authority to own its
properties and conduct its business as described in the
Registration Statement and to such counsel's knowledge has no
subsidiaries other than as listed in Exhibit 21 to the
Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; all necessary and proper
corporate proceedings have been taken in order to validly
authorize the authorized Common Stock; all outstanding shares
of Common Stock (including the Optional Common Shares) have
been duly and validly issued, are fully paid and nonassessable,
have been issued in compliance with the registration and
qualification provisions of federal and state securities laws,
to such counsel's knowledge were not issued in violation of or
subject to any preemptive rights or other rights to subscribe
for or purchase any securities and conform to the description
thereof in the Prospectus; without limiting the foregoing, to
such counsel's knowledge there are no preemptive or other
rights to subscribe for or purchase any of the Common Shares to
be sold by the Company or the Selling Shareholders hereunder;
(3) The certificates evidencing the Common Shares to
be delivered hereunder are in due and proper form under
Washington law, and when duly countersigned by the Company's
transfer agent and registrar, and delivered to you or upon your
order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Firm
Common Shares represented thereby will be duly authorized and
validly issued, fully paid and nonassessable, will not have
been issued in violation
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of or subject to any preemptive rights or other rights to
subscribe for or purchase securities and will conform in all
respects to the description thereof contained in the
Prospectus;
(4) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such counsel's
knowledge, there are no outstanding options, warrants or other
rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable for
capital stock of the Company;
(5) (a) The Registration Statement has become
effective under the Act, and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus has been
issued and, to such counsel's knowledge, no proceedings for
that purpose have been instituted or are pending or
contemplated by the Commission; any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the
Prospectus and each amendment or supplement thereto (except for
the financial statements and schedules included therein as to
which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Act and
the Rules and Regulations.
(c) To such counsel's knowledge, there are
no franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as
required; and
(d) To such counsel's knowledge, there are
no legal or governmental actions, suits or proceedings pending
or threatened against the Company which are required to be
described in the Prospectus which are not described as
required.
(6) The Company has the corporate power and
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the several Underwriters;
this Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the Company,
and is a valid and binding agreement of the Company in
accordance with its terms, except as enforceability may be
limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising
under the Act as to which no opinion need be expressed; and no
approval, authorization, order, consent, registration, filing,
qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is
required for the execution and delivery of this Agreement by
the Company or the consummation by the Company of the
transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under the
Act and such as may be required under applicable Blue Sky laws
in connection with the purchase and distribution of the Common
Shares by the Underwriters and the clearance of such offering
with the NASD;
(7) The execution and delivery of this Agreement by
the Company and the performance by the Company of its
obligations set forth herein will not conflict with, result in
the breach of, or constitute, either by itself or upon notice
or the passage of time or both, a default under, any agreement,
mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument known to such counsel to which the
Company is a party or by which the Company or any of its
property or assets may be bound or affected which is material
to the Company or its property or assets (each, a "Material
Contract"), or violate any of the provisions of the articles of
incorporation or bylaws, or other organizational documents, of
the Company or, to such counsel's knowledge, violate any
statute, judgment, decree, order, rule or regulation of any
court or governmental body having jurisdiction over the Company
or any of its property;
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(8) The Company is not in violation of its articles
of incorporation or bylaws, or other organizational documents,
or to such counsel's knowledge, in breach of or default with
respect to any provision of any Material Contract, except where
such default would not materially adversely affect the Company;
(9) To such counsel's knowledge, no holders of
securities of the Company have rights which have not been
waived to the registration of shares of Common Stock or other
securities, because of the filing of the Registration Statement
by the Company or the offering contemplated hereby;
(10) The statements in the Registration Statement and
Prospectus under the headings "Management," "Certain
Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" and in the Registration Statement in
Items 24 and 26, insofar as they are descriptions of contracts,
agreements or other legal documents or refer to statements of
law or legal conclusions, are accurate and complete in all
material respects and fairly present the information contained
therein.
(11) The Company has satisfied the conditions for use
of Form SB-2, as set forth in the General Instructions thereto,
with respect to the Registration Statement.
(12) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to
the Underwriters hereunder.
In rendering such opinion, such counsel may rely as to matters
of fact, on certificates of officers of the Company and of governmental
officials, in which case their opinion is to state that they are so doing and
that the Underwriters are justified in relying on such opinions or certificates
and copies of said opinions or certificates are to be attached to the opinion.
Such counsel shall also include a statement to the effect that nothing has come
to such counsel's attention that would lead such counsel to believe that either
at the effective date of the Registration Statement or at the applicable Closing
Date the Registration Statement or the Prospectus, or any such amendment or
supplement, contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading;
(ii) An opinion of Davis Wright Tremaine LLP, counsel for
Kevin J. Hafer, addressed to the underwriters and dated the Second Closing Date
to the effect that:
(1) To such counsel's knowledge, this Agreement and
the Shareholders Agreement have been duly executed and
delivered by or on behalf of Kevin J. Hafer; the Agent has been
duly and validly authorized to act as the custodian of the
Common Shares to be sold by Kevin J. Hafer; and the performance
of this Agreement and the Shareholders Agreement and the
consummation of the transactions herein contemplated by Kevin
J. Hafer will not result in a breach of, or constitute a
default under, any material indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument, known to
such counsel to which Kevin J. Hafer is a party or by which
Kevin J. Hafer or any of his properties may be bound, or
violate any statute, judgment, decree, order, rule or
regulation known to such counsel of any court or governmental
body having jurisdiction over Kevin J. Hafer or any of his
properties; and to such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required
for the execution and delivery of this Agreement or the
Shareholders Agreement by Kevin J. Hafer or the consummation by
Kevin J. Hafer of the transactions contemplated by this
Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required
under the rules of the NASD and applicable Blue Sky laws;
(2) To such counsel's knowledge, Kevin J. Hafer has
full right, power and authority to enter into this Agreement
and the Shareholders Agreement and to sell, transfer and
deliver the Optional Common Shares to be sold on the Second
Closing Date by Kevin J. Hafer hereunder, and good and
marketable title to such Optional Common Shares so sold, free
and clear of all liens, encumbrances, equities, claims,
restrictions,
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security interests, voting trusts, or other defects of title
whatsoever, has been transferred to the Underwriters (whom
counsel may assume to be bona fide purchasers) who have
purchased such Optional Common Shares hereunder; and
(3) To such counsel's knowledge, this Agreement and
the Shareholders Agreement are valid and binding agreements of
Kevin J. Hafer in accordance with their terms except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors' rights generally and except with
respect to those provisions relating to indemnities or
contributions for liabilities under the Act, as to which no
opinion need be expressed.
In rendering such opinion, such counsel may rely as to matters
of fact, on certificates of Kevin J. Hafer and of governmental
officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such
certificates and copies of said certificates are to be attached to the
opinion.
(iii) An opinion of Christensen O'Connor Johnson & Kindness
PLLC addressed to the Underwriters and dated the First Closing Date or
the Second Closing Date, as the case may be, with respect to certain
intellectual property matters, such opinion to be in form and
substance satisfactory to counsel for the Underwriters, and to the
effect that:
(1) To the best of such counsel's knowledge, the
Company owns all patents, trademarks, trademark registrations,
service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by it or necessary
for the conduct of its business, and such counsel is not aware
of any claim to the contrary or any challenge by any other
person to the rights of the Company with respect to the
foregoing;
(2) Such counsel is not aware of any legal actions,
claims or proceedings pending or threatened against the Company
alleging that the Company is infringing or otherwise violating
any patents or trade secrets owned by others;
(3) Such counsel has reviewed the descriptions
patent applications under the captions "Risk
Factors--Limited Protection of Proprietary Rights; Risk of
Third Party Infringements" and "Business--Proprietary
Technology" in the Registration Statement and Prospectus,
and, to the extent they constitute matters of law or legal
conclusions, these descriptions are accurate in all material
respects and fairly and completely present the patent
situation of the Company;
(4) To the best of such counsel's knowledge, for
each patent or patent application filed by the Company or
described in the Prospectus as being owned by it or necessary
for the conduct of its business, the Company has obtained a
written assignment of all rights and title therein to the
Company from all inventors and owners of such patent or patent
application and has properly recorded such written assignment
with the appropriate patent office or governmental agency;
(5) To the best of such counsel's knowledge, for
each copyrightable product described in the Prospectus, the
Company either (i) has registered all copyrights for such
product and has obtained and properly recorded written
assignments of all rights and title therein to the Company from
all authors and owners of such copyrights other than the
Company, including without limitation any and all independent
contractors; or (ii) was vested with original title to all
copyrights for such product and no written assignments for such
copyrights are required to perfect Company's rights and title
thereto; and
(6) To the best of such counsel's knowledge after
review of the file history and patent attorney's file for each
patent or patent application described in the Prospectus as
being owned by the Company or necessary for the conduct of its
business, such counsel is aware of nothing that causes such
counsel to believe that, as of the date of the Registration
Statement became effective and as of the date of such opinion,
the description of patents and patent applications under the
captions "Risk Factors--Limited Protection of Proprietary
Rights; Risk of Third Party Infringements" and
"Business--Proprietary Technology" in the
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Registration Statement and Prospectus contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading,
including without limitation, any undisclosed material issue
with respect to the subsequent validity or enforceability of
such patent or patent application.
(iv) An opinion of Goodwin, Proctor & Hoar, counsel for
Selling Stockholders [Advent VII, L.P., Advent Atlantic & Pacific II L.P.,
Advent New York L.P. and TA Venture Investors Limited Partnership] (the "TA
Selling Shareholders"), addressed to the Underwriters and dated the Second
Closing Date, to the effect that:
(1) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement have been duly
authorized, executed and delivered by or on behalf of each of
the TA Selling Shareholders; the Agent has been duly and
validly authorized to act as the custodian of the Common Shares
to be sold by each such TA Selling Shareholder; and the
performance of this Agreement and the Shareholders Agreement
and the consummation of the transactions herein contemplated by
the TA Selling Shareholders will not result in a breach of, or
constitute a default under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument to which
any of the TA Selling Shareholders is a party or by which any
of the TA Selling Shareholders or any of their properties may
be bound, or violate any statute, judgment, decree, order, rule
or regulation known to such counsel of any court or
governmental body having jurisdiction over any of the TA
Selling Shareholders or any of their properties; and to the
best of such counsel's knowledge, no approval, authorization,
order or consent of any court, regulatory body, administrative
agency or other governmental body is required for the execution
and delivery of this Agreement or the Shareholders Agreement or
the consummation by the TA Selling Shareholders of the
transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under the
Act and such as may be required under the rules of the NASD and
applicable Blue Sky laws;
(2) To the best of such counsel's knowledge, the TA
Selling Shareholders have full right, power and authority to
enter into this Agreement and the Shareholders Agreement and to
sell, transfer and deliver the Common Shares to be sold on the
Second Closing Date by such TA Selling Shareholders hereunder
and good and marketable title to such Common Shares so sold,
free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts, or other
defects of title whatsoever, has been transferred to the
Underwriters (whom counsel may assume to be bona fide
purchasers) who have purchased such Common Shares hereunder;
(3) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement are valid and binding
agreements of each of the TA Selling Shareholders in accordance
with their terms except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except with respect to those provisions
relating to indemnities or contributions for liabilities under
the Act, as to which no opinion need be expressed;
In rendering such opinion, such counsel may rely as to matters of
fact, on certificates of officers of the TA Selling Shareholders and of
governmental officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such certificates
and copies of said certificates are to be attached to the opinion.
(v) An opinion of Reiserer & Agee L.L.P., counsel for
Selling Shareholder Britannia Holdings Limited ("Britannia"), addressed to the
Underwriters and dated the Second Closing Date, to the effect that:
(1) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement have been duly
authorized, executed and delivered by or on behalf of
Britannia; the Agent has been duly and validly authorized to
act as the custodian of the Common Shares to be sold by
Britannia; and the performance of this Agreement and the
Shareholders Agreement and the consummation of the transactions
herein contemplated by Britannia will not result in a breach
of, or constitute a default under, any indenture, mortgage,
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<PAGE>
deed of trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or instrument to
which Britannia is a party or by which Britannia or any of its
properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental body having jurisdiction over Britannia
or any of its properties; and to the best of such counsel's
knowledge, no approval, authorization, order or consent of any
court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of
this Agreement or the Shareholders Agreement or the
consummation by Britannia of the transactions contemplated by
this Agreement, except such as have been obtained and are in
full force and effect under the Act and such as may be required
under the rules of the NASD and applicable Blue Sky laws;
(2) To the best of such counsel's knowledge,
Britannia has full right, power and authority to enter into
this Agreement and the Shareholders Agreement and to sell,
transfer and deliver the Common Shares to be sold on the Second
Closing Date by Britannia hereunder and good and marketable
title to such Common Shares so sold, free and clear of all
liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts, or other defects of title whatsoever,
has been transferred to the Underwriters (whom counsel may
assume to be bona fide purchasers) who have purchased such
Common Shares hereunder;
(3) To the best of such counsel's knowledge, this
Agreement and the Shareholders Agreement are valid and binding
agreements of Britannia in accordance with their terms except
as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and except
with respect to those provisions relating to indemnities or
contributions for liabilities under the Act, as to which no
opinion need be expressed;
In rendering such opinion, such counsel may rely as to matters of
fact, on certificates of officers of Britannia and of governmental officials, in
which case their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such certificates and copies of said
certificates are to be attached to the opinion.
(vi) Such opinion or opinions of Wilson Sonsini Goodrich &
Rosati, P.C., counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the incorporation of
the Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common Shares, the
Registration Statement and the Prospectus and other related matters as you may
reasonably require, and the Company and the Selling Shareholders shall have
furnished to such counsel such documents and shall have exhibited to them such
papers and records as they may reasonably request for the purpose of enabling
them to pass upon such matters. In connection with such opinions, such counsel
may rely on representations or certificates of officers of the Company and
governmental officials and the opinions of counsel to the Company and the
Selling Shareholders.
(vii) A certificate of the Company executed by both the
President and Chief Executive Officer and the Chief Financial Officer of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:
(1) The representations and warranties of the
Company set forth in Section 2 of this Agreement are true and
correct as of the date of this Agreement and as of the First
Closing Date or the Second Closing Date, as the case may be,
and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied on or prior to such Closing Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment
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<PAGE>
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act;
(3) Each of the respective signers of the
certificate has carefully examined the Registration Statement
and the Prospectus; in his opinion and to the best of his
knowledge, the Registration Statement and the Prospectus and
any amendments or supplements thereto contain all statements
required to be stated therein regarding the Company; and
neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements
therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which in his opinion, after consultation
with counsel, should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of
any prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has not been any material adverse change or a
development involving a material adverse change in the
condition (financial or otherwise), business, properties,
results of operations, management or prospects of the Company;
and no legal or governmental action, suit or proceeding is
pending or threatened against the Company which is material to
the Company, whether or not arising from transactions in the
ordinary course of business, or which may adversely affect the
transactions contemplated by this Agreement; since such dates
the Company has not entered into any verbal or written
agreement or other transaction which is not in the ordinary
course of business or incurred any material liability or
obligation, direct, contingent or indirect, made any change in
its capital stock, made any material change in its short-term
debt or funded debt or repurchased or otherwise acquired any of
the Company's capital stock; and the Company has not declared
or paid any dividend, or made any other distribution, upon its
outstanding capital stock payable to shareholders of record on
a date prior to the First Closing Date or Second Closing Date;
and
(6) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, the Company has not sustained a material loss or
damage by strike, fire, flood, windstorm, accident or other
calamity (whether or not insured).
(viii) On the Second Closing Date, a certificate, dated
the second Closing Date and addressed to you, signed by or on behalf
of each of the Selling Shareholders to the effect that the
representations and warranties of such Selling Shareholder in this
Agreement are true and correct, as if made at and as of the Second
Closing Date, and such Selling Shareholder has complied with all the
agreements and satisfied all the conditions on his part to be
performed or satisfied prior to the Second Closing Date.
(ix) On the date before this Agreement is executed and also
on the First Closing Date and the Second Closing Date, a letter
addressed to you from Coopers & Lybrand L.L.P., independent
accountants, the first one to be dated the day before the date of this
Agreement, the second one to be dated the First Closing Date and the
third one (in the event of a Second Closing) to be dated the Second
Closing Date, in form and substance satisfactory to you.
(x) On or before the First Closing Date, letters from each
of the Selling Shareholders, each holder of the Company's Common Stock
and each director and executive officer of the Company, in form and
substance satisfactory to you, confirming that for a period of 180
days after the date of the Prospectus, such person or entity will not
directly or indirectly sell or offer to sell or otherwise dispose of
any shares of Common Stock or any right to acquire any such shares
without the prior written consent of Montgomery Securities, which
consent may be withheld at the sole discretion of Montgomery
Securities, except in accordance with the terms of the lock-up
agreement.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Wilson Sonsini Goodrich & Rosati, P.C., counsel for the Underwriters. The
Company shall furnish
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you with such manually signed or conformed copies of such opinions,
certificates, letters and documents as you request. Any certificate signed by
any officer of the Company and delivered to the Underwriters or to counsel for
the Underwriters shall be deemed to be a representation and warranty by the
Company to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company without liability on the part of any Underwriter or the Company or the
Selling Shareholders except for the expenses to be paid or reimbursed by the
Company and by the Selling Shareholders pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof.
SECTION 9
REIMBURSEMENT OF UNDERWRITERS' EXPENSES
Notwithstanding any other provisions hereof, if this Agreement shall
be terminated by you pursuant to Section 8, or if the sale to the Underwriters
of the Common Shares at the First Closing is not consummated because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, telegraph charges and telephone charges relating directly to
the offering contemplated by the Prospectus. Any such termination shall be
without liability of any party to any other party except that the provisions of
this Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10
EFFECTIVENESS OF REGISTRATION STATEMENT
You, the Company and the Selling Shareholders will use your, its and
their best efforts to cause the Registration Statement to become effective, to
prevent the issuance of any stop order suspending the effectiveness of the
Registration Statement and, if such stop order be issued, to obtain as soon as
possible the lifting thereof.
SECTION 11
INDEMNIFICATION
(a) The Company and each Selling Shareholder, severally and not
jointly, agree to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such Underwriter or such controlling person may become subject, under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of the Company), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state in any of them a
material fact required to be stated therein or necessary to make the statements
in any of them not misleading, or arise out of or are based in whole or in part,
in the case of the Company, on any inaccuracy in any representation or warranty
of the Company or any failure of the Company to perform its obligations
hereunder or under law, or in the case of any Selling Shareholder, on any
inaccuracy in any representation or warranty of such Selling Shareholder
contained herein or any failure of such Selling Shareholder to perform its
obligations hereunder or under law; and will reimburse each Underwriter and each
such controlling person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating,
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defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that neither the Company nor
the Selling Shareholders will be liable in any such case to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with the information furnished to the Company pursuant to Section
4 hereof; provided further that the indemnity agreement provided in this
Section 11(a) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any loss,
claim, charge, liability or litigation based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Common Shares, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected has not been sent or given to such
person within the time required by the Act and the Rules and Regulations
thereunder unless such failure is the result of noncompliance by the Company
with Section 6(e) hereof; and provided further that, under this paragraph
11(a), the liability (i) of each of Selling Shareholders Kevin J. Hafer and
Britannia shall not exceed the net proceeds received by such Selling
Shareholder upon the sale of the Optional Common Shares by such Management
Selling Shareholder to the Underwriters, and (ii) of each TA Selling
Shareholder shall not exceed the lesser of (A) the aggregate proceeds
received by such TA Selling Shareholder upon the sale of the Optional Common
Shares by such TA Selling Shareholder to the Underwriters and (B) that
proportion of aggregate losses, claims, damages, liabilities or expenses
indemnified against as is equal to the proportion of the total number of
Optional Shares hereunder being sold by such TA Selling Shareholder to the
total number of Common Shares being sold by the Company and all Selling
Shareholders. No TA Selling Shareholder shall be required to provide
indemnification hereunder until the Underwriter or controlling person seeking
indemnification shall have first made a written demand for payment on the
Company with respect to any such loss, claim, damage, liability or expense
and the Company shall have either rejected such demand or failed to make such
requested payment within sixty (60) days after receipt thereof. In the event
that the Company rejects any such demand or fails to make any such requested
payment, the Underwriter or controlling person seeking indemnification agrees
to concurrently make demand for indemnification against all Selling
Shareholders; provided that such Underwriter or controlling person shall have
sole discretion as to whether to take any further action against any Selling
Shareholder and no failure by an Underwriter or controlling person to take
further action against a Selling Shareholder shall prejudice such
Underwriter's or controlling person's rights with respect to other Selling
Shareholders. The Company and the Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to their respective amounts of such liability for which they
shall each be responsible. In addition to their other obligations under this
Section 11(a), the Company and the Selling Shareholders agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company or the Selling Shareholders
herein or failure to perform its obligations hereunder, all as described in
this Section 11(a), they will reimburse in the manner set forth above each
Underwriter and each such controlling person on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligation of the Company or the Selling
Shareholders to reimburse each Underwriter and each such controlling person
for such expenses and the possibility that such payments might later be held
to have been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been improper,
each Underwriter and each such controlling person shall promptly return it to
the Company or the Selling Shareholders, as appropriate, together with
interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments which
are not made to an Underwriter or a controlling person within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement will be in addition
to any liability which the Company and the Selling Shareholders may otherwise
have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Shareholders and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act, against any
losses, claims, damages, liabilities or expenses to which the Company, or any
such director, officer, Selling Shareholder or controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof as contemplated below) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
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amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 4 hereof; and will reimburse the
Company, or any such director, officer, Selling Shareholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Shareholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. In addition to its other
obligations under this Section 11(b), each Underwriter severally agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 11(b)
which relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Shareholders) on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company (and, to the extent applicable, each officer, director, controlling
person or Selling Shareholders) for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Shareholder) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company (and, to the extent applicable, any
officer, director, controlling person or Selling Shareholder), within thirty
(30) days of a request for reimbursement, shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement will be in addition to
any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence or (ii) the indemnifying party
shall not have employed counsel reasonably satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders, on the one hand, and the
Underwriters, on the other hand, from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
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the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Selling Shareholders, on the one hand, and the
Underwriters, on the other hand, in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company and the Selling Shareholders, on the one hand, and the Underwriters,
on the other hand, shall be deemed to be in the same proportion, in the case of
the Company and the Selling Shareholders, as the total price paid to the Company
and the Selling Shareholders for the Common Shares sold by them to the
Underwriters (net of underwriting commissions but before deducting expenses),
and in the case of the Underwriters as the underwriting commissions received by
them bears to the total of such amounts paid to the Company and the Selling
Shareholders and received by the Underwriters as underwriting commissions. The
relative fault of the Company and the Selling Shareholders, on the one hand, and
the Underwriters, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact or the inaccurate
or the alleged inaccurate representation and/or warranty relates to information
supplied by the Company, the Selling Shareholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in subparagraph (c) of this Section 11, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in subparagraph (c) of
this Section 11 with respect to notice of commencement of any action shall apply
if a claim for contribution is to be made under this subparagraph (d); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subparagraph (c) for purposes of
indemnification. The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
subparagraph 11(d) were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 11, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 11 are several in proportion to their respective underwriting
commitments and not joint. The Selling Shareholders' obligations to contribute
pursuant to this Section 11 are several in proportion to the number of Optional
Common Shares sold and not joint.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 11(a) and 11(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event that the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and 11(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 11(a) and 11(b) hereof.
SECTION 12
DEFAULT OF UNDERWRITERS
It shall be a condition to this Agreement and the obligation of the
Company and the Selling Shareholders to sell and deliver the Common Shares
hereunder, and of each Underwriter to purchase the Common Shares in the manner
as described herein, that, except as hereinafter in this paragraph provided,
each of the Underwriters shall purchase and pay for all the Common Shares agreed
to be purchased by such Underwriter hereunder upon tender to the Underwriters of
all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Common Shares hereunder on
either the First or Second Closing Date and the aggregate number of Common
Shares which such defaulting Underwriter or
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Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Underwriters and the Company for the purchase of such Common Shares by other
persons ore not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company or the Selling Shareholders except for the expenses to be paid by the
Company and the Selling Shareholders pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Underwriters or the Company shall have the right to postpone the First or Second
Closing Date, as the case may be, for not more than five business days in order
that the necessary changes in the Registration Statement, Prospectus and any
other documents, as well as any other arrangements, may be effected. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13
EFFECTIVE DATE
This Agreement shall become effective immediately as to Sections 7, 9,
11, 14 and 16 and, as to all other provisions, (i) if at the time of execution
of this Agreement the Registration Statement has not become effective, at 2:00
P.M., California time, on the first full business day following the
effectiveness of the Registration Statement, or (ii) if at the time of execution
of this Agreement the Registration Statement has been declared effective, at
2:00 P.M., California time, on the first full business day following the date of
execution of this Agreement; but this Agreement shall nevertheless become
effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release of
any of the Common Shares for sale to the public. For the purposes of this
Section 13, the Common Shares shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the Common
Shares or upon the release by you of telegrams (i) advising Underwriters that
the Common Shares are released for public offering, or (ii) offering the Common
Shares for sale to securities dealers, whichever may occur first.
SECTION 14
TERMINATION
Without limiting the right to terminate this Agreement pursuant to any
other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you and the Selling Shareholders or by you by notice to the Company and the
Selling Shareholders at any time prior to the time this Agreement shall become
effective as to all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Shareholders to any
Underwriter (except for the expenses to be paid or reimbursed by the Company and
the Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof) or of any Underwriter to the Company or
the Selling Shareholders (except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
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international calamity or any change in political, financial or economic
conditions shall have occurred or shall have accelerated or escalated to such an
extent, as, in the judgment of the Underwriters, to affect adversely the
marketability of the Common Shares, (iii) if any adverse event shall have
occurred or shall exist which makes untrue or incorrect in a material respect
any statement or information contained in the Registration Statement or
Prospectus or which is not reflected in the Registration Statement or Prospectus
but should be reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if there shall
be any action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or the transactions
contemplated by this Agreement, which, in the judgment of the Underwriters, may
materially and adversely affect the Company's business or earnings and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any termination
pursuant to this subsection (b) shall be without liability on the part of any
Underwriter to the Company or the Selling Shareholders or on the part of the
Company or the Selling Shareholders to any Underwriter (except for expenses to
be paid or reimbursed by the Company and the Selling Shareholders pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof).
(c) This Agreement shall also terminate at 5:00 P.M., California
Time, on the tenth full business day after the Registration Statement shall have
become effective if the initial public offering price of the Common Shares shall
not then as yet have been determined as provided in Section 5 hereof. Any
termination pursuant to this subsection (c) shall be without liability on the
part of any Underwriter to the Company or the Selling Shareholders or on the
part of the Company or the Selling Shareholders to any Underwriter (except for
expenses to be paid or reimbursed by the Company and the Selling Shareholders
pursuant to Sections 7 and 9 hereof and except to the extent provided in
Section 11 hereof).
SECTION 15
FAILURE OF THE SELLING SHAREHOLDERS TO SELL AND DELIVER
If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholders at the Second Closing Date under the terms of this
Agreement, then the Underwriters may at their option, by written notice from you
to the Company and the Selling Shareholders, purchase the shares which the other
Selling Shareholders have agreed to sell and deliver in accordance with the
terms hereof. In the event of a failure by one or more of the Selling
Shareholders to sell and deliver as referred to in this Section, either you or
the Company shall have the right to postpone the Second Closing Date for a
period not exceeding seven business days in order that the necessary changes in
the Registration Statement, Prospectus and any other documents, as well as any
other arrangements, may be effected.
SECTION 16
REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY
The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers, of the Selling
Shareholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, or the
Selling Shareholders, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 17
NOTICES
All communications hereunder shall be in writing and, if sent to the
Underwriters shall be mailed, delivered or telegraphed and confirmed to you at
600 Montgomery Street, San Francisco, California 94111, Attention: Mr. David
DeRuff, with a copy to Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill
Road, Palo Alto, California 94304, Attention: Jeffrey D.
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<PAGE>
Saper, Esq.; and if sent to the Company or the Selling Shareholders shall be
mailed, delivered or telegraphed and confirmed to the Company at 20031 142nd
Avenue N.E., Woodinville, Washington 98072, Attention: Mr. Kevin J. Hafer, with
a copy to Davis Wright Tremaine LLP, 2600 Century Square, Seattle, Washington
98101, Attention: Samuel F. Saracino, Esq. The Company, the Selling
Shareholders or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 18
SUCCESSORS
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 12
hereof, and to the benefit of the officers and directors and controlling persons
referred to in Section 11, and in each case their respective successors,
personal representatives and assigns, and no other person will have any right or
obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
SECTION 19
PARTIAL UNENFORCEABILITY
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
SECTION 20
APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
the internal laws (and not the laws pertaining to conflicts of laws) of the
State of California.
SECTION 21
GENERAL
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in several counterparts, each one of
which shall be an original, and all of which shall constitute one and the same
document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Shareholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Shareholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Shareholder pursuant to a validly
existing and binding
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Power of Attorney which authorizes such Attorney-in-fact to take such action.
Any action taken under this Agreement by any of the Attorneys-in-fact will be
binding on all the Selling Shareholders.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company, the Selling Shareholders and
the several Underwriters including you, all in accordance with its terms.
Very truly yours,
APEX PC SOLUTIONS, INC.
----------------------------
Kevin J. Hafer,
President and Chief Executive Officer
SELLING SHAREHOLDERS
By:
----------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
DAIN BOSWORTH INCORPORATED
By: MONTGOMERY SECURITIES
By:
-----------------------------------
Richard A. Smith, Managing Director
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SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------------------------------ ------------------------
Montgomery Securities. . . . . . . . . . .
Dain Bosworth Incorporated . . . . . . . .
---------
TOTAL. . . . . . . . . 3,500,000
---------
---------
A-1
<PAGE>
SCHEDULE B
Number of Optional
Common Shares to be Sold by
Name of Selling Shareholder Selling Shareholders
- ------------------------------------------------- ---------------------------
Kevin J. Hafer. . . . . . . . . . . . . . . .
Britannia Holdings Limited. . . . . . . . . .
Advent VII L.P. . . . . . . . . . . . . . . .
Advent Atlantic and Pacific II L.P. . . . . .
Advent New York L.P. . . . . . . . . . . . .
TA Venture Investors Limited Partnership. . .
TOTAL. . . . . . . . . . . . . . 525,000
--------------------------
--------------------------
B-1
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
APEX PC SOLUTIONS, INC.
ARTICLE I
NAME
----
The name of this corporation is Apex PC Solutions, Inc.
ARTICLE II
PURPOSES
--------
This corporation is organized for the following purposes:
A. To engage in any business, trade or activity which may be conducted
lawfully by a corporation organized under the Washington Business Corporation
Act.
B. To engage in all such activities as are incidental or conducive to the
attainment of the purposes of this corporation, or any of them and to exercise
any and all powers authorized or permitted to be done by a corporation under any
laws that may be now or hereafter applicable or available to this corporation.
ARTICLE III
SHARES
------
A. CLASSES OF STOCK. The Corporation is authorized to issue two classes
of shares designated respectively "COMMON STOCK" and "PREFERRED STOCK." The
Common Stock shall consist of 10,000,000 authorized shares, no par value. The
Preferred Stock shall consist of 500,000 authorized shares, no par value, and
shall be issued in series. The first such series shall be designated Series A
Convertible Preferred Stock (the "SERIES A PREFERRED STOCK") and shall consist
of 300,000 shares. The second such series shall be designated Series B
Redeemable Preferred Stock (the "Series B Preferred Stock") and shall consist of
200,000 shares.
<PAGE>
B. RIGHTS, PREFERENCES AND PRIVILEGES OF PREFERRED STOCK AND COMMON
STOCK. The following is a statement of the designations, powers, privileges,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions relating to the Preferred Stock
and Common Stock:
1. DIVIDENDS.
(a)(i) The holders of the then outstanding shares of the Series
A Preferred Stock shall be entitled to receive when, as and if declared by the
board of directors of the Corporation (the "BOARD OF DIRECTORS"), on an as if
converted basis, any dividends declared on the Series B Preferred Stock or the
Common Stock. In addition, the Board of Directors may declare additional
dividends payable only to the holders of the then outstanding Series A Preferred
Stock. Except as otherwise set forth in Section 1(a)(ii) below, such dividends
shall not be cumulative, and no right shall accrue to the holders of the Series
A Preferred Stock by reason of the fact that dividends are not declared in any
fiscal year.
(ii) In the event of the failure of the Corporation to redeem
shares of the Series A Preferred Stock in accordance with the terms of Section 5
hereof, the Corporation shall accrue and pay with respect to each share of
Series A Preferred Stock to the holder thereof, out of funds legally available
therefor, dividends at an annual rate equal to the product obtained by
multiplying (A) the greater of (I) 12% or (II) the sum of (x) the prime rate
(other than commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America National Trust and
Savings Association, San Francisco, California, plus (y) 4%, by (B) $7.35 per
share, subject to adjustment for all stock splits, stock dividends,
combinations, recapitalizations and similar events applicable to the Series A
Preferred Stock (the "SERIES A ORIGINAL PURCHASE PRICE"), until each such share
has been converted, redeemed or repurchased. Such dividends shall be
cumulative, whether or not declared, so that if dividends in respect of any
previous or current cumulative annual dividend period, at the annual rate
specified above, shall not have been made or declared, the deficiency shall be
paid on or declared and set apart for the holders of the Series A Preferred
Stock before any dividend or any distribution shall be paid on or declared or
set apart for the holders of the Series B Preferred Stock or the Common Stock.
(b) The holders of the then outstanding shares of the Series B
Preferred Stock shall be entitled to receive when, as and if declared by the
Board of Directors, on an as if converted basis, any dividends declared on the
Common Stock. Such dividends shall not be cumulative, and no right shall
accrue to the holders of the Series B Preferred Stock by reason of the fact that
dividends are not declared in any fiscal year.
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<PAGE>
2. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) PREFERENCE - SERIES A PREFERRED STOCK. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary (a "LIQUIDATION"), the holders of each share of Series A Preferred
Stock shall be entitled to be paid, out of the assets of the Corporation
available for distribution to holders of the Corporation's capital stock of all
classes, whether such assets are capital, surplus, or earnings, before any sums
shall be paid or any assets distributed among or set aside for the holders of
shares of Common Stock an amount equal to the Series A Original Purchase Price
plus all accrued and unpaid (or declared and unpaid) dividends thereon, up to
and including the date of full payment. If the assets of the Corporation shall
be insufficient to permit the payment in full to the holders of the Series A
Preferred Stock of the amount thus distributable, then the entire assets of the
Corporation available for such distribution shall be distributed ratably among
the holders of the Series A Preferred Stock.
(b) PREFERENCE - SERIES B PREFERRED STOCK. Upon any Liquidation
and after payment of the full liquidation preferences of the Series A Preferred
Stock as provided in Section 2(a), the holders of each share of Series B
Preferred Stock shall be entitled to be paid, out of the remaining assets of the
Corporation then available for distribution, an amount equal to $5.00 per share,
subject to adjustment for all stock splits, stock dividends, combinations,
recapitalizations and similar events applicable to the Series B Preferred (the
"SERIES B ORIGINAL PURCHASE PRICE") plus all accrued and unpaid (or declared and
unpaid) dividends thereon, up to and including the date of full payment. If the
assets of the Corporation shall be insufficient to permit the payment in full to
the holders of the Series B Preferred Stock of the amount thus distributable,
then the entire assets of the Corporation available for such distribution shall
be distributed ratably among the holders of the Series B Preferred Stock.
(c) REMAINING ASSETS - SERIES A PREFERRED STOCK AND COMMON
STOCK. Upon any Liquidation and after payment of the full liquidation
preferences of the Series A Preferred Stock and Series B Preferred Stock as
provided in Section 2(a) and Section 2(b), respectively, any remaining assets of
the corporation then available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock (on an as-if converted basis)
and the Common Stock.
(d) CONSOLIDATION AND MERGER. A consolidation or merger (other
than a consolidation or merger in which the holders of voting securities of the
Corporation immediately before the consolidation or merger are the holders
immediately after such consolidation or merger of more than 50% of the voting
securities of the surviving or acquiring Corporation, or of a parent party of
such surviving or acquiring Corporation) of the Corporation shall be regarded as
a Liquidation within the meaning of this Section 2.
(e) DISTRIBUTIONS OTHER THAN CASH. Whenever the distribution
provided for herein shall be paid in property other than cash, the value of such
distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors.
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<PAGE>
3. CONVERSION RIGHTS.
The holders of the Series A Preferred Stock shall have conversion
rights as follows (the "CONVERSION RIGHTS"):
(a) RIGHT TO CONVERT INTO COMMON STOCK. Each share of Series A
Preferred Stock shall be convertible, without the payment of any additional
consideration by the holder thereof, at the option of the holder thereof, at any
time after the date of issuance of such share, at the office of the Corporation
or any transfer agent for the Series A Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
the Series A Original Purchase Price by the conversion price (the "CONVERSION
PRICE") in effect on the date on which the certificate is surrendered for
conversion. The initial Conversion Price shall be Seven Dollars and Thirty-Five
Cents ($7.35) per share of Common Stock. Such initial Conversion Price shall be
subject to adjustment, in order to adjust the number of shares of Common Stock
into which the Series A Preferred Stock is convertible, as hereinafter provided.
In the event of the issuance of a Redemption Notice for any shares of Series A
Preferred Stock in accordance with Section 5 hereof, the Conversion Rights of
the shares designated for redemption shall terminate at the close of business on
the Redemption Date, unless default is made in payment of the Redemption Price,
in which case the Conversion Rights for such shares shall continue until such
shares have been redeemed.
(b) AUTOMATIC CONVERSION INTO COMMON STOCK. Each share of Series A
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Conversion Price:
(i) upon the closing of the sale of Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement
under the Securities Act of 1933, as amended (the "SECURITIES ACT") (other than
a registration relating solely to a transaction under Rule 145 under the
Securities Act, or any successor thereto, or to an employee benefit plan of the
Corporation) at a public offering price of not less than $10.00 per share (as
adjusted for stock splits, stock dividends, combinations, recapitalizations and
similar events with respect to the Series A Preferred Stock or the Common Stock)
and in which the aggregate net proceeds received by the Corporation equals or
exceeds $20,000,000 (a "QUALIFIED PUBLIC OFFERING"). In the event of such an
offering, the person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A Preferred Stock shall not be deemed to have converted
that Series A Preferred Stock until immediately prior to the closing; or
(ii) upon the receipt by the Corporation of (A) the affirmative
election at a duly noticed meeting of the holders of at least two-thirds (2/3)
of the then outstanding shares of Series A Preferred Stock or (B) a duly
executed written election of the holders of at least two-thirds (2/3) of the
then outstanding shares of Series A Preferred Stock, in each case in favor of
the conversion of all of the shares of Series A Preferred Stock into Common
Stock.
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<PAGE>
(c) MECHANICS OF CONVERSION.
(i) No fractional share of Common Stock shall be issued upon
conversion of the Series A Preferred Stock. In lieu of any fractional shares to
which the holder would otherwise be entitled, after aggregating all shares of
Common Stock (including fractional shares thereof) issuable upon the conversion
of all shares of Series A Preferred Stock held by the holder which are to be
converted, the Corporation shall pay cash equal to such fraction multiplied by
the fair market value of a share of Common Stock at the time (as determined in
good faith by the Board of Directors).
(ii) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock, and before the
Corporation shall be obligated to issue certificates for shares of Common Stock
upon the automatic conversion of the Series A Preferred Stock as set forth in
Section 3(b) hereof, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and shall
state therein the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued (except that no such
written notice of intent to convert shall be necessary in the event of an
automatic conversion pursuant to Section 3(b) hereof). In the event of the
loss, theft or destruction of the holder's certificate or certificates, the
holder shall notify the Corporation or its transfer agent that such certificate
or certificates have been lost, stolen or destroyed and shall execute an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificate or certificates. The
Corporation shall, as soon as practicable after such delivery, or, in the case
of a lost, stolen or destroyed certificate, the execution and delivery of the
agreement and indemnity, issue and deliver at such office to such holder of
Series A Preferred Stock, or to such holder's nominee or nominees, a certificate
or certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid together with cash in lieu of any fraction of a
share. 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
Preferred Stock to be converted (except that in the case of an automatic
conversion pursuant to Section 3(b) hereof, such conversion shall be deemed to
have been made immediately prior to the closing of the public offering or as
specified in the affirmative vote or written consent) 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.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section 3(d), the
following definitions apply:
(1) "OPTIONS" shall mean rights, options, or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
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(2) "ORIGINAL ISSUE DATE" shall mean the date on which a
share of Series A Preferred Stock was first issued.
(3) "CONVERTIBLE SECURITIES" shall mean any evidence of
indebtedness, shares (other than Common Stock) or other securities convertible
into or exchangeable for Common Stock.
(4) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to Section 3(d)(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued, issuable or, pursuant to Section 3(d)(iii), deemed to be
issued:
(A) upon conversion of shares of Series A Preferred
Stock;
(B) to officers, directors or employees of, or
consultants to, the Corporation, in an amount not exceeding 176,470 shares of
Common Stock (as adjusted for stock splits, stock dividends, combinations,
recapitalizations or similar events), pursuant to a stock grant, option or
purchase plan or other employee stock incentive program or arrangement approved
by the Board of Directors;
(C) as a dividend or distribution on the Series A
Preferred Stock;
(D) in connection with any transaction for which
adjustment is made pursuant to Section 3(e) hereof;
(E) upon exercise of warrants to purchase Common
Stock, or upon conversion of shares of Preferred Stock issued upon exercise of
warrants to purchase Preferred Stock, that may be hereinafter issued in
connection with debt financings or equipment lease financing transactions
approved by the Board of Directors; and
(F) if the holders of shares of Series A Preferred
Stock representing not less than sixty-six and two-thirds percent (66-2/3%) of
the Common Stock issuable upon conversion of the outstanding shares of Series A
Preferred Stock agree in writing that such shares shall not constitute
Additional Shares of Common Stock.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in
the Conversion Price shall be made in respect of the issuance of Additional
Shares of Common Stock unless the consideration per share for an Additional
Share of Common Stock issued or deemed to be issued by the Corporation is less
than the Conversion Price in effect on the date of, and immediately prior to,
such issuance.
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(iii) OPTIONS AND CONVERTIBLE SECURITIES. In the event that
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any provision
contained therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the close
of business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3(d)(v) hereof) of such Additional Shares of
Common Stock would be less than the applicable Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
applicable Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common Stock issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such exercised Options, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
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(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by the Corporation
for the issue of such exercised Options, plus the consideration deemed to have
been received by the Corporation (determined pursuant to Section 3(d)(v)) upon
the issue of the Convertible Securities with respect to which such Options were
actually exercised;
(4) no readjustment pursuant to clauses (2) or (3) above
shall (A) have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the Conversion Price on the original adjustment date or
(ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date or (B) affect any shares of Common Stock previously issued
upon conversion of Series A Preferred Stock; and
(5) in the case of any Options which expire by their terms
not more than 30 days after the date of issue thereof, no adjustment of the
Conversion Price shall be made until the expiration or exercise of all such
Options.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event that this Corporation shall
issue Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 3(d)(iii)) without consideration
or for a consideration per share less than the Conversion Price in effect on the
date of and immediately prior to such issue, then and in such event, the
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Conversion Price
by a fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common Stock so issued
would purchase at the Conversion Price; and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common Stock so issued;
provided that, for purposes of calculating the number of shares of Common Stock
outstanding for this Section 3(d)(iv), only shares of Common Stock issuable upon
conversion of outstanding Series A Preferred Stock shall be deemed to be
outstanding, and no other shares of Common Stock then outstanding or shares of
Common Stock issuable upon the exercise of any Options or conversion or exchange
of any Convertible Securities shall be included in such calculation.
(v) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
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(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event that Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES: The consideration
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(d)(iii)(1), relating to Options
and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(e) ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS, COMBINATIONS OR
CONSOLIDATION OF COMMON STOCK. In the event that the Corporation at any time or
from time to time declares or pays, without consideration, any dividend on
Common Stock payable in Common Stock or in any right to acquire Common Stock for
no consideration, or effects a subdivision or combination of its outstanding
shares of Common Stock into a greater or smaller number of shares without a
proportionate and corresponding subdivision or combination of the outstanding
shares of Series A Preferred Stock, then and in each such event the Conversion
Price shall be appropriately increased or decreased proportionally.
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(f) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
that the Corporation at any time or from time to time makes, or fixes a record
date for the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 3, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their shares of Series A
Preferred Stock been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 3 with respect to the rights of the holders of
the Series A Preferred Stock.
(g) NO IMPAIRMENT. Except as provided in Section 6, the Corporation
will not, by amendment of its Articles of Incorporation or through any
reorganization, recapitalization, transfer of assets, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
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 Preferred 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 Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's shares of
Series A Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event that the Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights; or
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(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock;
then, in connection with each such event, the Corporation shall send to the
holders of the Series A Preferred Stock:
(A) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the matters
referred to in (iii) above; and
(B) in the case of the matters referred to in (iii) above,
at least 20 days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
(j) 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 Preferred Stock such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred 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
Preferred 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.
(k) NOTICES. Any notice required by the provisions of this Section 3
to be given to the holders of shares of Series A Preferred Stock shall be deemed
given three days after deposit in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation. Notice to holders located outside the United States shall be given
by telex or telecopy; provided, however, that such purchaser shall give the
Corporation its telex or telecopy number.
(l) ADJUSTMENTS. Subject to Section 2 above, in case of any
reorganization or any reclassification of the capital stock of the Corporation
(other than a subdivision or combination of shares provided for above), any
merger of the Corporation with or into another Corporation or Corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another Corporation, each share of Series A Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series A Preferred Stock would have
been entitled upon the record date of (or date of, if no record date is fixed)
such reorganization reclassification, merger or conveyance; and, in any case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the
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application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of the Series A Preferred Stock, to the end
that the provisions set forth herein shall thereafter be applicable, as nearly
as equivalent as is practicable, in relation to any shares of stock or the
securities or property (including cash) thereafter deliverable upon the
conversion of the shares of the Series A Preferred Stock.
(m) ISSUE TAXES. The Corporation shall pay any and all issue 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 Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
4. VOTING POWER.
(a) GENERAL. Except as otherwise provided herein, or as required by
law, each issued and outstanding share of Common Stock shall be entitled to one
vote on all matters, and no cumulative voting shall be permitted. Except as
required by law or by the provisions hereof, the holders of the Series A
Preferred Stock shall be entitled to vote on all matters with the holders of the
Common Stock on an as if converted basis. Except as required by law, the
holders of the Series B Preferred Stock shall have no voting rights whatsoever.
(b) BOARD OF DIRECTORS. The Board of Directors shall have five (5)
members or a greater number approved in accordance with Section 6(a) hereof.
The holders of the Series A Preferred Stock shall have the right to elect two
directors (the "SERIES A DIRECTORS") , the holders of the Common Stock shall
have the right to elect two directors and the holders of the shares of Common
Stock and the Series A Preferred Stock (voting together on an as-if converted
basis), shall have the right to elect the remaining director.
(c) PROCEDURES FOR THE ELECTION OF DIRECTORS.
(i) Each director of the Corporation shall hold office for a
term expiring at the next annual meeting of stockholders. Any vacancy caused by
the death or resignation of the Series A Director may be filled only by the
holders of Series A Preferred Stock. A special meeting of the holders of the
Series A Preferred Stock entitled to vote with respect to filling the vacancy
shall be called and held as promptly as practicable after any such death or
resignation at the direction of a majority of the Board of Directors, and in any
event shall be called within ten days, to be held within 15 days, after receipt
of a written request by the holders of record of at least 25% of the then
outstanding shares of Series A Preferred Stock. In connection with any special
meeting to be held for the purpose of electing the Series A Director to fill a
vacancy, only holders of Series A Preferred Stock shall be notified and be
permitted to participate at such meeting. If any special meeting of the holders
of Series A Preferred Stock required to be called by a holder of Series A
Preferred Stock for the election of directors pursuant to this Section 4(c)
shall not have been duly called within ten days after the request therefor, then
the secretary of the Corporation shall call the meeting. Any holders of shares
of Series A Preferred Stock shall
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have access to the stock record books of the Corporation for the purpose of so
calling a special meeting. The Corporation shall pay the reasonable expenses of
calling and holding any such meeting.
(ii) Any special meeting of the holders of shares of Series A
Preferred Stock to vote for the election of directors pursuant to this Section
4(c) shall be held in the city in which the preceding annual meeting of
shareholders of the Corporation was held or in the city designated by the
holders on record of at least 25% of the then outstanding shares of Series A
Preferred Stock. At a special or annual meeting for the election of directors
by the holders of shares of Series A Preferred Stock, the presence in person, by
proxy or by conference call in accordance with RCW 23B.07.080 of the holders of
50% of the outstanding shares of Series A Preferred Stock entitled to vote
thereon shall constitute a quorum. In connection with any special meeting to be
held for the purpose of electing the Series A Director to fill a vacancy, only
holders of the Series A Preferred Stock shall be notified and be permitted to
participate at such meeting. A majority of the holders of the shares of
Series A Preferred Stock entitled to vote thereon present in person, by proxy or
by telephone shall have the power to adjourn the meeting for the purpose of such
election, from time to time without notice, other than announcement at the
meeting, until a quorum shall be present. The election of the Series A Director
also may be accomplished by unanimous written consent in lieu of a meeting of
the holders of the Series A Preferred Stock in accordance with RCW 23B.07.040.
(iii) In connection with any vote for the Series A Director, each
holder of Series A Preferred Stock as provided herein shall be entitled to one
vote for each share of Common Stock into which the shares of Series A Preferred
Stock held by such holder are then convertible, the nominees receiving a
plurality of the votes entitled to be cast shall be elected.
5. REDEMPTION.
(a) REDEMPTION - SERIES A PREFERRED STOCK.
(i) Upon the transfer of an amount of Common Stock, Options (as
defined in Section 3(d) and on an as if exercised basis), Convertible Securities
(as defined in Section 3(d) and on an as if converted basis) or Options for
Convertible Securities (on an as if exercised and as if converted basis) equal
to or greater than 50% of the then issued and outstanding Common Stock from
shareholders who are not holders of Series A Preferred Stock through one or a
series of transactions to any one person or entity or the affiliates of such
person or entity, which such person or entity was not a shareholder or an
affiliate of a shareholder as of December 29, 1995 (an "EXISTING SHAREHOLDER"),
other than a transfer to a Permitted Transferee (as defined below) (a "CHANGE OF
CONTROL EVENT"), at the election of the holders of at least 50% of the
outstanding shares of the Series A Preferred Stock, all shares of the Series A
Preferred Stock shall be immediately redeemed by the Corporation, to the extent
permitted by law. In the event that the redemption of the Series A Preferred
Stock pursuant to this Section 5(a)(i) is not permitted in whole or in part, the
Corporation shall redeem, allocated ratably among the holders thereof, as many
shares of Series A Preferred Stock pursuant to this
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Section 5(a)(i) as permitted by law. In such event, the shares of Series A
Preferred Stock not redeemed shall remain outstanding and be entitled to all the
rights and preferences provided herein. At any time thereafter when additional
funds of the Corporation are legally available for redemption of shares of
Series A Preferred Stock, such funds shall be immediately used to redeem the
balance of the shares of Series A Preferred Stock. For purposes of this Section
5(a), a "Permitted Transferee" shall mean an Existing Shareholder's spouse,
siblings, ancestors and descendants (whether natural or adopted), any spouses of
such siblings, ancestors or descendants, any niece of an Existing Shareholder
(or any niece of a spouse of an Existing Shareholder), any trust for the benefit
of an Existing Shareholder or any of the foregoing, any exempt organization
described in I.R.C. Section 501(c)(3), or any other charitable organization (as
determined in good faith by the Board of Directors).
(ii) At the election of the holders of at least 50% of the
shares of Series A Preferred Stock, the notice of which has been delivered by
such holders to the Corporation at least 60 days prior to the fifth anniversary
of the original date of issue of the Series A Preferred Stock, and to the extent
permitted by law, the Corporation shall redeem, ratably among the holders
thereof, (A) one-half of the outstanding shares of the Series A Preferred Stock
on the fifth anniversary of the original date of issue thereof and (B) the
remaining outstanding shares of the Series A Preferred Stock on the sixth
anniversary of the original date of issue thereof.
(iii) In the event that the redemption of the Series A
Preferred Stock pursuant to either Section 5(a)(ii)(A) or Section 5(a)(ii)(B)
above is not permitted in whole or in part, the Corporation shall, at the fifth
anniversary of the original date of issue or the sixth anniversary of the
original date of issue (as appropriate), redeem as many shares of Series A
Preferred Stock pursuant to Section 5(a)(ii) as permitted by law, allocated
ratably among the holders thereof. In such event, the shares of Series A
Preferred Stock not redeemed shall remain outstanding and be entitled to all the
rights and preferences provided herein. At any time thereafter when additional
funds of the Corporation are legally available for the redemption of shares of
Series A Preferred Stock, such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obligated to redeem but
which it has not redeemed (up to, in the case of a redemption pursuant to
Section 5(a)(ii)(A), one-half of the outstanding shares of Series A Preferred
Stock on the fifth anniversary of the original date of issue thereof).
(b) REDEMPTION - SERIES B PREFERRED STOCK
(i) Upon the closing of a Qualified Public Offering, the
Corporation shall redeem all of the outstanding shares of the Series B Preferred
Stock.
(ii) To the extent permitted by law, but only to the extent that
funds remain available following the redemption (if any) of shares of Series A
Preferred Stock pursuant to Section 5(a), the Corporation shall redeem, ratably
among the holders thereof, (A) one-half of the outstanding shares of the
Series B Preferred Stock on the fifth anniversary of the original date
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of issue thereof and (B) the remaining outstanding shares of the Series B
Preferred Stock on the sixth anniversary of the original date of issue thereof.
(iii) In the event that the redemption of the Series B Preferred
Stock pursuant to either Section 5(b)(ii)(A) or Section 5(b)(ii)(B) above is not
permitted in whole or in part, the Corporation shall, at the fifth anniversary
of the original date of issue or the sixth anniversary of the original date of
issue (as appropriate), redeem as many shares of Series B Preferred Stock
pursuant to Section 5(b)(ii) as permitted by law, allocated ratably among the
holders thereof,. In such event, the shares of Series B Preferred Stock not
redeemed shall remain outstanding and be entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds of
the Corporation are legally available for the redemption of shares of Series B
Preferred Stock, but only to the extent that funds remain available following
the redemption (if any) of the Series A Preferred Stock pursuant to Section
5(a), such funds will immediately be used to redeem the balance of the shares
which the Corporation has become obligated to redeem but which it has not
redeemed (up to, in the case of a redemption pursuant to Section 5(b)(ii)(A),
one-half of the outstanding shares of Series B Preferred Stock on the fifth
anniversary of the original date of issue thereof).
(c) REDEMPTION PRICE. The redemption price for each share of Series
A Preferred Stock or Series B Preferred Stock redeemed pursuant to this Section
5 shall be the Series A Original Purchase Price or the Series B Original
Purchase Price, respectively, plus in each case all accrued and unpaid dividends
on such share, calculated in accordance with Section 1 above, whether or not
declared, and any otherwise declared and unpaid dividends on such share, up to
and including the date fixed for redemption (the "REDEMPTION PRICE").
(d) PRO RATA BASIS. The redemption or repurchase of all or any
portion or number of shares of the Preferred Stock, whether pursuant to the
provisions of this Section 5 or otherwise, and all dividends or other
distributions thereon or with respect thereto shall be on a pro rata basis in
right of payment and in all other respects for each and every share of such the
Preferred Stock (except as otherwise provided in Section 5(a) or Section 5(b)),
without regard to the identity of the holder.
(e) REDEMPTION NOTICE. At least 30 days prior to the date(s) fixed
for redemption pursuant to Section 5(a) or Section 5(b) above (each, a
"REDEMPTION DATE"), written notice (the "REDEMPTION NOTICE") shall be mailed,
postage prepaid, by the Corporation to each holder of record of each series of
Preferred Stock, at its address shown on the records of the Corporation. The
Redemption Notice shall contain the following information:
(i) The series of Preferred Stock to be redeemed; the number
of shares of the series of Preferred Stock held by the holder which shall be
redeemed by the Corporation, and the total number of shares of such series of
Preferred Stock held by all holders to be so redeemed,
(ii) The Redemption Date and the Redemption Price, and
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(iii) That the holder is to surrender to the Corporation at the
place designated in such notice, the holder's certificate or certificates
representing the shares of the series Preferred Stock to be redeemed.
(f) PAYMENT AND SURRENDER OF CERTIFICATES. Each holder of shares of
Preferred Stock to be redeemed shall surrender the certificate or certificates
representing such shares to the Corporation at the place designated in the
Redemption Notice, and thereupon the applicable Redemption Price for such shares
as set forth in this Section 5 shall be paid to the order of the person whose
name appears on such certificate or certificates and each surrendered
certificate shall be canceled and retired.
(g) NO RIGHTS AS SHAREHOLDER FOLLOWING REDEMPTION. If any shares of
Preferred Stock are not redeemed solely because a holder fails to surrender the
certificate or certificates representing such shares pursuant to Section 5(f)
hereof, then, from and after the Redemption Date, the holders of such shares of
Preferred Stock thereupon subject to redemption shall cease to have any rights
of a holder of Preferred Stock except solely for the right to receive the
Redemption Price upon surrender of the certificate or certificates representing
the shares.
(h) NO REISSUANCE OF THE PREFERRED STOCK. No share or shares of
Preferred Stock acquired by the Corporation or otherwise retired by reason of
redemption, purchase, conversion or otherwise shall be reissued. The
Corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the authorized number of shares of the Series A Preferred
Stock.
6. RESTRICTIONS AND LIMITATIONS.
(a) Except as expressly provided herein or as required by law, so
long as any shares of Series A Preferred Stock remain outstanding, the
Corporation shall not, and shall not permit any subsidiary (which shall mean any
Corporation or trust of which the Corporation directly or indirectly owns at the
time more than 50% of the voting power of such Corporation or trust) to, without
the vote or written consent by the holders of a majority of the then outstanding
shares of Series A Preferred Stock (each share of Series A Preferred Stock to be
entitled to one vote in each instance):
(i) Redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose), any share or shares of
the Corporation (except for (i) those shares repurchased from officers,
directors, consultants or employees under agreements requiring such persons to
sell such shares to the Corporation on termination of their relationship with
the Corporation or its subsidiaries or those shares repurchased from
shareholders under agreements granting the Corporation a right of first refusal
to purchase such shares, and (ii) the redemption of Preferred Stock pursuant to
Section 5 hereof);
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<PAGE>
(ii) Authorize or issue, or obligate itself to authorize or
issue, any other equity security senior to or on a parity with the Series A
Preferred Stock as to liquidation preferences, redemption, dividend rights,
conversion rights, voting rights or otherwise; or
(iii) Effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the Corporation or any
subsidiary thereof, or any consolidation or merger involving the Corporation or
any subsidiary thereof (other than a consolidation or merger in which the
holders of voting securities of the Corporation or subsidiary immediately before
the consolidation own (immediately after the consolidation or merger) voting
securities of the surviving or acquiring Corporation, or of a parent of such
Corporation, possessing more than 50% of the voting power of such surviving or
acquiring Corporation or parent), or any reclassification or other change of
shares, or any recapitalization or any dissolution, liquidation or winding up of
the Corporation; or
(iv) Amend, modify, repeal or add to any provision of its
Articles of Incorporation or Bylaws;
(v) Increase the size of its Board of Directors; or
(vi) Authorize, declare, pay or set aside any dividend or other
distribution with respect to the Common Stock.
ARTICLE IV
BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws or adopt new Bylaws. Nothing herein shall deny the concurrent power of
the shareholders to adopt, alter, amend or repeal the Bylaws.
ARTICLE V
REGISTERED AGENT AND OFFICE
The name of the current registered agent of this corporation and the
address of its current registered office are as follows:
NAME ADDRESS
DWTR&J Corp. 2600 Century Square Building
1501 4th Avenue
Seattle, Washington 98101-1688
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<PAGE>
ARTICLE VI
LIMITATION OF DIRECTORS' LIABILITY
A director shall have no liability to the corporation or its shareholders
for monetary damages for conduct as a director, except for acts or omissions
that involve intentional misconduct by the director, or a knowing violation of
law by the director, or for conduct violating RCW 23B.08.310, or for any
transaction from which the director will personally receive a benefit in money,
property or services to which the director is not legally entitled. If the
Washington Business Corporation Act is hereafter amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director shall be eliminated or limited to the full extent
permitted by the Washington Business Corporation Act, as so amended. Any repeal
or modification of this Article shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification for or with respect to an act or omission of such director
occurring prior to such repeal or modification.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. RIGHT TO INDEMNIFICATION, Each person who was, or is threatened
to be made a party to or is otherwise involved (including, without limitation,
as a witness) in any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was a director or officer of the corporation or, while a director
or officer, he or she is or was serving at the request of the corporation as a
director, trustee, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, trustee, officer, employee
or agent or in any other capacity while serving as a director, trustee, officer,
employee or agent, shall be indemnified and held harmless by the corporation, to
the full extent permitted by applicable law as then in effect, against all
expense, liability and loss (including attorneys's fees, judgments, fines, ERISA
excise taxes or penalties and amounts to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
trustee, officer, employee or agent and shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that except as provided
in Section 2 of this Article with respect to proceedings seeking to enforce
rights to indemnification, the corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the corporation. The right to
indemnification conferred in this Section 1 shall be a contract right and shall
include the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that the payment of such
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<PAGE>
expenses in advance of the final disposition of a proceeding shall be made only
upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section 1 or otherwise.
Section 2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 1 of
this Article is not paid in fall by the corporation within sixty (60) days after
a written claim has been received by the corporation, except in the case of a
claim for expenses incurred in defending a proceeding in advance of its final
disposition, in which case the applicable period shall be twenty (20) days, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, to the extent successful in whole or
in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim The claimant shall be presumed to be entitled to
indemnification under this Article upon submission of a written claim (and, in
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition, where the required undertaking
has been tendered to the corporation), and thereafter the corporation shall have
the burden of proof to overcome the presumption that the claimant is so
entitled. Neither the failure of the corporation (including its board of
directors, independent legal counsel or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
or reimbursement or advancement of expenses to the claimant is proper in the
circumstances nor an actual determination by the corporation (including its
board of directors, independent legal counsel or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses shall be a defense to the action or create a presumption
that the claimant is not so entitled.
Section 3. NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Articles of Incorporation, Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise.
Section 4. INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain
insurance, at its expense, to protect itself and any director, trustee, officer,
employee or agent of the corporation or another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or loss,
whether or not the corporation would have the power to indemnify such person
against such expense, liability or loss under the Washington Business
Corporation Act. The corporation may, without further shareholder action, enter
into contracts with any director or officer of the corporation in furtherance of
the provisions of this Article and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.
Section 5. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The corporation may, by action of its board of directors from time to time,
provide indemnification and pay
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expenses in advance of the final disposition of a proceeding to employees and
agents of the corporation with the same scope and effect as the provisions of
this Article with respect to the indemnification and advancement of expenses of
directors and officers of the corporation or pursuant to rights granted pursuant
to, or provided by, the Washington Business Corporation Act or otherwise.
Dated this 27th day of December, 1995.
/s/ Kevin Hafer
------------------------------------
Kevin Hafer, President
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<PAGE>
EXHIBIT 3.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED BYLAWS
OF
APEX PC SOLUTIONS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
ARTICLE I REGISTERED OFFICE AND REGISTERED AGENT. . . . . . . . . . . . . 1
ARTICLE II SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . 1
Section 1. Annual Meetings. . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Special Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Notice of Meetings . . . . . . . . . . . . . . . . . . . . 1
Section 4. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Record Date. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Shareholders' List for Meeting . . . . . . . . . . . . . . 3
Section 7. Quorum and Adjourned Meetings. . . . . . . . . . . . . . . 3
Section 8. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 9. Voting of Shares . . . . . . . . . . . . . . . . . . . . . 3
Section 10. Matters to be Considered at Shareholders
Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1. General Powers . . . . . . . . . . . . . . . . . . . . . . 4
Section 2. Number . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3. Tenure and Qualifications. . . . . . . . . . . . . . . . . 4
Section 4. Election . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Resignation. . . . . . . . . . . . . . . . . . . . . . . . 5
Section 7. Removal of Directors . . . . . . . . . . . . . . . . . . . 5
Section 8. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Quorum and Voting. . . . . . . . . . . . . . . . . . . . . 6
Section 10. Compensation . . . . . . . . . . . . . . . . . . . . . . . 6
Section 11. Presumption of Assent. . . . . . . . . . . . . . . . . . . 6
Section 12. Committees . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV SPECIAL MEASURES FOR CORPORATE ACTION. . . . . . . . . . . . . 7
Section 1. Actions by Written Consent . . . . . . . . . . . . . . . . 7
Section 2. Meetings by Conference Telephone . . . . . . . . . . . . . 8
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 1. Officers Designated. . . . . . . . . . . . . . . . . . . . 8
Section 2. Election, Qualification and Term of Office . . . . . . . . 8
Section 3. Powers and Duties. . . . . . . . . . . . . . . . . . . . . 9
Section 4. Assistant Secretaries and Assistant
Treasurers. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7. Compensation . . . . . . . . . . . . . . . . . . . . . . . 10
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ARTICLE VI SHARE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 10
Section 1. Issuance, Form and Execution of
Certificates. . . . . . . . . . . . . . . . . . . . . . . 10
Section 2. Transfers. . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3. Loss or Destruction of Certificates. . . . . . . . . . . . 11
ARTICLE VII BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. Books of Accounts, Minutes and Share
Register. . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. Financial Statements . . . . . . . . . . . . . . . . . . . 11
Section 3. Copies of Resolutions. . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IX AMENDMENT OF BYLAWS. . . . . . . . . . . . . . . . . . . . . . 12
Section 1. By the Shareholders. . . . . . . . . . . . . . . . . . . . 12
Section 2. By the Board of Directors. . . . . . . . . . . . . . . . . 12
ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE XI RULES OF ORDER . . . . . . . . . . . . . . . . . . . . . . . . 13
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<PAGE>
AMENDED AND RESTATED BYLAWS
OF
APEX PC SOLUTIONS, INC.
ARTICLE I
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the corporation shall be located in the State of
Washington at such place as may be fixed from time to time by the board of
directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office. Any change in the registered agent or registered office shall be
effective upon filing such change with the office of the Secretary of State of
the State of Washington.
ARTICLE II
SHAREHOLDERS' MEETINGS
Section 1. ANNUAL MEETINGS. The annual meeting of the shareholders of
this corporation, for the purpose of election of directors and for such other
business as may come before it, shall be held either (a) at the registered
office of the corporation, on the third Thursday in April of each and every
year, at 10:00 a.m., but if such day shall be a legal holiday, the meeting shall
be held at the same hour and place on the next succeeding day not a holiday, or
(b) at such other place and time which may be within or without the State of
Washington, as may be determined by the board of directors and specified in the
notice of the meeting.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders of
this corporation may be called at any time by the holders of twenty-five percent
(25%) of the voting shares of the corporation, or by the president, or by the
board of directors. No business shall be transacted at any special meeting of
shareholders except as is specified in the notice calling for said meeting. The
place of any special meeting shall be the registered office of the corporation
or as otherwise determined, within or without the State of Washington, by the
board of directors and specified in the notice of the meeting.
Section 3. NOTICE OF MEETINGS. Written notice of annual or special
meetings of shareholders stating the place, day, and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called, shall be
<PAGE>
given by the secretary or persons authorized to call the meeting to each
shareholder of record entitled to vote at the meeting. Such notice shall be
given no fewer than ten (10) nor more than sixty (60) days before the meeting
date, except that notice of a meeting to act on an amendment to the Articles of
Incorporation, a plan of merger or share exchange, a proposed sale, lease,
exchange or other disposition of all or substantially all of the assets of the
corporation other than in the usual or regular course of business, or the
dissolution of the corporation shall be given no fewer than twenty (20) nor more
than sixty (60) days before the meeting date. Notice may be transmitted by
mail, private carrier or personal delivery, telegraph or teletype, or telephone,
wire or wireless equipment which transmits a facsimile of the notice. If
mailed, such notice shall be effective when deposited in the United States mail,
first-class postage prepaid, and addressed to the shareholder at his or her
address as it appears on the stock transfer books of the corporation.
Otherwise, such notice shall be effective when received.
Section 4. WAIVER OF NOTICE. Notice of the time, place, and purpose of
any meeting may be waived in writing (either before or after such meeting).
Notice of time or place of a meeting will be waived by any shareholder by that
shareholder's attendance in person or by proxy, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting. Objection to consideration of a particular matter that is not
within the purposes described in a special meeting notice will be waived unless
the shareholder objects to considering the matter when it is presented. Any
shareholder so waiving shall be bound by the proceedings of any such meeting in
all respects as if due notice thereof had been given.
Section 5. RECORD DATE. The board of directors may fix in advance a
record date in order to determine the shareholders entitled to notice of a
shareholders' meeting, to demand a special meeting, to vote, or to take any
other action, such date to be not more than seventy (70) days prior to the date
on which the particular action requiring such determination of shareholders is
to be taken. If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a share dividend or a distribution (other than
one involving the purchase, redemption, or other acquisition of the
corporation's shares), the day before the date on which notice of the meeting is
effective or the date on which the board of directors authorizes such share
dividend or distribution, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination is effective for any adjournment
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thereof, unless the board of directors fixes a new record date, which it must do
if the meeting is adjourned to a date more than one hundred twenty (120) days
after the date fixed for the original meeting.
Section 6. SHAREHOLDERS' LIST FOR MEETING. After fixing a record date
for a shareholders' meeting, the corporation shall prepare an alphabetical list
of the names of all shareholders on the record date who are entitled to notice
of the shareholders' meeting. The list shall be arranged by voting group, and
within each voting group by class or series of shares, and show the address of
and number of shares held by each shareholder. A shareholder, shareholder's
agent, or shareholder's attorney may inspect the shareholder list, beginning ten
(10) days prior to the shareholders' meeting and continuing through the meeting,
at the corporation's principal office or at a place identified in the meeting
notice in the city where the meeting will be held, during regular business hours
and at the shareholder's expense. The shareholders' list shall be kept open for
inspection during such meeting or any adjournment.
Section 7. QUORUM AND ADJOURNED MEETINGS. Unless otherwise provided in
the Articles of Incorporation, including but not limited to those provisions of
the Articles of Incorporation regarding the election of the Series A Directors,
as defined in the Articles of Incorporation, a majority of the votes entitled to
be cast on a matter by a voting group shall constitute a quorum of that voting
group at a meeting of shareholders. Once a share is represented for any purpose
at a meeting, in person or by proxy, other than solely to object to holding the
meeting or transacting business at the meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting, unless a new record date is or must be set for that adjourned meeting.
Section 8. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by the shareholder's
attorney-in-fact or agent. An appointment of a proxy is effective when received
by the secretary or other officer or agent authorized to tabulate votes. An
appointment is valid for eleven (11) months unless a longer period is expressly
provided in the appointment of the proxy.
Section 9. VOTING OF SHARES. Except as otherwise provided in the
Articles of Incorporation or in these Bylaws, every shareholder of record shall
have the right at every shareholders' meeting to one vote for every share
standing in his or her name on the books of the corporation. If a quorum
exists, action on a matter, other than election of directors, is approved by a
voting group of shareholders if the votes cast within the voting group favoring
the action exceed the votes cast within the
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<PAGE>
voting group opposing the action, unless otherwise provided in the Washington
Business Corporation Act or the Articles of Incorporation, including but not
limited to those provisions of the Articles of Incorporation that provide for
the redemption of the Series A Preferred Stock and that impose restrictions and
limitations on the actions of the Corporation without the consent of the holders
of the Series A Preferred Stock.
Section 10. MATTERS TO BE CONSIDERED AT SHAREHOLDERS MEETINGS. If any
shareholder desires to bring up any matter for consideration or propose one or
more nominees for election to the board of directors at a meeting of the
shareholders of this corporation, such shareholder must give written notice to
the secretary of this corporation at least ninety (90) days in advance of the
date of the shareholders meeting setting forth in such notice the subject matter
that the shareholder desires to bring up at the meeting and the reason or
reasons for doing so or the name(s) of the nominees proposed for election to the
board of directors. The secretary shall then promptly make and forward copies
of such notice to each of the directors and officers of this corporation so that
they will be aware of the matter. Except as set forth herein, no matter may be
brought up for consideration by any shareholder at a special shareholders
meeting.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the corporation shall
be managed under the direction of, the board of directors except as otherwise
provided by the laws under which this corporation exists or in the Articles of
Incorporation.
Section 2. NUMBER. The number of directors of the corporation shall be
the number provided in the Articles of Incorporation.
Section 3. TENURE AND QUALIFICATIONS. The term of each director shall
expire at the next annual meeting of shareholders. Despite the expiration of a
director's term, the director shall continue to serve until the director's
successor shall have been elected and qualified or until there is a decrease in
the number of directors. Directors need not be residents of the state or
shareholders of the corporation.
Section 4. ELECTION. The directors shall be elected at the
shareholders' annual meeting each year; and if, for any cause, the directors
shall not have been elected at an annual
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<PAGE>
meeting, they may be elected at a special meeting of shareholders called for
that purpose in the manner provided by these Bylaws. Directors shall be elected
by the holders of classes or series of shares entitled to elect them.
Section 5. VACANCIES. Except as provided in the Washington Business
Corporation Act or the Articles of Incorporation, including but not limited to
those provisions of the Articles of Incorporation regarding the election of
Series A Directors, as defined in the Articles of Incorporation, in the case of
any vacancy in the board of directors, including a vacancy resulting from an
increase in the number of directors, the board of directors, a majority of the
remaining directors if they do not constitute a quorum, or the shareholders may
fill the vacancy.
Section 6. RESIGNATION. Any director may resign at any time by
delivering written notice to the board of directors, its chairperson, or the
president or secretary of the corporation. A resignation shall be effective
when the notice is delivered, unless the notice specifies a later effective
date.
Section 7. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, the entire board of directors, or any member
thereof, may be removed, with or without cause, by a vote of the holders of the
shares entitled to vote at an election of such directors.
Section 8. MEETINGS.
(a) The board of directors shall hold an annual meeting immediately
after the annual shareholders' meeting, at the same place as the annual
shareholders' meeting or at such other place and at such time as may be
determined by the directors. No notice of the annual meeting of the board of
directors shall be necessary.
(b) Special meetings may be called at any time and place by the
president, secretary, or any one (1) director. Notice of the time and place of
each special meeting shall be given by the secretary, or the persons calling the
meeting. The notice may be written or oral and shall be given at least two (2)
days in advance of the meeting. Written notice may be given by mail, private
carrier or personal delivery, telegraph or teletype, or telephone, wire or
wireless equipment which transmits a facsimile of the notice. Oral notice may
be communicated in person or by telephone, wire or wireless equipment which does
not transmit a facsimile of the notice. Such notice shall be effective at the
earlier of (i) when it is received, or (ii) five (5) days after it is deposited
in the United States mail, first-class postage prepaid, and correctly
5
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addressed. The purpose of the meeting need not be given in the notice. Notice
of any special meeting may be waived in writing (either before or after such
meeting) and will be waived by any director by attendance at or participation in
the meeting, unless the director at the beginning of the meeting, or promptly
upon the director's arrival, objects and does not thereafter vote for or assent
to action taken at the meeting.
(c) Regular meetings of the board of directors may be held at such
place and on such day and hour as shall from time to time be fixed by resolution
of the board of directors. No notice of regular meetings of the board of
directors shall be necessary.
(d) At any meeting of the board of directors, any business may be
transacted, and the board may exercise all of its powers.
Section 9. QUORUM AND VOTING.
(a) A majority of the number of directors specified in or fixed in
accordance with the Articles of Incorporation or these Bylaws shall constitute a
quorum, but a lesser number may adjourn any meeting from time to time until a
quorum is obtained, and no further notice thereof need be given.
(b) If a quorum is present when a vote is taken, the affirmative vote
of a majority of the directors present at the meeting is the act of the board of
directors. If enough directors withdraw from a meeting to leave less than a
quorum, the remaining directors may not continue to transact business at such
meeting.
Section 10. COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 11. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be deemed to have assented to the action taken unless:
(i) the director objects at the beginning of the meeting, or
promptly upon the director's arrival, to holding it or
transacting business at the meeting;
6
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(ii) the director's dissent or abstention from the action taken
is entered in the minutes of the meeting; or
(iii) the director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting
before its adjournment or to the corporation within a reasonable
time after adjournment of the meeting.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
Section 12. COMMITTEES. The board of directors, by resolution approved
by a majority of the full board of directors, may designate from among its
members one or more committees, each of which must have two (2) or more members
and, to the extent provided in such resolution, such committees shall have and
may exercise all the authority of the board of directors, except that no such
committee shall have the authority to: authorize or approve a distribution
except according to a general formula or method prescribed by the board of
directors; approve or propose to shareholders action that the Washington
Business Corporation Act requires to be approved by shareholders; fill vacancies
on the board of directors or on any of its committees; adopt amendments to the
Articles of Incorporation not requiring shareholder approval; adopt, amend or
repeal the Bylaws; approve a plan of merger not requiring shareholder approval;
or authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences, and limitations of a
class or series of shares, except that the board of directors may authorize a
committee, or a senior executive officer of the corporation, to do so within
limits specifically prescribed by the board of directors.
ARTICLE IV
SPECIAL MEASURES FOR CORPORATE ACTION
Section 1. ACTIONS BY WRITTEN CONSENT. Any corporate action required
or permitted by the Articles of Incorporation, Bylaws, or the Washington
Business Corporation Act, to be voted upon or approved at a duly called meeting
of the directors, committee of directors, or shareholders may be accomplished
without a meeting if one or more unanimous written consents of the respective
directors, committee members, or shareholders entitled to vote on the actions,
setting forth the actions so taken, shall be signed by all the directors,
committee members, or shareholders entitled to vote thereon, as the case may be.
Such consents may be signed in counterpart. In the case of action by the
directors or a committee of the directors, the
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consents may be signed before or after the action is taken. Action taken by
unanimous written consent of the directors or a committee of the directors is
effective when the last director or committee member signs the consent, unless
the consent specifies a later effective date. Action taken by unanimous written
consent of the shareholders is effective when all consents are in possession of
the corporation, unless the consent specifies a later effective date.
Section 2. MEETINGS BY CONFERENCE TELEPHONE. Members of the board of
directors, members of a committee of directors, or shareholders may participate
in or conduct their respective meetings by means of a conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear each other at the same time, and participation in a meeting by
such means shall constitute presence in person at such meeting.
ARTICLE V
OFFICERS
Section 1. OFFICERS DESIGNATED. The officers of the corporation shall
be a president, one or more vice presidents (the number thereof to be determined
by the board of directors), a secretary, and a treasurer, each of whom shall be
elected by the board of directors. Such other officers and assistant officers
as may be deemed necessary may be elected or appointed by the board of
directors. Any two or more offices may be held by the same person.
The board of directors may, in its discretion, elect a chairperson of the
board of directors and, if a chairperson has been elected, the chairperson
shall, when present, preside at all meetings of the board of directors and the
shareholders and shall have such other powers as the board may prescribe.
Section 2. ELECTION, QUALIFICATION AND TERM OF OFFICE. Each of the
officers shall be elected by the board of directors. None of said officers,
except the president and the chairperson of the board of directors, need be a
director, but a vice president who is not a director cannot succeed to or fill
the office of president. The officers shall be elected by the board of
directors at each annual meeting of the board of directors. Except as
hereinafter provided, each of said officers shall hold office from the date of
his or her election until the next annual meeting of the board of directors and
until a successor shall have been duly elected and qualified.
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Section 3. POWERS AND DUTIES.
(a) PRESIDENT. Unless otherwise determined by the board of
directors, the president shall be the chief executive officer of the corporation
and, subject to the direction and control of the board of directors, shall have
general charge and supervision over its property, business, and affairs. The
president shall, unless a chairperson of the board of directors has been elected
and is present, preside at meetings of the shareholders and the board of
directors.
(b) VICE PRESIDENT. In the absence of the president or the
president's inability to act, the senior vice president shall act in the
president's place and stead and shall have all the powers and authority of the
president, except as limited by resolution of the board of directors.
(c) SECRETARY. The secretary shall: (1) keep the minutes of the
shareholders' and of the board of directors' meetings in one or more books
provided for that purpose; (2) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (3) be custodian of
the corporate records and of the seal of the corporation and affix the seal of
the corporation to all documents as may be required; (4) keep, or cause to be
kept, a register of the post office address of each shareholder which shall be
furnished to the secretary by such shareholder; (5) have general charge of the
stock transfer books of the corporation; and (6) in general perform all duties
incident to the office of secretary and such other duties as from time to time
may be assigned to the secretary by the president or by the board of directors.
(d) TREASURER. Subject to the direction and control of the board of
directors, the treasurer shall have the custody, control, and disposition of the
funds and securities of the corporation and shall account for the same, and at
the expiration of term of office, the treasurer shall turn over to his or her
successor all property of the corporation in his or her possession.
Section 4. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers shall perform such duties as
shall be assigned to them by the secretary or the treasurer, respectively, or by
the president or the board of directors.
Section 5. REMOVAL. The board of directors shall have the right to
remove any officer whenever in its judgment the best interests of the
corporation will be served thereby.
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Section 6. VACANCIES. The board of directors shall fill any office
which becomes vacant with a successor who shall hold office for the unexpired
term and until a successor shall have been duly elected and qualified.
Section 7. COMPENSATION. The compensation of all officers of the
corporation shall be fixed by the board of directors.
ARTICLE VI
SHARE CERTIFICATES
Section 1. ISSUANCE, FORM AND EXECUTION OF CERTIFICATES. No shares of
the corporation shall be issued unless authorized by the board. Such
authorization shall include the maximum number of shares to be issued, the
consideration to be received for each share, and a statement that the board has
determined that such consideration is adequate. Certificates for shares of the
corporation shall be in such form as is consistent with the provisions of the
Washington Business Corporation Act and shall state:
(i) the name of the corporation and that the corporation is
organized under the laws of this state;
(ii) the name of the person to whom issued; and
(iii) the number and class of shares and the designation of the
series, if any, which such certificate represents.
Certificates shall be signed by two (2) officers of the corporation, and the
seal of the corporation may be affixed thereto. If any officer who has signed
or whose facsimile signature has been placed upon any certificate shall have
ceased to be such officer before such certificate is issued, it may be issued by
the corporation with the same effect as if the person were such officer at the
date of its issue. Certificates may be issued for fractional shares. No
certificate shall be issued for any share until the consideration established
for its issuance has been paid.
Section 2. TRANSFERS. Shares may be transferred by delivery of the
certificate therefor, accompanied either by an assignment in writing on the back
of the certificate or by a written power of attorney to assign and transfer the
same, signed by the record holder of the certificate. The board of directors
may, by resolution, provide that beneficial owners of shares shall be deemed
holders of record for certain specified purposes.
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Except as otherwise specifically provided in these Bylaws, no shares shall be
transferred on the books of the corporation until the outstanding certificate
therefor has been surrendered to the corporation.
Section 3. LOSS OR DESTRUCTION OF CERTIFICATES. In case of loss or
destruction of any certificate of shares, another may be issued in its place
upon proof of such loss or destruction and upon the giving of a satisfactory
indemnity bond to the corporation. A new certificate may be issued without
requiring any bond when, in the judgment of the board of directors, it is proper
to do so.
ARTICLE VII
BOOKS AND RECORDS
Section 1. BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The
corporation shall keep as permanent records minutes of all meetings of its
shareholders and board of directors, a record of all actions taken by the
shareholders and board of directors without a meeting, and a record of all
actions taken by a committee of the board of directors exercising the authority
of the board of directors on behalf of the corporation. The corporation shall
maintain appropriate accounting records. The corporation or its agent shall
maintain a record of its shareholders, in a form that permits preparation of a
list of the names and addresses of all shareholders, in alphabetical order by
class of shares showing the number and class of shares held by each. The
corporation shall keep a copy of the following records at its principal office:
the Articles or Restated Articles of Incorporation and all amendments to them
currently in effect; the Bylaws or Restated Bylaws and all amendments to them
currently in effect; the minutes of all shareholders' meetings and records of
all actions taken by shareholders without a meeting, for the past three (3)
years; its financial statements for the past three (3) years, including balance
sheets showing in reasonable detail the financial condition of the corporation
as of the close of each fiscal year, and an income statement showing the results
of its operations during each fiscal year; all written communications to
shareholders generally within the past three (3) years; a list of the names and
business addresses of its current directors and officers; and its most recent
annual report delivered to the Secretary of State of Washington.
Section 2. FINANCIAL STATEMENTS. The annual financial statements for
shareholders shall be prepared not later than four (4) months after the close of
each fiscal year and in any event prior to the annual meeting of shareholders.
If financial statements are prepared by the corporation for any purpose on a
particular basis (I.E., on the basis of generally accepted
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accounting principles or on some other basis), the annual financial statements
must be prepared, and disclose that they are prepared, on that same basis. If
the annual financial statements are reported upon by a public accountant, the
accountant's report must accompany them. If not, the statements must be
accompanied by a statement of the president or the person responsible for the
corporation's accounting records, stating the person's reasonable belief whether
the statements were prepared on the basis of generally accepted accounting
principles and, if not, describing the basis of preparation, and describing any
respects in which the statements were not prepared on a basis of accounting
consistent with the basis used for statements prepared for the preceding year.
Section 3. COPIES OF RESOLUTIONS. Any person dealing with the
corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the board of directors or shareholders, when certified
by the president or secretary.
ARTICLE VIII
CORPORATE SEAL
The board of directors may provide for a corporate seal which shall have
inscribed thereon the name of the corporation, the year and state of
incorporation and the words "corporate seal".
ARTICLE IX
AMENDMENT OF BYLAWS
Section 1. BY THE SHAREHOLDERS. These Bylaws may be amended, altered,
or repealed at any annual or special meeting of the shareholders; provided that,
in the case of a special meeting, notice of the proposed alteration or amendment
is contained in the notice of the meeting.
Section 2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended,
altered, or repealed by the board of directors at any annual, regular or special
meeting of the board.
ARTICLE X
FISCAL YEAR
The fiscal year of the corporation shall be set by resolution of the board
of directors.
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ARTICLE XI
RULES OF ORDER
The rules contained in the most recent edition of Robert's Rules of Order,
Newly Revised, shall govern all meetings of shareholders and directors where
those rules are not inconsistent with the Articles of Incorporation, these
Bylaws, or special rules of order of the corporation.
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December 12, 1996
Apex PC Solutions, Inc.
20031 - 142nd Ave. N.E.
Woodinville, WA 98072
Ladies and Gentlemen:
We have acted as counsel to Apex PC Solutions, Inc., a Washington
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of 4,025,000 shares of Common
Stock of the Company (the "Shares") on a registration statement on Form SB-2
filed on December 12, 1996 with the Securities and Exchange Commission (the
"Registration Statement"). 3,500,000 of the Shares will be issued and sold by
the Company (the "Company Shares"), and 525,000 of the Shares will be sold by
certain selling shareholders (the "Selling Shareholder Shares"), in each case
pursuant to an Underwriting Agreement, the form of which is attached as Exhibit
1.1 to the Registration Statement.
We have examined the Registration Statement, the Restated Articles of
Incorporation and the Amended and Restated Bylaws of the Company, certain
records of the Company's proceedings as reflected in its minute books, and the
originals, or certified, conformed or reproduction copies, of such other
documents, certificates and records as we have deemed relevant or necessary as
the basis for the opinions hereinafter expressed. In rendering our opinion, we
have assumed the genuineness of all signatures on original or certified copies,
the authenticity of documents, certificates and records submitted to us as
originals, the conformity to original or certified copies of all copies
submitted to us as certified or reproduction copies, the legal capacity of all
natural persons executing documents, certificates and records, and the
completeness and accuracy as of the date of
<PAGE>
Apex PC Solutions, Inc.
December 12, 1996
Page 2
this opinion letter of the information contained in such documents, certificates
and records.
Subject to the foregoing, we are of the opinion that the Shares have been
duly authorized and, in the case of the Company Shares, when issued and
delivered by the Company and paid for by the underwriters in accordance with the
Underwriting Agreement, and, in the case of the Selling Shareholder Shares, when
delivered by the selling shareholders and paid for by the underwriters in
accordance with the Underwriting Agreement, will be validly issued, fully paid
and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Prospectus which is a part of the Registration Statement. In giving this
consent, we do not admit that we come within the category of persons whose
consent is required by the Act.
Very truly yours,
DAVIS WRIGHT TREMAINE LLP
/s/ Davis Wright Tremaine LLP
<PAGE>
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is entered into as of December 29, 1995 by and among APEX PC
SOLUTIONS, INC., a Washington corporation (the "Company"), the entities named as
Purchasers on Exhibit A hereto (the "Purchasers"), and the persons or entities
named as Founders on Exhibit A hereto (the "Founders").
RECITALS
A. The Purchasers hold or, on the date hereof, are acquiring an aggregate
of 200,000 shares of the Company's Common Stock, no par value (the "Common
Shares") and an aggregate of 300,000 shares of the Company's Series A
Convertible Preferred Stock, no par value (the "Preferred Shares") (together,
the Common Shares and the Preferred Shares are referred to as the "Purchaser
Shares"), pursuant to the terms of a Stock and Subordinated Note Purchase
Agreement dated the date hereof among the Company, the Purchasers and the
Founders (the "Purchase Agreement").
B. The execution and delivery of this Agreement is a condition of the
Purchase Agreement and the Company desires to grant registration rights to the
Purchasers and the Founders.
C. The Founders hold on the date hereof an aggregate of 1,000,000 shares
of Common Stock of the Company ("Founders Shares") pursuant to the terms of the
Purchase Agreement, 500,000 of which shares shall be repurchased by the Company
pursuant to Section 6.3 of the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the Purchasers, the Founders and the Company agree as follows:
REGISTRATION
1. DEFINITIONS.
As used herein:
1.1 The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
1.2 The term "Registrable Shares" means and includes any shares of Common
Stock issued or issuable upon the conversion of the Purchaser Shares and, for
the purposes of Section 2.1 but not Sections 2.2, 2.3, 2.10, 2.11 and 5, the
Founders Shares; provided that Registrable Shares shall not include any shares
of Common Stock which have previously been registered or which have
<PAGE>
been sold to the public, or which have been sold in a private transaction in
which the transferor's rights pursuant to this Agreement were not assigned.
1.3 The term "Ownership Percentage" means and includes, with respect to
each holder of Registrable Shares requesting inclusion of Registrable Shares in
an offering pursuant to this Agreement, the number of Registrable Shares held by
such holder divided by the total of (a) all Registrable Shares held by all
holders requesting registration in such offering and (b) the total number of all
other securities entitled to registration pursuant to any agreement with the
Company approved by a majority in interest of the Purchasers and held by others
participating in the underwriting.
1.4 The term "Public Offering" shall mean a fully distributed,
underwritten public offering of shares of Common Stock registered under the
Securities Act.
1.5 The term "Securities Act" means the Securities Act of 1933, as
amended.
2. REGISTRATION RIGHTS.
2.1 "PIGGY BACK" REGISTRATION. If at any time the Company shall
determine to register under the Securities Act (including pursuant to a demand
of any shareholder of the Company exercising registration rights) any of its
Common Stock (except shares to be issued solely in connection with any
acquisition of any entity or business, shares issuable solely upon exercise of
stock options, or shares issuable solely pursuant to employee benefit plans), it
shall send to each holder of Registrable Shares written notice of such
determination and, if within fifteen (15) days after delivery of such notice,
such holder shall so request in writing, the Company shall include in such
registration all or any part of the Registrable Shares that such holder requests
to be registered, except that if, in connection with any offering involving an
underwriting of Common Stock to be issued by the Company, the managing
underwriter advises the Company that marketing factors require a limitation on
the number of shares of Common Stock to be included in any such registration,
then the number of shares that are entitled to be included in the registration
shall be allocated, first, to the Common Stock to be sold by the Company and
then to the Common Stock held by the holders of Common Stock having an
incidental ("piggy back") right to include such Common Stock in the registration
statement as provided below. To the extent that any Registrable Shares may be
included in the registration after the underwriter's cut-back (the "Available
Shares"), the Company shall be obligated to include in such registration
statement, with respect to each requesting holder, the amount equal to (i) the
number of Available Shares multiplied by (ii) such holder's Ownership
Percentage. Notwithstanding the foregoing, in any underwriting of Common Stock
that occurs after the Company's initial Public Offering, the underwriter shall
not reduce the number of Registrable Shares requested for inclusion hereunder to
be included to less than thirty percent (30%) of all shares to be underwritten.
No incidental right under this Section 2.1 shall be construed to limit any
registration required under Section 2.2.
2.2 REQUIRED REGISTRATION. (a) If at any time after the earlier to
occur of (i) 120 days after the Company has completed a Public Offering, or
(ii) the twelve (12) month anniversary date hereof, one or more holders of at
least forty percent (40%) of the Registrable Shares, shall notify the
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Company in writing that it or they intend to offer or cause to be offered for
public sale any portion or all of the Registrable Shares, the Company will so
notify all holders of Registrable Shares. Upon written request of any holder
received by the Company within twenty (20) days after written notice is
delivered by the Company, the Company will cause all or any part of the
Registrable Shares that may be requested by any holder thereof (including the
holder or holders giving the initial notice of intent to offer) to be registered
under the Securities Act as expeditiously as possible. The Company shall not be
obligated to effect, or to take any action to effect, any such registration
pursuant to this Section 2.2:
(i) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the Company
is already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(ii) After the Company has initiated two such registrations
pursuant to this Section 2.2 (counting for these purposes only registrations
which have been declared or ordered effective and pursuant to which
securities have been sold and registrations which have been withdrawn by the
holders as to which the holders have not elected to bear the expenses of
registration pursuant to Section 2.9 hereof and would, absent such election,
have been required to bear such expenses);
(iii) During the period starting with the date 60 days prior
to the Company's good faith estimate of the date of filing of, and ending on
a date 120 days after the effective date of, a Company-initiated initial
Public Offering; provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or
(iv) If the initiating holders propose to dispose of
Registrable Shares which may be immediately registered on Form S-3 pursuant
to a request made under Section 2.3 hereof;
(b) Notwithstanding anything contained in this Section 2.2 to the
contrary, if the Company furnishes to the holders of Registrable Shares
requesting any registration pursuant to such section, a certificate signed by
the President of the Company stating that, in the good faith judgment of the
Board of Directors of the Company, such registration would be detrimental to the
Company and that it is in the best interests of the Company to defer the filing
of a registration statement, then the Company shall have the right to defer the
filing of a registration statement with respect to such offering for a period of
not more than 120 days from receipt by the Company of the request by the
initiating holder; provided, however, that the Company may not exercise such
right more than once in any twelve month period.
2.3 REGISTRATION ON FORM S-3.
(a) In addition to the rights provided to the holders of Registrable
Shares in Section 2.1 and Section 2.2 above, if the registration of Registrable
Shares pursuant to the Securities Act can be effected on Form S-3 (or any
similar form promulgated by the Securities and Exchange
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Commission), upon the request of one or more holders of at least twenty percent
(20%) of the Registrable Shares, the Company will promptly so notify each holder
of Registrable Shares and then will, as expeditiously as possible thereafter,
effect the registration under the Securities Act on said Form S-3 of all or such
portion of the Registrable Shares as the holder or holders shall specify.
(b) Notwithstanding the foregoing, Company shall not be required to
register Registerable Shares on Form S-3 pursuant to Section 2.3(a), (i) on more
than one occasion in any calendar year or (ii) if the Company furnishes to the
holders of Registrable Shares requesting any registration pursuant to such
section, a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors of the Company, such
registration would be detrimental to the Company and that it is in the best
interests of the Company to defer the filing of a registration statement, then
the Company shall have the right to defer the filing of a registration statement
with respect to such offering for a period of not more than 90 days from receipt
by the Company of the request by the initiating holder; provided, however, that
the Company may not exercise such right more than three times, nor may the
Company exercise such right consecutively.
2.4 EFFECTIVENESS. The Company will use its best efforts to maintain the
effectiveness for of any registration statement pursuant to which any of the
Registrable Shares are being offered until the earlier of (a) such time as all
of the Registrable Shares registered thereby are sold or (b) nine (9) months
after the effective date of the registrable statement, and from time to time
will amend or supplement such registration statement and the prospects contained
therein as and to the extent necessary to comply with the Securities Act and any
applicable state securities statute or regulation.
2.5 INDEMNIFICATION OF HOLDERS OF REGISTRABLE SHARES. In the event that
the Company registers any of the Registrable Shares under the Securities Act,
the Company will indemnify and hold harmless each holder and each underwriter of
the Registrable Shares so registered (including any broker or dealer through
whom such shares may be sold) and each person, if any, who controls such holder
or any such underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages, expenses or liabilities,
joint or several, to which they or any of them become subject under the
Securities Act or under any other statute or at common law, or otherwise, and,
except as hereinafter provided, will reimburse each such holder, each such
underwriter and each such controlling person, if any, for any legal or other
expenses reasonably incurred, as incurred, by them or any of them in connection
with investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement, in any
preliminary or amended preliminary prospectus or in the prospectus (or the
registration statement or prospectus as from time to time amended or
supplemented by the Company) or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein not misleading or any
violation by the Company of any rule or regulation promulgated under the
Securities Act applicable to the Company and relating to action or inaction
required of the Company in connection with such registration, unless such untrue
statement or omission was made in such registration statement, preliminary or
amended, preliminary prospectus or prospectus in reliance upon and in conformity
with information furnished in writing to the
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Company in connection therewith by such holder of Registrable Shares, any such
underwriter or any such controlling person expressly for use therein. Promptly
after receipt by any holder of Registrable Shares, any underwriter or any
controlling person of notice of the commencement of any action in respect of
which indemnity may be sought against the Company, such holder of Registrable
Shares, or such underwriter or such controlling person, as the case may be, will
notify the Company in writing of the commencement thereof, and, subject to the
provisions hereinafter stated, the Company shall assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to such holder of Registrable Shares, such underwriter or such
controlling person, as the case may be), and the payment of expenses insofar as
such action shall relate to any alleged liability in respect of which indemnity
may be sought against the Company. Such holder of Registrable Shares, any such
underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and to participate in the defense thereof
but the fees and expenses of such counsel shall not be at the expense of the
Company unless the employment of such counsel has been specifically authorized
by the Company. The Company shall not be liable to indemnify any person for any
settlement of any such action effected without the Company's consent. The
Company shall not, except with the approval of each party being indemnified
under this Section 2.5, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to the parties being so indemnified of a release from
all liability in respect to such claim or litigation.
2.6 INDEMNIFICATION OF COMPANY. In the event that the Company registers
any of the Registrable Shares under the Securities Act, each holder of the
Registrable Shares so registered will indemnify and hold harmless the Company,
each of its directors and officers, each underwriter of the Registrable Shares
so registered (including any broker or dealer through whom any of such shares
may be sold) and each person, if any, who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, each other
holder and each of their directors and officers from and against any and all
losses, claims, damages, expenses or liabilities, joint or several, to which
they or any of them may become subject under the Securities Act or under any
other statute or at common law or otherwise, and, except as hereinafter
provided, will reimburse the Company and each such director, officer,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement, in any preliminary or amended preliminary prospectus
or in the prospectus (or the registration statement or prospectus as from time
to time amended or supplemented) or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein not misleading, but
only insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such holder of Registrable Shares, expressly for use therein;
provided, however, that such holder's obligations hereunder shall be limited to
an amount equal to the proceeds to such holder of the Registrable Shares sold in
such registration. Promptly after receipt of notice of the commencement of any
action in respect of which indemnity may be sought against such holder of
Registrable Shares, the Company will notify such holder of Registrable Shares in
writing of the commencement thereof,
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and such holder of Registrable Shares shall, subject to the provisions
hereinafter stated, assume the defense of such action (including the employment
of counsel, who shall be counsel satisfactory to the Company) and the payment of
expenses insofar as such action shall relate to the alleged liability in respect
of which indemnity may be sought against such holder of Registrable Shares. The
Company and each such director, officer, underwriter or controlling person shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof but the fees and expenses of such counsel shall not be at
the expense of such holder of Registrable Shares unless employment of such
counsel has been specifically authorized by such holder of Registrable Shares.
Notwithstanding the two preceding sentences, if the action is one in which the
Company may be obligated to indemnify any holder of Registrable Shares pursuant
to Section 2.5, the Company shall have the right to assume the defense of such
action, subject to the right of such holders to participate therein as permitted
by Section 2.5. Such holder of Registrable Shares shall not be liable to
indemnify any person for any settlement of any such action effected without such
holder's consent. Such holder shall not, except with the approval of the
Company, consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to the party being so indemnified of a release from all liability in
respect to such claim or litigation.
2.7 EXCHANGE ACT REGISTRATION. The Company will use its best efforts to
file on a timely basis with the Securities and Exchange Commission all
information that the Commission may require under either of Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, as amended, and, so long
as it is required to file such information, shall use its best efforts to take
all action that may be required as a condition to the availability of Rule 144
under the Securities Act (or any successor exemptive rule hereinafter in effect)
with respect to the Company's Common Stock. The Company shall furnish to any
holder of Registrable Shares forthwith upon request (a) a written statement by
the Company as to its compliance with the reporting requirements of Rule 144,
(b) a copy of the most recent annual or quarterly report of the Company as filed
with the Securities and Exchange Commission and (c) any other reports and
documents that a holder may reasonably request in availing itself of any rule or
regulation of the Securities and Exchange Commission allowing a holder to sell
any such Registrable Shares without registration.
2.8 FURTHER OBLIGATIONS OF THE COMPANY. Whenever the Company is required
hereunder to register Registrable Shares, it agrees that it shall also do the
following:
(a) Furnish to each selling holder such copies of each preliminary
and final prospectus and any other documents that such holder may reasonably
request to facilitate the public offering of its Registrable Shares;
(b) Use its best efforts to register or qualify the Registrable
Shares to be registered pursuant to this Agreement under the applicable
securities or "blue sky" laws of such jurisdictions as any selling holder may
reasonably request; provided, however, that the Company shall not be obligated
to qualify to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to the service of process in suits
other than those arising out of the offer
-6-
<PAGE>
or sale of the securities covered by the registration statement in any
jurisdiction where it is not then so subject;
(c) Furnish to each selling holder a copy of the signed:
(i) opinion of counsel for the Company, dated the effective
date of the registration statement;
(ii) "comfort" letters signed by the Company's independent
public accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent permitted by
the standards of the American Institute of Certified Public Accountants,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants' "comfort" letters) with respect to events subsequent to the date of
the financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities, but only if and to the extent that
the Company is required to deliver or cause the delivery of such opinion or
"comfort" letters to the underwriters in an underwritten public offering of
securities;
(d) Permit each selling holder or his counsel or other
representatives to inspect and copy such corporate documents and records as may
reasonably be requested by them; and
(e) Furnish to each selling holder, upon request, a copy of all
documents filed and all correspondence from or to the Securities and Exchange
Commission in connection with any such offering unless confidential treatment of
such information has been requested of the Securities and Exchange Commission.
2.9 EXPENSES. In the case of any registration under Section 2.1, 2.2 or
2.3 the Company shall bear all costs and expenses of each such registration,
including, but not limited to, printing, legal and accounting expenses,
Securities and Exchange Commission filing fees and "blue sky" fees and expenses;
provided, however, that the Company shall have no obligation to pay or otherwise
bear (i) any portion of the fees or disbursements of more than one counsel for
the selling holders of Registrable Shares in connection with the registration of
their Registrable Shares, (ii) any portion of the underwriter's commissions or
discounts attributable to the Registrable Shares being offered and sold by the
holders of Registrable Shares, or (iii) any of such expenses if the payment of
such expenses by the Company is prohibited by the laws of a state in which such
offering is qualified (but only to the extent so prohibited); and provided
further, that, in the event any registration under the Securities Act is
initiated by any holders of Registrable Shares pursuant to Section 2.2 or 2.3 of
this Agreement and such registration is thereafter withdrawn or terminated by
such holders for reasons other than the occurrence of one or more events
regarding the Company which may have a material adverse affect upon the business
or prospects of the Company, and such holders learn of such event or events
after the date of the demand for registration and prior to the date of
withdrawal or termination by them and such withdrawal or termination occurs with
reasonable promptness thereafter, then the Company shall have no obligation to
pay or otherwise bear any fees, expenses or
-7-
<PAGE>
other costs arising out of or relating to such registration, unless, in the case
of a registration under Section 2.2 hereof, such holders relinquish one of their
rights to demand registration under such section.
2.10 TRANSFER OF REGISTRATION RIGHTS. The registration rights of the
holders of Registrable Shares under this Agreement may be transferred by any
Purchaser to (i) any partner or affiliate of such Purchaser and (ii) to any
transferee of such Purchaser's Registrable Shares who after such transfer will
hold at least 5% of the holdings of Registrable Shares of such Purchaser;
provided that the Company is given written notice within a reasonable period of
time following such transfer setting forth the name and address of the
transferee and identifying the number of Registrable Shares transferred.
2.11 NO SUPERIOR RIGHTS. The Company will not grant registration rights to
any person or entity without the prior written and executed consent of the
holders of at least 66 2/3% of the Registrable Securities.
2.12 MARKET STAND-OFF AGREEMENT. Provided that all holders of Registrable
Securities are treated equally and all officers and directors of the Company are
bound by restrictions not less restrictive then those set forth in this
Section 2.12, no holder of Registrable Shares shall, to the extent requested by
the Company or any managing underwriter of the Company, sell or otherwise
transfer or dispose of (other than to donees or partners of the holder who agree
to be similarly bound) any Registrable Shares during a period (the "Stand-Off
Period") equal to 180 days following the effective date of a registration
statement of the Company filed under the Securities Act (or such shorter period
as the Company or managing underwriter may authorize) except for securities sold
as part of the offering covered by such registration statement in accordance
with the provisions of this Agreement. In order to enforce the foregoing
covenant, the Company may impose stock transfer restrictions with respect to the
Registrable Shares of each holder until the end of the Stand-Off Period.
2.13 UNDERWRITING.
(a) (i) If the holders of Registrable Securities intend to
distribute the Registrable Securities covered by their request pursuant to
Section 2.2 or 2.3 hereof by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to such Section and the Company
shall include such information in the written notice referred to in such
Sections. The right of any such holder to registration pursuant to Sections 2.2
and 2.3 shall be conditioned upon such holder's participation in such
underwriting and the inclusion of such holder's Registrable Securities in the
underwriting to the extent requested (unless otherwise mutually agreed by a
majority in interest of the holders of Registrable Securities) to the extent
provided herein.
(ii) The Company shall (together with all holders of Registrable
Securities proposing to distribute their securities through such underwriting)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by a majority in interest of the
holders of Registrable Securities. Notwithstanding any other provision of this
Section 2.13, if the managing underwriter advises the holders of Registrable
Securities in writing
-8-
<PAGE>
that marketing factors require a limitation of the number of shares to be
underwritten, then, subject to the provisions of Sections 2.2 and 2.3, the
Company shall so advise all holders of Registrable Securities and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all holders of Registrable Securities
requesting inclusion in the registration in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
holders of Registrable Securities at the time of filing the registration
statement, provided however, that the number of shares of Registrable Securities
to be included in such underwriting shall not be reduced unless (i) all other
shares which are not Registrable Securities are first entirely excluded from the
Underwriting or (ii) the holders of not less than 50% of the Registrable
Securities consent thereto in writing. No Registrable Securities excluded from
the underwriting by reason of the managing underwriter's marketing limitation
shall be included in such registration.
(iii) If any holder of Registrable Securities disapproves of the
terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, the managing underwriter and the other holders of
Registrable Securities . The Registrable Securities and/or other securities so
withdrawn shall also be withdrawn from registration; provided, however, that if
by the withdrawal of such Registrable Securities a greater number of Registrable
Securities held by other holders of Registrable Securities may be included in
such registration (up to the maximum of any limitation imposed by the
underwriters), then the Company shall offer to all holders of Registrable
Securities who have included Registrable Securities in the registration the
right to include additional Registrable Securities in the same proportion used
in determining the underwriter limitation in this Section 2.13.
(b) The substantive provisions of Sections 2.13(a)(i) and 2.13
(a)(iii) shall be applicable to any participation in an underwritten offering
pursuant to Section 2.1.
3. ASSIGNABILITY
Subject to the provisions of Section 2.10 hereof, this Agreement shall be
binding upon and inure to the benefit of the respective heirs, successors and
assigns of the parties hereto.
4. LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Washington.
5. AMENDMENT
Any modification, amendment, or waiver of this Agreement or any provision
hereof shall be in writing and executed by holders of not less than 66-2/3% of
the Registrable Shares; provided however, that no such modification, amendment
or waiver shall reduce the aforesaid percentage of Registrable Shares without
the consent of the record of beneficial holders of at least 90% of the
Registrable Shares; provided, further, however, that no such modification,
amendment of waiver shall
-9-
<PAGE>
adversely affect the rights of the Founders hereunder in a manner different than
the way in which the rights of the Purchasers are affected without consent of a
majority of the holders of the Founders Shares.
6. CONFLICT
In the event of any conflict between the terms of this Agreement and the
Purchase Agreement, the terms of this Agreement shall control.
7. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
8. NOTICE
Any notices and other communications required or permitted under this
Agreement shall be effective if in writing and delivered personally or sent by
telecopier, Federal Express or registered or certified mail, postage prepaid,
addressed as follows:
If to the Purchasers, to: TA Associates
435 Tasso Street, Suite 200
Palo Alto, California 94301
Attn: Jeffrey T. Chambers
Telecopier: (415) 326-4933
with a copy to: Jeffrey D. Saper, Esq.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Telecopier: (415) 493-6811
If to the Company, to: Apex PC Solutions
20031 142nd Avenue, N.W.
Woodinville, Washington 98072
Telecopier: (206) 402-9494
with a copy to: Samuel F. Saracino, Esq.
Davis Wright Tremaine
2600 Century Square
1501 Fourth Avenue
Seattle, WA 98101
Telecopier: (206) 628-7040
-10-
<PAGE>
If to the Founders, to the address set forth for each in Exhibit A attached
hereto.
Unless otherwise specified herein, such notices or other communications
shall be deemed delivered (a) on the date delivered, if delivered personally,
(b) two business days after being sent, if sent by Federal Express or other
commercial overnight delivery service, (c) one business day after being sent, if
sent by telecopier with confirmation of good transmission and receipt, and
(d) three business days after being sent, if sent by registered or certified
mail. Each of the parties herewith shall be entitled to specify another address
by giving notice as aforesaid to each of the other parties hereto.
9. TERMINATION
The obligations of the Company under Sections 2.1, 2.2 and 2.3 shall
terminate on the seventh anniversary of the Company's initial Public Offering.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
COMPANY
APEX PC SOLUTIONS, INC.
a Washington corporation
By: /s/ Kevin Hafer
-----------------------------------------
Name: Kevin Hafer
Title: President
PURCHASERS
ADVENT VII L.P.
By: TA Associates VII L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
ADVENT ATLANTIC AND PACIFIC II L.P.
By: TA Associates AAP II Partners, its General
Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
[Signature Page to Registration Rights Agreement]
-12-
<PAGE>
ADVENT NEW YORK L.P.
By: TA Associates VI L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
TA VENTURE INVESTORS LIMITED PARTNERSHIP
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, General Partner
FOUNDERS
/s/ Sterling Crum
------------------------------
Sterling Crum
BRITANNIA HOLDINGS LIMITED
By: /s/ Patrick Adrian Blin
----------------------------------------
Name: Patrick Adrian Blin
Title: Director
[Signature Page to Registration Rights Agreement]
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<PAGE>
EXHIBIT A
LIST OF PURCHASERS
Advent VII, L.P.
Advent Atlantic and Pacific II L.P.
Advent New York L.P.
TA Venture Investors Limited Partnership
A-1
<PAGE>
LIST OF FOUNDERS
Sterling Crum
6560 125th Avenue, N.E.
Kirkland, Washington 98033
Telecopier: (206) 822-7844
Britannia Holdings Limited
Kings House, The Grange, St. Peter Port
Guernsey, Channel Islands GY1 2QJ
Telecopier: 44-1481-724116
A-2
<PAGE>
EXHIBIT 10.2
APEX PC SOLUTIONS, INC.
S CORPORATION INDEMNIFICATION AGREEMENT
THIS S CORPORATION INDEMNIFICATION AGREEMENT (the "Agreement") is made the
29 day of December, 1995, by and between Apex PC Solutions, Inc., a Washington
corporation (the "Company"), and Sterling Crum (the "Shareholder").
Whereas, the Company has filed as an S corporation, as defined in
Section 1361 of the Internal Revenue Code of 1986, as amended (the "Code"), for
federal and state income tax purposes since inception and terminated its S
corporation status on October 31, 1995 (the "Termination Date");
Whereas, it is anticipated that the Company will sell and issue debt and
equity securities to certain investors (the "Investors") named in the Company's
Stock and Subordinated Note Purchase Agreement dated of even date herewith (the
"Purchase Agreement"); and
Whereas, the Investors have required the Shareholder and the Company to
enter into this Agreement to provide indemnification to the Company in the event
income tax liabilities are incurred by the Company, to the extent provided in
this Agreement; and
Now, therefore, the parties hereto agree as follows:
ARTICLE I
TAX INDEMNIFICATION
1.1 SHAREHOLDER INDEMNIFICATION FOR TAX LIABILITIES. Except with respect
to tax imposed by any tax jurisdiction that does not recognize S corporations as
pass-through entities, the Shareholder hereby indemnifies and agrees to hold the
Company harmless from, against and in respect of any U.S. federal or state
income tax liability (including interest and penalties), if any, resulting from
the Company failing to qualify as an S corporation under Code
section 1361(a)(1)for any taxable period ending on or prior to the Termination
Date (the "Indemnification Period").
1.2 AUDIT AND CONTEST RIGHTS. The parties hereto shall cooperate with
each other in the conduct of any audit or other proceeding relating to the
Company's income taxes relating to the Indemnification Period. Within twenty
(20) days notice of any proposed or threatened adjustment which could give rise
to a claim for indemnification under Section 1.1, the Company shall notify the
Shareholder thereof and thereafter, the Shareholder shall have the right to
control any resulting proceedings and to determine when, whether and to what
extent to settle any such claim, assessment or dispute; provided, however, that
the Shareholder shall not settle or otherwise agree to any adjustment or
adjustments that would have the effect of increasing any tax liability with
respect to the Company without obtaining the prior written consent of the
Company.
<PAGE>
1.3 PAYMENTS. The Shareholder shall make any payment under Section 1.1
within thirty (30) days after the final determination (as such term is defined
in Section 1313(a) of the Code) of any tax liability resulting in a claim for
indemnification. Any amounts paid by the Shareholder hereunder shall be treated
as contributions to the capital of the Company.
ARTICLE II
MISCELLANEOUS
2.1 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute an instrument representing the Agreement between
the parties hereto.
2.2 CONSTRUCTION OF TERMS. Nothing herein implied is intended, or shall
be construed, to confer upon or give any person, form or corporation, other than
the parties hereto or their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
2.3 GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws of
the State of Washington.
2.4 AMENDMENT AND MODIFICATION. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties, nor, except as specifically set forth herein, is this Agreement
intended to confer upon any other person except the parties any rights or
remedies hereunder. Notwithstanding the foregoing, no provision of this
Agreement may be amended or waived by the Company or the Shareholder without the
prior written consent of the Designated Representative (as such term is defined
in the Purchase Agreement).
The Company and the Shareholder agree and acknowledge that the Investors
are purchasing securities of the Company in reliance, in part, upon the
agreements between the Company and the Shareholders set forth in this Agreement.
2.5 INTERPRETATION. The title, article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
2.6 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
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<PAGE>
2.7 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings with respect to the subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
SHAREHOLDER APEX PC SOLUTIONS, INC.
a Washington corporation
/s/ Sterling Crum By: /s/ Kevin Hafer
- ----------------------------------- --------------------------------
Sterling Crum Kevin Hafer, President
[Signature Page to S Corporation Indemnification Agreement]
-3-
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is being entered into as of
December 29, 1995 (the "Closing Date") by and between APEX PC SOLUTIONS, INC., a
Washington corporation (the "Company"), and Kevin Hafer ("Employee").
RECITALS
A. Pursuant to a Stock and Subordinated Note Purchase Agreement, dated as
of the Closing Date (the "Purchase Agreement"), by and among the Company,
Sterling Crum, Britannia Holdings Limited and the entities listed on Exhibit A
thereto (the "Investors"), the Investors are purchasing certain shares of
preferred stock and certain subordinated notes of the Company (the "Purchase").
B. Employee holds and will hold, after the Purchase, certain options to
purchase the common stock of the Company and has been serving as the President
and Chief Executive Officer of the Company.
C. The Investors have required, as a condition to consummating the
Purchase, that Employee execute and deliver this Agreement, and Employee has
agreed to continue his employment with the Company on the terms and conditions
set forth in this Agreement.
AGREEMENT
In order to induce the Investors to consummate the Purchase and to specify
the terms and conditions of Employee's relationship with the Company, and in
further consideration of the mutual covenants and agreements contained herein,
the parties agree as follows:
1. EMPLOYMENT
1.1 TERM; DUTIES.
(a) TERM. Subject to Section 1.6 below, Employee agrees to serve as
an employee of the Company during the period commencing on January 1, 1996, and
ending on December 31, 1996, subject to automatic one year annual renewals if
neither party has provided the other with a written notice expressing an intent
to terminate the Employee's employment with the Company 60 days prior to the
beginning of such renewal period (the "Employment Term").
(b) DUTIES. During the Employment Term, Employee shall serve as the
President and Chief Executive Officer of the Company or as the Company's board
of directors may specify from time to time, and shall have such responsibilities
as may be assigned to him by the Company's board of directors. Employee agrees
to serve the Company faithfully and to the
<PAGE>
best of his ability, and to devote substantially all of his working time,
attention and efforts during the Employment Term to the business and affairs of
the Company. Employee represents and warrants to the Company that he is under
no contractual commitments inconsistent with his obligations set forth in this
Agreement.
(c) LOCATION. Employee's principal job location shall be in the
Woodinville, Washington area.
1.2 SALARY; BONUS. In consideration of all services to be rendered by
Employee to the Company during the Employment Term, the Company shall pay to
Employee the annual salary set forth on the Benefit Schedule attached hereto as
SCHEDULE A, payable at such times as other salaried employees of the Company
receive their regular salary payments. The Company shall also pay to Employee
an annual bonus of up to fifty percent (50%) of Employee's annual salary payable
if Employee and the Company meet performance objectives mutually agreed to by
Employee and the Company. The Company shall be entitled to withhold from the
salary and bonus payments otherwise required to be made to Employee such amounts
as the Company may be required to withhold under applicable tax laws and other
applicable legal requirements. The salary and bonus of the Employee may be
increased at the discretion of the board of directors.
1.3 OTHER BENEFITS. The Company shall provide to Employee, during the
Employment Term, the same benefits that the Company makes generally available to
all of its other employees during the Employment Term, subject to Employee's
satisfaction of the respective eligibility requirements for such benefits.
Further, the Employee shall receive the following benefits and compensation:
(a) CASH BONUS. Employee shall receive a cash bonus in the amount
set forth on the Benefit Schedule declared by the Company in 1995 and payable to
Employee in January, 1996.
(b) OPTIONS ON COMMON STOCK. Employee shall receive options to
purchase the number of shares of the Company's Common Stock as set forth on the
Benefit Schedule.
(c) STOCK BONUS. Employee shall receive a stock bonus for the number
of shares of the Company's Series B Redeemable Preferred Stock as set forth on
the Benefit Schedule; PROVIDED, HOWEVER, that Employee shall have no immediate
right, title, or interest in or to such shares of Series B Redeemable Preferred
Stock, which shall vest only if:
(i) Employee is still employed by the Company upon the
redemption of the Series B Redeemable Preferred Stock pursuant to Section
5(b) of Article III of the Company's Restated Articles of Incorporation
(including, without limitation, a redemption upon the closing of a
Qualified Public Offering as defined in the Company's Restated Articles of
Incorporation or a redemption on the fifth and sixth anniversary of the
original issue date of the Series B Redeemable Preferred Stock), or
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<PAGE>
(ii) At the time of the redemption of the Series B Redeemable
Preferred Stock pursuant to Section 5(b) of Article III of the Company's
Restated Articles of Incorporation (including, without limitation, a
redemption upon the closing of a Qualified Public Offering as defined in
the Company's Restated Articles of Incorporation or a redemption on the
fifth and sixth anniversary of the original issue date of the Series B
Redeemable Preferred Stock), Employee was previously terminated for Cause
under Section 1.7(e) of the Employment Agreement,
and in either case only if, as, and to the extent that Employee's shares of
Series B Redeemable Preferred Stock are actually redeemed for cash, AND,
PROVIDED, FURTHER, that in the event Employee's shares of the Company's Series B
Redeemable Preferred Stock are redeemed for cash only in part, Employee shall
vest only in the number of shares of Series B Redeemable Preferred Stock
calculated by multiplying 200,000 by a fraction, the numerator of which is the
amount of the cash proceeds paid to Employee in the redemption (other than
amounts paid in the redemption for accrued and unpaid dividends on the Series B
Redeemable Preferred Stock), and the denominator of which is One Million Dollars
($1,000,000). All certificates for such shares of the Company's Series B
Redeemable Preferred Stock shall contain the following legend:
The shares represented by this certificate have not vested and are
subject to forfeiture under the terms and conditions set forth in the
Employment Agreement dated December __, 1995, between Kevin Hafer and
the corporation. A copy of the Employment Agreement is on file at the
corporation's principal place of business and it registered office.
(d) QUARTERLY PERFORMANCE BONUS. In recognition of the extra duties
and responsibilities on Employee in dealing with the Investors under the
Purchase Agreement and the holders of the Company's Class A and Class B
Subordinated Promissory Notes, Employee shall be entitled to a quarterly bonus
in the amount set forth on the Benefit Schedule in each calendar quarter in
which the Company makes all required payments of interest due on the Company's
Class A and Class B Subordinated Promissory Notes, payable on or before the last
day of each calendar quarter.
(e) LIFE INSURANCE. The Company agrees to purchase and maintain on
Employee's life a One Million Dollar ($1,000,000) life insurance policy payable
to Employee's wife or estate (or as otherwise directed by Employee) for so long
as Employee is employed by the Company until such time as he is (or has) fully
vested in the Series B Redeemable Preferred Stock.
(f) 1995 GROWTH BASED BONUS. The Company will pay Employee in
January, 1996, the growth based bonus accrued by the Company for Employee for
the period beginning November 23, 1995, and ending December, 1995.
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<PAGE>
(g) 1995 ACCRUED BONUS. The Company will pay Employee the 1995
accrued bonus described on the Benefit Schedule on or before January 12, 1996,
pursuant to the resolution of the Company's Board of Directors dated October 30,
1995.
1.4 NO OTHER COMPENSATION. Employee acknowledges and agrees that his
other compensation programs with the Company shall terminate at the close of
business on December 31, 1995, and he shall not be entitled to receive from the
Company or any other affiliate of the Company, any salary, bonus or other
compensation or benefit of any nature (whether relating to any period prior to
the Closing Date or relating to any period after the Closing Date) except as
expressly provided in Sections 1.2 and 1.3 above (including amounts accruing
after December 31, 1995, under the Company's growth based bonus program for
management). Employee represents and warrants to the Company that he is not
aware of any claims or rights he may have against the Company arising directly
or indirectly from his past employment with the Company, and Employee hereby
releases and discharges the Company and its affiliates from all claims, rights,
causes of action, demands and obligations arising directly or indirectly from
his employment with the Company prior to the Closing Date.
1.5 EXPENSES. Employee shall be entitled to reimbursement from the
Company for reasonable out-of-pocket business expenses reasonably incurred by
Employee during the Employment Term in the performance of Employee's duties
under this Agreement; PROVIDED, HOWEVER, that the Company shall not be required
to reimburse Employee for any such expenses unless: (a) Employee presents
vouchers and receipts indicating in reasonable detail the amount and business
purpose of each of such expenses; and (b) Employee otherwise complies with the
Company's reimbursement policies established from time to time and in effect
during the Employment Term.
1.6 TERMINATION.
(a) Either the Company or the Employee shall have the right to
terminate this Agreement, with or without Cause (as defined in Section 1.7
below), at any time during the Employment Term by delivering written notice of
termination to the other. Upon the termination of this Agreement during the
Employment Term, Employee's employment with the Company shall terminate and,
except as provided in Section 1.6(b) below, the Company shall have no further
monetary obligation or other obligation of any nature to Employee under this
Agreement or with respect to his employment or the termination of his
employment.
(b) If (i) the Company terminates this Agreement without Cause (as
defined in Section 1. 7 below) during the Employment Term (including the failure
of the Company to renew this Agreement pursuant to Section 1.1) , (ii) Employee
satisfies all of his obligations relating to the termination of his employment
under this Agreement (including his obligations under Sections 2, 3 and 4.1
hereof), and (iii) Employee executes and delivers to the Company a general
release of liability (satisfactory in form and substance to the Company) in
favor of the Company, then so long as Employee does not breach Sections 2, 3 or
4.1 hereof, Employee shall be entitled to continue to receive the compensation
specified in Section 1.2 and the benefits described in
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<PAGE>
Section 1.3 for one year from the date of such termination, and all options to
purchase the common stock of the Company then held by the Employee shall
continue vesting for the period extending one year from such date of termination
as if the Employee's employment with the Company continued for that period.
(c) The termination of this Agreement pursuant to this Section 1.6 or
otherwise shall not limit or otherwise affect any of Employee's obligations
under Sections 2, 3, and 4.1 hereof.
1.7 DEFINITION OF "CAUSE." Employee's employment with the Company shall
be deemed to have been terminated for "Cause" if such employment is terminated
following: (a) any intentional misconduct, fraud or bad faith on the part of
Employee in the performance of his duties as an employee of the Company; (b) the
conviction of Employee of, or the entry by Employee of a plea of guilty or no
contest to, any felony; (c) the breach by Employee of any material provision in
this Agreement; (d) the continued failure of Employee to perform any reasonable
duties assigned to him by the Company, if such breach or failure is not fully
cured by Employee within thirty (30) days after he receives written notice of
such failure; or (e) the inability of Employee to perform any of his material
duties as a result of illness or injury, if Employee remains unable to perform
such duties for a total of thirteen (13) consecutive weeks.
2. CONFIDENTIAL INFORMATION.
2.1 OBLIGATION TO KEEP CONFIDENTIAL. Employee agrees to keep all
Confidential Information (as defined in Section 2.2 below) strictly and
permanently confidential and, accordingly, agrees that he shall not at any time
(whether during or after the Employment Term) directly or indirectly use for any
purpose, or disclose or permit to be disclosed to any person or entity, any
Confidential Information. Employee acknowledges that the Confidential
Information constitutes unique and valuable assets of the Company acquired at
great time and expense by the Company, and that any disclosure or other use of
such Confidential Information, other than for the sole benefit of the Company,
would be wrongful and would cause irreparable harm to the Company.
2.2 DEFINITION OF "CONFIDENTIAL INFORMATION." The term "Confidential
Information" means any non-public information (whether or not in written form
and whether or not expressly designated as confidential) relating directly or
indirectly to the Company or any of the Company's subsidiaries or other
affiliates or relating to the business, operations, financial affairs,
performance, assets, investments, technology, processes, products, contracts,
customers, licensees, sublicensees, suppliers, personnel, plans or prospects of
the Company or any of the Company's subsidiaries or other affiliates, including
any such information consisting of or otherwise relating directly or indirectly
to trade secrets, know-how, technology, designs, drawings, processes, license or
sublicense arrangements, formulae, proposals, customer lists or preferences,
pricing lists, referral sources, marketing or sales techniques or plans,
operations manuals, service manuals, financial information, projections, lists
of suppliers or distributors or sources of supply; PROVIDED, HOWEVER, that
"Confidential Information" shall not be deemed to include information which, at
the
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time of initial disclosure to Employee, is part of, or without violation of this
Agreement or fault of Employee becomes part of, the public knowledge or
literature and is readily accessible to third parties.
3. NON-COMPETITION AND NON-SOLICITATION
3.1 NON-COMPETITION. During the period commencing on the Closing Date and
continuing until the date two (2) years after the termination of the Employee's
employment with the Company (the "Noncompete Period"), Employee shall not,
directly or indirectly, provide (as an employee, consultant or otherwise) any
service, support, product, or technology to any person or entity, if such
service, support, product or technology involves or relates to, in any material
respect:
(a) manufacturing, marketing, or distributing specialized cabinets and
concentrator switches that allow users to access different computers from a
single keyboard and monitor, or
(b) other products the Company is actively developing, manufacturing,
marketing, or distributing on the date of such termination
(the "Restricted Business").
3.2 NON-SOLICITATION. Employee further agrees that during the Noncompete
Period, he will not:
(a) directly or indirectly, personally or through others, encourage,
induce, attempt to induce, solicit or attempt to solicit (on Employee's own
behalf or on behalf of any other person or entity) any employee of the Company
or any of the Company's subsidiaries to leave his or her employment with the
Company or any of the Company's subsidiaries;
(b) employ, or permit any entity over which Employee exercises any
control, to employ such employee who has terminated his or her employment with
the Company or any of Company's subsidiaries during the Noncompete Period; or
(c) directly or indirectly, personally or through others, approach,
contact, solicit, advise or do (or attempt to do) business with, or otherwise
interfere with the relationship of the Company or any of the Company's
subsidiaries with, any person or entity who is, was or is reasonably anticipated
to become a customer or client of the Company or any of Company's subsidiaries
with respect to any Restricted Business.
4. MISCELLANEOUS PROVISIONS.
4.1 SURRENDER OF REWARDS AND PROPERTY. At such time as Employee no longer
serves as an employee of the Company, Employee shall deliver promptly to the
Company (a) all
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records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, reports, data, tables, calculations or copies thereof in his
possession or under his control which are the property of the Company or which
relate in any way to the business, products, practices or techniques of the
Company, and (b) all other property and Confidential Information of the Company
in his possession or under his control, including all documents which contain
any Confidential Information of the Company.
4.2 SPECIFIC PERFORMANCE. Employee agrees that in the event of any breach
or threatened breach by Employee of any covenant, obligation or other provision
contained in this Agreement, the Company shall be entitled (in addition to any
other remedy that may be available to it) to (a) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision, and (b) injunction restraining such
breach or threatened breach.
4.3 NON-EXCLUSIVITY. The rights and remedies of the Company hereunder are
not exclusive of or limited by any other rights or remedies which the Company
may have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative). Without limiting the generality of
the foregoing, the rights and remedies of the Company hereunder, and the
obligations and liabilities of Employee hereunder, are in addition to their
respective rights, remedies, obligations and liabilities under the law of unfair
competition, misappropriation of trade secrets and the like.
4.4 NOTICES. Any notice or other communication required or permitted to
be delivered to either party under this Agreement shall be in writing and shall
be deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other party hereto):
if to the Company: Apex PC Solutions, Inc.
20031 142nd Avenue, N.E.
Woodinville, WA 98072
Attention: Secretary
Facsimile: (206) 402-9494
if to Employee: Kevin Hafer
12115 198th Avenue, N.E.
Woodinville, WA 98072
4.5 SEVERABILITY. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such
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<PAGE>
circumstances and in such jurisdiction shall not affect the validity or
enforceability of such provision or part thereof under any other circumstances
or in any other jurisdiction and (c) such invalidity of enforceability of such
provision or part thereof shall not affect the validity or enforceability of the
remainder of such provision or the validity or enforceability of any other
provision of this Agreement. Each provision of this Agreement is separable from
every other provision of this Agreement, and each part of each provision of this
Agreement is separable from every other part of such provision.
4.6 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all by, the laws of the State of Washington (without
giving effect to principles of conflicts of laws).
4.7 WAIVER. No failure on the part of either party to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of
either party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Neither party shall be deemed to have waived any
claim arising out of this Agreement, or any power, right, privilege or remedy
under this Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
4.8 CAPTIONS. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
4.9 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
4.10 FURTHER ASSURANCES. Each party hereto shall execute and/or cause to
be delivered to the other party hereto such instruments and other documents and
shall take such other actions as such other party may reasonably request to
effectuate the intent and purposes of this Agreement.
4.11 ENTIRE AGREEMENT. This Agreement set forth the entire understanding
of the parties relating to the subject matter hereof and thereof and supersede
all prior agreements and understandings between the parties relating to the
subject matter hereof and thereof. In particular, the parties agree that (i)
the letter agreement dated January 5, 1995 between Sterling Crum and Employee is
terminated and superseded in its entirety, and (ii) the Proprietary Information
and Non-Competition Agreement between the Company and Employee dated March 5,
1993, is also terminated and superseded in its entirety.
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4.12 AMENDMENTS. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of the Company and Employee.
4.13 ASSIGNMENT. This Agreement and all rights and obligations of
Employee hereunder are personal to Employee and may not be transferred or
assigned by Employee at any time. The Company may, with Employee's written
consent (which consent shall not be unreasonably withheld), assign its rights
under this Agreement to any entity that assumes the Company's obligations
hereunder in connection with any sale or transfer of all or a substantial
portion of the Company's assets to such entity.
4.14 BINDING NATURE. Subject to Section 4.13, this Agreement will be
binding upon and inure to the benefit of the Company and its successors and
assigns and Employee and his representatives, executors, administrators, estate,
heirs, successors and assigns.
4.15 ATTORNEYS' FEES AND EXPENSES. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against either party hereto, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
APEX PC SOLUTIONS, INC.
By: /s/Sterling Crum
-------------------------------------
Name: Sterling Crum
------------------------------
Title: Secretary
-----------------------------
/s/Kevin Hafer
-----------------------------------
Kevin Hafer
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SCHEDULE A TO EMPLOYMENT CONTRACT
BENEFIT SCHEDULE
KEVIN HAFER
SECTION 1.2 - 1996 ANNUAL SALARY. Employee's 1996 annual salary is One
Hundred Sixty Thousand Dollars ($160,000).
SECTION 1.3(a) - CASH BONUS. Employee shall receive a cash bonus of One
Million Seventy Thousand Dollars ($1,070,000).
SECTION 1.3(b) - OPTIONS ON COMMON STOCK. Employee shall receive options
to purchase 88,235 of the Company's Common Stock, which shall vest if Employee
is still employed by the Company as follows:
(i) Employee's options to purchase 50,000 shares shall vest as
to 1,764.71 shares on January 1, 1996, and as 1,176.47 shares on the first
day of each of the following 41 months; and
(ii) Employee's options to purchase 38,235 shares shall vest as
to 9,558.75 shares on January 1, 1997, and as to 796.56 shares on the first
day of each of the following 36 months.
SECTION 1.3(c) - STOCK BONUS. Employee shall receive a stock bonus of
200,000 shares of the Company's Series B Redeemable Preferred Stock subject to
the restrictions described in Section 1.3(c) of the Employment Agreement.
SECTION 1.3(d) - QUARTERLY PERFORMANCE BONUS. Seventeen Thousand Five
Hundred Dollars ($17,500).
SECTION 1.3(g) - 1995 ACCRUED BONUS. The 1995 accrued bonus is Three
Hundred Thousand Dollars ($300,000).
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EXHIBIT 10.4
CREDIT AGREEMENT
Between
U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
and
APEX PC SOLUTIONS, INC.
Dated as of December 28, 1995
<PAGE>
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . 9
1.3 Rules of Construction . . . . . . . . . . . . . . . . . . . . 9
1.4 Incorporation of Recitals and Exhibits. . . . . . . . . . . . 9
ARTICLE II. REVOLVING LOAN. . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Revolving Note. . . . . . . . . . . . . . . . . . . . . . . . 10
2.4 Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Revolving Loan Fee. . . . . . . . . . . . . . . . . . . . . . 10
2.7 Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . 10
2.8 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III. TERM LOAN. . . . . . . . . . . . . . . . . . . . . . . . . 12
3.1 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 12
3.3 Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.4 Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 Term Loan Fees. . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV. GENERAL PROVISIONS APPLICABLE TO THE LOANS. . . . . . . . . 13
4.1 Fundings. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Manner of Payment . . . . . . . . . . . . . . . . . . . . . . 14
4.3 Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.4 Book Entry Loan Account . . . . . . . . . . . . . . . . . . . 14
4.5 Computations of Interest. . . . . . . . . . . . . . . . . . . 15
4.6 Default Interest. . . . . . . . . . . . . . . . . . . . . . . 15
4.7 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . 15
4.8 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.9 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.10 Extensions, Renewals, and Modifications . . . . . . . . . . . 15
4.11 Basis for Determining Interest Rate Inadequate or Illegal . . 16
4.12 Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS. . . . . . 17
5.1 Conditions Precedent for Initial Funding. . . . . . . . . . . 17
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5.2 Conditions Precedent to Each Subsequent Funding . . . . . . . 19
ARTICLE VI. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . 19
6.1 Financial Data. . . . . . . . . . . . . . . . . . . . . . . . 20
6.2 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . 21
6.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . 21
6.4 Payment of Charges. . . . . . . . . . . . . . . . . . . . . . 21
6.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.6 Maintenance of Records. . . . . . . . . . . . . . . . . . . . 22
6.7 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Hazardous Substances. . . . . . . . . . . . . . . . . . . . . 22
6.9 Corporate Existence . . . . . . . . . . . . . . . . . . . . . 23
6.10 Notice of Disputes and Other Matters. . . . . . . . . . . . . 23
6.11 Exchange of Note. . . . . . . . . . . . . . . . . . . . . . . 24
6.12 Maintenance of Liens. . . . . . . . . . . . . . . . . . . . . 24
6.13 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . 24
6.14 After-Acquired Collateral . . . . . . . . . . . . . . . . . . 25
6.15 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 25
6.16 Maintenance of Bank Accounts. . . . . . . . . . . . . . . . . 25
ARTICLE VII. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 25
7.1 Dividends and Distributions . . . . . . . . . . . . . . . . . 25
7.2 Transactions with Affiliates. . . . . . . . . . . . . . . . . 26
7.3 Other Indebtedness. . . . . . . . . . . . . . . . . . . . . . 26
7.4 Leases and Leasebacks . . . . . . . . . . . . . . . . . . . . 26
7.5 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.6 Advances and Loans. . . . . . . . . . . . . . . . . . . . . . 27
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.8 Consolidation, Merger, and Sale of Assets . . . . . . . . . . 27
7.9 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 28
7.10 Type of Business. . . . . . . . . . . . . . . . . . . . . . . 28
7.11 Change of Chief Executive Office or Name. . . . . . . . . . . 28
7.12 Change in Documents . . . . . . . . . . . . . . . . . . . . . 28
7.13 Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.14 Pension Plan. . . . . . . . . . . . . . . . . . . . . . . . . 28
7.15 Debt Service Coverage . . . . . . . . . . . . . . . . . . . . 28
7.16 Funded Debt Coverage Ratio. . . . . . . . . . . . . . . . . . 29
7.17 Working Capital . . . . . . . . . . . . . . . . . . . . . . . 29
7.18 Limitation on Capital Expenditures. . . . . . . . . . . . . . 29
7.19 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VIII. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 29
8.1 Corporate Status. . . . . . . . . . . . . . . . . . . . . . . 29
8.2 Power and Authority . . . . . . . . . . . . . . . . . . . . . 29
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8.3 No Violation of Agreements. . . . . . . . . . . . . . . . . . 30
8.4 Recording and Enforceability. . . . . . . . . . . . . . . . . 30
8.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.6 Good Title to Properties. . . . . . . . . . . . . . . . . . . 30
8.7 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . 31
8.8 Properties in Good Condition. . . . . . . . . . . . . . . . . 31
8.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . 31
8.10 Outstanding Indebtedness. . . . . . . . . . . . . . . . . . . 31
8.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.12 License Fees. . . . . . . . . . . . . . . . . . . . . . . . . 32
8.13 Trademarks, Patents, Et . . . . . . . . . . . . . . . . . . . 32
8.14 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.15 Regulations U and X . . . . . . . . . . . . . . . . . . . . . 32
8.16 Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.17 Condition of Property . . . . . . . . . . . . . . . . . . . . 32
8.18 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE IX. EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . 33
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . 33
9.2 Acceleration; Remedies. . . . . . . . . . . . . . . . . . . . 35
ARTICLE X. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 36
10.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.2 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . 36
10.3 Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.4 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.5 Entire Agreement and Amendments . . . . . . . . . . . . . . . 37
10.6 Benefit of Agreement. . . . . . . . . . . . . . . . . . . . . 37
10.7 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 38
10.8 Descriptive Headings. . . . . . . . . . . . . . . . . . . . . 38
10.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 38
10.10 Consent to Jurisdiction, Service, and Venue . . . . . . . . . 38
10.11 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 38
10.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 39
10.13 Statutory Notice. . . . . . . . . . . . . . . . . . . . . . . 39
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EXHIBITS
Exhibit A -- Revolving Note, Section 2.3
Exhibit B -- Term Note, Section 3.3
Exhibit C -- Prepayment Formula, Section 4.9
Exhibit D -- Security Agreement, Section 5.1(b)
Exhibit E -- Subordination Documents, Section 5.1(d)
Exhibit F -- Opinion of Counsel, Section 5.1(e)
Exhibit G -- Board Resolution and Incumbency Certificate, Section 5.1(i)
Exhibit H -- Existing Liens, Section 7.5
Exhibit I -- Schedule of Trademarks, Trade Names, Service Marks, Patents and
Applications, Section 8.13
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CREDIT AGREEMENT
This credit agreement is made and entered into as of the 28th day of
December, 1995, by and between U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION, a
national banking association ("U. S. Bank"), and APEX PC SOLUTIONS, INC., a
Washington corporation ("Borrower"). Words and phrases with initial capitalized
letters have the meanings assigned in ARTICLE I of this Agreement.
R E C I T A L S :
A. U. S. Bank is a national banking association with its principal
place of business in Seattle, Washington. Borrower is a corporation formed and
existing under the laws of the state of Washington and is engaged in the
business of manufacturing and distributing specialized cabinets and concentrator
switches that allow users to access different computers with different computer
platforms and applications from a single keyboard and monitor.
B. Borrower has requested U. S. Bank to extend to Borrower an
operating line of credit in the amount of $3,000,000 and a term loan to Borrower
in the amount of $6,000,000.
C. U. S. Bank is ready, able, and willing to extend such credit
facilities to Borrower on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:
ARTICLE I. DEFINITIONS
1.1 TERMS DEFINED. As used herein, the following terms have the
meanings set forth below:
"Affiliate" means a Person that now or hereafter, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with Borrower. A Person shall be deemed to control a
corporation or partnership if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management of such corporation or
partnership, whether through the ownership of voting securities, by contract, or
otherwise.
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<PAGE>
"Agreement" means this credit agreement and includes all amendments to
this Agreement.
"Applicable Law" means all applicable provisions and requirements of
all (a) constitutions, statutes, ordinances, rules, regulations, standards,
orders, and directives of any Governmental Bodies, (b) Governmental Approvals,
and (c) orders, decisions, decrees, judgments, injunctions, and writs of all
courts and arbitrators, whether such Applicable Laws presently exist, or are
modified, promulgated, or implemented after the date hereof.
"Applicable Margin" means:
(a) With respect to the Term Loan (i) 1.5 percent per annum for Prime
Rate Borrowings, and (ii) 2.75 percent per annum for IBOR Rate Borrowings; and
(b) With respect to the Revolving Loan from the date of the initial
Funding through May 15, 1996, (i) 1.5 percent per annum for Prime Rate
Borrowings, and (ii) 2.75 percent per annum for IBOR Rate Borrowings. With
respect to the Revolving Loan commencing May 16, 1996, and thereafter, the
Applicable Margin shall be adjusted 45 days after the end of each fiscal quarter
of Borrower by reference to the following matrix and based upon Borrower's
financial statements for the preceding fiscal quarter; PROVIDED, however, if
Borrower has not delivered to U. S. Bank its financial statements for the
previous fiscal quarter by the Applicable Margin adjustment date, the Applicable
Margin for the Revolving Loan from such interest rate adjustment date until the
next Applicable Margin adjustment date shall be 1.5 percent per annum for Prime
Rate Borrowings, and 2.75 percent per annum for IBOR Rate Borrowings:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUNDED DEBT PRIME RATE IBOR RATE BORROWING
COVERAGE RATIO AS BORROWING APPLICABLE MARGIN
OF THE END OF THE APPLICABLE MARGIN
PREVIOUS FISCAL
QUARTER
- --------------------------------------------------------------------------------
Less than or equal 1.00% 2.25%
to .75:1.00
- --------------------------------------------------------------------------------
Greater than 1.25% 2.50%
.75:1.0 and less
than or equal to
1.00:1.00
- --------------------------------------------------------------------------------
Greater than 1.50%* (or default 2.75% * (or default
1.00:1.00 rate, if applicable) rate, if applicable)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* The parties acknowledge that commencing with Borrower's fiscal quarter
ending December 31, 1996, it shall constitute an Event of Default if the
Funded Debt Coverage Ratio is greater than 1.0:1.0 as of the end of any
fiscal quarter of Borrower, and accordingly
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at any such time the default interest rate provided for in this Agreement
will, at the option of U. S. Bank, be applicable.
"Borrower" means Apex PC Solutions, Inc., a Washington corporation,
and its successors.
"Borrowing Base" has the meaning set forth in SECTION 2.7 herein.
"Borrowing Notice" has the meaning set forth in SECTION 4.1(A) herein.
"Britannia" means Britannia Holdings Limited.
"Business Day" means any day except a Saturday, Sunday, or other day
on which national banks in the state of Washington are authorized or required by
law to close.
"Capital Expenditures" means the aggregate amount of capital
expenditures of Borrower as determined in accordance with generally accepted
accounting principles, including leases that are or should be capitalized
pursuant to generally accepted accounting principles.
"Cash Flow" means Borrower's net income (after taxes) for the relevant
period, subject to the following adjustments:
(a) There shall be added to net income: (i) charges against income
consisting of depreciation of real and personal property and amortization, and
(ii) interest expense; and
(b) There shall be deducted from net income: (i) revenues derived from
sources other than continuing operations, such as net gains from sales of
capital assets, restoration to contingency reserves, collection of proceeds of
life insurance policies, write-up of assets, or gains from the sale,
acquisition, or retirement of securities, (ii) cash paid by Borrower during the
relevant period for Capital Expenditures, which cash does not constitute
proceeds of Capital Expenditure loans made to Borrower, and (iii) dividends and
distributions paid to Borrower's shareholders.
"Claims" has the meaning set forth in SECTION 10.11 herein.
"Collateral" means all the property, real or personal, tangible or
intangible, now owned or hereafter acquired, in which U. S. Bank has been or is
to be granted a security interest by Borrower or any other Person, to secure the
Indebtedness of Borrower to U. S. Bank.
"Debt Service" means, as of the last day of the relevant period, the
current portion of long-term Indebtedness of Borrower, including the current
portion of capitalized leases, plus interest expense for the relevant period.
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"Debt Service Coverage Ratio" means the ratio of Cash Flow to Debt
Service.
"Default" means any condition or event that constitutes an Event of
Default or with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"Disclosure Schedule" means the disclosure schedule attached as an
exhibit to the Stock and Note Purchase Agreement.
"Eligible Accounts Receivable" means the accounts receivable of
Borrower excluding the following: (a) accounts receivable that have been
outstanding in excess of 60 days past due, (b) all accounts receivable from any
single customer of Borrower if 25 percent or more of such customer's accounts
owed to Borrower are in excess of 60 days past due, (c) accounts receivable due
from officers, employees, or Affiliates of Borrower, (d) accounts receivable
that are partially or wholly subject to the right of setoff (other than accounts
receivable from Fortune 500 companies or their affiliates that are subject to
rights of setoff related to returns of merchandise to Borrower or warranty
claims against Borrower), (e) accounts receivable resulting from COD sales,
finance charges, and consignments, (f) accounts receivable due from Persons not
residents of the United States (other than accounts receivable from affiliates
of Fortune 500 companies), (g) accounts receivable due from the federal
government(1) (h) accounts receivable that constitute any retainage,
(i) accounts receivable that constitute dated billings and (j) accounts
receivable in which any Person other than U. S. Bank has a security interest.
Notwithstanding the foregoing, "Eligible Accounts Receivable" shall not include
any accounts receivable unless and until U. S. Bank holds a first, valid,
binding perfected security interest in any such accounts receivable.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" has the meaning set forth in SECTION 9.1 herein.
"Excess Cash Flow" means Borrower's net income (after taxes) for the
relevant period, subject to the following adjustments:
- -------------------
(1) The parties acknowledge that Borrower has one or more contracts to
supply products to the General Services Administration and therefore
has accounts receivable from the federal government. While such
accounts receivable do not constitute Eligible Accounts Receivable
under the current definition of such term, upon Borrower's request,
U. S. Bank agrees to negotiate with Borrower in good faith with
respect to the terms and conditions for including such accounts
receivable in Eligible Accounts Receivable.
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<PAGE>
(a) There shall be added to net income charges against income consisting
of depreciation of real and personal property and amortization; and
(b) There shall be deducted from net income: (i) revenues derived from
sources other than continuing operations, such as net gains from sales of
capital assets, restoration to contingency reserves, collection of proceeds of
life insurance policies, write-up of assets, or gains from the sale,
acquisition, or retirement of securities, (ii) cash paid by Borrower during the
relevant period for Capital Expenditures, which cash does not constitute
proceeds of Capital Expenditure loans made to Borrower, and (iii) an amount
equal to the current portion of Borrower's long-term Indebtedness, including the
current portion of capitalized leases.
"Funded Debt" means any Indebtedness of Borrower that requires
scheduled principal reduction payments and in any event shall include the Term
Loan and capitalized leases, but shall excluded Subordinated Debt.
"Funded Debt Coverage Ratio" means the ratio of Funded Debt as of the
last day of the relevant period to Cash Flow for the relevant period. For
purposes of calculating the Funded Debt Coverage Ratio as of the last day of
each of Borrower's first and fourth fiscal quarters, there shall be excluded
from Funded Debt an amount equal to the amount that the outstanding principal
balance of the Term Loan on the last day of each such respective fiscal quarter
exceeds the amount of the Term Loan Commitment as of (a) May 1 of such year for
calculations as of the last day of Borrower's first fiscal quarter, and
(b) May 1 of the following year for calculations as of the last day of
Borrower's fourth fiscal quarter.
"Funding" means any disbursement of the proceeds of the Revolving Loan
or Term Loan or the issuance or renewal of any Letters of Credit.
"Governmental Approval" means any authorization, consent, approval,
certificate of compliance, license, permit, or exemption from, contract with,
registration or filing with, or report or notice to, any Governmental Body
required or permitted by Applicable Law.
"Governmental Body" means the government of the United States, any
state or any foreign country, or any governmental or regulatory official, body,
department, bureau, subdivision, agency, commission, court, arbitrator, or
authority, or any instrumentality thereof, whether federal, state, or local.
"Hazardous Materials" means oil or petrochemical products, PCB's,
asbestos, urea formaldehyde, flammable explosives, radioactive materials,
hazardous wastes, toxic substances, or related materials including but not
limited to substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," or "toxic substances"
under any Hazardous Materials Laws.
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<PAGE>
"Hazardous Materials Claims" means (a) enforcement, cleanup, removal,
or other regulatory actions instituted, completed, or threatened by any
Governmental Body pursuant to any applicable Hazardous Materials Laws; and
(b) claims made or threatened by any third party against Borrower or its
property relating to damage, contribution, cost recovery, compensation, loss, or
injury resulting from Hazardous Materials.
"Hazardous Materials Laws" means all Applicable Laws pertaining to
Hazardous Materials.
"IBOR Borrowing Rate" means the IBOR Rate plus the Applicable Margin.
"IBOR Rate" means for any Interest Period, the rate per annum equal to
the arithmetic average (rounded upward to the nearest 1/16 of 1 percent) of the
rates per annum determined by U. S. Bank as of the times specified in
SECTION 4.1(a) herein on the date two Business Days prior to the first day of
the applicable Interest Period as the rates offered to U. S. Bank by three
Eurodollar money market dealers in such Eurodollar market as may be selected by
U. S. Bank for U.S. dollar deposits to be delivered on the first day of such
Interest Period for the number of months therein; PROVIDED, however, that
U. S. Bank's IBOR Rate shall be adjusted to take into account the maximum
reserves required to be maintained for Eurocurrency liabilities by banks during
each such Interest Period as specified in Regulation D of the Board of Governors
of the Federal Reserve System or any successor regulation.
"IBOR Rate Borrowing" means any Funding or any portion of the
applicable Loan for which Borrower has elected the IBOR Borrowing Rate to apply.
The minimum amount of each IBOR Rate Borrowing shall be $1,000,000 and may only
be in integrals of $100,000 in excess thereof.
"Indebtedness" means all items that in accordance with generally
accepted accounting principles would be included in determining total
liabilities as shown on the liabilities side of the balance sheet as of the date
that "Indebtedness" is to be determined and in any event includes liabilities
secured by any mortgage, deed of trust, pledge, lien, or security interest on
property owned or acquired, whether or not such a liability has been assumed,
and the guaranties, endorsements (other than for collection in the ordinary
course of business), and other contingent obligations with regard to the
obligations of other Persons.
"Interest Period" means as to any IBOR Rate Borrowing, a period of
one, two, three, six, or twelve months commencing on the date the IBOR Borrowing
Rate becomes applicable thereto; PROVIDED however, that: (a) no Interest Period
shall be selected that would extend beyond the maturity date of the applicable
Loan; (b) any Interest Period that would otherwise expire on a day which is not
a Business Day, shall be extended to the next succeeding Business Day, unless
the result of such extension would be to extend such Interest Period into
another calendar month, in which event the Interest Period shall end on the
immediately preceding Business Day; and (c) any Interest Period that begins on
the last
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<PAGE>
Business Day of a calendar month (or on 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.
"Investors" means Advent VII L.P., Advent Atlantic and Pacific II
L.P., Advent New York L.P., and TA Venture Investors Limited Partnership.
"Letter of Credit" has the meaning set forth in SECTION 2.8 herein and
includes all renewals, replacements, and amendments thereof.
"Loans" means the Revolving Loan and the Term Loan, as well as all
renewals, replacements, and amendments thereof.
"Loan Documents" means this Agreement, the Notes, the Security
Agreement, and the Subordination Documents, together with all other agreements,
instruments, and documents arising out of or relating to this Agreement or the
Loans, and includes all renewals, replacements and amendments thereof.
"Notes" means the Revolving Note and the Term Note, as well as all
renewals, replacements, and amendments thereof.
"Participant" means any financial institution to which U. S. Bank
sells a participation in any of the Loans.
"Permitted Liens" has the meaning set forth in SECTION 7.5 herein.
"Person" means any individual, partnership, joint venture, firm,
corporation, association, trust, or other enterprise or any Governmental Body.
"Plan" means an employee pension benefit plan that is covered by ERISA
or subject to the minimum funding standards under Section 412 of the Internal
Revenue Code of 1986 and is either (a) maintained by Borrower or any Affiliate
for employees of Borrower or any Affiliate or (b) maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which Borrower or any Affiliate is then
making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions.
"Prime Borrowing Rate" means the Prime Rate plus the Applicable
Margin.
"Prime Rate" means that rate of interest announced by U. S. Bank from
time to time as its prime rate. The Prime Rate is not necessarily the lowest
rate of interest charged by U. S. Bank to any classification of U. S. Bank
customers. For purposes of this Agreement, each time the Prime Rate changes, a
contemporaneous change shall occur in the interest rate charged to Borrower on
any Loans then bearing interest at a rate indexed to the
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<PAGE>
Prime Rate, effective upon the announcement or publication of any such change in
rate. U. S. Bank shall not be obligated to notify Borrower of any change in the
Prime Rate; however, the Prime Rate is available upon inquiry of U. S. Bank.
"Prime Rate Borrowing" means any Funding or portion of the applicable
loan pursuant to the terms of this Agreement that bears interest at the Prime
Borrowing Rate.
"Revolving Loan" has the meaning set forth in SECTION 2.1 herein and
includes all renewals, replacements, and amendments of the Revolving Loan.
"Revolving Note" has the meaning set forth in SECTION 2.3 herein and
includes all renewals, replacements, and amendments of the Revolving Note.
"Security Agreement" has the meaning set forth in SECTION 5.1(B)
herein and includes all renewals, replacements, and amendments of the Security
Agreement.
"Stock and Note Purchase Agreement" means the stock and subordinated
note purchase agreement executed by Borrower, Sterling Crum, Britannia, and the
Investors dated December , 1995.
"Subordinated Debt" means the Indebtedness of Borrower to Britannia
and the Investors in the initial principal amount of $20,000,000, which
Indebtedness is subordinated to the Indebtedness of Borrower to U. S. Bank
pursuant to the Subordination Documents.
"Subordination Documents" has the meaning set forth in SECTION 5.1(D)
herein and includes all amendments of the Subordination Documents approved by
U. S. Bank.
"Term Loan Commitment" means $6,000,000 less (on a cumulative basis):
(a) (i) $400,000 on December 31, 1996, (ii) $900,000 on December 31, 1997,
(iii) $900,000 on December 31, 1998, (iv) $900,000 on December 31, 1999, (v)
$900,000 on December 31, 2000, and (vi) $900,000 on December 31, 2001; and
(b) On May 1 of each year, commencing May 1, 1997, an amount equal to 25
percent of Excess Cash Flow during the preceding fiscal year of Borrower;
PROVIDED, however, that in the event that the Funded Debt Coverage Ratio as of
the last day of such preceding fiscal year is less than or equal to 1.0:1.0,
then the Term Loan Commitment shall not be reduced by 25 percent of Excess Cash
Flow on May 1 of the following year. U. S. Bank and Borrower acknowledge that
commencing December 31, 1996, if the Funded Debt Coverage Ratio is greater than
1.0:1.0, there shall exist an Event of Default pursuant to SECTION 7.16, and
U. S. Bank may exercise any remedies available under the Loan Documents or
Applicable Law.
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<PAGE>
"Term Loan" has the meaning set forth in SECTION 3.1 herein and
includes all renewals, replacements, and amendments of the Term Loan.
"Term Note" has the meaning set forth in SECTION 3.3 herein and
includes all renewals, replacements, and amendments of the Term Note.
"U. S. Bank" means U. S. Bank of Washington, National Association, a
national banking association, and its successors and assigns.
"Working Capital" means Borrower's current assets, less Borrower's
current liabilities.
1.2 ACCOUNTING TERMS. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with generally accepted accounting
principles consistently applied.
1.3 RULES OF CONSTRUCTION. Unless the context otherwise requires,
the following rules of construction apply to the Loan Documents:
(a) Words in the singular include the plural and in the plural
include the singular.
(b) Provisions of the Loan Documents apply to successive events and
transactions.
(c) In the event of any inconsistency between the provisions of this
Agreement and the provisions of any of the other Loan Documents, the provisions
of this Agreement govern.
1.4 INCORPORATION OF RECITALS AND EXHIBITS. The foregoing recitals
are incorporated into this Agreement by reference. All references to "Exhibits"
contained herein are references to exhibits attached hereto, the terms and
conditions of which are made a part hereof for all purposes.
ARTICLE II. REVOLVING LOAN
2.1 LOAN COMMITMENT. Subject to and upon the terms and conditions
set forth herein and in reliance upon the representations, warranties, and
covenants of Borrower contained herein or made pursuant hereto, U. S. Bank will
make Fundings to Borrower from time to time during the period ending on January
15, 1997, but such Fundings (together with any outstanding Letters of Credit)
shall not exceed, in the aggregate principal amount at any one time outstanding,
$3,000,000 (the "Revolving Loan"). Borrower may borrow, repay, and reborrow
hereunder either the full amount of the Revolving Loan or any lesser sum.
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2.2 USE OF PROCEEDS. The proceeds of the Revolving Loan shall be
used by Borrower for general corporate purposes.
2.3 REVOLVING NOTE. The Revolving Loan shall be evidenced by a
promissory note in the form attached hereto as EXHIBIT A (the "Revolving Note").
2.4 INTEREST RATES. Each time Borrower requests a Funding under the
Revolving Loan, at any time prior to the expiration of each Interest Period for
any IBOR Rate Borrowing, and at any other time with respect to Prime Rate
Borrowings, so long as there exists no Event of Default, Borrower may elect
either the Prime Borrowing Rate or the IBOR Borrowing Rate to apply to such
Funding, such existing IBOR Rate Borrowing at the end of the Interest Period, or
such existing Prime Rate Borrowing. In the event Borrower does not specify an
interest rate election as provided for herein for a requested Funding or prior
to the end of any Interest Period with respect to an existing IBOR Rate
Borrowing, then such Funding or existing IBOR Rate Borrowing at the expiration
of such Interest Period shall be deemed to constitute a Prime Rate Borrowing.
2.5 REPAYMENT.
(a) Commencing on the first day of the first month following the
initial Funding under the Revolving Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Revolving Loan.
(b) Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to the Revolving Loan on January 15,
1997.
2.6 REVOLVING LOAN FEE. On January 2, 1996, Borrower shall pay
U. S. Bank a nonrefundable fee for the Revolving Loan in the amount of $7,500.
2.7 BORROWING BASE.
(a) The outstanding balance of principal on the Revolving Loan
(together with any outstanding Letters of Credit) shall at no time exceed an
amount equal to 80 percent of Eligible Accounts Receivable ("Borrowing Base").
(b) Borrower shall submit to U. S. Bank a Borrowing Base certificate
in a form acceptable to U. S. Bank calculating the Borrowing Base and executed
by Borrower on or before the 10th day of each month dated as of the last day of
the prior month if as of the last day of the prior month there were any amounts
outstanding under the Revolving Loan.
(c) If at any time the aggregate principal amount of the Revolving
Loan (together with any outstanding Letters of Credit) exceeds the Borrowing
Base, Borrower shall repay such outstanding portion of the Revolving Loan in an
amount equal to such excess within one Business Day. Borrower's failure to do
so shall constitute an Event of Default.
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2.8 LETTERS OF CREDIT.
(a) Subject to and upon the terms and conditions set forth herein and
in reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") up to a maximum aggregate
of $3,000,000 for the benefit of Borrower in forms acceptable to U. S. Bank from
time to time and for the period ending on January 15, 1997. The expiration date
of any Letter of Credit shall not extend beyond January 15, 1997. The maximum
aggregate amount of outstanding Letters of Credit plus the aggregate outstanding
amount of principal and interest on the Revolving Loan shall not exceed, at any
one time, $3,000,000.
(b) Prior to the issuance of any Letter of Credit, Borrower shall
execute and deliver to U. S. Bank a letter of credit application and such other
documents as U. S. Bank customarily receives in connection with the issuance of
letters of credit.
(c) Borrower shall pay to U. S. Bank a fee for the issuance of each
Letter of Credit in an amount equal to U. S. Bank's standard fee for the
issuance of letters of credit plus U. S. Bank's handling charges. Such fees may
be paid to U. S. Bank by U. S. Bank making a Funding under the Revolving Loan.
(d) Any draws on Letters of Credit issued by U. S. Bank pursuant to
the terms of this Agreement shall be paid by Borrower immediately upon receipt
of notice from U. S. Bank of such draw. So long as Borrower meets the
conditions to Fundings under the Loans, draws on Letters of Credit may be paid
from Fundings under the Loans. In the event Borrower fails to make such
immediate repayment, U. S. Bank shall be authorized to consider any such draws
as Fundings under the Revolving Loan. In the event Borrower is in Default under
the terms of this Agreement on the date of any such draw, such draw will
nevertheless constitute a Funding on the Revolving Loan and shall not constitute
a waiver of any of U. S. Bank's rights hereunder or under any of the other Loan
Documents. In the event that any Letters of Credit are outstanding upon the
expiration of the Commitment Period for the Revolving Loan, Borrower shall, upon
U. S. Bank's request, deposit with U. S. Bank in a special demand deposit
account set up by Borrower, an amount of cash necessary to cover all outstanding
Letters of Credit. Borrower hereby grants U. S. Bank a security interest in any
such demand deposit account and gives U. S. Bank the authority to debit such
account upon a draw on outstanding Letters of Credit in an amount equal to the
amount paid by U. S. Bank to the beneficiaries of such Letters of Credit. In
the event Borrower does not establish such an account, or in the event the
amount of funds in such account are insufficient to satisfy the obligations of
U. S. Bank under all outstanding Letters of Credit, then all payments made by
U. S. Bank under such Letters of Credit shall automatically constitute Fundings
under the Revolving Loan, notwithstanding the fact that the Commitment Period
for the Revolving Loan has expired. U. S. Bank shall maintain possession of the
Revolving Note until all Letters of Credit have either expired, been canceled,
or been paid by U. S. Bank and U. S. Bank has been reimbursed in full.
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ARTICLE III. TERM LOAN
3.1 LOAN COMMITMENT. Subject to and upon the terms and conditions
set forth herein and in reliance upon the representations, warranties, and
covenants of Borrower contained herein or made pursuant hereto, U. S. Bank will
make Fundings to Borrower from time to time during the period ending on December
31, 2002, but such Fundings shall not exceed, in the aggregate principal amount
at any one time outstanding, the amount of the Term Loan Commitment (the "Term
Loan"). Borrower may borrow, repay, and reborrow hereunder either the full
amount of the Term Loan or any lesser sum.
3.2 USE OF PROCEEDS. Initially the proceeds of the Term Loan shall
be used solely to (a) repay Indebtedness of Borrower in the amount of
$4,800,000, (b) pay bonuses to Borrower's employees in an aggregate amount not
to exceed $1,070,000, and (c) pay expenses of Borrower's recapitalization.
Subsequent to the initial disbursement of Term Loan proceeds, the proceeds of
the Term Loan shall be used by Borrower for general corporate purposes.
3.3 TERM NOTE. The Term Loan shall be evidenced by a promissory note
in the form attached hereto as EXHIBIT B (the "Term Note").
3.4 INTEREST RATES. Each time Borrower requests a Funding under the
Term Loan, at any time prior to the expiration of each Interest Period for any
IBOR Rate Borrowing, and at any other time with respect to Prime Rate
Borrowings, so long as there exists no Event of Default, Borrower may elect
either the Prime Borrowing Rate or the IBOR Borrowing Rate to apply to such
Funding, such existing IBOR Rate Borrowing at the end of the Interest Period, or
such existing Prime Rate Borrowing. In the event Borrower does not specify an
interest rate election as provided for herein for a requested Funding or prior
to the end of any Interest Period with respect to an existing IBOR Rate
Borrowing, then such Funding or existing IBOR Rate Borrowing at the expiration
of such Interest Period shall be deemed to constitute a Prime Rate Borrowing.
3.5 REPAYMENT.
(a) Commencing on the first day of the first month following the
initial Funding under the Term Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Term Loan.
(b) Borrower shall make principal payments to U. S. Bank in an amount
necessary to reduce the outstanding principal balance of the Term Loan to the
amount of the Term Loan Commitment on each of the dates that the amount of the
Term Loan Commitment is reduced.
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(c) Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to the Term Loan on December 31, 2002.
3.6 TERM LOAN FEES.
(a) Borrower shall pay U. S. Bank a nonrefundable fee for the Term
Loan in the amount of $90,000, $45,000 of which is payable on January 2, 1996,
and $45,000 of which is payable on June 30, 1996.
(b) Commencing on January 1, 1997, and on January 1 of each year
thereafter, Borrower shall pay U. S. Bank a nonrefundable commitment fee in an
amount equal to .125 percent of the amount of the Term Loan Commitment as of
each such date.
ARTICLE IV. GENERAL PROVISIONS APPLICABLE TO THE LOANS
4.1 FUNDINGS.
(a) Borrower shall give U. S. Bank irrevocable notice (either in
writing or orally and promptly confirmed in writing) for each Prime Rate
Borrowing and shall give U. S. Bank two Business Days prior written notice for
each IBOR Rate Borrowing (between 8 a.m. and 12 noon Seattle, Washington time).
Each such notice ("Borrowing Notice") shall be given by, and any written notice
or confirmation of an oral notice shall be signed by, Kevin Hafer or Sterling
Crum, each of whom is authorized to request Fundings and direct disposition of
any such Fundings until written notice by Borrower of the revocation of such
authority is received by U. S. Bank. The Borrowing Notice shall specify (i) the
amount of the requested Funding, (ii) the interest option chosen by Borrower in
accordance with the provisions of this Agreement, (iii) for IBOR Rate
Borrowings, the Interest Period, and (iv) whether Borrower is requesting a new
Funding at the IBOR Borrowing Rate or conversion of any portion of the Prime
Rate Borrowing to an IBOR Rate Borrowing. Each Borrowing Notice shall be
effective upon receipt, except that notices received by U. S. Bank after
12 noon, Seattle time, on a Business Day shall be deemed to be received on the
immediately succeeding Business Day. Each Borrowing Notice shall be irrevocable
and shall be deemed to constitute a representation and warranty by Borrower
that, as of the date of the notice, (i) the statements set forth in ARTICLE VIII
herein are true and correct, (ii) no material adverse change in Borrower's
financial condition has occurred subsequent to November 22, 1995, and (iii) no
Event of Default has occurred and is continuing.
(b) Any such Funding shall be conclusively presumed to have been made
to or for the benefit of Borrower when made in accordance with such a request
and direction for disposition or when such Funding is deposited to the credit of
the account of Borrower with U. S. Bank or is transmitted to any other bank with
directions to credit the same to the account of Borrower at such bank,
regardless of whether persons other than those authorized hereunder to make
requests for Fundings have authority to draw against any such account.
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Borrower acknowledges that U. S. Bank cannot effectively determine whether a
particular request for a Funding is valid, authorized, or authentic. It is
nevertheless important to Borrower that it has the privilege of making requests
for Fundings in accordance with SECTION 4.1(A) herein. Therefore, to induce
U. S. Bank to lend funds in response to such requests and in consideration for
U. S. Bank's agreement to receive and consider such requests, Borrower assumes
all risk of the validity, authenticity, and authorization of such requests,
whether or not the individual making such requests has authority to request
Fundings and whether or not the aggregate sum owing exceeds the maximum
principal amount referred to above, except any risk relating to authorization
with respect to Persons other than the Persons identified in SECTION 4.1(A)
herein or other Persons subsequently authorized in writing to U. S. Bank to
request Fundings. U. S. Bank shall not be responsible under principles of
contract, tort, or otherwise for the amount of an unauthorized, except as to
authorization with respect to Persons other than the Persons identified in
SECTION 4.1(A) herein, or other Persons subsequently authorized in writing to
U. S. Bank, or invalid Funding; rather, Borrower agrees to repay any sums with
interest as provided herein.
4.2 MANNER OF PAYMENT. All sums payable to U. S. Bank pursuant to
this Agreement shall be paid directly to U. S. Bank in immediately available
United States funds. Whenever any payment to be made hereunder or on any of the
Notes becomes due and payable on a day that is not a Business Day, such payment
may be made on the next succeeding Business Day and such extension of time shall
in such case be included in computing interest on such payment.
4.3 STATEMENTS. U. S. Bank shall send Borrower statements of all
amounts due hereunder; the statements shall be considered prima facie evidence
unless Borrower notifies U. S. Bank to the contrary within 30 days of receipt of
any statement that Borrower claims to be incorrect. Borrower agrees that
accounting entries made by U. S. Bank with respect to Borrower's loan accounts
shall constitute prima facie evidence of all Fundings made under and payments
made on any of the Loans. Without limiting the methods by which U. S. Bank may
otherwise be entitled by Applicable Law to make demand for payment of the Loans
upon Borrower, Borrower agrees that any statement, invoice, or payment notice
from U. S. Bank to Borrower with respect to any principal or interest obligation
of Borrower to U. S. Bank shall be deemed to be a demand for payment in
accordance with the terms of such statement, invoice, or payment notice. Under
no circumstances shall a demand by U. S. Bank for partial payment of principal
or interest or both be construed as a waiver by U. S. Bank of its right
thereafter to demand and receive payment (in part or in full) of any remaining
principal or interest obligation.
4.4 BOOK ENTRY LOAN ACCOUNT. U. S. Bank shall establish a book entry
loan account for each of the Loans in which U. S. Bank will make debit entries
of all Fundings pursuant to the terms of this Agreement. U. S. Bank will also
record in the applicable loan account, in accordance with customary banking
practices, all interest and other charges, expenses, and other items properly
chargeable to Borrower, if any, together
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with all payments made by Borrower on account of the Indebtedness evidenced by
Borrower's respective loan accounts and all other sums credited to the
respective loan accounts. The debit balance of Borrower's respective loan
accounts shall reflect the amount of Borrower's Indebtedness to U. S. Bank from
time to time by reason of advances, charges, payments, or credits.
4.5 COMPUTATIONS OF INTEREST. All computations of interest shall be
based on a 360-day year for the actual number of days elapsed.
4.6 DEFAULT INTEREST. Upon the occurrence and during the continuance
of any Event of Default, U. S. Bank may, at its option, raise the interest rate
charged on the Loans to a rate of up to the Prime Rate plus 4.5 percent per
annum from the date of the occurrence of the Event of Default until the Event of
Default is cured or waived by U. S. Bank or, absent cure or waiver, until the
Loans are repaid in full.
4.7 MAXIMUM INTEREST RATE. Notwithstanding any provision contained
herein or in the Notes, the total liability of Borrower for payment of interest
pursuant hereto, including late charges, shall not exceed the maximum amount of
interest permitted by Applicable Law to be charged, collected, or received from
Borrower; and if any payments by Borrower include interest in excess of that
maximum amount, U. S. Bank shall apply the excess first to reduce the unpaid
balance of the Loans, then to reduce the balance of any other Indebtedness of
Borrower to U. S. Bank. If there is no such Indebtedness, the excess shall be
returned to Borrower.
4.8 LATE CHARGE. If any payment of principal or interest required
under any of the Loans is 15 days or more past due, Borrower will be charged a
late charge of 5 percent of the delinquent payment or $5, whichever is greater,
for each such late payment. The 15 day period provided for herein shall not be
construed as a waiver of any Default or Event of Default resulting from any late
payment under any of the Loans.
4.9 PREPAYMENTS. Borrower may prepay all or any portion of any Prime
Rate Borrowings without premium. In the event that Borrower prepays all or any
portion of any IBOR Rate Borrowing prior the expiration of the applicable
Interest Period, Borrower shall pay to U. S. Bank a yield maintenance premium in
an amount calculated pursuant to the formula attached hereto as EXHIBIT C. All
prepayments shall be applied to the Loans being prepaid in the inverse order of
maturity.
4.10 EXTENSIONS, RENEWALS, AND MODIFICATIONS. Any extensions,
renewals, and modifications of the Loans shall be governed by the terms and
conditions of this Agreement and the other Loan Documents unless otherwise
agreed to in writing by U. S. Bank and Borrower.
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4.11 BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR ILLEGAL.
(a) U. S. Bank's obligation to maintain the IBOR Rate for the Loans
shall be suspended upon U. S. Bank's giving notice to Borrower that it shall be
against Applicable Law or impossible for U. S. Bank to maintain the IBOR Rate
for the Loans until U. S. Bank notifies Borrower that the circumstances giving
rise to the suspension no longer exist.
(b) After the date of this Agreement, if adoption of any Applicable
Law or any change therein or any change in the interpretation or administration
thereof by any Governmental Body, central bank, or comparable agency charged
with the interpretation or administration thereof, or if compliance by
U. S. Bank with any request or directive (whether or not having the force of
Applicable Law) of any such Governmental Body, central bank, or comparable
agency makes it against Applicable Law or impossible for U. S. Bank maintain the
Loans at the IBOR Rate, U. S. Bank shall immediately give notice thereof to
Borrower.
(c) Upon notice to Borrower provided for in SECTION 4.11(A) or (b)
herein, all IBOR Rate Borrowings shall automatically convert to Prime Rate
Borrowings.
(d) If U. S. Bank notifies Borrower that the circumstances giving
rise to the suspension of the IBOR Rate no longer apply, then the interest rate
elections set forth in this Agreement shall again be effective on the date
U. S. Bank provides such notice to Borrower.
4.12 INTEREST COST. If the revision of Regulation D announced by the
Board of Governors of the Federal Reserve Board, or if the adoption of any
Applicable Law or any change therein or any change in the interpretation or
administration thereof by any Governmental Body, central bank, or comparable
agency charged with the interpretation or administration thereof, or if
compliance by U. S. Bank with any request or directive (whether or not having
the force of Applicable Law) of any such Governmental Body, central bank, or
comparable agency:
(a) Shall subject U. S. Bank to any tax, duty, or other charge
resulting from all or any portion of the Loans bearing interest at the IBOR
Rate, or shall change the basis of taxation of payments to U. S. Bank of the
principal of or interest on the Loans, or any portion thereof, with interest
accruing at the IBOR Rate or any other amount due under this Agreement with
regard to the Loans with interest bearing at the IBOR Rate (except for changes
in the rate of tax on the overall net income of U. S. Bank imposed by the
jurisdiction in which U. S. Bank's principal executive office lies); or
(b) Shall impose or modify any reserve (including but not limited to
any reserve imposed by the Board of Governors of the Federal Reserve System),
special deposit, or similar requirement against assets of, deposits with, or for
the account of, or credit
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extended by U. S. Bank or shall impose on U. S. Bank any other condition
affecting the IBOR Rate Borrowings under the Loans;
and the result of any of the foregoing is to increase the cost to U. S. Bank of
maintaining the IBOR Rate Borrowings or to reduce the return of U. S. Bank under
this Agreement; then, from time to time, within ten days after demand by
U. S. Bank, Borrower shall pay to U. S. Bank such additional amount or amounts
as will compensate U. S. Bank for such increase in cost or reduction in return.
ARTICLE V. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS
5.1 CONDITIONS PRECEDENT FOR INITIAL FUNDING. U. S. Bank shall not
be required to make the initial Funding under either of the Loans unless or
until the following conditions have been fulfilled to the satisfaction of
U. S. Bank:
(a) U. S. Bank shall have received this Agreement, the Revolving
Note, and the Term Note, duly executed and delivered by the respective parties
thereto.
(b) U. S. Bank shall have received, duly executed and delivered by
Borrower, duplicate originals of a security agreement in the form attached
hereto as EXHIBIT D ("Security Agreement"), granting to U. S. Bank a first
priority and exclusive security interest in all of the personal property of
Borrower, whether tangible or intangible, now owned or hereafter acquired. One
of the originals of the Security Agreement shall be filed by U. S. Bank with the
United States Patent and Trademark Office.
(c) U. S. Bank shall have received, duly executed and delivered by
Borrower, such financing statements and other documents deemed necessary by
U. S. Bank to perfect the security interest granted to U. S. Bank.
(d) U. S. Bank shall have received the following documents related to
the Subordinated Debt, duly executed and delivered by each of the parties
thereto, in the form attached hereto as EXHIBIT E ("Subordination Documents"):
The Class A Subordinated Promissory Notes and the Class B Subordinated
Promissory Note referred to in the Stock and Note Purchase Agreement.
(e) U. S. Bank shall have received from counsel for Borrower, an
opinion addressed to U. S. Bank and dated as of the date of this Agreement, in
the form attached hereto as EXHIBIT F.
(f) U. S. Bank shall have received an independent appraisal of
Borrower, in form and substance satisfactory to U. S. Bank.
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(g) No Default or Event of Default hereunder shall exist, and after
having given effect to the requested Funding, no Default or Event of Default
shall exist.
(h) All representations and warranties of Borrower contained herein
or otherwise made in writing in connection herewith shall be true and correct in
all material respects with the same effect as though such representations and
warranties had been made on and as of the date of the initial Funding.
(i) All corporate proceedings of Borrower shall be satisfactory in
form and substance to U. S. Bank, and U. S. Bank shall have received all
information and copies of all documents, including records of all corporate
proceedings, that U. S. Bank has requested in connection therewith, such
documents where appropriate to be certified by proper corporate authorities or
Governmental Bodies. Borrower shall provide U. S. Bank with the following
documents prior to or upon the execution of this Agreement:
(i) Copies of the articles of incorporation of Borrower,
together with all amendments thereto, certified by Borrower to be true
and complete;
(ii) A certificate of authority for Borrower in the state
of Washington, dated within 30 days of the date of the execution of
this Agreement; and
(iii) A certified resolution of the directors of Borrower
and incumbency certificate in the form attached hereto as EXHIBIT G.
(j) U. S. Bank shall have received such evidence deemed necessary by
U. S. Bank that U. S. Bank's security interests in the Collateral constitute
first priority and exclusive security interests, except as otherwise provided
herein.
(k) U. S. Bank shall have received verification that it finds
acceptable of a $12,500,000 equity contribution to Borrower from the Investors.
(l) U. S. Bank shall have received, reviewed, and approved all
documents arising out of or related to the recapitalization of Borrower,
together with evidence satisfactory to U. S. Bank that concurrently with the
initial Funding under the Term Loan, such recapitalization shall have been
consummated.
(m) U. S. Bank shall have received, reviewed, and approved a
Collateral and financial status examination as performed by U. S. Bank's
internal audit staff.
(n) U. S. Bank shall have received a Borrowing Notice from Borrower
for the initial Fundings requested under the Loans.
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(o) U. S. Bank shall have received insurance certificates and lender
loss payable endorsements on casualty/property loss insurance in forms
satisfactory to U. S. Bank to the effect set forth in SECTION 6.5 hereof.
5.2 CONDITIONS PRECEDENT TO EACH SUBSEQUENT FUNDING. The obligation
of U. S. Bank to make any Funding subsequent to the initial Funding hereunder is
subject to the fulfillment, to the satisfaction of U. S. Bank, of the following:
(a) The conditions set forth in SECTION 5.1 shall have been
previously satisfied, and U. S. Bank shall have received evidence satisfactory
to U. S. Bank of satisfaction thereof;
(b) U. S. Bank shall have received a Borrowing Notice for each
requested Funding under the applicable Loan;
(c) There shall be executed and delivered to U. S. Bank such further
instruments, agreements, and documents, as may be reasonably necessary or proper
in the opinion of U. S. Bank to confirm the obligations of Borrower to
U. S. Bank hereunder, the grant of security therefor, and the proper use of the
proceeds of all Fundings;
(d) The representations and warranties of Borrower in ARTICLE VIII
herein shall be true on the date of each Funding with the same force and effect
as if made on and as of that date;
(e) No Default or Event of Default shall exist, and after having
given effect to the requested Funding, no Default or Event of Default shall
exist; and
(f) To the extent not previously delivered, all other documents,
agreements, and instruments from or with respect to Borrower or any other Person
that may be called for hereunder shall be duly executed and delivered to
U. S. Bank, including but not limited to all documents, agreements, and
instruments deemed necessary by U. S. Bank to perfect its security interest in
Collateral acquired after the date of this Agreement. For the purposes of this
Agreement, the waiver of delivery of any document, agreement, or instrument from
or with respect to Borrower or any other Person does not constitute a continuing
waiver with respect to the obligation to fulfill the conditions precedent to
each Funding hereunder.
ARTICLE VI. AFFIRMATIVE COVENANTS
Borrower hereby covenants and agrees that so long as this Agreement is
in effect, and until the Loans, together with interest thereon, and all other
obligations incurred hereunder are paid or satisfied in full, Borrower shall:
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6.1 FINANCIAL DATA. Keep its books of account in accordance with
generally accepted accounting principles, consistently applied, and furnish to
U. S. Bank:
(a) As soon as practicable and in any event within 45 days after the
close of each fiscal quarter of Borrower, the following unaudited financial
statements of Borrower for each such quarter, all in reasonable detail and
certified by Borrower to be true and correct: balance sheet, statement of
income, and statement of cash flows. There shall be included in such financial
statements a calculation of the financial covenants provided for in ARTICLE VII
herein.
(b) As soon as practicable and in any event within 120 days after the
close of each fiscal year of Borrower, the following financial statements of
Borrower, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Borrower's current independent certified public accountant or such other
independent certified public accountants selected by Borrower and satisfactory
to U. S. Bank: balance sheet, statement of income, and statement of cash flows.
Borrower shall provide U. S. Bank with a copy of its independent certified
public accountants' management letter or other similar report or correspondence
to Borrower.
(c) As soon as practicable and in any event within 45 days after the
close of each fiscal quarter of Borrower, certificates signed by Borrower,
stating that during such period no Default or Event of Default existed or if any
such Default or Event of Default existed, specifying the nature thereof, the
period of existence thereof, and what action Borrower proposes to take or has
taken with respect thereto, and that during such period Borrower was in
compliance with all of the financial covenants set forth in ARTICLE VII herein;
and promptly upon the occurrence of any Default or Event of Default, a
certificate signed by Borrower, specifying the nature thereof, the period of
existence thereof, and what action Borrower proposes to take or has taken with
respect thereto.
(d) As soon as practicable and in any event within 30 days after the
close of each calendar month on the last day of which there were any amounts
outstanding under the Revolving Loan, accounts receivable and accounts payable
agings for each such month in a form and in such detail as is acceptable to
U. S. Bank.
(e) As soon as practicable and in any event within 90 days after the
beginning of each fiscal year of Borrower, a statement projecting all capital
expenditures to be made or committed to during such fiscal year with respect to
Borrower.
(f) As soon as practicable and in any event within 90 days after the
beginning of each fiscal year, a projection of the financial operations of
Borrower in a form and in such detail as is acceptable to U. S. Bank.
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(g) With reasonable promptness, such other information regarding the
business, operations, and financial condition of Borrower as U. S. Bank may from
time to time reasonably request.
6.2 LICENSES AND PERMITS. Maintain all Governmental Approvals and
all related or other material agreements necessary for Borrower to operate its
business, as it now exists or as it may be modified or expanded. Borrower will
at all times comply with all Applicable Laws relating to the operations,
facilities, or activities of Borrower.
6.3 MAINTENANCE OF PROPERTIES. Keep Borrower's properties in good
repair and in good working order and condition, in a manner consistent with past
practices and comparable to industry standards; from time to time make all
appropriate and proper repairs, renewals, replacements, additions, and
improvements thereto; and keep all equipment that may now or in the future be
subject to compliance with any Applicable Laws in material compliance with such
Applicable Laws.
6.4 PAYMENT OF CHARGES. Duly pay and discharge all material
(a) taxes, assessments, levies, and any other charges of Governmental Bodies
imposed on or against Borrower or its property or assets, or upon any property
leased by Borrower, prior to the date on which penalties attached thereto,
unless and to the extent only that such taxes, assessments, levies, and any
other charges of Governmental Bodies, after written notice thereof having been
given to U. S. Bank, are being contested in good faith and by appropriate
proceedings, (b) claims allowed by Applicable Laws, whether for labor,
materials, rentals, or anything else, which could, if unpaid, become a lien or
charge upon Borrower's property or assets or the outstanding capital stock of
Borrower or adversely affect the facilities or operations of Borrower, (unless
and to the extent only that the validity thereof is being contested in good
faith and by appropriate proceedings after written notice thereof has been given
to U. S. Bank); (c) trade bills in accordance with the terms thereof or
generally prevailing industry standards; and (d) other Indebtedness heretofore
or hereafter incurred or assumed by Borrower, unless such Indebtedness be
renewed or extended, or unless after written notice thereof has been given to
U. S. Bank, Borrower's obligation to pay such Indebtedness is being contested in
good faith and by appropriate proceedings. In the event any charge is being
contested by Borrower as allowed above, Borrower shall establish adequate
reserves against possible liability therefor.
6.5 INSURANCE.
(a) Maintain insurance upon Borrower's properties and business
against such risks and in such amounts as is customary in Borrower's business.
Borrower shall cause each insurance policy issued in connection therewith to
provide and shall cause the insurer issuing such policy to certify to U. S. Bank
that (i) if such insurance is proposed to be canceled or materially changed for
any reason whatsoever, such insurer will promptly notify U. S. Bank, and such
cancellation or change shall not be effective as to U. S. Bank for 30 days after
receipt by U. S. Bank of such notice, unless the effect of the change is to
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extend or increase coverage under the policy; (ii) U. S. Bank will have the
right at its election to remedy any default in the payment of premiums within
30 days of notice from the insurer of the default; and (iii) loss payments from
casualty/property loss insurance in excess of $50,000 in each instance will be
payable jointly to the Borrower and U. S. Bank as secured party or otherwise as
its interest may appear.
(b) From time to time upon request by U. S. Bank, promptly furnish or
cause to be furnished to U. S. Bank evidence, in form and substance satisfactory
to U. S. Bank, of the maintenance of all insurance, indemnities, or bonds
required by this SECTION 6.5 or by any license, lease, or other agreement to be
maintained, including but not limited to such originals or copies as U. S. Bank
may request of policies, certificates of insurance, riders, assignments, and
endorsements relating to the insurance and proof of premium payments.
6.6 MAINTENANCE OF RECORDS. Keep at all times books of account and
other records in which full, true, and correct entries will be made of all
dealings or transactions in relation to the business and affairs of Borrower.
6.7 INSPECTION. Allow any representative of U. S. Bank to visit and
inspect any of the properties of Borrower, to examine the books of account and
other records and files of Borrower, to make copies thereof, and to discuss the
affairs, business, finances, and accounts of Borrower with its officers,
employees, and accountants, all at such reasonable times and as often as
U. S. Bank may desire in its reasonable discretion. This right of inspection
shall specifically include U. S. Bank's collateral and financial examinations.
6.8 HAZARDOUS SUBSTANCES.
(a) Borrower hereby covenants and agrees that so long as any
Indebtedness of Borrower to U. S. Bank is outstanding:
(i) Borrower will not permit its property or any portion
thereof to be a site for the storage, use, generation, manufacture,
disposal or transportation of Hazardous Materials, except for
merchandise, cleaning supplies, and other similar materials sold,
used, stored, or otherwise handled n in the ordinary course of
Borrower's existing business in compliance with all Hazardous
Materials Laws;
(ii) Borrower will not permit any Hazardous Materials to be
disposed of off its property other than in properly licensed disposal
sites;
(iii) Borrower, at Borrower's sole cost and expense (as
between Borrower and U. S. Bank), will keep and maintain its property
and each portion thereof in compliance with and shall not cause or
permit its
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property or any portion thereof to be in violation of any Hazardous
Materials Laws; and
(iv) Borrower will immediately advise U. S. Bank in writing
of any Hazardous Material Claim.
(b) Borrower agrees to indemnify U. S. Bank and hold U. S. Bank
harmless from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and costs and
expenses (including attorney fees), arising directly or indirectly from or out
of or in any way connected with (i) the accuracy of the representations
contained in SECTION 8.17 herein; (ii) any activities on its property during
Borrower's ownership, possession, or control of its property which directly or
indirectly results in its property or any other property becoming contaminated
with Hazardous Materials; (iii) the discovery of Hazardous Materials on its
property; (iv) the cleanup of Hazardous Materials from its property; and (v) the
discovery of Hazardous Materials or the cleanup of Hazardous Materials from
adjacent or other property that has become contaminated as a result of any
activity on Borrower's property. As between Borrower and U. S. Bank, Borrower
acknowledges that it will be solely responsible for all costs and expenses
relating to the cleanup of Hazardous Materials from its property or from any
other properties that become contaminated with Hazardous Materials as a result
of activities on or the contamination of its property. Nothing contained in
this SECTION 6.8(B) shall require Borrower to indemnify and hold U. S. Bank
harmless from any damages, losses, or liability arising from any activities of
U. S. Bank or any other Person (other than any Borrower or Affiliate) after
U. S. Bank or any other Person (other than any Borrower or Affiliate) acquires
title to the property in question pursuant to a foreclosure, deed in lieu of
foreclosure, or similar transaction and has actual possession of such property.
(c) Borrower's obligations under this SECTION 6.8 are unconditional
and shall not be limited by any nonrecourse or other limitations of liability
provided for in the Loan Documents. The representations, warranties, and
covenants of Borrower set forth in this SECTION 6.8 and SECTION 8.17 herein
(including but not limited to the indemnity provided for in SECTION 6.8(b)
above) shall survive the closing and repayment of the Loans to U. S. Bank;
and, to the extent permitted by Applicable Laws and Hazardous Materials Laws,
shall survive the transfer of its property by foreclosure proceedings (whether
judicial or nonjudicial), deed in lieu of foreclosure, or otherwise. Borrower
acknowledges and agrees that its covenants and obligations hereunder are
separate and distinct from its obligations under the Loans and the Loan
Documents.
6.9 CORPORATE EXISTENCE. Maintain and preserve the corporate
existence of Borrower.
6.10 NOTICE OF DISPUTES AND OTHER MATTERS. Promptly give written
notice to U. S. Bank of:
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(a) Any citation, order to show cause, or other legal process or
order that could have a material adverse effect on Borrower, directing Borrower
to become a party to or to appear at any proceeding or hearing by or before any
Governmental Body that has granted to Borrower any Governmental Approval, and
include with such notice a copy of any such citation, order to show cause, or
other legal process or order;
(b) Any (i) refusal, denial, threatened denial, or failure by any
Governmental Body to grant, issue, renew, or extend any material Governmental
Approval; (ii) proposed or actual revocation, termination, or modification
(whether favorable or adverse) of any Governmental Approval by any Governmental
Body; (iii) dispute or other action with regard to any Governmental Approval by
any Governmental Body; (iv) notice from any Governmental Body of the imposition
of any material fines or penalties or forfeitures; or (v) threats or notice with
respect to any of the foregoing or with respect to any proceeding or hearing
that might result in any of the foregoing;
(c) Any dispute concerning or any material threatened nonrenewal or
material modification of any material lease for real or personal property to
which Borrower is a party; or
(d) Any actions, proceedings, or claims of which Borrower may have
notice that may be commenced or asserted against Borrower in which the amount
involved is $50,000 or more and is not fully covered by insurance or which, if
not solely a claim for monetary damages, could, if adversely determined, have a
material adverse effect on Borrower.
6.11 EXCHANGE OF NOTE. Upon receipt of a written notice of loss,
theft, destruction, or mutilation of a Note, and upon surrendering such Note for
cancellation if mutilated, execute and deliver a new Note or a Note of like
tenor in lieu of such lost, stolen, destroyed, or mutilated Note. Any Note
issued pursuant to this SECTION 6.11 shall be dated so that neither gain nor
loss of interest shall result therefrom. U. S. Bank agrees to indemnify
Borrower if any third party makes a claim under such lost, stolen, destroyed, or
mutilated Note that has been replaced.
6.12 MAINTENANCE OF LIENS. At all times maintain the liens and
security interests provided under or pursuant to this Agreement as valid and
perfected first liens and security interests on the property and assets intended
to be covered thereby. Except as contemplated under SECTION 7.5, Borrower shall
take all action requested by U. S. Bank necessary to assure that U. S. Bank has
valid and exclusive liens and security interests in all Collateral.
6.13 OTHER AGREEMENTS. Subject to any applicable notice and cure
period, comply with all covenants and agreements set forth in or required
pursuant to any of the other Loan Documents.
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6.14 AFTER-ACQUIRED COLLATERAL. Upon request by U. S. Bank, execute
and deliver to U. S. Bank appropriate instruments in order to effectuate the
proper granting and perfection of a first priority security interest in or
assignment of all property to U. S. Bank, whether personal, real, or mixed,
hereafter acquired by Borrower, concurrently with the acquisition thereof.
Within 45 days of the end of each fiscal quarter of Borrower, Borrower shall
deliver to U. S. Bank an updated schedule of Borrower's patents, trademarks, and
trade names if there has been any change in the status of Borrower's patents,
trademarks, or trade names since the date of the previous schedule delivered to
U. S. Bank.
6.15 FURTHER ASSURANCES. Within ten days of request by U. S. Bank,
duly execute and deliver or cause to be duly executed and delivered to
U. S. Bank such further instruments, agreements, and documents and do or cause
to be done such further acts as may be necessary or proper in the opinion of
U. S. Bank to carry out more effectively the provisions and purpose of this
Agreement and the other Loan Documents.
6.16 MAINTENANCE OF BANK ACCOUNTS. As security for repayment of the
Loans, maintain its principal depository accounts with U. S. Bank. Borrower
hereby grants to U. S. Bank a security interest in all such accounts in order to
secure the obligations of Borrower hereunder.
ARTICLE VII. NEGATIVE COVENANTS
Borrower covenants and agrees that until all the Loans, together with
interest thereon, and all other obligations incurred hereunder are paid or
satisfied in full, Borrower shall not, without the prior written consent of
U. S. Bank:
7.1 DIVIDENDS AND DISTRIBUTIONS. Declare or pay any cash
distributions or dividends or return any capital to any of Borrower's
shareholders (with the exception of any such transaction that occurs
substantially simultaneously with the Funding under the Loans); authorize or
make any distribution, payment, or delivery of property or cash to any of
Borrower's shareholders (with the exception of any such transaction that occurs
substantially simultaneously with the Funding under the Loans); redeem, retire,
purchase, or otherwise acquire, directly or indirectly, for consideration, any
shares or other interests of Borrower now or hereafter outstanding (with the
exception of any such transaction that occurs substantially simultaneously with
the Funding under the Loans); pay any Subordinated Debt; or set aside any funds
for any of the foregoing purposes except that Borrower shall be allowed to (a)
make interest payments on the Subordinated Debt in accordance with the
Subordination Documents unless a Default or Event of Default exists, or unless
giving effect to the proposed payment would give rise to a Default or an Event
of Default, (b) pay dividends to its shareholders after U. S. Bank has received
Borrower's audited financial statements for Borrower's fiscal year ending
December 31, 1996, unless a Default or Event of Default exists, or unless giving
effect to the proposed payment would give rise to a Default or an Event of
Default.
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7.2 TRANSACTIONS WITH AFFILIATES. Except for the redemption of
certain shares of Borrower's stock from Britannia substantially simultaneously
with the initial Funding of the Loans, and the possible conversion of the
series A preferred stock into common stock as contemplated under Borrower's
restated articles of incorporation, enter into any transaction, other than an
arm's length transaction, in which an Affiliate of Borrower shall have any
interest; or make any payment or agree to make any payment to any such
Affiliate; or transfer or agree to transfer ownership or possession of any of
its business or assets, tangible or intangible, real, personal, or mixed, to any
Affiliate.
7.3 OTHER INDEBTEDNESS. Create, incur, assume, or suffer to exist,
contingently or otherwise, any Indebtedness except (a) Indebtedness represented
by the Notes; (b) accounts and other current payables arising from the ordinary
course of business; (c) the Subordinated Debt; and (d) additional Indebtedness
outstanding or committed to at any time (including but not limited to
indebtedness evidenced by notes, bonds, debentures, capitalized leases, purchase
agreements, and other contractual obligations) not in excess of an aggregate
amount at any one time outstanding of $500,000. The Indebtedness described in
clauses (a), (b), (c), and (d) hereof is collectively called. Notwithstanding
clause (d) above, Borrower may not guarantee or become contingently liable for
the obligation of any Person except as provided for herein. In computing the
additional indebtedness permitted by clause (d) hereof, all capital lease
payments due from Borrower within 12 months shall be included if the amounts of
such lease payments are not otherwise included as Indebtedness in accordance
with generally accepted accounting principles. Except as set forth in
SECTION 7.5 herein, none of the additional indebtedness permitted by this
SECTION 7.3 shall be secured by all or any portion of the Collateral.
7.4 LEASES AND LEASEBACKS. Except for arrangements entered into
prior to the date hereof and except for leases of computer hardware for testing
purposes not to exceed an aggregate amount of $100,000 in any fiscal year, enter
into any new agreement to rent or lease any material real or personal property
or enter into any arrangement with any bank, insurance company, or other lender
or investor providing for the leasing of any real or personal property or
equipment (a) that at the time has been or is sold or transferred by Borrower to
such lender or investor or (b) that has been or is being acquired from another
Person by such lender or investor or on which one or more buildings have been or
are to be constructed by such lender or investor, for the purpose of leasing
such property to Borrower. Borrower may, however, enter into such leases in the
ordinary course of business provided that there is compliance with
SECTION 7.3(D) hereof.
7.5 LIENS. Contract, create, incur, assume, or suffer to exist any
mortgage, pledge, lien, or other charge or encumbrance of any kind (including
but not limited to the charge upon property purchased under conditional sales or
other title retention agreements) upon or grant any interest in any of its
property or assets whether now owned or hereafter acquired, except (a) liens
granted pursuant to this Agreement; (b) liens in connection with worker's
compensation, unemployment insurance, or other social security obligations;
(c) good faith deposits in connection with bids, tenders, contracts, or
leases or
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deposits to secure public statutory obligations; (d) mechanic's, carrier's,
repairmen's, or other like liens in the ordinary course of business with respect
to obligations that are not overdue or that are being contested in good faith
and for which appropriate reserves have been established or for which deposits
to obtain the release of such liens have been made; (e) liens for taxes,
assessments, levies, or charges of Governmental Bodies imposed upon Borrower or
its property, operations, income, products, or profits that are not at the time
due or payable or for which, if the validity thereof is being contested in good
faith by legal or administrative proceedings, appropriate reserves have been
established; (f) encumbrances consisting of zoning regulations, easements,
rights-of-way, survey exceptions, and other similar restrictions on the use of
real property or minor irregularities in title thereto that do not materially
impair the use of such property in the operation of the business of Borrower;
(g) liens arising out of judgments or awards with regard to which Borrower shall
be prosecuting an appeal in good faith and for which a stay of execution has
been issued and appropriate reserves established; and (h) the currently existing
liens listed on EXHIBIT H hereto. The liens described in clauses (a) through
(h) herein are called the "Permitted Liens."
7.6 ADVANCES AND LOANS. Lend money, make credit available (other
than in the ordinary course of business to customers), or lend property or the
use thereof to any Person; purchase or repurchase the stock or Indebtedness or
all or a substantial part of the assets or properties of any Person (with the
exception of any such transaction to occur substantially simultaneously with the
Funding under the Loans); guarantee, assume, endorse, or otherwise become
responsible for (directly or indirectly or by any instrument having the effect
of assuring any Person's payment, performance, or capability) the Indebtedness,
performance, obligations, stock, or dividends of any Person; or agree to do any
of the foregoing; but Borrower may endorse negotiable instruments for deposit or
collection in the ordinary course of business.
7.7 INVESTMENTS. Invest in (by capital contribution or otherwise),
acquire, purchase, or make any commitment to purchase the obligations, stock, or
equity of any Person except (a) direct obligations of the government of the
United States of America or any agency or instrumentality thereof,
(b) interest-bearing certificates of deposit or repurchase agreements issued by
any commercial banking institution satisfactory to U. S. Bank, (c) stock or
obligations issued in settlement of claims of Borrower against others by reason
of bankruptcy or a composition or readjustment of debt or reorganization of any
debtor of Borrower.
7.8 CONSOLIDATION, MERGER, AND SALE OF ASSETS. Wind up, liquidate,
or dissolve Borrower's affairs or enter into any transaction of merger or
consolidation with any Person; convey, sell, lease, or otherwise dispose of (or
agree to do any of the foregoing at any time) any of its material licenses,
contracts, or permits; sell all or a substantial part of its property or assets
or sell any part of its property or assets necessary or desirable for the
conduct of its business as now generally conducted or as proposed to be
conducted, except the sale of inventory in the ordinary course of Borrower's
business; sell any of its notes
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receivable, installment or conditional sales agreements, or accounts receivable;
purchase, lease, or otherwise acquire all or a substantial part of the property
or assets of any other Person.
7.9 SUBSIDIARIES. Form or acquire any Person or any portion thereof.
7.10 TYPE OF BUSINESS. Enter into any business which is substantially
different from or not connected with the business in which Borrower is presently
engaged or make any substantial change in the nature of its business or
operations.
7.11 CHANGE OF CHIEF EXECUTIVE OFFICE OR NAME. Change (a) the chief
executive office of Borrower, (b) Borrower's name, or (c) the location of any of
the Collateral, provided, however, that Borrower may move Collateral to other
locations within the state of Washington and may sell inventory in the ordinary
course of its business; or adopt or use any trade name other than those set
forth in SECTION 8.16 herein without (x) prior written notice to U. S. Bank and
(y) the execution, delivery, and filing (and payment of filing fees and taxes)
of all such documents as may be necessary or advisable in the opinion of
U. S. Bank to continue to perfect and protect the liens and security interests
in the Collateral.
7.12 CHANGE IN DOCUMENTS. Amend, supplement, terminate, or otherwise
modify in any way Borrower's restated articles of incorporation as they exist as
of the date of this Agreement or the Subordination Documents.
7.13 CONTROL. Except as provided in the Stock and Note Purchase
Agreement, enter into any agreement (other than employment agreements) with any
Person that confers upon such Person the right or authority to control or direct
a major portion of the business or assets of Borrower.
7.14 PENSION PLAN. Terminate or partially terminate any Plan now
existing or hereafter established for Borrower or its Affiliates or withdraw
from participation therein under circumstances that result or could result in
liability to the Pension Benefit Guaranty Corporation, to the fund by which the
Plan is funded, or to the employees (or their beneficiaries) for whom the Plan
is or shall be maintained; or permit any other event or circumstance to occur
that results or could result in liability to the Pension Benefit Guaranty
Corporation or a violation of ERISA that would result in substantial liability
to the Pension Benefit Guaranty Corporation or the U.S. Department of Labor.
EX99 DEBT SERVICE COVERAGE. Permit the Debt Service Coverage Ratio to
be less than 1.2:1.00 as of the end of any fiscal quarter of Borrower,
calculated on a trailing four-quarter basis.
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7.16 FUNDED DEBT COVERAGE RATIO. Permit the Funded Debt Coverage
Ratio to be greater than 1.0:1.0 as of the end of any fiscal quarter of Borrower
commencing with the fiscal quarter ending December 31, 1996, calculated on a
trailing four-quarter basis.
7.17 WORKING CAPITAL. Permit the Working Capital to be less than
$4,500,000 as of the end of any fiscal quarter of Borrower.
7.18 LIMITATION ON CAPITAL EXPENDITURES. Permit the total amount of
Capital Expenditures to exceed $400,000 in any fiscal year of Borrower.
7.19 SUBORDINATED DEBT. Permit the outstanding principal amount of
Subordinated Debt to be less than $20,000,000 at any time.
ARTICLE VIII. REPRESENTATIONS AND WARRANTIES
In order to induce U. S. Bank to enter into this Agreement and to make
the Loans as herein provided, Borrower hereby makes the following
representations, covenants, and warranties, all of which shall survive the
execution and delivery of this Agreement and shall not be affected or waived by
any inspection or examination made by or on behalf of U. S. Bank:
8.1 CORPORATE STATUS. Borrower is a corporation organized and
validly existing under the laws of the state of Washington. Borrower has the
power and authority to own its property and assets and to transact the business
in which it is engaged or presently proposes to engage. Borrower is qualified
to do business in all states except where the failure to be qualified could not
have a material adverse effect on Borrower.
8.2 POWER AND AUTHORITY. Borrower has the power to execute, deliver,
and carry out the terms and provisions of this Agreement and each of the Loan
Documents and has taken all necessary action to authorize the execution,
delivery, and performance of this Agreement and the other Loan Documents, the
borrowings hereunder, and the making and delivery of the Notes and all Loan
Documents delivered hereunder. This Agreement constitutes and the Notes and
other Loan Documents and instruments issued or to be issued hereunder, when
executed and delivered pursuant hereto, constitute or will constitute the
authorized, valid, and legally binding obligations of Borrower enforceable in
accordance with their respective terms, except to the extent that any of the
Collateral is subject to a lease or a security interest that requires notice to
or the consent of the lessor or secured party, as the case may be, and except
contracts with the General Services Administration that require notice to or the
consent of the General Services Administration to the granting of a security
interest in such Collateral and such notice is not given or such consent is not
obtained, or that prohibits the granting of a security interest.
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8.3 NO VIOLATION OF AGREEMENTS. Except for matters described in the
Disclosure Schedule and in SECTION 8.2 herein, Borrower is not in default under
any material provision of any agreement to which it is a party or in violation
of any material provision of any Applicable Laws. The execution and delivery of
this Agreement, the Notes, the other Loan Documents, and the instruments
incidental hereto; the consummation of the transactions herein or therein
contemplated; and compliance with the terms and provisions hereof or thereof
(a) will not violate any material provision of any Applicable Law and (b) will
not conflict or be inconsistent with; result in any breach of any of the
material terms, covenants, conditions, or provisions of; constitute a default
under; or result in the creation or imposition of (or the obligation to impose)
any lien, charge, or encumbrance upon any of the property or assets of Borrower
pursuant to the terms of: any material Governmental Approval, mortgage, deed of
trust, lease, agreement, or other instrument to which Borrower is a party, by
which Borrower may be bound, or to which Borrower may be subject, and (c) will
not violate any of the provisions of the articles of incorporation of Borrower.
Notwithstanding the foregoing, U. S. Bank acknowledges that Borrower's contracts
with the General Services Administration and certain equipment leases entered
into by Borrower prior to the date of this Agreement may require notice or
consent prior to Borrower granting U. S. Bank a security interest therein, and
U. S. Bank also acknowledges that Borrower has not given such notices nor
obtained any such consents. Except for any of Borrower's contracts with the
General Services Administration with respect to which notice or consent is
required for the granting of a security interest, no Governmental Approval is
necessary (x) for the execution of this Agreement, the making of the Notes, or
the assumption and performance of this Agreement or the Notes by Borrower or
(y) for the consummation by Borrower of the transactions contemplated by this
Agreement including but not limited to the grant of the security interests to
U. S. Bank.
8.4 RECORDING AND ENFORCEABILITY. Neither the articles of
incorporation, bylaws, or other applicable corporate documents of Borrower nor
other agreements require recording, filing, registration, notice, or other
similar action in order to insure the legality, validity, binding effect, or
enforceability against all Persons of this Agreement, the Notes, or other Loan
Documents executed or to be executed hereunder, other than filings or recordings
that may be required under the Uniform Commercial Code or in connection with the
perfection of the security interests of U. S. Bank in patents, trademarks, and
similar types of Collateral.
8.5 LITIGATION. There are no actions, suits, or proceedings pending
or threatened against or affecting Borrower before any Governmental Body that
could have a material adverse effect on Borrower or the Collateral. Borrower is
not in default under any material provision of any Applicable Law or
Governmental Approval of any Governmental Body which could have a material
adverse effect on Borrower or on the Collateral.
8.6 GOOD TITLE TO PROPERTIES. Borrower has good and marketable title
to, or a valid leasehold interest in, its property and assets, subject to no
liens, mortgages,
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pledges, encumbrances, or charges of any kind, except those permitted under the
provisions of SECTION 7.5 of this Agreement.
8.7 LICENSES AND PERMITS. All Governmental Approvals with respect to
the business of Borrower were to Borrower's knowledge duly and validly issued by
the respective Governmental Bodies, are in full force and effect, and are to
Borrower's knowledge valid and enforceable in accordance with their terms. With
regard to such Governmental Approvals, no fact or circumstance exists that
constitutes or, with the passage of time or the giving of notice or both, would
constitute a material default under any thereof, or permit the grantor thereof
to cancel or terminate the rights thereunder, except upon the expiration of the
full term thereof. Borrower presently holds all material Governmental Approvals
as are necessary or advisable in connection with the conduct of its business as
now conducted and as presently proposed to be conducted.
8.8 PROPERTIES IN GOOD CONDITION. All the material properties of
Borrower are, and all material properties to be added in connection with any
contemplated expansion will be in good repair and good working order and
condition (ordinary wear and tear excepted) in a manner consistent with past
practices of Borrower, and comparable to industry standards and are and will be
in material compliance with all Applicable Laws.
8.9 FINANCIAL STATEMENTS. The (a) reviewed financial statements of
Borrower dated December 31, 1994, and all schedules and notes included in such
financial statements and (b) unaudited financial statements of Borrower that
have heretofore been delivered to U. S. Bank are true and correct in all
material respects and present fairly (i) the financial position of Borrower as
of the date of said statements and (ii) the results of operations of Borrower
for the periods covered thereby; and there are not any significant liabilities
that should have been reflected in the financial statements or the notes thereto
under generally accepted accounting principles, contingent or otherwise,
including liabilities for taxes or any unusual forward or long-term commitments,
that are not disclosed or reserved against in the statements referred to above
or in the notes thereto or that are not disclosed herein. All such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied. There has been no material adverse change
(including but not limited to any such change occasioned by accident, act of
God, war, fire, flood, explosion, strike or other labor dispute, or orders or
action by any Governmental Body or public utility) in the operations, business,
property, assets, or condition (financial or otherwise) of Borrower since
December 31, 1994.
8.10 OUTSTANDING INDEBTEDNESS. Other than current trade payables,
current obligations under real and personal property leases, the Notes, the
Subordinated Debt, and Indebtedness of Borrower to be repaid substantially
simultaneously with the initial Funding under the Loans (including cash and
stock bonuses to be paid to Kevin Hafer, as well as costs and fees incurred by
Borrower prior to December 31, 1995), Borrower has no Indebtedness, including
but not limited to Indebtedness to Affiliates, that is not listed on Borrower's
unaudited financial statements dated November 22, 1995.
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8.11 TAXES. Except as set forth in the Disclosure Schedule, Borrower
has duly filed all tax returns and reports required by Applicable Law to be
filed; and all taxes, assessments, levies, fees, and other charges of
Governmental Bodies upon Borrower or upon its assets that are due and payable
have been paid (except as otherwise permitted in this Agreement).
8.12 LICENSE FEES. Borrower has paid all fees and charges that have
become due for any Governmental Approval for its business or has made adequate
provisions for any such fees and charges that have accrued.
8.13 TRADEMARKS, PATENTS, ETC. Attached hereto as EXHIBIT I is a
schedule of all trademarks, trade names, service marks, patents, and
applications therefor currently held by Borrower or in which it has an interest,
e.g., a license. Borrower possesses all necessary trademarks, trade names,
service marks, copyrights, patents, patent rights, and licenses to conduct its
businesses as now and as proposed to be conducted, without conflict with the
rights or claimed rights of others.
8.14 DISCLOSURE. To the best of Borrower's knowledge, the exhibits
hereto, the financial information and statements referred to in SECTION 8.9
herein, any certificate, statement, report or other document furnished to
U. S. Bank by Borrower or any other Person in connection herewith or in
connection with any transaction contemplated hereby, and this Agreement, do not
contain any untrue statements of material fact or omit to state any material
fact necessary in order to make the statements contained therein or herein not
misleading.
8.15 REGULATIONS U AND X. Borrower does not own and no part of the
proceeds hereof will be used to purchase or carry any margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System)
or to extend credit to others for the purpose of purchasing or carrying any
margin stock. Borrower is not engaged principally or as one of its important
activities in the business of extending credit for the purpose of purchasing or
carrying any margin stock. If requested by U. S. Bank, Borrower will furnish to
U. S. Bank a statement in conformity with the requirements of Federal Reserve
Form U-1 referred to in said Regulation. No part of the proceeds of the Loans
will be used for any purpose that violates or is inconsistent with the
provisions of Regulation X of said Board of Governors.
8.16 NAMES. Neither Borrower nor any of its predecessors operate or
do business or during the past five years have operated or done business under a
fictitious, trade, or assumed name other than: Apex PC Solutions and Apex
Computer Company.
8.17 CONDITION OF PROPERTY. Except as otherwise disclosed to
U. S. Bank, Borrower hereby represents and warrants to U. S. Bank that as of the
date hereof and continuing hereafter, Borrower's property (both owned and
leased) and each portion thereof (a) are not and to the best knowledge of
Borrower after due investigation have not been a site
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for the use, generation, manufacture, storage, disposal, or transportation of
any Hazardous Material; (b) are presently in compliance with all Hazardous
Materials Laws; and (c) are not being used and to the best knowledge of Borrower
after due investigation have not been used in any manner that has resulted in or
will result in Hazardous Materials being spilled or disposed of on any adjacent
or other property.
8.18 PENSION PLANS. No "reportable event" as defined in
Section 4043(b) of Title IV of ERISA has occurred and is continuing with respect
to any plan maintained for employees of Borrower or any Affiliate. In addition,
each of the plans maintained for the employees of Borrower and its Affiliates
are in compliance with the requirements of ERISA, including the minimum funding
requirements.
ARTICLE IX. EVENTS OF DEFAULT; REMEDIES
9.1 EVENTS OF DEFAULT. "Event of Default," wherever used herein,
means any one of the following events (whatever the reason for the Event of
Default, whether it shall relate to one or more of the parties hereto, and
whether it shall be voluntary or involuntary or be pursuant to or affected by
operation of Applicable Law):
(a) If Borrower fails to pay the principal of or any installment of
interest on either of the Notes, within five days of the date the same becomes
due and payable, whether at scheduled maturity, by acceleration, or otherwise;
or
(b) If any Indebtedness of Borrower in excess of $50,000 for money
borrowed or credit extended (including,without limitation, the Subordinated
Debt) becomes or is declared due and payable (after any applicable grace period)
prior to the stated maturity thereof or is not paid as and when it becomes due
and payable, or if any event occurs that constitutes an event of default (after
any applicable grace period) under any instrument, agreement, or evidence of
Indebtedness relating to any such obligation of Borrower that would allow the
holder of such Indebtedness to demand payment thereof; or
(c) If Borrower fails to pay or perform (after any applicable grace
period) any obligation or Indebtedness to others in excess of $50,000 (other
than as set forth in SECTION 9.1(B) herein), whether now or hereafter incurred;
or
(d) If any representation or warranty (i) made by Borrower in this
Agreement or (ii) made by Borrower or any other Person in any document,
certificate, or statement furnished pursuant to this Agreement or in connection
herewith, is false or misleading in any material respect; or
(e) If Borrower fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to ARTICLE VI and VII herein and
Borrower fails to cure the same within the following-described cure periods:
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(i) If Borrower fails to observe or perform any term, covenant,
or agreement to be performed or observed pursuant to ARTICLE VI or VII
herein and Borrower fails to cure the same within the following-described
cure periods:
(ii) No cure period: SECTIONS 6.5, 6.9, 6.16, 7.8, 7.9, 7.10,
7.12, 7.13, 7.15, 7.16, 7.17, 7.18, and 7.19;
(iii) Within five days after the occurrence, without notice:
SECTIONS 6.1, 6.12, 6.14, 7.3, 7.4, 7.5, 7.6, 7.7, and 7.11;
(iv) Within five days after written notice from U. S. Bank:
SECTIONS 6.7, 6.11, 6.15, and 7.1;
(v) Within 30 days after the occurrence, without notice:
SECTIONS 6.2, 6.3, 6.4, 6.6, 6.8, 6.10, 7.2, and 7.14; and
(vi) As specified in the Loan Documents referred to in
SECTION 6.13; or
(f) If Borrower fails to observe or perform (not otherwise specified
in this ARTICLE IX) any term, covenant, or agreement to be performed or observed
pursuant to the provisions of this Agreement, the other Loan Documents, or any
other agreement incidental hereto and such default is not cured within 30 days,
or in the event that the Default is not curable within 30 days, and so long as
Borrower is diligently pursuing a cure thereof, within 60 days; or
(g) If the validity of any of such documents has been disaffirmed by
or on behalf of any of the parties thereto other than U. S. Bank and such
default is not cured within 30 days; or
(h) If custody or control of any substantial part of the property of
Borrower is assumed by any Governmental Body or if any Governmental Body takes
any final action, the effect of which would be to have a material adverse effect
on Borrower; or
(i) If Borrower suspends or discontinues its business, or if Borrower
makes an assignment for the benefit of creditors or a composition with
creditors, is unable or admits in writing its inability to pay its debts as they
mature, files a petition in bankruptcy, becomes insolvent (howsoever such
insolvency may be evidenced), is adjudicated insolvent or bankrupt, petitions or
applies to any tribunal for the appointment of any receiver, liquidator, or
trustee of or for it or any substantial part of its property or assets,
commences any proceeding relating to it under any Applicable Law of any
jurisdiction whether now or hereafter in effect relating to bankruptcy,
reorganization, arrangement, readjustment of debt, receivership, dissolution, or
liquidation; or if there is commenced against Borrower any such proceeding that
remains undismissed for a period of 60 days or more, or an order, judgment,
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or decree approving the petition in any such proceeding is entered; or if
Borrower by any act or failure to act indicates its consent to, approval of, or
acquiescence in, any such proceeding or any appointment of any receiver,
liquidator, or trustee of or for it or for any substantial part of its property
or assets, suffers any such appointment to continue undischarged or unstayed for
a period of 60 days or more, or takes any corporate action for the purpose of
effecting any of the foregoing; or if any court of competent jurisdiction
assumes jurisdiction with respect to any such proceeding, or if a receiver or a
trustee or other officer or representative of a court or of creditors, or if any
Governmental Body, under color of legal authority, takes and holds possession of
any substantial part of the property or assets of Borrower; or
(j) If there is any refusal or failure by any Governmental Body to
issue, renew, or extend any lease or Governmental Approval with respect to the
operation of the business of Borrower, or any denial, forfeiture or revocation
by any Governmental Body of any Governmental Approval that could have a material
adverse effect on Borrower; or
(k) If, after the date of this Agreement, any Person or Persons
during the terms of the Loans acquire an aggregate 50 percent or more of the
outstanding shares of voting stock of Borrower; PROVIDED, HOWEVER, that there
shall be excluded from the calculation of the percentage of voting stock
acquired, any voting stock acquired by shareholders of Borrower as of the date
of this Agreement; or
(l) If any material adverse change in the business or financial
condition of Borrower occurs and in the reasonable opinion of U. S. Bank, such
material adverse change will substantially impair Borrower's ability to repay
the Loans.
9.2 ACCELERATION; REMEDIES. Upon the occurrence of any Event of
Default or at any time thereafter, if any Event of Default is then continuing,
U. S. Bank may, by written notice to Borrower, declare the entire unpaid
principal balance or any portion of the principal balance of all or any of the
Notes and interest accrued thereon to be immediately due and payable by the
maker thereof; and such principal and interest shall thereupon become and be
immediately due and payable, without presentation, demand, protest, notice of
protest, or other notice of dishonor of any kind (except as otherwise provided
herein), all of which are hereby expressly waived by Borrower. U. S. Bank may
proceed to protect and enforce its rights hereunder or realize on any or all
security granted pursuant hereto in any manner or order it deems expedient
without regard to any equitable principles of marshaling or otherwise. All
rights and remedies given by this Agreement, the Notes, and the other Loan
Documents are cumulative and not exclusive of any thereof or of any other rights
or remedies available to U. S. Bank; no course of dealing between Borrower and
U. S. Bank or any delay or omission in exercising any right or remedy shall
operate as a waiver of any right or remedy; and every right and remedy may be
exercised from time to time and as often as deemed appropriate by U. S. Bank.
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ARTICLE X. MISCELLANEOUS
10.1 NOTICES. All notices, requests, consents, demands, approvals,
and other communications hereunder shall be deemed to have been duly given,
made, or served if made in writing and delivered personally, sent via facsimile,
or mailed by first class mail, postage prepaid, to the respective parties to
this Agreement as follows:
(a) If to Borrower:
Apex PC Solutions, Inc.
20031 - 142nd Avenue NE
Woodinville, Washington 98072
Attention: Kevin Hafer
Facsimile No.: (206) 402-9494
with copy to:
Davis Wright Tremaine
1501 Fourth Avenue, Suite 2600
Seattle, Washington 98101-1688
Attention: Samuel F. Saracino
Facsimile No.: (206) 628-7040
(b) If to U. S. Bank:
U. S. Bank of Washington, National Association
10800 NE Eighth Street, Suite 1000
Bellevue, Washington 98004
Attention: Tony W. Chalfant
Facsimile No.: (206) 450-5989
The designation of the persons to be so notified or the address of such persons
for the purposes of such notice may be changed from time to time by similar
notice in writing, except that any communication with respect to a change of
address shall be deemed to be given or made when received by the party to whom
such communication was sent.
10.2 PAYMENT OF EXPENSES. Whether or not the transactions hereby
contemplated are consummated, Borrower shall pay on demand all costs and
expenses of U. S. Bank incurred in connection with the preparation, negotiation,
execution, and delivery of the Loan Documents, as well as any amendments,
modifications, consents, or waivers relating thereto, including, without
limitation, reasonable attorney fees, appraisal fees, and recording fees. In
addition, if there shall occur any Default or Event of Default, U. S. Bank shall
be entitled to recover any reasonable costs and expenses incurred in connection
with the preservation of rights under, and enforcement of, the Loan Documents,
whether or not any
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lawsuit or arbitration proceeding is commenced, in all such cases, including,
without limitation, reasonable attorney fees and costs. Reasonable attorney
fees shall include, without limitation, attorney fees and costs incurred in
connection with any bankruptcy case or other insolvency proceeding commenced by
or against Borrower or any Person granting a security interest in any item of
Collateral, including all fees incurred in connection with (a) moving from
relief from the automatic stay, to convert or dismiss the case or proceeding, or
to appoint a trustee or examiner, or (b) proposing or opposing confirmation of a
plan of reorganization or liquidation, in any case without regarding to the
identity of the prevailing party.
10.3 SETOFF. Borrower hereby pledges and gives to U. S. Bank, and any
Participant, a lien and security interest in for the amount of all present and
future Indebtedness of Borrower to U. S. Bank the balance of any deposit account
maintained by Borrower at U. S. Bank or any Participant. During the existence
of any Event of Default, Borrower hereby authorizes U. S. Bank or any such
Participant at U. S. Bank's sole option, at any time and from time to time, to
apply to the payment of all or any portion of the Loans or other Indebtedness of
Borrower to U. S. Bank, any deposit balance or balances now or hereafter in the
possession of U. S. Bank or such Participant that belong to or are owed to
Borrower.
10.4 NO WAIVER. No failure or delay on the part of U. S. Bank or the
holder of any of the Notes in exercising any right, power, or privilege
hereunder and no course of dealing between Borrower and U. S. Bank or the holder
of any of the Notes shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power, or privilege hereunder preclude any other
or further exercise thereof or the exercise of any right, power, or privilege.
The rights and remedies herein expressly provided are cumulative and not
exclusive of any rights or remedies that U. S. Bank or any subsequent holder of
any of the Notes would otherwise have. No notice to or demand on Borrower in
any case shall entitle Borrower to any other or further notice or demand in
similar or other circumstances or shall constitute a waiver of the right of
U. S. Bank to any other or further action in any circumstances without notice or
demand.
10.5 ENTIRE AGREEMENT AND AMENDMENTS. This Agreement and the other
Loan Documents represent the entire agreement between the parties hereto with
respect to the Loans and the transactions contemplated hereunder and, except as
expressly provided herein, shall not be affected by reference to any other
documents. This Agreement, or any provision hereof, may not be changed, waived,
discharged, or terminated orally, but only by an instrument in writing, signed
by the party against whom enforcement of the change, waiver, discharge, or
termination is sought.
10.6 BENEFIT OF AGREEMENT. This Agreement is binding upon and inures
to the benefit of Borrower and U. S. Bank and their successors and assigns and
all subsequent holders of any of the Notes or any portion thereof. Without the
prior written consent of Borrower, which consent shall not be unreasonably
withheld, U. S. Bank shall not assign
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rights or participations hereunder or any portion thereof to another Person,
except for assignments in connection with any acquisition of U. S. Bank and
assignments or participations required by any Governmental Body. Borrower,
however, is precluded from assigning any of its respective rights or delegating
any of its obligations hereunder or under any of the other agreements between
Borrower and U. S. Bank without the prior written consent of U. S. Bank.
10.7 SEVERABILITY. If any provision of this Agreement or any of the
Loan Documents is held invalid under any Applicable Laws, such invalidity shall
not affect any other provision of this Agreement that can be given an effect
without the invalid provision, and, to this end, the provisions hereof are
severable.
10.8 DESCRIPTIVE HEADINGS. The descriptive headings of the several
sections of this Agreement are inserted for convenience only and do not affect
the meaning or construction of any of the provisions hereof.
10.9 GOVERNING LAW. This Agreement and the rights and obligations of
the parties hereunder and under the other Loan Documents shall be construed in
accordance with and shall be governed by the laws of the state of Washington
without regard to the choice of law rules thereof.
10.10 CONSENT TO JURISDICTION, SERVICE, AND VENUE. For the
purpose of enforcing payment of any of the Notes, performance of the obligations
under any of the Notes, any arbitration award under the other Loan Documents, or
otherwise in connection herewith, Borrower hereby consents to the jurisdiction
and venue of the courts of the state of Washington or of any federal court
located in such state including but not limited to the Superior Court of
Washington for King County and the United States District Court for the Western
District of Washington. Borrower hereby waives the right to contest the
jurisdiction and venue of courts located in King County, Washington, on the
ground of inconvenience or otherwise and waives any right to bring any action or
proceeding against U. S. Bank in any court outside King County, Washington. The
provisions of this section do not limit or otherwise affect the right of
U. S. Bank to institute and conduct action in any other appropriate manner,
jurisdiction, or court.
10.11 ARBITRATION.
(a) Either Borrower or U. S. Bank may require that all disputes,
claims, counterclaims, and defenses, including those based on or arising from
any alleged tort ("Claims") relating in any way to the Loans be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.
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(b) This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to
U. S. Bank.
(c) If arbitration occurs and each party's Claim is less than
$100,000, one neutral arbitrator will decide all issues; if either party's Claim
is more than $100,000, three neutral arbitrators will decide all issues. All
arbitrators will be active Washington State Bar members in good standing. All
arbitration hearings will be held in Seattle, Washington. In addition to all
other powers, the arbitrator or arbitrators shall have the exclusive right to
determine all issues of arbitrability and shall have the authority to issue
subpoenas. Judgment on any arbitration award may be entered in any court with
jurisdiction.
(d) If either party institutes any judicial proceeding relating to
the Loans, that action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.
(e) This arbitration clause cannot be modified or waived by either
party except in writing, which writing must refer to this arbitration clause and
be signed by Borrower and U. S. Bank.
10.12 COUNTERPARTS. This Agreement and each of the Loan Documents
may be executed in one or more counterparts, each of which shall constitute an
original agreement, but all of which together shall constitute one and the same
instrument.
10.13 STATUTORY NOTICE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO
LOAN MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
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IN WITNESS WHEREOF, Borrower and U. S. Bank have caused this Agreement
to be duly executed by the respective, duly authorized signatories as of the
date first above written.
APEX PC SOLUTIONS, INC.
By /s/ Kevin J. Hafer
------------------------------------------
Title President
---------------------------------------
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Tony W. Chalfant
------------------------------------------
Title Vice President
---------------------------------------
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SECURITY AGREEMENT
This security agreement ("Agreement") is made and entered into as of
December 28, 1995, by APEX PC SOLUTIONS, INC., a Washington corporation
("Borrower"), for the benefit of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION,
a national banking association ("U. S. Bank").
R E C I T A L S :
A. Concurrently with the execution hereof, U. S. Bank and Borrower
entered into a credit agreement (together with all supplements, exhibits, and
amendments thereto, referred to as the "Credit Agreement"), pursuant to which
U. S. Bank agreed to extend to Borrower credit facilities as more fully
described therein (the "Loans").
B. Borrower wishes to grant to U. S. Bank a security interest in all
its assets as security for all the Secured Obligations.
NOW, THEREFORE, in order for U. S. Bank to make the Loans, Borrower
agrees as follows:
ARTICLE I. DEFINITIONS
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings when used herein. For the purposes of this
Agreement, the following terms shall have the following meanings:
"Account" means any right to payment for goods sold or leased or for
services rendered that is not evidenced by an Instrument or Chattel Paper,
whether or not it has been earned by performance.
"Account Debtor" means the party who is obligated on or under any
Account, Chattel Paper, or General Intangible.
"Assignee Deposit Account" shall have the meaning set forth in
SECTION 5.7 hereof.
"Chattel Paper" means all interest of Borrower in writings that
evidence both a monetary obligation and a security interest in or a lease of
specific goods, including any group of writings consisting of both a security
agreement or a lease and an Instrument or series of Instruments.
"Collateral" means all property, real, personal, and mixed, tangible
and intangible, wherever located, now owned or hereafter acquired by Borrower,
or in which
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Borrower has or later obtains an interest, and all products, profits, rents, and
proceeds of such property, including but not limited to Accounts, Chattel Paper,
Deposit Accounts, Documents, Equipment, Financial Assets, General Intangibles,
Goods, Instruments, Inventory, Investment Property, Trademarks, Software, and
Vehicles.
"Deposit Account" means a demand, time, savings, passbook, or like
account maintained with a bank, savings and loan association, credit union, or
like organization, other than an account evidenced by a certificate of deposit.
"Document" means all of Borrower's right, title, and interest in or to
any document of title as defined in RCW 62A.1-201 and any receipt of the kind
described in RCW 62A.7-201(2).
"Equipment" means all of Borrower's right, title, and interest in and
to Goods that are used or bought for use primarily in business and that are not
included within the definition of Inventory, including but not limited to all
machinery, equipment, furnishings, fixtures, vehicles, tools, supplies, and
other equipment of any kind and nature and all additions, substitutions, and
replacements of any of the foregoing, together with all attachments, components,
parts, accessories, improvements, upgrades, and accessories installed thereon or
affixed thereto.
"Event of Default" means an occurrence of an Event of Default as
defined in the Credit Agreement.
"Financial Assets" means all of Borrower's right, title, and interest
in and to any financial asset as defined in RCW 62A.8-102.
"General Intangibles" means all personal property (including things in
action) other than Goods, Accounts, Chattel Paper, Documents, Financial Assets,
Instruments, Investment Property, and money, including but not limited to all
Trademarks, Software, insurance proceeds, patents, copyrights, trade names,
trade secrets, goodwill, registration, license rights, licenses, permits,
corporate and other business records, rights to refunds or indemnification, and
all other intangible personal property of Borrower of every kind and nature.
"Goods" means all things that are movable or that are fixtures, not
including money, Documents, Financial Assets, Instruments, Accounts, Chattel
Paper, Investment Property, or General Intangibles.
"Instrument" means any negotiable instrument or other writing that
evidences a right to the payment of money and is not itself a security agreement
or lease and is of a type that is in the ordinary course of business transferred
by delivery with any necessary endorsement or assignment.
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"Inventory" means all Goods held by Borrower for sale or lease,
furnished or to be furnished by Borrower under any contract of service, or held
by Borrower as raw materials, work in progress, or materials used or consumed in
Borrower's business.
"Investment Property" means all of Borrower's right, title, and
interest in and to any investment property as defined in RCW 62A.9-115.
"Secured Obligations" means (a) any present or future Indebtedness of
Borrower to U. S. Bank, now existing or hereafter created, under the Credit
Agreement, the Notes, or the other Loan Documents, including any refinancing,
renewal, replacement, extension, amendment, or substitution of such
indebtedness, (b) any liability or obligation of Borrower hereunder, and (c) any
cost, expense, or liability, including but not limited to reasonable attorney
fees, that may be incurred and advances that may be made by U. S. Bank in any
way in connection with any of the foregoing or any security therefor.
"Software" means all of Borrower's computer software in all of its
forms and manifestations, including without limitation, all source materials,
source codes, object codes, binary forms, source language statements,
specifications, disks, tapes, programs, program layouts, formulae, technical
information, designs, diagrams, models, flow charts, manufacturing processes,
engineering data and techniques, instructions, manuals, patents, copyrights,
mask works, trademarks, trade secrets, and other general intangibles and
contract rights arising out of or relating thereto.
"Trademark" means (a) any trademark, trade name, corporate name,
company name, business name, fictitious business name, trade style, service
mark, logo or other source or business identifier, and the goodwill associated
therewith, now existing or hereafter adopted or acquired, any registration or
recording thereof, and any application in connection therewith, whether in the
United States Patent and Trademark Office or in any similar office or agency of
the United States or of any state thereof, or any other country or any political
subdivision thereof, or otherwise, including but not limited to any thereof
referred to in SCHEDULE I hereto, and (b) all renewals thereof.
"Vehicle" means any car, truck, trailer, construction or earth-moving
equipment, or other vehicle covered by a certificate of title of any state,
including but not limited to any tires or other appurtenances to any of the
foregoing.
ARTICLE II. GRANT OF SECURITY INTEREST
As security for the payment and satisfaction of the Secured
Obligations, Borrower hereby grants to U. S. Bank a continuing security interest
in and assigns to U. S. Bank all of Borrower's right, title, and interest in the
Collateral and all products, profits, rents, and proceeds thereof.
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ARTICLE III. COVENANTS OF BORROWER
Borrower shall fully perform each of the covenants set forth below.
3.1 OBLIGATIONS TO PAY.
(a) Borrower shall pay to U. S. Bank, in timely fashion and in full,
all amounts payable by Borrower to U. S. Bank, pursuant to the Credit Agreement,
the Notes, and the other Loan Documents; and
(b) Borrower shall pay and reimburse U. S. Bank for all reasonable
expenditures including reasonable attorney fees and legal expenses in connection
with the exercise by U. S. Bank of any of its rights or remedies under the
Credit Agreement or the other Loan Documents.
3.2 PERFORMANCE. Borrower shall fully perform in a timely fashion
every covenant, agreement, and obligation set forth in the Credit Agreement and
the other Loan Documents.
3.3 FURTHER DOCUMENTATION. At its own expense, Borrower shall
execute and deliver any financing statement, any renewal, substitution, or
correction thereof, or any other document; shall procure any document; and shall
take such further action as U. S. Bank may reasonably require in obtaining the
full benefits of this Agreement.
3.4 FILING FEES. Borrower shall pay all costs of filing any
financing, continuation, or termination statement with respect to the security
interests granted herein.
3.5 PLEDGES. Borrower shall deliver and pledge to U. S. Bank,
endorsed or accompanied by instruments of assignment or transfer satisfactory to
U. S. Bank, any Instruments, Investment Property, Documents, General
Intangibles, or Chattel Paper that U. S. Bank may specify from time to time.
3.6 MAINTENANCE OF RECORDS. Borrower shall keep and maintain at its
own cost and expense satisfactory and complete records of the Collateral
including but not limited to a record of all payments received and all credits
granted with respect to the Collateral and all other dealings with the
Collateral. Borrower shall mark its books and records pertaining to the
Collateral to evidence this Agreement and the security interests granted herein.
Borrower shall deliver and turn over to U. S. Bank all books and records
pertaining to the Collateral at any time after the occurrence and during the
continuation of an Event of Default, if so demanded by U. S. Bank.
3.7 DISPOSITION OF COLLATERAL. Except as allowed in the Credit
Agreement and except in the ordinary course of Borrower's business, Borrower
shall not sell or transfer
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any of the Collateral or release, compromise, or settle any obligation or
receivable due to Borrower.
3.8 INDEMNIFICATION. Borrower agrees to pay, and to indemnify
U. S. Bank and hold U. S. Bank harmless from, all liabilities, costs, and
expenses including but not limited to reasonable legal fees and expenses with
respect to or resulting from (a) any delay in paying any excise, sales, or other
taxes that may be payable or determined to be payable with respect to any of the
Collateral, (b) any delay by Borrower in complying with any requirement of law
applicable to any of the Collateral, or (c) any of the transactions contemplated
by this Agreement. In any suit, proceeding, or action brought by U. S. Bank
under any Account to enforce payment of any sum owing thereunder or to enforce
any provisions of any Account, Borrower will indemnify U. S. Bank and hold
U. S. Bank harmless from all expense, loss, or damage suffered by reason of any
defense, setoff, counterclaim, recoupment, reduction, or liability whatsoever of
the Account Debtor thereunder arising out of a breach by Borrower of any
obligation thereunder or arising out of any other agreement, indebtedness, or
liability at any time owing to or in favor of such Account Debtor or its
successors from Borrower.
3.9 LIMITATIONS ON AMENDMENTS, MODIFICATIONS, TERMINATIONS, WAIVERS,
AND EXTENSIONS OF CONTRACTS AND AGREEMENTS GIVING RISE TO ACCOUNTS. Except as
allowed in the Credit Agreement, and except in the ordinary course of Borrower's
business, Borrower will not (a) amend, modify, terminate, waive, or extend any
provision of any agreement giving rise to an Account in any manner that could
reasonably be expected to have a material adverse effect on the value of such
Account as Collateral or (b) fail to exercise promptly and diligently every
material right that it may have under each agreement giving rise to an Account,
other than any right of termination.
3.10 LIMITATIONS ON DISCOUNTS, COMPROMISES, AND EXTENSIONS OF
ACCOUNTS. Except as allowed in the Credit Agreement, and except in the ordinary
course of Borrower's business, Borrower will not grant any extension of the time
of payment of any of the Accounts; compromise, compound, or settle the same for
less than the full amount thereof; release, wholly or partially, any Person
liable for the payment thereof; or allow any credit or discount whatsoever
thereon.
3.11 FURTHER IDENTIFICATION OF COLLATERAL. Borrower will furnish to
U. S. Bank from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as U. S. Bank may request, all in reasonable detail.
3.12 NOTICES. Borrower will advise U. S. Bank promptly in reasonable
detail at its address set forth in SECTION 7.9 (a) of any lien (other than liens
created hereby or permitted under the Credit Agreement) on or claim asserted
against any of the Collateral and (b) of the occurrence of any other event that
could reasonably be expected to have a material adverse effect on the Collateral
or on the liens created hereunder.
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3.13 CHANGES IN LOCATIONS, NAME, ETC. Borrower will not (a) change
the location of its chief executive office/chief place of business from that
specified in SECTION 4.10 or remove its books and records from the location
specified in SECTION 4.7, (b) permit any of the Inventory or Equipment
(excluding Vehicles) to be kept at locations other than those listed on
SCHEDULE II hereto, or (c) change its name, identity, or structure to such an
extent that any financing statement filed by U. S. Bank in connection with this
Agreement would become seriously misleading, unless it shall have given
U. S. Bank at least ten days' prior written notice thereof.
3.14 TRADEMARKS.
(a) Borrower (either itself or through licensees) will (i) continue
to use each Trademark on each and every trademark class of goods applicable to
its current line as reflected in its current catalogs, brochures, and price
lists in order to maintain such Trademark in full force free from any claim of
abandonment for nonuse, unless Borrower obtains the prior written consent of
U. S. Bank which consent shall not be withheld unreasonably, (ii) maintain as in
the past the quality of products and services offered under such Trademark,
(iii) employ such Trademark with the appropriate notice of registration, (iv)
not adopt or use any mark that is confusingly similar to or a colorable
imitation of such Trademark unless U. S. Bank shall obtain a perfected security
interest in such mark pursuant to this Agreement, and (v) not (and not permit
any licensee or sublicensee thereof to) do any act or knowingly omit to do any
act whereby any Trademark may become invalidated.
(b) Borrower will notify U. S. Bank immediately if it knows, or has
reason to know, of (i) any application or registration relating to any Trademark
material to its business that may become abandoned or dedicated, or (ii) any
adverse determination or development (including but not limited to the
institution of, or any adverse determination or development in, any proceeding
in the United States Patent and Trademark Office or any court or tribunal in any
country) regarding Borrower's ownership of any material Trademark or its right
to register, keep, or maintain the same.
(c) Whenever Borrower, either by itself or through any agent,
employee, licensee, or designee, shall file an application for the registration
of any material Trademark with the United States Patent and Trademark Office or
any similar office or agency in any other country or any political subdivision
thereof, Borrower shall report such filing to U. S. Bank within five Business
Days after the last day of the calendar month in which such filing occurs.
Borrower shall execute and deliver to U. S. Bank all agreements, instruments,
powers of attorney, documents, and papers that U. S. Bank may request to
evidence U. S. Bank's security interest in any Trademark and in the goodwill and
general intangibles of Borrower relating to or represented by the Trademark.
Borrower hereby constitutes U. S. Bank its attorney-in-fact, such appointment to
take effect upon the occurrence and to remain in effect during the continuation
of an Event of Default, to execute and file all such writings for the foregoing
purposes, with all acts of such attorney being hereby ratified and
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confirmed; and such power, being coupled with an interest, is irrevocable until
all Secured Obligations are paid in full.
(d) Borrower will take all reasonable and necessary steps, including
but not limited to all reasonable and necessary steps in any proceeding before
the United States Patent and Trademark Office or any similar office or agency in
any other country or any political subdivision thereof, to maintain and pursue
each application, to obtain the relevant registration, and to maintain each
registration of material Trademarks, including but not limited to filing
applications for renewal, affidavits of use, and affidavits of incontestability.
(e) If any Trademark that is included in the Collateral is infringed,
misappropriated, or diluted by a third party, Borrower shall promptly notify
U. S. Bank after it learns thereof and shall take such action as Borrower
reasonably deems appropriate under the circumstances to protect such Trademark.
3.15 VEHICLES. Within 30 days after the date of acquisition of any
Vehicle constituting Collateral, the application for certificate of title
thereto indicating U. S. Bank's first priority lien on such Vehicle, and any
other necessary documentation, shall be filed in each office in each
jurisdiction that U. S. Bank deems advisable to perfect its lien on any Vehicle
constituting Collateral.
3.16 SOFTWARE. Borrower agrees to execute and deliver to U. S. Bank
from time to time upon U. S. Bank's reasonable request, any and all instruments,
documents, financing statements, registration statements, applications for
registration, and other documents reasonably deemed necessary by U. S. Bank to
perfect or otherwise give constructive notice of its security interest in the
Software or any portion thereof, including Software hereafter created or
acquired by Borrower. Any such action shall give due recognition to Borrower's
interest in preserving the confidentiality of the Software.
(a) ACCESS TO SOFTWARE. U. S. Bank shall have no access to the
Software unless and until there shall occur and be continuing an Event
of Default. If there shall occur and be continuing an Event of
Default, Borrower shall, at the request of U. S. Bank, assemble and
deliver to U. S. Bank the Software, and shall cooperate with
U. S. Bank in disposing of the same, in realization of its security
interest therein. Borrower hereby acknowledges and agrees that any
disposition of the Software by U. S. Bank in realization of its
security interest therein shall not be subject to any licenses or
restrictions, other than those licenses or other rights of third
parties to use, modify, and distribute the Software heretofore granted
by Borrower, and those licenses and other rights that Borrower may
grant in the future in the ordinary course of business or pursuant to
the Credit Agreement. U. S. Bank and any other third party claiming
through U. S. Bank shall take the Software subject to the rights of
parties other than Borrower arising out of such licenses and other
rights.
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(b) NEGATIVE COVENANT. Borrower covenants and agrees that so
long as it is indebted to U. S. Bank, Borrower shall not, without the
prior written consent of U. S. Bank, sell, license, assign, or
otherwise convey or encumber the Software to any person or entity
provided that Borrower may license the use, modification, and
distribution of the Software in the ordinary course of Borrower's
business.
3.17 INSURANCE. Borrower agrees to insure the Collateral against all
hazards in form and amount reasonably satisfactory to U. S. Bank. If Borrower
fails to obtain such insurance, U. S. Bank shall have the right, but not the
obligation, to obtain either insurance covering both Borrower's and U. S. Bank's
interest in the Collateral, or insurance covering only U. S. Bank's interest in
the Collateral. Borrower agrees to pay any premium charged for such insurance.
This amount may be added to the outstanding balance of the Loans, and interest
thereon shall be charged at the rate specified in any applicable loan document,
or U. S. Bank may demand immediate payment. Any unpaid insurance premium
advanced by U. S. Bank shall be secured under the terms of this Agreement.
U. S. Bank will have no liability whatsoever for any loss which may occur by
reason of the omission or lack of coverage of any such insurance. Borrower
hereby assigns to U. S. Bank the right to receive proceeds of such insurance to
the full amount of the Secured Obligations and hereby directs any insurer to pay
all proceeds directly to U. S. Bank, and authorizes U. S. Bank to endorse any
draft. In U. S. Bank's sole discretion, U. S. Bank may apply any insurance
proceeds either toward repair of the property or reduction of the balance of the
Secured Obligations.
3.18 COPY OF FINANCING STATEMENT. Borrower agrees that a carbon,
photographic, or other reproduction of a financing statement or this Agreement
is sufficient as a financing statement.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
Borrower hereby makes the following representations and warranties:
4.1 TITLE TO COLLATERAL. Except as set forth in the Credit
Agreement, Borrower has good and marketable title to all the Collateral, free
and clear of all liens excepting only the security interests created pursuant to
this Agreement or permitted pursuant to the Credit Agreement.
4.2 NO IMPAIRMENT OF COLLATERAL. None of the Collateral shall be
impaired or jeopardized because of the security interest herein granted, except
to the extent the granting of a security interest is prohibited, or consent to
or notice regarding the granting of a security interest is required, as set
forth in the Credit Agreement.
4.3 OTHER AGREEMENTS. The execution and delivery of this Agreement,
the consummation of the transactions provided for herein, and the fulfillment of
the terms hereof will not result in the material breach of any of the terms,
conditions, or provisions of, or
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<PAGE>
constitute a material default under, or conflict with, or cause any acceleration
of any obligation under any (a) Applicable Law or (b) agreement or other
instrument to which Borrower is a party or by which Borrower is bound, except to
the extent the granting of a security interest is prohibited, or consent to or
notice regarding the granting of a security interest is required, as set forth
in the Credit Agreement.
4.4 NO APPROVALS. No Governmental Approvals of any nature are
required in connection with the security interests herein granted.
4.5 AUTHORITY. Borrower has full power and authority to assign to
U. S. Bank and to grant to U. S. Bank a security interest in the Collateral.
4.6 LOCATION OF RECORDS. The address of the office where the books
and records of Borrower are kept concerning the Collateral is set forth on
SCHEDULE II.
4.7 LOCATION OF COLLATERAL. The locations of all Inventory and
Equipment of Borrower are described on SCHEDULE II.
4.8 NAME. Borrower conducts its business only under the names "Apex
PC Solutions, Inc." and "Apex Computer Company."
4.9 ACCOUNTS. The amount represented by Borrower to U. S. Bank from
time to time as owing by each Account Debtor or by all Account Debtors in
respect of the Accounts will at such time be the correct amount actually owing
by such Account Debtor or Debtors thereunder. No material amount payable to
Borrower under or in connection with any Account is evidenced by any Instrument
or Chattel Paper that has not been delivered to U. S. Bank.
4.10 CHIEF EXECUTIVE OFFICE. Borrower's chief executive office and
chief place of business is located at the address set forth on SCHEDULE II.
4.11 TRADEMARKS. SCHEDULE I hereto includes all Trademarks owned by
Borrower in its own name as of the date hereof. To the best of Borrower's
knowledge, each such Trademark is valid, subsisting, unexpired, and enforceable
and has not been abandoned. Except as set forth in SCHEDULE I or the Credit
Agreement, none of such Trademarks is the subject of any licensing or franchise
agreement. No holding, decision, or judgment that would limit, cancel, or
question the validity of any such Trademark has been rendered by any
Governmental Body. No action or proceeding is pending that (a) seeks to limit,
cancel, or question the validity of any such Trademark or (b) would, if
adversely determined, have a material adverse effect on the value of any
Trademark.
4.12 VEHICLES. SCHEDULE III is a complete and correct list of all
Vehicles owned by Borrower on the date hereof that constitute Collateral
hereunder. Borrower shall deliver to U. S. Bank the original certificate of
title for each Vehicle on the date hereof.
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<PAGE>
Each certificate of title shall thereafter indicate U. S. Bank's first priority
lien on the Vehicle covered by such certificate. Borrower shall execute and
deliver to U. S. Bank any and all agreements, instruments, documents, powers of
attorney, and papers that U. S. Bank may request to evidence and perfect
U. S. Bank's security interest in any Vehicle. Borrower hereby constitutes
U. S. Bank its attorney-in-fact, such appointment to take effect upon the
occurrence and to remain in effect during the continuation of an Event of
Default, to execute and file all such writings for the foregoing purposes, with
all acts of such attorney being hereby ratified and confirmed; and such power,
being coupled with an interest, is irrevocable until all Secured Obligations are
paid in full.
ARTICLE V. U. S. BANK'S RIGHTS WITH RESPECT
TO THE COLLATERAL
5.1 NO DUTY ON U. S. BANK'S PART. U. S. Bank shall not be required
(except at its option upon the occurrence and during the continuation of any
Event of Default) to realize upon any Accounts, Financial Assets, Instruments,
Investment Property, Chattel Paper, or General Intangibles; collect the
principal, interest, or payment due thereon, exercise any rights or options of
Borrower pertaining thereto; make presentment, demand, or protest; give notice
of protest, nonacceptance, or nonpayment; or do any other thing for the
protection, enforcement, or collection of such Collateral. The powers conferred
on U. S. Bank hereunder are solely to protect U. S. Bank's interests in the
Collateral and shall not impose any duty upon U. S. Bank to exercise any such
powers. U. S. Bank shall be accountable only for amounts that U. S. Bank
actually receives as a result of the exercise of such powers; and neither
U. S. Bank nor any of its officers, directors, employees, or agents shall be
responsible to Borrower for any act or failure to act hereunder, except for
willful misconduct or gross negligence.
5.2 NEGOTIATIONS WITH ACCOUNT DEBTORS. Upon the occurrence and
during the continuation of any Event of Default, U. S. Bank may, in its sole
discretion, extend or consent to the extension of the time of payment or
maturity of any Instruments, Accounts, Chattel Paper, or General Intangibles.
5.3 RIGHT TO ASSIGN. Except as otherwise provided in the Credit
Agreement, U. S. Bank may assign or transfer the whole or any part of the
Secured Obligations and may transfer therewith as collateral security the whole
or any part of the Collateral; and all obligations, rights, powers, and
privileges herein provided shall inure to the benefit of the assignee and shall
bind the successors and assigns of the parties hereto.
5.4 DUTIES REGARDING COLLATERAL. Except as otherwise set forth in
SECTION 5.1, beyond the safe custody of the Collateral, U. S. Bank shall not
have any duty as to any Collateral in its possession or control, or as to any
preservation of any rights of or against other parties.
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<PAGE>
5.5 COLLECTION FROM ACCOUNT DEBTORS. Upon the occurrence and during
the continuation of any Event of Default, Borrower shall, upon demand by
U. S. Bank (and without any grace or cure period), notify all Account Debtors to
make payment to U. S. Bank of any amounts due or to become due. Upon the
occurrence and during the continuation of an Event of Default, Borrower
authorizes U. S. Bank to contact the Account Debtors for the purpose of having
all or any of them pay their obligations directly to U. S. Bank. Upon the
occurrence and during the continuation of an Event of Default, Borrower shall
enforce collection of any indebtedness owed to it by Account Debtors.
5.6 INSPECTION. U. S. Bank and its designees, from time to time at
reasonable times and intervals, may inspect the Equipment and Inventory and
inspect, audit, and make copies of and extracts from all records and all other
papers in the possession of Borrower.
5.7 ASSIGNEE DEPOSIT ACCOUNT. Upon demand by U. S. Bank after the
occurrence and during the continuation of an Event of Default, Borrower will
transmit and deliver to U. S. Bank, in the form received, immediately after
receipt, all cash, checks, drafts, Chattel Paper, Instruments, or other writings
for the payment of money including Investment Property (properly endorsed, where
required, so that the items may be collected by U. S. Bank) that may be received
by Borrower at any time. All items or amounts that are delivered by Borrower to
U. S. Bank, or collected by U. S. Bank from the Account Debtors, shall be
deposited to the credit of a Deposit Account ("Assignee Deposit Account") of
Borrower with U. S. Bank, as security for the payment of the Secured
Obligations. Borrower shall have no right to withdraw any funds deposited in
the Assignee Deposit Account. U. S. Bank may, from time to time in its
discretion, and shall, upon the request of Borrower made not more than twice in
any week, apply all or any of the balance, representing collected funds, in the
Assignee Deposit Account, to payment of the Secured Obligations, whether or not
then due, in such order of application, not inconsistent with the terms of the
Credit Agreement and this Agreement, as U. S. Bank may determine; and U. S. Bank
may, from time to time in its discretion, release all or any of such balance to
Borrower.
ARTICLE VI. U. S. BANK'S RIGHTS AND REMEDIES
6.1 GENERAL. Upon the occurrence of any Event of Default, U. S. Bank
may exercise its rights and remedies in the Credit Agreement and in any other
Loan Documents and any other rights and remedies at law and in equity,
simultaneously or consecutively, all of which rights and remedies shall be
cumulative. The choice of one or more rights or remedies shall not be construed
as a waiver or election barring other rights and remedies. Borrower hereby
acknowledges and agrees that U. S. Bank is not required to exercise all rights
and remedies available to it equally with respect to all the Collateral and that
U. S. Bank may select less than all the Collateral with respect to which the
rights and remedies as determined by U. S. Bank may be exercised.
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<PAGE>
6.2 NOTICE OF SALE; DUTY TO ASSEMBLE COLLATERAL. In addition to or
in conjunction with the rights and remedies referred to in SECTION 6.1 hereof:
(a) Written notice mailed to Borrower at the address designated
herein ten days or more prior to the date of public or private sale of any of
the Collateral shall constitute reasonable notice.
(b) If U. S. Bank requests, Borrower will assemble the Collateral and
make it available to U. S. Bank at places that U. S. Bank shall reasonably
select, whether on Borrower's premises or elsewhere.
ARTICLE VII. GENERAL PROVISIONS
7.1 ENTIRE AGREEMENT. This Agreement, together with the Credit
Agreement and the other Loan Documents, sets forth all the promises, covenants,
agreements, conditions, and understandings between the parties hereto with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements, or conditions,
express or implied, oral or written, with respect thereto, except as contained
or referred to herein. This Agreement may not be amended, waived, discharged,
or terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of such amendment, waiver, discharge, or termination is
sought.
7.2 INVALIDITY. If any provision of this Agreement shall for any
reason be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereunder, but this
Agreement shall be construed as if such invalid or unenforceable provision had
never been contained herein.
7.3 NONWAIVER AND NONEXCLUSIVE RIGHTS AND REMEDIES.
(a) No right or remedy herein conferred upon or reserved to
U. S. Bank is intended to be to the exclusion of any other right or remedy, but
each and every such right or remedy shall be cumulative and shall be in addition
to every other right or remedy given hereunder and now or hereafter existing at
law or in equity.
(b) No delay or omission by U. S. Bank in exercising any right or
remedy accruing upon an Event of Default shall impair any such right or remedy,
or shall be construed to be a waiver of any such Event of Default, or an
acquiescence therein, nor shall it affect any subsequent Event of Default of the
same or of a different nature.
7.4 TERMINATION OF SECURITY INTEREST. When all the Secured
Obligations have been paid in full, the security interest provided herein shall
terminate and U. S. Bank shall return to Borrower all Collateral then held by
U. S. Bank, if any, and upon written request of Borrower, shall execute, in form
for filing, termination statements of the security
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<PAGE>
interests herein granted. Thereafter, no party hereto shall have any further
rights or obligations hereunder.
7.5 SUCCESSORS AND ASSIGNS. All rights of U. S. Bank hereunder shall
inure to the benefit of its successors and assigns, and all obligations of
Borrower shall be binding upon its successors and assigns.
7.6 U. S. BANK'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Borrower hereby irrevocably constitutes and appoints U. S. Bank
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of Borrower and in the name of Borrower or in its own name, from
time to time in U. S. Bank's discretion, for the purpose of carrying out the
terms of this Agreement, upon the occurrence and during the continuation of an
Event of Default, to take any and all appropriate action, and to execute any and
all documents and instruments that may be reasonably necessary or desirable to
accomplish the purposes of this Agreement; and without limiting the generality
of the foregoing, Borrower hereby gives U. S. Bank the power and right, on
behalf of Borrower, without consent by or notice to Borrower, to do the
following:
(i) upon the occurrence and during the continuation of an Event
of Default, to transfer to U. S. Bank or to any other person all or
any of said Collateral, to endorse any Instruments pledged to
U. S. Bank, and to fill in blanks in any transfers of Collateral,
powers of attorney, or other documents delivered to U. S. Bank;
(ii) upon the occurrence and during the continuation of an Event
of Default, to pay or discharge taxes and liens levied or placed on or
threatened against the Collateral, to effect any repairs or any
insurance called for by the terms of this Agreement, and to pay all or
any part of the premiums therefor and the costs thereof;
(iii) upon the occurrence and during the continuation of any Event of
Default (A) to take possession of, endorse, and collect any checks, drafts,
notes, acceptances, or other instruments for the payment of moneys due
under any Account, Instrument, or General Intangible or with respect to any
other Collateral and (B) to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by
U. S. Bank for the purpose of collecting all such moneys due under any
Account, Financial Assets, Instrument, Investment Property, or General
Intangible or with respect to any other Collateral whenever payable; and
(iv) upon the occurrence and during the continuation of any Event
of Default (A) to direct any party liable for any payment under any of
the
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Collateral to make payment of all moneys due or to become due thereunder
directly to U. S. Bank or as U. S. Bank shall direct; (B) to ask for,
demand, collect, and receive payment of and receipt for, any and all
moneys, claims and other amounts due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications, notices, and
other documents in connection with any of the Collateral; (D) to commence
and prosecute any suits, actions, or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral or any thereof
and to enforce any other right in respect of any Collateral; (E) to defend
any suit, action, or proceeding brought against Borrower with respect to
any Collateral; (F) to settle, compromise, or adjust any suit, action, or
proceeding described in clause (E) above and, in connection therewith, to
give such discharge or releases as U. S. Bank may deem appropriate; (G) to
assign any Trademark (along with the goodwill of the business to which any
such Trademark pertains) throughout the world for such terms or terms, on
such conditions, and in such manner as U. S. Bank shall in its sole
discretion determine; and (H) generally, to sell, transfer, pledge, and
make any agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though U. S. Bank were the absolute
owner thereof for all purposes; and to do, at U. S. Bank's option and
Borrower's expense, at any time or from time to time, all acts and things
that U. S. Bank deems necessary to protect, preserve or realize upon the
Collateral and U. S. Bank's liens thereon and to effect the intent of this
Agreement, all as fully and effectively as Borrower might do.
(b) Borrower hereby ratifies all that said attorneys shall lawfully
do or cause to be done by virtue hereof. This power of attorney is a power
coupled with an interest and shall be irrevocable.
(c) Borrower also authorizes U. S. Bank, at any time and from time to
time, to execute, in connection with the sale provided for in ARTICLE VI hereof,
any endorsements, assignments, or other instruments of conveyance or transfer
with respect to the Collateral.
(d) The powers conferred on U. S. Bank hereunder are solely to
protect U. S. Bank's interests in the Collateral and shall not impose any duty
upon U. S. Bank to exercise any such powers. U. S. Bank shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers, and neither it nor any of its officers, directors, employees, or agents
shall be responsible to Borrower for any act or failure to act hereunder, except
for willful misconduct or gross negligence.
7.7 PERFORMANCE BY U. S. BANK OF BORROWER'S OBLIGATIONS. If Borrower
fails to perform or comply with any of its agreements contained herein and
U. S. Bank, as
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provided for by the terms of this Agreement, shall itself perform or comply, or
otherwise cause performance or compliance, with such agreement, the expense of
U. S. Bank incurred in connection with such performance or compliance, together
with interest thereon at the rate provided for in the Credit Agreement upon the
occurrence of an Event of Default, shall be payable by Borrower to U. S. Bank on
demand and shall constitute Secured Obligations.
7.8 GOVERNING LAW. This Agreement and the rights and obligations of
the parties hereunder shall be construed and enforced in accordance with and
shall be governed by the laws of the state of Washington, without regard to the
choice of law rules thereof.
7.9 NOTICES. All notices, requests, consents, demands, approvals,
and other communications hereunder shall be deemed to have been duly given,
made, or served if in writing and when delivered personally, or sent via
facsimile, or mailed by first class mail, postage prepaid, to the respective
parties to this Agreement as follows:
(a) If to U. S. Bank:
U. S. Bank of Washington,
National Association
10800 N.E. Eighth Street, Suite 1000
Bellevue, Washington 98004
Attn: Tony W. Chalfant, Vice President
Facsimile number (206) 450-5989
(b) If to Borrower:
Apex PC Solutions, Inc.
20031 142nd Avenue N.E.
Woodinville, Washington 98072
Attn: Kevin Hafer, President
Facsimile number (206) 402-9494
with a copy to:
Davis Wright Tremaine
1501 Fourth Avenue, Suite 2600
Seattle, Washington 98101-1688
Attn: Samuel F. Saracino
Facsimile number (206) 628-7040
The designation of the person to be so notified or the address of such person
for the purposes of such notice may be changed from time to time by similar
notice in writing, except that
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<PAGE>
any communication with respect to a change of address shall be deemed to be
given or made when received by the party to whom such communication was sent.
7.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original Agreement, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Borrower and U. S. Bank have caused these presents
to be duly executed by their respective duly authorized signatories as of the
day and year first above written.
APEX PC SOLUTIONS, INC.
By /s/ Kevin Hafer
------------------------------------
Kevin Hafer, President
ACCEPTED BY: U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Tony W. Chalfant
------------------------------------
Tony W. Chalfant, Vice President
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<PAGE>
SCHEDULE I
TRADEMARKS
Marks published:
switchback sn: 74/621,260 pub date: 9/12/95
viewpoint sn: 74/621,261 pub date: 9/12/95
Marks filed:
vista 11/13/95 sn: 75/017990
outlook 11/13/95 sn: 75/018077
oscar 11/13/95 sn: 75/018078
Patents applied for:
Computer Inconnection System sn: 08/519,193 filed: 8/25/95 (includes
oscar)
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<PAGE>
SCHEDULE II
Address of
chief executive office:
20031 142nd Avenue N.E.
Woodinville, Washington 98072
Address of Office where
books and records are kept:
20031 142nd Avenue N.E.
Woodinville, Washington 98072
Addresses of locations of
collateral:
20031 142nd Avenue N.E.
Woodinville, Washington 98072
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<PAGE>
SCHEDULE III
VEHICLES
None, except forklift leased pursuant to Safeline lease described in the Credit
Agreement.
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<PAGE>
TERM NOTE
$6,000,000 December 28, 1995
For value received, the undersigned, APEX PC SOLUTIONS, INC., a
Washington corporation ("Borrower"), promises to pay to the order of U. S. BANK
OF WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 10800 N.E. Eighth Street, Bellevue, Washington 98004, or such other
place or places as the holder hereof may designate in writing, the principal sum
of Six Million Dollars ($6,000,000) or so much thereof as advanced by U. S. Bank
in lawful, immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement of
even date herewith by and between Borrower and U. S. Bank (together with all
supplements, exhibits, amendments and modifications thereto, the "Credit
Agreement"). Borrower also promises to pay interest on the unpaid principal
balance hereof, commencing as of the first date of an advance hereunder, in like
money in accordance with the terms and conditions, and at the rate or rates
provided for in the Credit Agreement. All principal, interest, and other
charges are due and payable in full on December 31, 2002.
Borrower and all endorsers, sureties, and guarantors hereof jointly
and severally waive presentment for payment, demand, notice of nonpayment,
notice of protest, and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor, or enforcement of
the payment of this Note except such notices as are specifically required by
this Note or by the Credit Agreement, and they agree that the liability of each
of them shall be unconditional without regard to the liability of any other
party and shall not be in any manner affected by any indulgence, extension of
time, renewal, waiver, or modification granted or consented to by U. S. Bank.
Borrower and all endorsers, sureties, and guarantors hereof (1) consent to any
and all extensions of time, renewals, waivers, or modifications that may be
granted by U. S. Bank with respect to the payment or other provisions of this
Note and the Credit Agreement; (2) consent to the release of any property now or
hereafter securing this Note with or without substitution; and (3) agree that
additional makers, endorsers, guarantors, or sureties may become parties hereto
without notice to them and without affecting their liability hereunder.
This Note is the Term Note referred to in the Credit Agreement and as
such is entitled to all of the benefits and obligations specified in the Credit
Agreement, including but not limited to any Collateral and any conditions to
making advances hereunder. Terms
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<PAGE>
defined in the Credit Agreement are used herein with the same meanings.
Reference is made to the Credit Agreement for provisions for the repayment of
this Note and the acceleration of the maturity hereof.
APEX PC SOLUTIONS, INC.
By /s/ Kevin Hafer
---------------------------------
Kevin Hafer, President
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<PAGE>
REVOLVING NOTE
$3,000,000 December 28, 1995
For value received, the undersigned, APEX PC SOLUTIONS, INC., a
Washington corporation ("Borrower"), promises to pay to the order of U. S. BANK
OF WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 10800 N.E. Eighth Street, Bellevue, Washington 98004, or such other
place or places as the holder hereof may designate in writing, the principal sum
of Three Million Dollars ($3,000,000) or so much thereof as advanced by
U. S. Bank in lawful, immediately available money of the United States of
America, in accordance with the terms and conditions of that certain credit
agreement of even date herewith by and between Borrower and U. S. Bank (together
with all supplements, exhibits, amendments and modifications thereto, the
"Credit Agreement"). Borrower also promises to pay interest on the unpaid
principal balance hereof, commencing as of the first date of an advance
hereunder, in like money in accordance with the terms and conditions, and at the
rate or rates provided for in the Credit Agreement. All principal, interest,
and other charges are due and payable in full on January 15, 1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly
and severally waive presentment for payment, demand, notice of nonpayment,
notice of protest, and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor, or enforcement of
the payment of this Note except such notices as are specifically required by
this Note or by the Credit Agreement, and they agree that the liability of each
of them shall be unconditional without regard to the liability of any other
party and shall not be in any manner affected by any indulgence, extension of
time, renewal, waiver, or modification granted or consented to by U. S. Bank.
Borrower and all endorsers, sureties, and guarantors hereof (1) consent to any
and all extensions of time, renewals, waivers, or modifications that may be
granted by U. S. Bank with respect to the payment or other provisions of this
Note and the Credit Agreement; (2) consent to the release of any property now or
hereafter securing this Note with or without substitution; and (3) agree that
additional makers, endorsers, guarantors, or sureties may become parties hereto
without notice to them and without affecting their liability hereunder.
This Note is the Revolving Note referred to in the Credit Agreement
and as such is entitled to all of the benefits and obligations specified in the
Credit Agreement, including but not limited to any Collateral and any conditions
to making advances hereunder. Terms defined in the Credit Agreement are used
herein with the same meanings. Reference
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<PAGE>
is made to the Credit Agreement for provisions for the repayment of this Note
and the acceleration of the maturity hereof.
APEX PC SOLUTIONS, INC.
By /s/ Kevin Hafer
---------------------------------
Kevin Hafer, President
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<PAGE>
EXHIBIT C
Prepayment Formula
Borrower may prepay the principal balance of the Loans in whole
or in part by paying, in addition to the principal payment, accrued interest and
any other sums due U. S. Bank at the time of prepayment, a yield maintenance
charge ("YMC") as determined by the following formula and if YMC is greater than
zero:
YMC = p x (i - y) x f
Where:
p = the prepaid principal amount.
i = the current interest rate.
y = the most current yield rate ("Yield Rate") on the U.S. Treasury
Security, with a term most closely matching the remaining term from
the date of prepayment to the end of the Yield Maintenance Period, as
reported under the heading "Week Ending" ("Auction average" for 3 or
6-month Treasury Bills) in the most currently available Federal
Reserve statistical release H.15(519) of the Board of Governors of the
Federal Reserve System.
n = the number of months, and any fraction thereof remaining, between the
prepayment date and the end of the Yield Maintenance Period.
(-n)
f = present value factor = 1 - (1 + y) .
-----------
y
"Yield Maintenance Period" means the time period from the date of
prepayment to the end of the applicable Interest Period.
If Borrower shall submit a payment amount in excess of the
principal, interest, and other amounts due U. S. Bank, the allocation of
principal and YMC shall be calculated based on the following formula:
a = p + YMC
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<PAGE>
Where:
a = the excess amount to be applied.
p = the prepaid principal amount = a .
------------------
f x (i - y) + 1
YMC = a - p.
f, i, and y have the same meaning as stated above.
Any partial prepayment of the outstanding balance shall not
extend the due date of any subsequent monthly installments or change the amount
of such installments, unless U. S. Bank shall otherwise agree in writing.
Borrower shall pay the YMC due under the Credit Agreement whether
the prepayment is voluntary or involuntary (in connection with U. S. Bank's
acceleration of the unpaid principal balance of the Loans). Notwithstanding any
other provision herein to the contrary, Borrower shall not be required to pay
any YMC in connection with any prepayment occurring as a result of the
application of insurance proceeds or condemnation awards under U. S. Bank's
deeds of trust.
Should the Federal Reserve statistical release H.15(519) not be
available or discontinued, U. S. Bank shall choose another source or comparable
data in its sole and absolute discretion.
U. S. Bank's determination of the Yield Rate, date of H.15
report, Yield Maintenance Period and calculation of the formulas contained
herein shall be conclusive absent manifest error.
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<PAGE>
EXHIBIT 10.5
[LETTERHEAD]
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: March 22, 1995
-----------------------------------------------
SECTION 1.02 LANDLORD (INCLUDE LEGAL ENTITY): Christopher L. Clark, as
-----------------------------
his separate estate.
- --------------------------------------------------------------------------------
Address of Landlord: 408 Aurora Avenue N., Seattle, WA 98109.
------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 1.03 TENANT (INCLUDE LEGAL ENTITY): Apex PC Solutions, Inc., a
-------------------------------
Washington corporation
- --------------------------------------------------------------------------------
Address of Tenant: 20107 142nd Avenue N.E., Suite A, Woodinville, Washington
--------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 1.04 PROPERTY: The Property is part of Landlord's multi-tenant
real property developed known as Clark Industrial Center
------------------------------------------------
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and described or depicted in Exhibit "A" (the "Project"). The Project includes
the land, the buildings and all other improvements located on the land, and the
common areas described in Paragraph 4.05(a). The Property is (include street
address, approximate square footage and description): 20107 142nd Ave. N.E.,
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Suite A, Woodinville, WA, consisting of approximately 18,988 sq. ft.
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warehouse/assembly space including approximately 3,340 sq. ft. of ground level
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office and 2,800 sq. ft. of second level office.
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SECTION 1.05 LEASE TERM: Three (3) years zero (0) months beginning on
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October 1, 1995, or such other date as is specified in this Lease, and ending on
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September 30, 1998
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SECTION 1.06 PERMITTED USES: (See Article Five) general office, light
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manufacturing, and distribution of PC file server cabinet systems and related
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articles.
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SECTION 1.07 TENANT'S GUARANTOR: (If none, so state). None.
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SECTION 1.08 BROKERS: (See Article Fourteen) (if none, so state).
Landlord's Broker: Regency Group, Inc.
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Tenant's Broker: CB Commercial Real Estate Group, Inc.
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SECTION 1.09 COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen)$ Separate schedule.
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SECTION 1.10 INITIAL SECURITY DEPOSIT: (See Section 3.03) $10,922.00.
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SECTION 1.11 VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) 32 + the potential for eight (8) additional on the S perimeter of the
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Property if not disallowed by Section 1.12.
SECTION 1.12 RENT AND OTHER CHARGES PAYABLE BY TENANT: Any agency having
jurisdiction.
(a) BASE RENT: TEN THOUSAND NINE HUNDRED TWENTY-TWO DOLLARS & NO/100
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Dollars ($10,922) per month for the first twelve (12) months, as provided in
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Section 3.01, and shall be increased on the first day of the 13th, 25th, 49th,
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61st, 73rd month(s) after the Commencement Date, either (i) as provided in
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Section 3.02, or
(ii)----------------------------------------------------------------------------
- -----------------------------------------------. (If (ii) is completed, then
(i) and Section 3.02 are inapplicable.)
(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) Tenant's Initial Pro Rata Share of Common Area Expenses -
58.65*% (see Section 4.05); (v) Impounds for Insurance Premiums and Property
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Taxes (see Section 4.08); (vi) Maintenance, Repairs and Alterations (see
Article Six). *subject to adjustment based on the total net rentable area of
the completed project. All such costs are auditable by Tenant.
SECTION 1.13 LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (see
Section 9.05) One hundred percent (100%) of the Profit (the "Landlord's
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Share").
SECTION 1.14 RIDERS: The following Riders are attached to and made a part
of this Lease: (If none, so state)
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Exhibit "B" Description of Landlord's Scope of Work
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Exhibit "B-1" Special Tenant Improvements
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Exhibit "C" Floor Plan
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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 nondelivery 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
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by giving written notice to Landlord within ten (10) days after the sixty
(60)-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 Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute such 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. For the purpose of this
section only, September 1, 1995 is defined as the commencement date.
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 Rent 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 twenty-five percent (25%). In order for the Tenant to be held
liable for damages, the Landlord must notify the Tenant in writing at least
ninety (90) days prior to the expiration date of the current lease term that the
potential for damages exists and outline the scope of such damages.
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.
SECTION 3.02 COST OF LIVING INCREASES. The Base Rent shall be increased
on 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), not to exceed four percent (4%)
annually, or actual CPI, whichever is less.
(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 relationship is ceased with respect to the Security Deposit.
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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 4.08
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 taxing 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.
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 and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and noncontributing;
(ii) contain cross-liability endorsements; and (iii) insure Landlord against
Tenant's performance under Section 5.05, if the matters give 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 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.
(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 have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain
insurance for Tenant's fixtures or equipment or 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 4.08, 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 nonprimary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). For insurance policies
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maintained by Landlord which cover improvements on the entire Project, Tenant
shall pay Tenant's prorated share of the premiums, in accordance with the
formula in Paragraph 4.05(a) for determining Tenant's share of Common Area
costs. If insurance policies maintained by Landlord cover improvements on real
property other than the Project, 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 the
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 this 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-12 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 which Tenant deems necessary 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 COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Tenant shall not
interfere with the rights of Landlord, other tenants or any other person
entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Tenant shall not cause large
trucks or other large vehicles to be parked within the Project or on the
adjacent public streets. Temporary parking of large delivery vehicles in the
Project may be permitted by the rules and regulations established by Landlord.
Vehicles shall be parked only in striped parking spaces and not in driveways,
loading areas or other locations not specifically designed for parking.
Handicapped spaces shall only be used by those legally permitted to use them.
If Tenant parks more vehicles in the parking area than the number set forth in
Section 1.11 of this Lease, such conduct shall be a material breach of this
Lease. In addition to Landlord's other remedies under the Lease, Tenant shall
pay a daily charge determined by Landlord for each such additional vehicle.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas
in good order, condition and repair and shall operate the Project, in Landlord's
sole discretion, as a first-class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as determined below) of
all costs incurred by Landlord for the operation and maintenance of the Common
Areas. Common Area costs include, but are not limited to, costs and expenses
for the following: gardening and landscaping; utilities, water and sewage
charges; maintenance of signs (other than Tenant's signs); premiums for
liability, property damage, fire and other types of casualty insurance on the
Common Areas and worker's compensation insurance; all property taxes levied on
or attributable to personal property used in connection with the Common Areas;
straight-line depreciation on personal property owned by Landlord which is
consumed in the operation or maintenance of the Common Areas; rental or lease
payments paid by Landlord for rented or leased personal property used in the
operation or maintenance
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of the Common Areas; fees for required licenses and permits; repairing,
resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse
removal, security and similar items; reserves for roof replacement and exterior
painting and other appropriate reserves; and a reasonable allowance to Landlord
for Landlord's supervision of the Common Areas (not to exceed five percent (5%)
of the gross rents of the project for the calendar year). Landlord may cause
any or all of such services to be provided by third parties and the cost of such
services shall be included in Common Area costs. Common Area costs shall not
include depreciation of real property which forms part of the Common Areas.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata
share of all Common Area costs (prorated for any fractional month) upon written
notice from Landlord that such costs are due and payable, and in any event prior
to delinquency. Tenant's pro rata share shall be calculated by dividing the
square foot area of the Property, as set forth in Section 1.04 of the Lease, by
the aggregate square foot area of the project which is leased or held for lease
by tenants, as of the date on which the computation is made. Tenant's initial
pro rata share is set out in Paragraph 1.12(b). Any changes in the Common Area
costs and/or the aggregate area of the Project leased or held for lease during
the Lease Term shall be effective on the first day of the month after such
change occurs. Landlord may, at Landlord's election, estimate in advance and
charge to Tenant as Common Area costs, all real property taxes for which Tenant
is liable under Section 4.02 of the Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of the Lease, all maintenance and repair
costs for which Tenant is liable under Section 6.04 of the Lease, and all other
Common Area costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Landlord may
adjust such estimates at any time based upon Landlord's experience and
reasonable anticipation of costs. Such adjustments shall be effective as of the
next rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted accounting principles
setting forth, in reasonable detail, the Common Area costs paid or incurred by
Landlord during the preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment between Landlord and
Tenant, with payment to or credit given by Landlord (as the case may be), so
that Landlord shall receive the entire amount of Tenant's share of such costs
and expenses for such period.
SECTION 4.06 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
ten (10) days after it becomes due, Tenant shall pay Landlord a late charge
equal to ten percent (10%) 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 4.07 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
fifteen percent (15%) 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 4.08 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 (1/12th) 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
noninterest 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.
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
tenants of the Project, 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.
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. Landlord approves of the Tenant's use of
touch-up paint.
SECTION 5.04 SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent, which consent shall
not be unreasonably withheld. 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
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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 expenses 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 gross negligence or
willful misconduct. As used in this section, the term "Tenant" shall include
Tenant's employees, agents, contractors and invitees, if applicable.
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 governing the presence and use of Hazardous Material; or for
an 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 Sale" or "For Lease" signs on the Property.
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. Tenant 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. *Subject to Landlord's completion of
the improvements provided for in Exhibits A, B and C.
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 gross negligence or willful misconduct.
SECTION 6.03 LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good order,
condition and repair: the foundations, exterior walls and roof of the Property
(including painting the exterior surface of the exterior walls of the Property
not more often than once every five (5) years, if necessary) and all components
of electrical, mechanical, plumbing, heating and air conditioning systems and
facilities located in the Property which are concealed or used in common by
tenants of the Project. However, Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall make repairs under this Section 6.03 within a reasonable time
after receipt of written notice from Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease.
SECTION 6.04 TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of
the Property (including structural, nonstructural, interior, systems and
equipment) in good order, condition and repair (including interior repainting
and refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaid 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,
unless Landlord maintains such equipment under Section 6.03 above. If any part
of the Property or the Project 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.
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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 nonstructural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively 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
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 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 of such work is required. Landlord may elect to
record and post notices of nonresponsibility 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 of 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.
(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, except
that upon satisfactory completion of such repairs, 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 or option period, 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 to such election within thirty (30) days
after Tenant's notice to Landlord of the occurrence of the damage.
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, any 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. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. 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 or to the Property.
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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 lease 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 of 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 have the right to either terminate or 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. Any attempted transfer without
consent shall be void and shall constitute a noncurable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests 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 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 relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors:
(i) the business of the proposed assignee or subtenant and the proposed use of
the 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.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on
such transaction as and when received by Tenant, unless Landlord gives written
notice to Tenant and the assignee or subtenant that Landlord's Share shall be
paid by the assignee or subtenant to Landlord directly. The "Profit" means (A)
all amounts paid to Tenant for such assignment or sublease, including "key"
money, monthly rent in excess of the monthly rent payable under the Lease, and
all fees and other consideration paid for the assignment or sublease, including
fees under any collateral agreements, less (B) costs and expenses directly
incurred by Tenant in connection with the execution and performance of such
assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before
Tenant is obligated to pay the Landlord's Share to Landlord. The Profit in the
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case of a sublease of less than all the Property is the rent allocable to the
subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within thirty
(30) days after the transaction documentation is signed, and Landlord may
inspect Tenant's books and records to verify the accuracy of such statement. On
written request, Tenant shall promptly furnish to Landlord copies of all the
transaction documentation, all of which shall be certified by Tenant to be
complete, true and correct. Landlord's receipt of Landlord's Share shall not be
a consent to any further assignment or subletting. The breach of Tenant's
obligation under this Paragraph 9.05(b) shall be a material default of the
Lease.
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. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property 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 when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after 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. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(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 or rearrangement 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 thirty (30) 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
thirty (30) 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, 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 of 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, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As 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 or judicial decisions of the state in which the Property is located.
SECTION 10.04 REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent."
Tenant shall
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be credited with having paid all of the Abated Rent on the expiration of the
Lease Term only if Tenant has fully, faithfully, and punctually performed all of
Tenant's obligations hereunder, including the payment of all rent (other than
the Abated Rent) and all other monetary obligations and the surrender of the
Property in the physical condition required by this Lease. Tenant acknowledges
that its right to resolve credit for the Abated Rent is absolutely conditioned
upon Tenant's full, faithful and punctual performance of its obligations under
this Lease. If Tenant defaults and does not cure within any applicable grace
period, the Abated Rent shall immediately become due and payable in full and
this Lease shall be enforced as if there were no such rent abatement or other
rent concession. In such case Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
SECTION 10.05 AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending any action in any bankruptcy court or other court with respect to the
Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to Landlord's
right to possession of the Property. All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
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, and 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 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 of 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, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize 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. Tenant shall sign and deliver any
instrument or documents 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 written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
SECTION 11.04 ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord 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 Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with respect to Tenant
or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver
such statement to Landlord within ten (10) days after Landlord's request.
Landlord may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10)-day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (1) that the terms and
provisions of the 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 is not
in default under the Lease. In such event, Tenant shall be stopped from denying
the truth of such facts.
SECTION 11.05 TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, 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 statements 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 proposes set
forth in this Lease. These reviews will not occur more than one time in any
calendar year, and only after execution of the Tenant's current non-disclosure
agreement.
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
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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 is
such action shall award to the party in whose favor a judgment is entered, a
reasonable sum as attorneys' 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.
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 Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
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 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.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
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 the 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.
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
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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 is transaction except: REGENCY GROUP, INC., who represents
- --------------------------------------------------------------------------------
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and , who
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represents
----------------------------------------------------------------------
- --------------------------------------------------------------------------.
In the event that REGENCY GROUP, INC. 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.
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.
See attached Rider.
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Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on March 31, 1995 CHRISTOPHER L. CLARK, AS HIS SEPARATE
--------------------- ----------------------------------------
at Redmond, WA ESTATE
--------------------------. ----------------------------------------
By: /s/ C. L. Clark
-------------------------------------
Christopher L. Clark
Its:
------------------------------------
By:
-------------------------------------
Its:
------------------------------------
"TENANT"
Signed on March 31, 1995 APEX PC SOLUTIONS, INC.
--------------------- ----------------------------------------
at Redmond, WA
--------------------------. ----------------------------------------
By: /s/ Kevin J. Hafer
-------------------------------------
Kevin J. Hafer
Its: General Manager
------------------------------------
By:
-------------------------------------
Its:
------------------------------------
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-Registered Trademark-, INC. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS-Registered Trademark-, 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.
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Rider to Lease dated March 22, 1995 between Christopher L. Clark, as his
separate estate, Landlord, and Apex PC Solutions, Inc., a Washington
Corporation, Tenant, at Clark Industrial Center, 20107 - 142nd Ave. N.E.,
Suite A, Woodinville, Washington.
ARTICLE SIXTEEN: OPTION TO EXTEND TERM
Subject to the full and complete compliance by Tenant with the terms and
provisions hereof, Tenant shall have an option to extend the term of this Lease
for two (2) two (2) year periods each, commencing at the termination date of the
original Lease and the termination date of the first option period, by Tenant
giving Landlord notice, in writing, delivered certified mail to the address
shown in Article One, Section 1.02, six (6) months prior to the termination date
of the original lease term and six (6) months prior to the termination date of
the first option period. If no such notice is received by Landlord, these
options shall be deleted. If the first option is not exercised the second
option shall be deleted. All terms and conditions of this Lease shall remain
the same during the extended term, except that the guaranteed minimum monthly
base rental shall be adjusted as set forth in Article One, Section 1.12(a) and
Tenant shall occupy the space base rent free during the 37th month of the lease.
ARTICLE SEVENTEEN: DELAY IN DELIVERY
In the event the Landlord is unable to deliver possession as scheduled, the
Landlord and Tenant agree to split (50/50) damages (if any) that may be awarded
against the Tenant for Tenant's failure to vacate its currently occupied lease
space at the end of the current term (9/30/95).
/s/ CLC /s/ KJH
-------------------- --------------------
Initials Landlord Initials Tenant
<PAGE>
STATE OF WASHINGTON )
) ss.
County of KING )
This is to certify that on this 31 day of March, 1995, before me, the
undersigned, a Notary Public in and for the State of Washington, duly
commissioned and qualified, personally appeared KEVIN HAFER to me known to be
the GENERAL MANAGER of APEX PC SOLUTIONS, INC., the Corporation that executed
the within and foregoing instrument, and acknowledged for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Mary L. Flynn
--------------------------------------------------
NOTARY PUBLIC In and for the State of Washington,
NOTARY PUBLIC Residing at: Kirkland, WA
STATE OF WASHINGTON -------------------------------------
MARY FLYNN My Commission Expires: 2-25-99
My Appointment Expires ---------------------------
FEB 25, 1999
STATE OF WASHINGTON )
) ss.
County of KING )
This is to certify that on this 31 day of March, 1995, before me, the
undersigned, a Notary Public in and for the State of Washington, duly
commissioned and qualified, personally appeared CHRISTOPHER L. CLARK to me known
to be the INDIVIDUAL described in and who executed the within and foregoing
instrument, and acknowledged to me that he signed and sealed the same as HIS
free and voluntary act and deed, for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
/s/ Mary L. Flynn
--------------------------------------------------
NOTARY PUBLIC In and for the State of Washington,
NOTARY PUBLIC Residing at: Kirkland, WA
STATE OF WASHINGTON -------------------------------------
MARY FLYNN My Commission Expires: 2-25-99
My Appointment Expires ---------------------------
FEB 25, 1999 Printed Name: Mary L. Flynn
-------------------------------------
<PAGE>
EXHIBIT "A"
THE PROJECT
[SITE PLAN]
<PAGE>
EXHIBIT B
LANDLORD'S
SCOPE OF WORK
INDUSTRIAL BUILDING
AT
20107 NE 142ND
WOODINVILLE, WASHINGTON
FOR
APEX PC SOLUTIONS, INC.
LANCE MUELLER & ASSOCIATES/ARCHITECT
130 LAKESIDE, SUITE 250
SEATTLE, WA 98122
(206) 325-2553
Revised March 30, 1995
<PAGE>
SCOPE OF WORK
INDUSTRIAL BUILDING
20107 142nd N.E.
Woodinville, WA
GENERAL DESCRIPTION
This facility is designed for B-2 office and manufacturing and storage use. The
construction type will be type V-N sprinklered. Site parking will be provided
as approved by the City of Woodinville. Landscape, utilities and paving will be
developed at this time to construct a fully operational facility.
The building facade will be constructed using a combination of site precast
concrete, and storefront/curtain wall with energy efficient glazing. The
building structure will consist of wood roof, wood second floor and concrete
glass exterior.
DIVISION 1 - GENERAL CONDITIONS
A. Construction Schedule: 5 months.
B. Building Permit: Included as part of project construction.
C. Tenant Improvement Permit: Included as part of tenant improvement
allowances.
D. Professional Services: Architectural, civil, structural, landscape
space planning are provided as part of the project.
E. Sales Tax: Included as part of the proposal.
F. Builder Risk: Included as part of the proposal.
G. Testing: Included as part of the proposal.
DIVISION 2 - SITE WORK
2.1 SITE CLEARING
A. Clear site of all debris and organic material and deposit off site.
Store usable material for planters and landscape areas.
B. Remove existing building and improvements not to be saved.
2.2 SITE EARTHWORK
A. Rough grade site to elevations as required by final design. Cut, fill
and import as required. Provide 6" of structural fill below paving,
slab on grade and building area. Conform to recommendations of Soils
Engineer.
INITIAL
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Lessor
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Lessee
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2.3 BUILDING EARTHWORK
A. prepare footing areas per soils report.
2.4 SITE UTILITIES
A. Provide site utilities including storm drainage, fire water, sanitary
sewer and domestic water. Power and phone service, see Division 16.
Connect all roof drainage to storm system. Back fill of trenches to
be approved by Soils Engineer.
2.5 SITE IMPROVEMENT
A. Provide site lighting per W.S.E.C. and City approved drawings.
B. Provide striping, handicap and directional signage.
C. Provide chain link fence with slats and grates at dumpster enclosure
with concrete slab.
2.6 LANDSCAPE AND IRRIGATION
A. Provide irrigation at all planting areas with programmable controls
and deduct meter.
B. Provide planting, lawn and topsoil per City approved plans necessary
for occupancy of this building.
2.7 SITE PAVING
A. Provide 2" class "B" asphaltic paving over 4" crushed rock on 6"
structural fill as approved by Soils Engineer at car parking areas.
B. Widen paving at private streets and public streets as required.
2.8 SITE CONCRETE
A. Provide 4" unreinforced broom finish walks per plan.
B. Provide extruded concrete curbs per City approved drawings.
C. Provide concrete driveway aprons, transformer pads and handicap ramps
as required or noted.
D. Provide sidewalks and curbs at streets and private streets.
DIVISION 3 - CONCRETE
3.1 SLAB ON GRADE
A. Slab on grade to be 5" unreinforced slab on grade utilizing 5-1/2
sack, fG = 3000 psi concrete with 4" maximum slump Control joints per
A.C.I. See structural drawings.
INITIAL
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Lessor
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Lessee
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2
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3.2 SITE PRECAST CONCRETE
A. Provide site precast spandrels, panels, and columns a minimum of
5-1/2" thick. Locate reveal and articulation per final design
drawings. Concrete mix per structural drawings. Provide 4" maximum
slump hard trowels/smooth finish all concrete.
DIVISION 4 - MASONRY - No work.
DIVISION 5 - METALS
5.1 MISCELLANEOUS METALS
A. Provide shell stairs and rails, roof ladders, structural and
miscellaneous steel for concrete panel connection.
B. Provide miscellaneous architectural metal items such as railings, sill
angles and jamb angles as required galvanizing all exterior ferrous
metal.
5.2 REINFORCING STEEL
A. Provide size and grade per structural drawings.
5.3 STRUCTURAL STEEL
A. Provide steel columns for wood roof system.
5.4 METAL STUD FRAMING
A. Metal stud framing at all interior nonbearing walls.
5.5 SUSPENDED CEILING FRAMING
A. Suspended metal framing at all GWB ceiling for Seismic Zone III.
DIVISION 6 - CARPENTRY
6.1 ROUGH CARPENTRY
A. Provide wood framing and furring as required.
6.2 FINISH CARPENTRY
A. Provide wood trims, casing and miscellaneous items where shown and
required.
6.3 CABINETRY
A. Included in finish space allowance.
INITIAL
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Lessee
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DIVISION 7 - THERMAL AND MOISTURE BARRIER
7.1 BUILDING INSULATION
A. Roof insulation -- provide R-11 rigid insulation on the roof.
B. R-19 batts above ceiling at office with F.S.25 facing.
C. R-19 batts at exterior walls above ceiling to second floor deck with
F.S.25 facing.
D. R-11 batts at exterior and perimeter walls behind GWB wallboard.
E. R-11 rigid below slab at building perimeter at heated areas.
F. Pipe insulation -- Provide pipe insulation at all hot water and
horizontal runs or cold water lines.
G. Sound insulation -- Provide sound batts at restroom and stairs.
7.2 BUILT UP ROOFING
A. Provide 24 ga. preprimed flashing and coping as detailed.
B. Provide curbs and flashing for mechanical equipment.
C. Provide Malarkey NM3. Installed per manufacturer's recommendations.
7.3 ROOF HATCHES
A. Provide 1 access ladder to roof with hatch at rear stair.
7.4 SEALANTS
A. Tremco sealant provided at appropriate applications.
DIVISION 8 - DOORS AND WINDOWS
8.1 GLASS AND ALUMINUM
A. Provide 1" insulated solar gray insulating units at vision panels.
B. Provide 1" insulated spandrel units at black out areas.
C. Provide clear anodized aluminum offset glassing system with aluminum
sill extensions.
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8.2 EXTERIOR DOOR
A. Storefront Doors -- Narrow stile clear anodized with closer, panic
hardware, handicap hardware and locking accessories. Doors to be
single safety glazed. Prep door for security system.
B. Hollow Metal Doors -- Hollow metal doors and frames with paint finish.
Fire rating per Code. Provide handicap hardware and locking devices.
Prep doors for security system.
8.3 INTERIOR DOORS
A. Hollow Metal Doors in metal frames at exit enclosures and where rating
exceeds 20 min. label. Handicap hardware provided and closer where
required by Code.
B. Solid Core Doors with Oak veneer in wood sash typical. 20 min. label
units where required. Handicap hardware and closer where required by
Code.
8.4 OVERHEAD DOORS
A. Provide metal high lift sectional doors with insulation inserts and
metal covers.
8.5 HARDWARE
A. Hardware to be commercial grade "D" series Schlage. Latchset, lockset
closers, butt, thresholds, weather and smoke seal provided as required
by Code. Restroom and core signage provided as part of shell.
Building directory at lobby provided as part of multi-tenant building.
DIVISION 9 - FINISHES - BUILDING SHELL
9.1 INTERIOR WALL FINISHES
A. Interior perimeter wall at office 5/8" GWB screwed to furring, taped
finished ready for paint.
B. Interior Walls -- 5/8" GWB on metal studs with finish paint. One hour
assembly at rear exit enclosure. Tape and prep for paint at second
floor.
C. Wall Covering: N.I.C.
D. Wainscot: P-Iam wainscot provided at restroom wet walls.
9.2 EXTERIOR FRAME WALLS & SOFFITS
A. Provide exterior gypsum soffit board with paint finish.
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9.3 FLOOR COVERING
A. Entry -- Walk off mat inset in carpet at office entries.
B. Office -- Carpet provided at $12 per yd. allowance.
C. Provide sheet vinyl and cove base at restrooms.
D. Stairs -- Vinyl thread covers provided and V.C.T. at landings at exit
enclosures. Carpet covered stairs at stairs next to main entry.
E. Base -- 4" vinyl base at all carpet.
9.4 CEILINGS
A. General ceiling 2x4 suspended grid system, installed for Seismic
Zone 3. 2x4 standard white acoustical tile.
B. Restroom: 5/8" GWB smooth finished and painted.
9.5 COLUMNS
A. Interior: Paint Mill White.
9.6 PAINTING
A. Exterior Painting:
1. Concrete -- surface to be paint with acrylic latex.
2. Metal -- 2 coats exterior alkyd enamel over appropriate primer.
3. Dryvit -- surface to be painted with 2 coat of system of acrylic
latex.
4. Concrete Paving.
5. Concrete Floor.
6. Paving & Striping -- parking lot paint per City standard.
B. Interior Painting:
1. GWB -- latex enamel primer and 2 coats of latex stain enamel.
2. Interior Wood -- 1 coat of stain, 1 coat of sanding sealer, 2
coats of lacquer.
3. Interior Metal Railings -- 1 coat of primer and 2 coats of P.P.B.
Duranar.
4. Warehouse/manufacturing.
9.7 TENANT IMPROVEMENT
A. All finishes within office as noted are included in proposal.
DIVISION 10 - SPECIALTIES
10.1 BUILDING SIGNAGE
A. N.I.C.
10.2 INTERIOR SIGNAGE
A. Restroom doors as required by Code.
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10.3 TOILET ACCESSORIES
A. Industry standard Bobrick quality accessories are included as part of
core restrooms. A partial list of accessories include toilet paper
dispensers, toilet seat cover dispensers, semi-recessed paper towel
dispensers, receptacles, soap dispensers, mirrors, grab bars, and
tampon receptacles.
10.4 TOILET PARTITIONS
A. P-Lam type floor mounted partitions and screens.
10.5 FIRE EXTINGUISHERS
A. N.I.C.
DIVISION 11 - EQUIPMENT
A. Two door bumpers at each dock height door.
DIVISION 12 - FURNISHINGS
12.1 BLINDS
A. N.I.C.
12.2 MATTING
A. Surface walk off mats installed at entry to office.
DIVISION 13 - SPECIAL CONSTRUCTION - No work.
DIVISION 14 - CONVEYING SYSTEMS - No work.
DIVISION 15 - MECHANICAL
15.1 PLUMBING
A. Roof Drains and Piping
Provide as required with overflows.
B. Floor Drains and Piping
Provide at restroom.
C. Water Heater
Provide at warehouse. Gas fired.
D. Gas Piping
Provided from 5' outside to heating equipment.
E. Sanitary Piping
Provide from fixtures to 5' outside building.
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F. Fixtures each floor:
1 -- electric water cooler
1 -- lunch counter sink
2 -- lavatories at mens and womens room
2 -- water closets at mens room and womens room
1 -- lavatory at each office restroom
1 -- water closet at each office restroom
G. Faucets and miscellaneous plumbing items associated with fixtures
provided.
H. Fixtures - 3 provided as part of improvement budget.
I. All fixtures to meet H.C. Code.
J. Valve, Regulator Meter
Provided as part of building shell. Landscape deduct meter will be
provided.
K. Hose Bibbs.
Provide F.P. bid at east and west building face.
15.2 FIRE PROTECTION
A. Design Criteria
City of Woodinville approved system for ordinary hazards.
B. Heads
Semi-recessed at office ceiling -- standard temperature dry pendant at
soffit.
Storage/manufacturing area per Code.
C. Hose Stations
Per City standards.
D. Standpipes
Per City standards.
E. Monitor System
Provide flow switches as required for monitoring.
F. Pumper Connection and Backflow
Prevention per City standards.
G. Head Locations
As required by Code.
H. Risers
Riser locations will be located in concealed locations.
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15.3 HVAC
A. System Description
A central gas fired electric cooling HVAC system is provided for each
floor (2 units). This system includes a minimum of 1 zone per floor.
The system includes compliance to 1994 WSEC and future energy saving
options including computer controls and setbacks, economizer cycles
and gas heating.
B. Distribution System
1. Distribution boxes installed in ceiling attic space.
2. Control thermostat mounted on interior wall.
3. Supply air diffuser located in ceiling system on flexible tubing.
C. Return Air
The building has noncombustible floor construction which will allow a
return air plenum.
D. Manufacturing/Storage Area
Heated as allowed by 1994 WSEC by using suspended gas fired unit
heaters.
DIVISION 16 - ELECTRICAL
16.1 DESCRIPTION
A. Electrical system for the transformer vault is for 3 phase 800A 408V.
The size of the system will be determined from the mechanical load,
site lighting load, building lighting load, manufacturing power and
office power needs.
16.2 LIGHTING
A. Site Lighting
Building mounted lights utilizing Metal Halide fixture. System to be
photo cell operated.
B. Soffit Lights
Recess Metal Halide system photo operated.
C. Storage/Manufacturing
.7 watts per s.f. using 8' 2-tube fluorescent at 24' clear of FF.
D. Restroom
Surface mounted fluorescent with diffuser.
E. General Office Lighting
2x4 layin 3-tube with energy conserving features.
Switching per Energy code criteria.
16.3 SMOKE DETECTION AND FIRE DETECTION
A. A monitored smoke alarm and fire detection system will be provided per
Code, monitoring to central stations.
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16.4 ELECTRICAL OUTLETS
A. Perimeter outlets at 10' o.c. at office. Provide 4 outlets at lunch
area. Outlets at restrooms, exit corridors, for irrigation system and
phone equipment is also included. Outlets at storage/manufacturing
other than noted are not included.
16.5 SWITCHING
A. Switching for office lighting to be located at 2 locations at each
floor.
B. Switching for restrooms to be located in each room.
C. Switching for storage/manufacturing located at panel.
D. Other master switching for site lighting to be located at electrical
panel.
16.6 PHONE SERVICE
A. Conduit for phone service from the street to electrical room will be
provided. Conduit for phone service to each floor will be provided to
a central location. All phone wire and services will be provided by
tenant.
16.7 COMPUTER AND DATA CABLING
A. All work provided by others.
16.8 EMERGENCY POWER
A. None provided.
16.9 EMERGENCY LIGHTING
A. Emergency egress lighting is provided as part of tenant work per Code.
16.10 EXIT LIGHTING
A. Included as part of project as required by Code.
16.11 SECURITY SYSTEM
A. Not included.
16.12 FIRE ALARM SYSTEM
A. Fire alarm system as required by Code.
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16.13 POWER DISTRIBUTION
A. Main panel gear to be located at electrical/phone room area in
warehouse.
B. Office and warehouse/storage/manufacturing area to have separate
panel.
C. Panel location for H.V.A.C. system to be conveniently located.
D. Provide one 400A 440/208V 3 phase manufacturing area panel without
breakers.
16.14 MISCELLANEOUS
A. Exhaust fans at restrooms, hook up of all mechanical equipment is
included.
END OF SCOPE OF WORK
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EXHIBIT C
Floor Plan
[FLOOR PLAN]
<PAGE>
EXHIBIT B-1
SPECIALTY TENANT IMPROVEMENTS
Landlord will provide the following specialty tenant improvements to the
premises at its sole cost with the understanding that Tenant agrees to reimburse
Landlord for the specialty improvements listed below costing approximately
$44,000. The Tenant will pay the Landlord as additional rent $935
(calculations: $44,000 amortized over 5 years at 10% interest) per month over
the term of the lease. These additional rent payments shall commence October 1,
1995.
If Tenant does not exercise this option on or after the 36th month, Tenant shall
pay to Landlord in a lump sum payment the remaining unamortized principal
balance in the approximate amount of $20,260.
Specialty Improvements to be amortized:
1. Upgrade production area lighting.
A. Assembly area approximately 3,200 sq. ft.
1. 8 delete 8' two lamp strip fixtures
2. 15 add metal halide 400 watt hi-bay fixtures to provide 50 foot
candles at 3' from floor.
B. Warehouse area approximately 10,000 sq. ft.
1. 25 delete 8' tow lamp strips
2. 10 add metal halide 400 watt hi-bay fixtures to provide 15 foot
candles at 3' from floor.
2. Heat and ventilation for productions area.
A. 2 -- 145 mbh unit heaters with gas piping.
B. Code required ventilation for production area.
C. 10,000 CFM fan for summer ventilation.
D. 3 ceiling paddle fans.
3. Insulation (required if production area to be heated).
A. Walls below 8' -- furred GWB with R-11 batt insulation.
B. Walls above 8' -- vinyl faced R-11 on stick pins.
C. Batt R-11 at demising wall.
D. Upgrade roof from R-11 rigid insulation to R-19 rigid.
4. Added electrical circuits.
A. 208V, 20 amp forklift charger circuit
B. 34 -- 100V circuits.
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EXHIBIT C
FLOOR PLAN
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FIRST AMENDMENT TO LEASE
RE: ADDITION OF EXTRA SPACE
This Agreement amends the Lease dated March 22, 1995, between
Christopher L. Clark, as Landlord and Apex P.C. Solutions, Inc., as Tenant, as
follows:
SECTION 1.04 PROPERTY
Amend address of the Property to 20031 142nd Avenue N.E., Woodinville,
Washington. Add to the property description an area to be referred to
hereinafter as the "Extra Space" defined as approximately 6177 S.F. of
warehouse space in Bay 3 of the building, and as depicted in Exhibit A to
this Amendment. The Extra Space will be insulated and heated only per the
Washington State Energy Code for such space. Lighting is "as is."
KJH
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SECTION 1.05 LEASE TERM
The Lease Term for the Extra Space shall be for thirty-five months
beginning on November 1, 1995, and ending on September 30, 1998.
SECTION 1.06 PERMITTED USES
The Extra Space will be used for storage of inventory.
SECTION 1.11 PARKING
For so long as the Extra Space is leased by Tenant, Tenant shall have the
use of an additional six parking spaces beyond those provided in the Lease.
KJH
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Tenant acknowledges that the six parking spaces north of the building's
southern loading dock are usable spaces whether or not approved by the City
of Woodinville, so long as their use is not prohibited by the City.
SECTION 1.12 BASE RENT
Base Rent for the Extra Space shall be $2,780 per month. Tenant's initial
share of expenses shall now be 69.2%, subject to adjustment if net rentable
area changes for any other reason.
KJH
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ARTICLE 16 OPTION TO EXTEND TERM
The options provided in the Lease shall apply separately to the Extra
Space. Tenant may exercise an option on basic space while not exercising
on the Extra Space, but shall not be permitted to exercise its option for
the Extra Space without exercising its option for the primary space.
<PAGE>
SPECIAL TENANT IMPROVEMENTS
Landlord will provide two overhead roll-up doors (12' x 14') in the
existing demising wall on grid line C at locations directed by Tenant.
Landlord will construct a new demising wall approximately 13.5 feet south
of grid line D. Tenant agrees to compensate Landlord for one half the cost
of the new wall ($7,500) and all of the cost of the two new doors ($4,000)
by the following method: monthly amortization over thirty-six months by
monthly payments of $380 commencing October 1, 1995.
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OTHER CONDITIONS
All other terms of the Lease remain unchanged.
Signed this 14th day of September, 1995.
Tenant: Landlord:
/s/ Kevin J. Hafer /s/ C.L. Clark
- -------------------------------- ------------------------------
By: Kevin J. Hafer By: C.L. Clark
President President
Title Title
<PAGE>
EXHIBIT A
[FLOOR PLAN]
<PAGE>
CHRIS L. CLARK
408 AURORA AVENUE NORTH
SEATTLE, WA 98109
September 25, 1995
Mr. Kevin Hafer, President
Apex P.C. Solutions Inc.
20031 142nd Avenue N.E.
Woodinville, WA 98072
Dear Kevin:
Congratulations on your move into your new and spacious quarters. I hope you
will find the new building to meet your needs for many years to come.
As you know, we are about to start the build-out for Hutton Communications in
the North Bay. This will keep Rod Kittleson in the building from now until the
end of the year. Feel free to ask Rod to address any minor problems that may
come up. By January 1st, I hope all bugs are worked out. You can also contact
me at any time, as I am acting personally as the property manager.
I have prepared a detailed estimate of the N-N-N- charges for 1995. In
accordance with the Lease, the following payment schedule appears correct:
October 1 November 1 December 1
--------- ---------- ----------
- -Rent for Basic Space 10,922 10,922 10,922
- -Special TI -- Basic Space 935 935 935
- -Rent for Extra Space ----- 2,780 2,780
- -Special TI -- Extra Space 380 380 380
- -N-N-N- Charges from Schedule 1,787 2,234 2,234
- -September N-N-N 1,350 ------ ------
------ ------ ------
15,374 17,251 17,251
<PAGE>
Mr. Kevin Hafer
Apex P.C. Solutions Inc.
September 23, 1995
Page 2
I expect to prepare a N-N-N budget and give you a schedule such as this each
December for the coming year. Each January I will reconcile all N-N-N expenses
for the prior year and give you an adjustment billing or credit.
Other than the annual schedule of rental payments, I do not plan to submit
monthly invoices. I hope you can enter the entire annual schedule in your
accounts payable computer as we do at W.G. Clark.
Again, Kevin, I am very pleased to have Apex P.C. Solutions as a tenant, and
look forward to a lasting and friendly relationship.
Sincerely,
/s/ Chris
Chris Clark
<PAGE>
N N N COST ANALYSIS FOR CLARK INDUSTRIAL BUILDING 1995
FOR APEX PC SOLUTIONS
<TABLE>
<CAPTION>
N N N COST ITEM ESTIMATED EXPENSE PERCENT MONTHLY AMOUNTS DUE
ANNUAL PER ALLOCATION
EXPENSE MONTH TO APEX PC SEPT OCT NOV DEC
<S> <C> <C> <C> <C> <C> <C> <C>
PROPERTY TAX 9676 806
PROPERTY INSURANCE 1013 84
PARKING LOT SWEEPING 3072 256
LANDSCAPE MAINTENANCE 3144 262
IRRIGATION WATER 1200 100
YARD LIGHTING 600 50
FIRE ALARM/ PHONE LINE INCL. MTNCE 960 80
ROOF REPLACEMENT RESERVE 2000 167
EXTERIOR REPAINTING RESERVE 1000 83
PARKING LOT MAINTENANCE RESERVE 600 50
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1,938 54.2% $1,050
54.2% $1,050
71.5% $1,386
Note: percent allocation to be 71.5% $1,386
69.2% in 1996
WATER AND SEWER CHARGES 3600 300 100.0% $300 $300 $300 $300
Will be 75% as of 1-1-96. Based on
fixture count.
ADMINISTRATION CHARGE RENT
4% of base rent on basic and extra space SEPT. 0 4.0% $0
OCT. 10,922 4.0% $437
NOV. 13,702 4.0% $548
DEC. 13,702 4.0% $548
-------------------------------------
-------------------------------------
TOTAL OF N N N CHARGES PER MONTH $1,350 $1,787 $2,234 $2,234
</TABLE>
<PAGE>
EXHIBIT 10.6
COMPAQ COMPUTER CORPORATION
PURCHASE AGREEMENT
This Purchase Agreement ("Agreement") is made by Compaq Computer
Corporation ("Buyer") and Apex PC Solutions, Inc. a Washington Corporation
("Seller"). The terms and conditions contained in this Agreement shall
govern the purchase and sale of Product listed in Exhibit A ("Products and
Pricing").
1. INTENT
A. Buyer intends to enter into a long-term relationship with Seller. As such,
Seller is willing to cooperate with Buyer to further mutual long term goals
by sharing Product road map and technology directions. Seller agrees to
cooperate to achieve Buyer's long term program goals such as shortening
Product lead-times, increasing volume flexibility, achieving Just-in-Time
delivery, achieving ongoing cost reductions and specific quality goals, and
continuous quality improvement.
B. This Agreement is not a requirements contract and does not obligate Buyer
to purchase any minimum quantity of Product but only establishes the terms
and conditions for such purchases if and when they occur.
2. PURCHASE ORDERS
A. Buyer will purchase Products only by issuing purchase orders ("Order or
Orders") to Seller. Orders shall contain such things as quantity, price,
delivery date, part number, and revision level. Buyer shall make
commercially reasonable efforts to send written confirmation (except by
mutual agreement) of Orders within one (1) week after Issuance. If Seller
fails to return the acknowledgment, Seller will be deemed to have accepted
any Order which conforms with the terms of this Agreement. No additional
or different provisions proposed by Seller shall apply unless expressly
agreed to in writing by Buyer. Buyer hereby gives notice of its objection
to any additional or different terms.
B. Seller agrees that all Buyer sites, subsidiaries, affiliated companies and
subcontractors, wherever located, shall be entitled to make purchases under
this Agreement.
3. TERM OF AGREEMENT
A. The term of this Agreement shall be twelve (12) months, commencing on the
date Buyer executes this Agreement ("Effective Date"). This Agreement will
be automatically renewed at the conclusion of the initial twelve (12) month
period for successive twelve (12) month periods unless one of the parties
indicates by written notice to the other party not less than thirty (30)
days prior to the end of any such twelve (12) month period that it does not
intend to renew the Agreement. Notwithstanding the foregoing, the
Agreement shall remain in full force and effect and shall be applicable to
any Order(s) issued by Buyer to Seller during the term of this Agreement
until any and all obligations of the parties under such Order(s) have been
fulfilled.
<PAGE>
4. PRICING
A. The prices for the Products shall be set forth in Exhibit A and shall be
fixed for the period set forth therein (the "Pricing Period").
B. Prices shall include all charges such as packaging, packing, crating,
storage, forwarding agent or brokerage fees, freight shipping charges,
document fees, duties, and any and all sales, use, excise and similar
taxes. F.O.B. point specified in Exhibit A.
C. *
D. *
5. DELIVERY
A. Time shall be of the essence in meeting Buyer's requirements. Delivery
performance shall be measured by on-dock date at Buyer's specified ship-to
location.
B. Unless otherwise set forth in the Order, title and risk of loss shall pass
to Buyer at Buyer's specified ship-to location.
C. If Seller delivers Product in advance of the specified delivery date, Buyer
may either return such Product at Seller's risk and expense for subsequent
delivery on the specified delivery date or retain such material and make
payment when it would have been due based on the specified delivery date.
D. Changes to delivery dates may only be made by Buyer's authorized purchasing
representatives. Buyer may, without cost or liability, issue change
requests for Product quantities and schedule dates in accordance with the
Flexibility Agreement attached as Exhibit D ("Flexibility Agreement").
Written confirmation will be sent by Seller to Buyer within two (2) work
days of receiving a change request, and Buyer shall provide a confirming
Order change within ten (10) working days of receiving Seller's
confirmation.
E. Seller shall notify Buyer in writing immediately if Seller has knowledge of
any event which could result in any change to the agreed delivery plan.
F. In the event that Product scheduled for delivery is more than one
(1) business day late, Buyer may request such Product to be shipped and
delivered via a different mode of transportation at sellers expense.
Alternatively, Buyer may purchase substitute Product elsewhere without
affecting other remedies Buyer may have and charge Seller any additional
cost incurred as a result.
6. PACKING, MARKING, AND SHIPPING INSTRUCTIONS
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
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A. All Product shall be prepared and packed in a commercially reasonably
manner so as to secure the lowest transportation rates and meet carrier's
requirements or those set forth in the Product specification attached as
Exhibit B ("Specification").
B. Each shipping container shall be marked to show Buyer's Order number, part
number, revision level, lot number, and quantity contained therein. A
packing list showing the Order number shall be included in each container.
C. Seller agrees to standardize the count multiples used in shipments.
7. QUALITY
A. Seller shall establish and/or maintain a quality improvement plan
acceptable to Buyer. Seller's Quality improvement Plan is attached to this
Agreement as Exhibit C ("Quality Plan").
B. At Buyer's request, Seller will facilitate on-site visits and inspections
by Buyer during normal business hours. Buyer's inspections shall in no way
relieve Seller of its obligation to deliver conforming Product or waive
Buyer's right of inspection and acceptance at the time the Products are
delivered.
C. Seller agrees to provide relevant outgoing inspection, quality, and
reliability data upon Buyer's request.
D. Seller agrees to conform to the revision level stated on Buyer's Order.
E. Seller agrees to advise Buyer of any changes to process, materials, or
sources of supply and ensure that such changes do not compromise
specifications, quality, or reliability of Products ordered by Buyer.
8. INSPECTION AND ACCEPTANCE
A. Products purchased pursuant to this Agreement shall be subject to
inspection and test by Buyer at all times and places, including the period
of manufacture or development. Unless otherwise specified in the Order,
final inspection and acceptance of Product by Buyer shall be at Buyer's
facilities. Buyer reserves the right to reject Product which does not
conform to the specifications, drawings, samples or other descriptions
specified by Buyer. Buyer may, at its option, either return defective or
non-conforming Product for full credit of the purchase price plus any
transportation charges paid by Buyer, or require prompt correction or
replacement of defective or non-conforming Product, which rights shall be
in addition to such other rights as Buyer may have in law or in equity.
Product required to be corrected or replaced shall be subject to the same
inspection and warranty provisions of this Agreement as Product originally
delivered under any Order. Buyer may charge Seller for costs of any above
normal level of inspection.
B. In the event Buyer returns Product back to Seller for correction or
replacement, Seller shall repair or replace all defective Product within
* of receipt of such Product. Seller will issue a "Return Material
Authorization" within twenty-four (24) hours of receipt. Seller shall
bear all risk and costs such as labor, material, inspection, and shipping
to and from Buyer's facilities. If Buyer incurs any such costs, it may
either recover them directly from Seller or set off via a credit note any
amounts due to Seller. Seller agrees to provide failure analysis of
rejected material within * after receipt of reject materials. Seller
will also provide a written corrective action report addressing the steps
that will be taken to eliminate the cause of the problem. Buyer and
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
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<PAGE>
Seller will negotiate in good faith any cost incurred by Seller on
product returned where failure cannot be found.
9. WARRANTY
A. Seller warrants that title to all Products delivered to Buyer under this
Agreement shall be free and clear of all liens, encumbrances, security
interests or other claims and that for a period of * from date of
acceptance of material by Buyer, that all Product shall be free from
defects in material, workmanship, and design. Seller further warrants
that all Product shall conform to applicable specifications, drawings,
samples, and descriptions referred to in this Agreement. The warranty for
replaced or repaired Product will be the same as the original Product.
B. Defective material discovered during Buyer's manufacturing or assembly
processes are not considered to be a warranty repair and shall be corrected
in accordance with paragraph 8.B.
C. Seller agrees that in case of epidemic failure (greater than * failure for
the same cause in any * period), Seller shall provide correction or
replacement in accordance with Paragraph 8.B.
D. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 9, NO WARRANTIES, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, ARE MADE WITH RESPECT TO THE PRODUCT
DELIVERED BY SELLER TO BUYER UNDER THIS AGREEMENT.
10. OUT OF WARRANTY REPAIRS and SPARE PARTS AVAILABILITY
A. Seller agrees to refurbish to a "like new" condition any out of warranty
Product at the refurbishment prices listed in Exhibit E ("Service, Repair,
and Refurbishment"). In addition, Seller agrees to make available for
purchase by Buyer replacement and repair parts for Products ("Spares") in
accordance with Exhibit E.
11. PAYMENT AND SETOFF
A. Terms of payment shall be net 45 from the date of Seller's invoice provided
that Product has been received by Buyer. Payment of invoices shall not
constitute final acceptance of the Product.
B. Buyer retains the right to setoff rejections of Product or discrepancies on
paid invoices against future invoices.
C. Unless otherwise specified in Exhibit A or agreed to in writing by the
parties, payment shall be in U.S. dollars.
12. CHANGES
A. Buyer may from time to time change the specifications for the Products and
Seller agrees to make best efforts to comply. If changes result in a
change in Seller's costs or in the time for performance, an adjustment will
be made. Any adjustment must be in writing and must be requested within
ten (10) days of receipt by Seller of the notice of change.
B. No changes shall be made by Seller in the form, fit, or function of
Products purchased hereunder without Buyer's prior written approval.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
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<PAGE>
13. TERMINATION FOR CAUSE
A. Seller may terminate this Agreement and/or any Order issued hereunder at
any time by written notice in the event Buyer:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and, in the case of a breach which is capable
of remedy, falls to remedy same within thirty (30) days of
notification of said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors,
or a receiver or similar officer is appointed to take charge of all or
a part of the Buyer's assets and such condition is not cured within
thirty (30) days.
B. Buyer may terminate this Agreement and/or any Order issued hereunder at any
time by written notice in the event Seller:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and in the case of a breach which is capable
of remedy, fails to remedy same within thirty (30) days of
notification of said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors,
or a receiver or similar officer is appointed to take charge of all or
a part of Seller's assets and such condition is not cured within
thirty (30) days, or
3. Assigns or attempts to assign, or subcontracts or attempts to
subcontract, any or all of its rights or obligations under this
Agreement or any Orders issued hereunder to a third party without
Buyer's prior written approval, or
4. Failure to agree on pricing for any Pricing Period.
C. Upon termination by Seller of the Agreement and/or any Order issued under
13A above, Buyer's entire liability shall be to purchase all finished
goods, work in progress, and Buyer unique materials that have been
purchased within lead time by Seller to fulfill Buyer's Order(s).
D. Upon termination by Buyer of the Agreement and/or any Order issued under
13B above:
1. Buyer shall have the option to purchase any materials or work in
progress which Seller may have purchased or processed for the
fulfillment of any Order at Seller's cost plus a reasonable amount for
any value already added by Seller,
2. Buyer shall have no liability beyond payment for any balance due for
Products delivered by Seller before notice of termination.
14. TERMINATION FOR CONVENIENCE
A. Buyer may terminate this Agreement and/or any Order issued hereunder at any
time for any reason upon giving written notice of termination to the
Seller. Upon receipt of such notice, Seller shall immediately cease to
incur expenses pursuant to this Agreement and/or the Order that has been
terminated unless otherwise directed in the termination notice. Seller
shall also take all reasonable steps to mitigate the cost to Buyer for
terminating this Agreement and/or any Order. Within sixty (60) days from
the date of
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<PAGE>
notice, Seller shall notify Buyer of costs incurred up to the date of
termination. In no event shall such cost exceed the unpaid balance:
1. Due for conforming material delivered prior to receipt of Buyer's
termination notice; and
2. Due on purchase orders previously issued in conformance with this
Agreement.
B. In addition to the foregoing, in the event that this Agreement is
terminated pursuant to this Paragraph, Buyer's entire liability shall be to
purchase all finished goods, work in progress, and Buyer unique materials
that have been purchased within lead time by Seller to fulfill Buyer's
Order(s).
15. LIMITATION OF LIABILITY
A. EXCEPT FOR A BREACH OF SECTION 19, 23 OR 24 OF THIS AGREEMENT, NEITHER
PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL (INCLUDING, WITHOUT LIMITATION,
LOST PROFITS, Unliquidated INVENTORY, ETC.), INCIDENTAL, INDIRECT, SPECIAL,
ECONOMIC, OR PUNITIVE DAMAGES ARISING OUT OF OR RESULTING FROM THIS
AGREEMENT EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. SELLER'S LIABILITY TO BUYER FOR DIRECT DAMAGES UNDER THIS
AGREEMENT SHALL BE LIMITED TO THE AMOUNTS PAID BY BUYER UNDER THIS
AGREEMENT, INCLUDING ANY OTHER AMOUNTS PAID BY BUYER SUCH AS FREIGHT AND
STORAGE.
16. FORCE MAJEURE
A. Neither party shall be liable for its failure to perform any of its
obligations hereunder during any period in which performance is delayed by
earthquake, fire, flood, war, embargo, riot or the intervention of any
government authority ("Force Majeure"), provided that the party suffering
such delay immediately notifies the other party of the delay. If, however,
Seller's performance is delayed for reasons set forth above for a
cumulative period of thirty (30) calendar days or more, the Buyer,
notwithstanding any other provision of this Agreement to the contrary. may
terminate this Agreement and/or any Order issued hereunder by notice to
Seller. In the event of such termination, Buyer's sole liability hereunder
will be for the payment to Seller of any balance due and owing for
conforming Product delivered by Seller prior to Seller's notification of
delay to Buyer. In the event the parties do not terminate this Agreement
and/or Order due to a Force Majeure, the time for performance or cure will
be extended for a period equal to the duration of the Force Majeure.
17. PRODUCT NOTICES
A. Any notice given under this Agreement shall be in writing and will be
effective when delivered personally or deposited in the mail, postage
prepaid and addressed to the parties at their respective addresses set
forth below, or at any new address subsequently designated in writing by
either party to the other:
If to Seller: If to Buyer:
APEX PC SOLUTIONS, INC. COMPAQ COMPUTER CORPORATION
4580 150TH AVENUE, NE P.O. BOX 692000
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<PAGE>
REDMOND, WA 98052 20555 S.H. 249
HOUSTON, TEXAS 77269-2000
ATTN.: CHRIS SlRIANNI ATTN.: JOHN BRADSHAW
with a copy to:
COMPAQ COMPUTER CORPORATION
P.O. BOX 692000
20555 S.H. 249
HOUSTON, TX 77269-2000
ATTN.: Division Counsel - Operations
18. COMPLIANCE WITH LAWS
A. All Product supplied and work performed under this Agreement shall comply
with all applicable laws and regulations in effect. In particular, Seller
agrees that its performance under this Agreement shall comply with all laws
governing its relationship with its employees, agents or subcontractors and
with the chlorofluorocarbon labeling requirements of the U.S. Clean Air Act
of 1990. Upon request, Seller agrees to certify compliance with such
applicable laws and regulations.
19. PATENT, COPYRIGHT AND TRADEMARK INDEMNITY
A. Seller shall defend, at its expense, any claim against Buyer alleging that
Products furnished under this Agreement (other than claims related to the
Buyer's logo and/or trademark) infringe any patent, copyright or trademark
and shall pay all costs and damages awarded, provided Seller is notified in
writing of such claim and permitted to defend and compromise such claim.
If a final injunction against Buyer's use of the Products results from such
a claim (or, if Buyer reasonably believes such a claim is likely) Seller
shall, at its expense, and at Buyer's request, either use commercially
reasonable efforts to obtain for Buyer the right to continue using the
Product or replace or modify the Product so that it becomes noninfringing.
In the event that Seller cannot obtain such right for Buyer, Seller shall
repurchase all finished Products which Buyer has unsold in its warehouse at
that time. The foregoing states the sole and exclusive liability of Seller
for infringement of proprietary rights.
B. Seller warrants that there are no claims of infringement with respect to
the Product.
C. Seller is authorized to use Compaq logo and trademark only to the extent
necessary to meet the required specification for the Product(s). No other
rights with respect to Buyer's trademarks, trade names or brand names are
conferred, other expressly or by implication, upon Seller.
20. CAPACITY PLANNING
A. Seller agrees to review forecasts provided by Buyer and advise Buyer if
Seller anticipates that he will be unable to achieve the requested
volumes. Buyer volume forecasts will be provided to Seller in accordance
with Exhibit A. Seller may from time to time request Buyer to review
Buyer's forecast and advise of any changes.
21. GRATUITIES
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<PAGE>
A. Each party represents that it has not offered nor given and will not offer
nor give any employee, agent, or representative of the other party any
gratuity with a view toward securing any business from the other party or
influencing such person with respect to the business between the parties.
22. INSURANCE AND STATUTORY OBLIGATIONS
A. If Seller's work under this Agreement requires access by Seller to any of
Buyer's premises or the premises of Buyer's customers or locations where
Buyer conducts business, or with material or equipment furnished by Buyer,
Seller shall take all necessary precautions to prevent the occurrence of
any injury to persons or property during the progress of such work and,
except to the extent that such injury is due solely and directly to Buyer's
acts or negligence, Seller shall indemnify Buyer against all loss which may
result in any way from any act or negligence of Seller; its employees,
servants, agents or subcontractors, and Seller shall maintain such
insurance as shall protect Buyer from such risks and from any statutory
liabilities arising therefrom and shall provide evidence of such insurance
to Buyer upon request.
23. INDEMNIFICATION
Seller agrees to protect, defend, indemnify and save Buyer harmless from
all sums, costs and expense which Buyer may incur or be obliged to pay as a
result of any loss, expense, damage, liability, claims, demands in favor of
any person, as a result of personal injury or death resulting from the use
of the Products where the personal injury or death is solely and directly
the result of the gross negligence or willful misconduct of Seller.
24. CONFIDENTIAL INFORMATION
A. Each party recognizes that it may have previously entered or will in the
future enter into various agreements with the other party which obligates
it to maintain as confidential certain information disclosed to it by the
other party. To the extent that such information or any further
confidential information, which might include but is not limited to
business plans, forecasts, capacity, pricing, inventory levels, etc.
(collectively referred to hereinafter as "Information"), is disclosed in
furtherance of this Agreement or any Order issued hereunder, such
information shall be so disclosed pursuant to the minimum terms and
conditions listed below; provided, however, the minimum terms and
conditions listed below shall in no way relieve the parties from any
obligation or modify such obligations previously agreed to in other
agreements. Both parties agree that this Agreement and any other
agreements regarding confidential information shall hereafter be considered
as coterminous, and shall expire no earlier than the date of expiration or
termination of this Agreement.
B. Both parties agree that the party receiving Information will maintain such
Information in confidence for a period of three (3) years from the date of
disclosure of such information.
C. Each party shall protect the other party's information to the same extent
that it protects it own confidential and proprietary information and shall
take all reasonable precautions to prevent unauthorized disclosure to third
parties.
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<PAGE>
D. The parties acknowledge that the unauthorized disclosure of such
Information will cause irreparable harm. Accordingly, the parties agree
that the injured party shall have the right to seek immediate injunctive
relief enjoining such unauthorized disclosure.
E. This provision shall not apply to information (1) known to the receiving
party at the time of receipt from the other party, (2) generally known or
available to the public through no act or failure to act by the receiving
party, (3) furnished to third parties by the disclosing party without
restriction on disclosure, or (4) furnished to the receiving party by a
third party as a matter of right and without restriction on disclosure.
F. Immediately upon termination of this Agreement or at the request of the
other party, each of the parties shall promptly return all materials in its
possession containing Information of the other party.
25. COUNTRY OF ORIGIN
A. For each Product purchased under this Agreement, Seller shall furnish Buyer
with country of origin (manufacture), by quantity and part number (Buyer's
and Seller's) if necessary.
B. Seller agrees to provide necessary export documents and to facilitate
export of Product. Seller further agrees to assist Buyer's import of
Product as reasonably requested by Buyer.
26. PROPERTY FURNISHED BY BUYER
A. Any tools, drawings, specifications, or other materials furnished by Buyer
for use by Seller in its performance under this Agreement or any Order
issued hereunder shall be identified and shall remain the property of Buyer
and shall be used by Seller only in its performance hereunder. Such
property shall be delivered, upon request, to destination specified by
Buyer in good condition, except for normal wear and tear.
27. GENERAL
A. Any obligations and duties which by their nature extend beyond the
expiration or earlier termination of this Agreement shall survive any such
expiration or termination and remain in effect.
B. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, such provision shall be enforced to the
fullest extent permitted by applicable law and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
C. No action, except those regarding claims by third parties, or claims with
respect to patents, copyrights, trademarks or trade names or the
unauthorized disclosure of Confidential Information, regardless of form,
arising out of this Agreement may be brought by either party more than two
(2) years after the cause of action has arisen, or, in the case of
nonpayment, more than two (2) years from the date the payment was due.
D. Any waiver of any kind by a party of a breach of this Agreement must be in
writing, shall be effective only to the extent set forth in such writing
and shall not operate or be construed as a waiver of any subsequent
breach. Any delay or omission in exercising
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<PAGE>
any right, power or remedy pursuant to a breach or default by a party
shall not impair any right, power or remedy which either party may have
with respect to a future breach or default.
E. Seller hereby gives assurance to Buyer that it shall not export, re-export
or otherwise disclose, directly or indirectly, technical data received from
Buyer or the direct product of such technical data to any person or
destination when such export, re-export or disclosure is prohibited by the
laws of the United States or regulations of a Department of the United
States.
F. This Agreement is considered to be Compaq Confidential.
G. The entire Agreement between the parties is incorporated in this Agreement
and Appendices attached hereto, and it supersedes all prior discussions and
agreements between the parties relating to the subject matter hereof. This
Agreement can be modified only by a written amendment duly signed by
persons authorized to sign agreements on behalf of both parties, and shall
not be supplemented or modified by any course of dealing or trade usage.
Variance from or addition to the terms and conditions of this Agreement in
any Order, or other written notification from Seller will be of no effect.
H. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND ANY ORDER
ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF WASHINGTON,
U.S.A.
IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS
AGREEMENT.
For the Buyer For the Seller
/s/ Grover Edmiston
for Ron Hughes 9/19/94 /s/ Kevin J. Hafer 9/8/94
- ------------------------------------- -------------------------------------
Signature (date) Signature (date)
Ronald J. Hughes Kevin J. Hafer
Name -------------------------------------
Name
Vice-president Corporate Procurement
Title General Manager
-------------------------------------
Title
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<PAGE>
CORPORATE PURCHASE AGREEMENT AMENDMENT
EXHIBIT A
PRODUCTS AND PRICING
ITEM SELLER REFERENCE COMPAQ REFERENCE LEAD-TIME PRICE TIME
- ---- ---------------- ---------------- --------- ----- ----
1. 242694-001 242694-001 8 weeks * *
* *
* *
* *
2. 242695-001 242695-001 8 weeks * *
* *
* *
* *
3. 242778-001 242778-001 8 weeks * *
* *
* *
* *
Seller agrees that the price is firm for the period of 90 days and that
price will be renegotiated prior to the end of the firm pricing period.
Seller agrees to furnish a non-binding price forecast for the following
three calendar quarters.
Seller further agrees to provide price in US.
This Appendix A is effective October 11, 1996 and amends the Corporate
Purchase Agreement (the "Agreement") between Apex PC Solutions and Compaq
Computer Corporation executed on September 19, 1994. The EXHIBIT A in the
original Agreement shall be replaced in its entirety by this Exhibit A.
Except as expressly amended by this Amendment, the Agreement shall
continue in full force and effect in accordance with its terms.
APEX PC SOLUTIONS COMPAQ COMPUTER CORPORATION
By: /s/ CHRISTOPHER L. SIRIANNI By: /s/ DANIEL M. ROSCKES
--------------------------------- ---------------------------------
Name: CHRISTOPHER L. SIRIANNI Name: DANIEL M. ROSCKES
------------------------------- -------------------------------
Title: Vice President Title: Director
------------------------------ ------------------------------
Date: 10-9-96 Date: 10-16-96
------------------------------- -------------------------------
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
page 10
<PAGE>
EXHIBIT B
SPECIFICATION
Buyer's specification number 169953-001/-002 and 169954-001/-002 is
incorporated by reference.
page 11
<PAGE>
EXHIBIT C
QUALITY AGREEMENT
page 12
<PAGE>
COMPAQ COMPUTER CORPORATION
AND
APEX PC SOLUTIONS
SWITCHBOX QUALITY PLAN
*
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
page 13
<PAGE>
EXHIBIT D
FLEXIBILITY AGREEMENT
The following changes to volumes on existing purchase orders may be made without
cost or liability to Buyer.
NUMBER OF WEEKS PRIOR % INCREASE
TO SCHEDULED DELIVERY DATES
8 weeks or more *
6 weeks *
5 weeks *
4 weeks *
3 weeks or less *
*
*
Q394
- -------------------------------------------------------------------------------
WEEK/ORDER 12 11 10 9 8 7 6 5 4 WEEK 0
- -------------------------------------------------------------------------------
Apex Inventory * * * * * * * * * *
- -------------------------------------------------------------------------------
Apex WIP * * * * * * * * * *
- -------------------------------------------------------------------------------
Vendor WIP 80% C * * * * * * * * * *
- -------------------------------------------------------------------------------
Vendor WIP (80% C * * * * * * * * * *
- -------------------------------------------------------------------------------
Vendor Raw Material * * * * * * * * * *
- -------------------------------------------------------------------------------
Q494
- -------------------------------------------------------------------------------
WEEK/ORDER 12 11 10 9 8 7 6 5 4 WEEK 0
- -------------------------------------------------------------------------------
Apex Inventory * * * * * * * * * *
- -------------------------------------------------------------------------------
Apex WIP * * * * * * * * * *
- -------------------------------------------------------------------------------
Vendor WIP 80% C * * * * * * * * * *
- -------------------------------------------------------------------------------
Vendor WIP (80% C * * * * * * * * * *
- -------------------------------------------------------------------------------
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
page 27
<PAGE>
- -------------------------------------------------------------------------------
Vendor Raw Material * * * * * * * * * *
- -------------------------------------------------------------------------------
*
*
*
- -------------------------------------------------------------------------------
Week/Order 14 13 12 11 10 9 8 7 6 5 4 Week 0
- -------------------------------------------------------------------------------
Reschedule * * * * * * * * * * * *
- -------------------------------------------------------------------------------
Compaq Option * * * * * * * * * * * *
- -------------------------------------------------------------------------------
* *
*
*
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
page 28
<PAGE>
EXHIBIT E
SERVICE, REPAIR, AND REFURBISHMENT
A. OUT OF WARRANTY REPAIRS
1. Seller agrees to refurbish to "like new" condition any out of warranty
Product at the prices listed below. This obligation shall be
satisfied by either refurbishing Product submitted by Buyer or
replacing such Product with refurbished Product of the same part
number. Returned Product shall be at the latest revision level.
"Like new" condition means refurbished to meet the electrical and
mechanical requirements of the Buyer's applicable specifications
including the replacement of non-functioning parts.
2. Product submitted by Buyer for refurbishment will be in reasonably
good condition and repairable. In the event Product submitted for
refurbishment has been tampered with in an attempt to repair it or has
been damaged beyond repair, Seller will not be obligated to make out
of warranty repairs.
3. Seller agrees to provide monthly status reports indicating quantities
of units returned, units which aren't repairable, and units for which
no trouble was found.
4. Seller agrees, upon Buyer request, to provide repair training,
documentation, and spare parts to local service providers. Local
service providers will be selected by mutual agreement.
5. Fair and equitable repair pricing to be negotiated in good faith at a
later date.
B. SPARE PARTS AVAILABILITY
No spare parts. Whole unit replacement.
C. DOCUMENTATION
In addition to warranty service, Apex agrees to provide out of warranty
service for a period of up to *. Apex also agrees that if for any
reason Apex is unable to perform out of warranty service, bills of
material, wiring schematics and other pertinent documentation will be
provided to Compaq, or its designated representative. It is understood
that this information is and will remain the property of Apex PC Solutions
and will be used under license by Compaq Computer Corporation and or its
designated representative.
D. LOCAL SERVICE SUPPORT
Seller will, at buyer's request, and by mutual consent, provide spare parts
and training for Buyer's local service providers in Buyer's geographic
sales regions.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
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<PAGE>
EXHIBIT F
LOCAL SITE REQUIREMENTS
HOUSTON
to be determined
SCOTLAND
to be determined
SINGAPORE
to be determined
page 30
<PAGE>
<PAGE>
EXHIBIT 10.7
PRIVATE LABEL AGREEMENT
THIS PRIVATE LABEL AGREEMENT (this "Agreement") is made and entered into
as of the 8th day of September, 1994, by and between APEX PC SOLUTIONS, INC.,
a Washington corporation ("Seller") and WRIGHT LINE, INC., a Massachusetts
corporation ("Purchaser").
R E C I T A L S
A. Purchaser desires to purchase certain switching products (the
"Products", as defined in SCHEDULE 1), which will be finished by Seller as
private label products incorporating Purchaser's artwork and trademarks.
B. Seller is willing to sell the Products to the Purchaser on the
terms and conditions set forth herein.
NOW, THEREFORE, the parties agree as follows:
A G R E E M E N T
1. PURCHASE ORDERS. Seller shall sell Products to Purchaser in
accordance with the terms of this Agreement. Purchaser shall place orders for
Products on standard purchase order forms, however, purchase terms will be
governed by this Agreement. The purchase price for the Products, including
Purchaser's artwork, product packaging, and any user documentation relating
to the Products, shall be as set forth in SCHEDULE L attached to this
Agreement. The purchase price, together with all applicable shipping charges
and taxes, if applicable, shall be payable in full to Seller within 30 days
after Purchaser receives the invoice therefor. Purchaser shall pay a late
payment charge of 1.5% per month, or the maximum rate permitted by applicable
law, whichever is less, on any unpaid amount for each calendar month or
fraction thereof that any payments are in arrears to Seller. Purchaser shall
pay all taxes based on or in any way measured by this Agreement, the
Products, or any rights or services related thereto, excluding taxes based on
Seller's net income, but including any personal property taxes. Purchaser
shall pay all expenses related to the artwork of Purchaser to be incorporated
into the Products, and shall provide Seller with such artwork in a timely
manner.
2. TERM OF AGREEMENT. The initial term of this Agreement shall be
twelve (12) months, commencing on the date first written above ("Effective
Date"). This Agreement will be automatically renewed at the conclusion of the
initial 12-month period for successive 12-month periods unless one of the
parties indicates by written notice to the other party not less than thirty (30)
<PAGE>
days prior to the end of any such 12-month period that it does not intend to
renew the Agreement. Notwithstanding the foregoing, the Agreement shall
remain in full force and effect and shall be applicable to any purchase
orders issued by Purchaser to Seller during the term of this Agreement until
any and all obligations of the parties under such purchase orders have been
fulfilled.
3. PRICING. Prices for the Products are set forth in SCHEDULE 1
and shall be fixed for the initial 12-month period of the term of the
Agreement. Sixty (60) days prior to the end of the initial term of the
Agreement, and sixty (60) days prior to the end of any subsequent term of
this Agreement, Purchaser and Seller shall meet to review pricing and volume
requirements for the following 12-month period of the Agreement. If
Purchaser and Seller fail to reach agreement on mutually acceptable pricing
and volume requirements for the following 12-month period, this Agreement
shall terminate effective as of the end of the then current 12-month period
of the Agreement.
4. VOLUME.
a. Purchaser shall purchase and Seller shall sell at least *
units of the Products for each * period of the initial 12-month term of this
Agreement. If Purchaser purchases fewer than * units of the Products in any *
period following the initial * period (i.e., * ), Seller shall no longer be
bound by the restrictions of SECTION 17(A) of this Agreement. The provisions
contained within this paragraph shall be Seller's sole remedy for failure of
Purchaser to purchase minimum volumes herein.
b. If at any time following the initial * period of this
Agreement, Purchaser purchases fewer than any minimum volume of the Products
required by this Agreement, Seller shall not be bound to sell the Products to
Purchaser upon the terms set forth in this Agreement, and in particular, without
limitation, shall not be bound by the restrictions of SECTION 17(A) of this
Agreement. Purchaser shall, however, have the right to purchase the Products
in lot quantities of at least * units, at a price which is at least * below any
private label price offered to a Competitor of Purchaser (as defined in
SECTION 17(A)).
c. If the failure of Purchaser to meet the minimum volumes
provided in SECTION 4(A) is due to the failure of Seller to deliver such
minimum volumes for that * period, Purchaser shall not be required to purchase
minimum volumes for that * period.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
2
<PAGE>
5. DELIVERY. Purchaser shall advise Seller of Purchaser's
desired mode of shipment, and Purchaser shall pay all costs associated with
such mode of shipment. The Products shall be packaged in accordance with
Seller's then current packaging specifications for the mode of shipment that
Purchaser selects, and the cost of such packaging shall be included in the
purchase price set forth on SCHEDULE 1. The Products shall be delivered
F.O.B. Seller's shipping point and Purchaser thereafter assumes all risk of
loss therefor.
6. TITLE. Upon shipment, title to the Products shall vest in
Purchaser. Title in and to any user documentation and maintenance
documentation shall remain solely in Seller. subject to the payment of the
purchase price set forth in SCHEDULE 1, Purchaser shall only obtain a
nonexclusive license to distribute the user documentation to customers who
purchase the Products from Purchaser.
7. MARKETING. Purchaser shall use its best efforts to actively
market and distribute the Products through Purchaser's existing sales
organization and distribution channels. Any sale, marketing, advertising or
distribution of the Products by Purchaser or its agents shall be in
compliance with Seller's UL, TUV and CUL requirements.
8. WARRANTY. Seller warrants that, under normal use and service,
the Products shall be free from defects in material and workmanship for a
period of one year after shipment of the Products to Purchaser's customers.
The foregoing warranty shall not be transferrable to customers who purchase
the Products from Purchaser. If the Products fail to meet the warranties of
this Section 8 and Purchaser gives Seller notice thereof during the
applicable warranty period, Seller's sole obligation shall be to correct the
failure by repair, replacement, or credit for the purchase price of the
Products, as determined in Seller's sole discretion.
EXCEPT AND TO THE EXTENT EXPRESSLY PROVIDED IN THIS SECTION 8 AND IN
LIEU OF ALL OTHER WARRANTIES, THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, AND IN NO EVENT SHALL ANY WARRANTIES UNDER THIS
AGREEMENT EXTEND, IN WHOLE OR IN PART, TO CUSTOMERS WHO PURCHASE THE PRODUCTS
FROM PURCHASER.
Seller shall not be liable to Purchaser for the warranty provisions of
this SECTION 8 if:
a. Modifications are made to the Products by someone other than
Seller;
3
<PAGE>
b. Attachments, features or devices (other than AT, PS2 or
compatible computers) are employed on the Products that are not supplied by
Seller or not approved in writing by Seller; or
c. The products are subject to misuse or abuse.
9. MAINTENANCE SERVICES AND TECHNICAL SUPPORT. During the term
hereof and for a period of * after any expiration, termination, or cancellation
of this Agreement, Seller shall offer maintenance services and technical support
to customers who purchase the Products from Purchaser. Purchaser shall forward
all calls requesting maintenance services or technical support to Seller.
Seller's personnel will identify themselves to customers of Purchaser as being
associated with Purchaser. Seller will notify Purchaser if replacements for the
Products are needed and if so, Purchaser will ship such Products directly to the
customers of Purchaser. Seller and Purchaser shall cooperate and negotiate in
good faith to arrive at a mutually acceptable rate schedule for out of warranty
repairs.
10. TRAINING. Seller shall provide * of training in the
use and maintenance of the Products, at times which are mutually acceptable to
Seller and Purchaser, at any of Purchaser's sites in the United States, as
determined by Purchaser. Seller shall be responsible for providing appropriate
instructional materials as part of the training. Purchaser shall not be
required to pay for the training sessions, but Purchaser shall reimburse Seller
for all living expenses of Seller's personnel in connection with the training
sessions. Such reimbursement shall be paid by Purchaser within ten days after
submission of an invoice therefor to Purchaser. Seller shall pay for the
travel expenses of Seller's personnel in connection with the training sessions.
11. TERMINATION.
a. Seller may terminate this Agreement at any time by
written notice in the event Purchaser:
(i) Fails to comply with any material provision of this
Agreement, and, in the case of a breach which is capable of remedy fails to
remedy same within thirty (30) days of receipt of written notification of
said breach; or
(ii) Becomes insolvent or makes an assignment for the
benefit of creditors, or a receiver or similar officer is appointed to take
charge of all or a part of the Purchaser's assets and such condition is not
cured within thirty (30) days.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
4
<PAGE>
b. Purchaser may terminate this Agreement at any time by
written notice in the even Seller:
(i) Fails to comply with any material provision of this
Agreement, and fails to remedy same within thirty (30) days of receipt of
written notification of said breach; or
(ii) Becomes insolvent or makes an assignment for the
benefit of creditors, or a receiver or similar officer is appointed to take
charge of all or a part of the Seller's assets and such condition is not
cured within thirty (30) days.
c. Either party may terminate this Agreement in accordance
with SECTION 2 or SECTION 3 of this Agreement.
12. LIMITATION OF LIABILITY. IN NO EVENT SHALL SELLER BE LIABLE
TO PURCHASER OR CUSTOMERS OF PURCHASER FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES OR LOST PROFITS ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE PERFORMANCE OR BREACH THEREOF, EVEN IF SELLER HAS BEEN
ADVISED OF THE POSSIBILITY THEREOF. SELLER'S LIABILITY, IF ANY, TO PURCHASER
OR TO THE CUSTOMERS OF PURCHASER HEREUNDER SHALL IN NO EVENT EXCEED THE TOTAL
OF THE AMOUNTS PAID TO SELLER HEREUNDER BY PURCHASER.
13. RESALE TERMS AND CONDITIONS. Purchaser's sale of the Products
to customers shall be on terms and conditions which are consistent with
Paragraph 19 of this Agreement which restricts Purchaser's sale of Products
to customers.
14. NOTICES. Any notice given under this Agreement shall be in
writing and shall be effective when delivered personally or deposited in the
mail, postage pre-paid and addressed to the parties at their respective
address as set forth below, or at any, new address subsequently designated in
writing by either party to the other:
If to Seller: Apex PC Solutions, Inc.
4850-150th Avenue N.E.
Redmond, Washington 98052
Attn: Kevin Hafer
If to Purchaser: Wright Line, Inc.
160 Gold Star Boulevard
Worcester, Massachusetts 01606
Attn: Philip T. Burkart
15. PROPRIETARY RIGHTS. All right, title and interest in and to any
copyright, patent, trademark, trade secret or other intellectual or proprietary
rights in the Products are the sole, confidential and exclusive property of
Seller, other than any artwork provided by Purchaser to be incorporated into the
5
<PAGE>
Products. No right, title or interest therein or thereto shall be acquired
by Purchaser by virtue of this Agreement other than as expressly provided
herein. Seller shall defend or settle, at its own expense, any cause of
action or proceeding brought against Purchaser which is based solely on a
claim that the products infringe any existing United states patent or
copyright. Seller shall indemnify and hold Purchaser harmless against any
final judgment that may be awarded by a court of competent jurisdiction
against Purchaser as a result of the foregoing, including any award of
attorneys' fees; provided, however, that Purchaser shall give Seller prompt
written notice of such claim and provide Seller with all reasonable
cooperation and information in Purchaser's possession.
If a claim is made that the Products infringe any issued or enforceable
patent, trademark, trade secret, copyright or other intellectual property
right or if Seller believes that a likelihood of such a claim exists, Seller
may procure for Purchaser the right to continue using the Products, modify
the Products to make them noninfringing, replace the Products with
noninfringing products of similar capability, or remove the Products and
refund the purchase price thereof.
Seller shall not be liable to Purchaser for any claim of infringement
pursuant to this SECTION 15 if such claim is based on modifications made to
the Products by someone other than Seller.
Seller's foregoing indemnity and obligation shall in no event extend, in
whole or in part, to the customers purchasing the Products from Purchaser.
The foregoing sets forth the entire liability of Seller to Purchaser and its
customers for the infringement of proprietary rights by the Products or any
portion' thereof.
Purchaser shall retain all right, title and interest in and to any
trademark, tradename, and any other property and artwork provided to Seller
in connection with this Agreement. Seller shall not use such property other
than as expressly provided herein. Purchaser shall indemnify and hold Seller
harmless against any claim brought against Seller based upon a claim that the
artwork provided by Purchaser infringes the proprietary rights of any third
parties.
16. CONFIDENTIAL INFORMATION.
a. Each party recognizes that pursuant to this Agreement, it
may receive information from the other party which is confidential. To the
extent that such confidential information ("Information") is disclosed in
furtherance of this Agreement or any purchase order issued hereunder, such
6
<PAGE>
Information shall be so disclosed pursuant to the minimum terms and
conditions listed below.
b. Information disclosed that is considered in good faith by
the disclosing party as confidential and/or proprietary shall be clearly
marked as "confidential" or "proprietary." Information not easily marked
including Information orally disclosed shall be summarized in writing and
designated confidential by the disclosing party within thirty (30) days of
its disclosure. However, all Purchaser's customers' names learned by Seller
shall be treated as confidential regardless of source.
c. Both parties agree that the party receiving Information
will maintain such Information in confidence for a period of * from the
date of disclosure of such Information, provided that Information which does
not relate directly to the Products, such as customer lists and distribution
methods, shall be held in confidence indefinitely.
d. Each party shall protect the other party's Information to
the same extent that it protects its own confidential and proprietary
Information and shall take all reasonable precautions to prevent unauthorized
disclosure to third parties.
e. The parties acknowledge that the unauthorized disclosure
of such information will cause irreparable harm. Accordingly, the parties
agree that the injured party shall have the right to seek immediate
injunctive relief in joining such unauthorized disclosure.
f. This provision shall not apply to information known to
the receiving party at the time of receipt from the other party, generally
known or available to the public through no act or failure to act by the
receiving party, furnished to third parties by the disclosing party without
restriction or disclosure, or furnished to the receiving party by a third
party-as a matter of right and without restriction or disclosure.
g. Immediately upon termination of this Agreement or at the
request of the other party, each of the parties shall promptly return all
materials in its possession containing Information of the other party.
17. *
a. *
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
7
<PAGE>
b. *
c. *
18. *
19. COMPLIANCE WITH LAWS. Seller and Purchaser shall comply with
all applicable laws, regulations, rules, orders, and other requirements, now
or hereafter in effect, of governmental authorities having jurisdiction.
Without limiting the generality of the foregoing, Purchaser shall comply with
all such requirements relating to the import, export, or re-export of the
Products or any other items subject to this Agreement (including; but not
limited to, the requirements under the U.S. Export Administration Act,
Regulations of the Department of Commerce or its successors, executive
orders, and other export controls of the United States of America).
Purchaser shall not export or re-export, or authorize or permit the export or
re-export of, any such items to any Restricted Country (as defined below)
without first obtaining the permission of the United States Office of Export
Administration or its successors. A "Restricted Country" shall mean any
country to which export or re-export of the Products is prohibited without
first obtaining the permission of The United states Office of Export
Administration or its successor, and includes, without limitation, Libya,
Cuba, and North Korea.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
8
<PAGE>
20. MISCELLANEOUS.
a. Any obligations and duties which by their nature extend
beyond the expiration or earlier termination of this Agreement shall survive
any such expiration or termination and remain in effect.
b. If any provision or provisions of this Agreement shall be
held to be invalid, illegal or unenforceable, such provision shall be
enforced to the fullest extent permitted by applicable law and the validity,
legality and enforceability of the remaining provisions shall not in any way
be effected or impaired thereby.
c. Any waiver of any kind by a party of a breach of this
Agreement must be in writing. Shall be effective only to the extent set
forth in writing and shall not operate or be construed as a waiver of any
subsequent breach.
d. This Agreement shall be construed under and governed by
the laws of the State of Washington. The parties agree that King County,
Washington, shall be the proper forum for any action brought under this
Agreement.
e. This Agreement contains the entire agreement of Seller
and Purchaser with regard to the subject matter of this Agreement. This
Agreement entirely supersedes and replaces that certain letter of intent
dated July 5, 1994.
f. Neither party may assign its rights or obligations under
this Agreement without the other party's prior written consent.
g. The provisions of this Agreement are for the benefit of
the parties hereto and not for any other person.
h. Both parties are acting in separate capacities and not as
employees, partners, joint venturers, associates, or agents of one another.
With regard to the performance of this Agreement, each party acknowledges
that it does not have the authority to act for or in the name of the other
party or to commit the other party in any manner whatsoever. The employees
9
<PAGE>
or agents of one party shall not be deemed or construed to be the employees
or agents of the other party for any purpose whatsoever.
DATED as of the date first above written.
WRIGHT LINE INC., a Massachusetts
corporation
By /s/ Philip T. Burkart
----------------------------------
Its President
------------------------------
APEX PC SOLUTIONS, INC., a
Washington corporation
By /s/ Kevin Hafer
----------------------------------
Its General Manager
------------------------------
10
<PAGE>
SCHEDULE 1
PRODUCTS AND PRICING
1. PRODUCTS. The products consist of (a) Seller's 8 port desktop
concentrator unit, EL-81DT, as finished with Purchaser's artwork and
trademarks, (b) Seller's 7' Cable Set, and (c) Seller's 12' Cable Set.
2. PRICING. The price of the Products shall depend on the volume
ordered by Purchaser, as follows:
===============================================================================
* * *
PRODUCT LIST PRICE PER MONTH PER MONTH PER MONTH
- -------------------------------------------------------------------------------
8 Port Switch * * * *
- -------------------------------------------------------------------------------
7' Cable Set * * * *
- -------------------------------------------------------------------------------
12' Cable Set * * * *
===============================================================================
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
11
<PAGE>
[LOGO]
November 20, 1996
Mr. Peter Fink
Vice President
Wright Line Corporation
160 Gold Star Boulevard
Worcester, Massachusetts 01606
Dear Peter,
Pursuant to our conversation regarding market changes and price
reductions on LMS four and eight port switches, Apex PC Solutions, Inc. can
make the following announcement. Effective immediately, unit price of the
LC94-M2 and LC98-M2 will be reduced to * and * respectively.
Open Wright Line orders will be adjusted to reflect new prices prior to
shipment. New orders will be accepted at the lower price and in accordance
with all aspects of the existing contract in force and our * volume
agreement. In addition, please use this letter to confirm the previously
offered price of * for Wright Line cable number LC97-MM (std. 12 ft.
cable).
Apex intends to publish a competitive analysis of competitive product as
a sales aid and a duplicate copy will be sent to Wright Line. Recent price
moves in the market represent unique challenges to Apex and its OEM
customers. It is important to note that Apex is acutely aware of the
changing market and will act accordingly to insure that our products address
the marketplace.
Sincerely,
Chris Sirianni
Vice President, Sale & Marketing
cc Dave Kinsley, Wright Line
Kevin Hafer
Mike Neiertz
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 10.8
PROPRIETARY INFORMATION AND NONCOMPETITION AGREEMENT
IN CONSIDERATION OF MY EMPLOYMENT BY APEX PC SOLUTIONS, INC. (the "Company"), my
compensation during the term of my employment, the disclosure to me of Company
confidential, proprietary, customer or trade secret information, and the use and
enjoyment of Company materials, equipment, facilities, and overall business
endeavors,
I HEREBY AGREE as follows:
1. I will give to the Company the benefit of my best skill and effort. I
shall not, during the term of my employment with the Company, and for a
period of one year thereafter, directly or indirectly engage in, or have
any interests in, any business or activity which is in competition with any
business endeavor of the Company.
I understand that this Agreement does not constitute an agreement for
employment for any particular period of time and does not entitle me to any
specific employment. I recognize that my continued employment with the
Company shall be "at will" and is subject to termination at any time with
or without cause.
2. Except as required by my employment with the Company, and solely for the
benefit of the Company, I will not, at any time during the term of my
employment by the Company, or at any time thereafter, directly, indirectly
or otherwise use, communicate, disclose or disseminate any confidential,
proprietary or trade secret information (collectively, "confidential
information") without the prior written consent of the Company.
Confidential information includes, without limitation, matters not
generally known outside the Company, such as developments relating to
existing and future products and services marketed or used by the Company
and also data relating to the general business operations of the Company
(e.g., concerning sales, costs, profits, organizations, customer lists,
pricing methods, etc.).
3. a. I will disclose promptly to the Company in writing all ideas,
processes, improvements, inventions, discoveries or other intellectual
properties conceived or developed in whole or in part during the term of my
employment with the Company related to any of the Company's business
(collectively, "developments"), whether or not conceived or developed
during working hours or on the property of the Company. Such developments
shall be the property of the Company, and it shall have the right to any
patents which may be issued with respect to the same. It shall be presumed
that any development produced by me during the twelve (12) months after
termination of my employment were conceived in part during my term of
employment and are covered by this provision. I understand that I will
have to refute this presumption in the event of a dispute. I will also,
and hereby do, assign to the Company and/or its nominees all my right,
title and interest in such developments and all right, title and interest
in any patent applications or patents that may be issued based thereon. I
will also, and hereby do, assign to the Company any and all copyrights and
reproduction rights to any material prepared by me in connection with my
employment. I agree to sign applications for patents, assignments, and
other papers, and do such things as the Company may require for
establishing and protecting its ownership and to effectuate the foregoing,
either during my employment or thereafter.
b. There shall be excluded from the operation of this Agreement my
developments (1) which were made prior to this employment by the Company
and which are listed and described below; or (2) which do not relate to the
actual or anticipated business or research and development of the Company
(including subsidiaries and affiliates) provided that such developments are
made or conceived by me entirely during other than Company working hours
and not on the Company's premises and not with the use of Company
equipment, supplies, facilities, tools, devices or trade secret
information. There shall be no other exclusions unless agreed to in
writing by the Company.
4. All documents, records, notebooks, notes, memoranda, drawings or other
documents made or compiled by me at any time, or in my possession,
including any and all copies thereof, shall be the property of the Company,
and shall be held by me in trust and solely for the benefit of the Company,
and shall be delivered to the Company by me upon termination of employment
or at any other time upon request by the Company.
5. In this Agreement, the term employment will be taken to mean employment as
a regular independent subcontractor, or seasonal or temporary employee or
consultant, as well as a full-time or regular part-time employee of the
Company.
6. I acknowledge that I am capable of gainful employment without breaching
this Agreement. I also represent that, to the best of my knowledge, I have
no present obligation to assign to any former employer or any other person,
corporation, or firm any developments covered by this Agreement. I also
represent that, to the best of my knowledge, there is no legal prohibition
including but not limited to an agreement with any former employer that
might prevent me from performing my duties of employment with the Company.
I am aware that the harm to the Company from a breach of my obligations
under this Agreement may be difficult to determine and may be wholly or
partially irreparable, and therefore I agree that such obligations may be
enforced by injunctive relief and other appropriate remedies, as well as by
damages. If any bond from the Company is required in connection with such
enforcement, I agree that a reasonable value of such bond shall be $500.
7. This Agreement will be binding on and for the benefit of the named parties
and any successors or assigns of the business of the Company.
No term of this Agreement shall be interpreted to limit or replace any
other right or remedy of the Company under applicable law relating to the
protection of trade secrets or otherwise. If any part of this Agreement is
held to be unenforceable to any extent in any context, it will still be
enforced to the fullest extent allowed by law in that and other contexts,
and the validity and enforceability of the rest of this Agreement shall not
be affected.
- --------------------------------- ------------------------------
Signature of Employee, Consultant Kevin J. Hafer, President
or Subcontractor Apex PC Solutions, Inc.
Date:
---------------------------
<PAGE>
EXHIBIT 10.9
APEX PC SOLUTIONS INC.
1995 EMPLOYEE STOCK PLAN
(As Adopted December 29, 1995)
1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees and Outside Directors of the
Company and its Parent and Subsidiaries, if any, and to promote the success of
the Company's business. Options granted under this Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at the
time of grant.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of this Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of this Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Apex PC Solutions, Inc., a Washington
corporation.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE" means an Employee's absence of
any interruption or termination of his or her employment relationship with the
Company or any Subsidiary. Continuous Status as an Employee shall not be
considered interrupted in the case of (i) sick leave; (ii) military leave; (iii)
any other leave of absence approved by the Administrator, provided that such
leave is for a period of not more than ninety (90) days, unless reemployment
upon the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to Company policy adopted from time to time;
or (iv) transfers between locations of the Company or between the Company, its
Subsidiaries or its successor.
(h) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company (or a Parent or Subsidiary) shall not be
sufficient to constitute "employment" by the Company (or Parent or Subsidiary).
Page 1 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported, as quoted
on such system or exchange for the last market trading day prior to the time of
determination) as reported in the Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System thereof or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high and low asked prices for the Common Stock on
the last market trading day prior to the day of determination, as reported in
the Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(k) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(l) "NONSTATUTORY STOCK" means an Option not intended to qualify as
an Incentive Stock Option.
(m) "OPTION" means a stock option granted pursuant to this Plan.
(n) "OPTIONED STOCK" means the Common Stock subject to an Option.
(o) "OPTIONEE" means an Employee or Outside Director who receives an
Option.
(p) "OUTSIDE DIRECTOR" means a director of the Company (or Parent or
Subsidiary) who is not an Employee.
(q) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "PLAN" means this 1995 Employee Stock Plan.
Page 2 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
(s) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(t) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of Section 12
of this Plan, the maximum aggregate number of shares which may be optioned and
sold under this Plan is 176,470 Shares of Common Stock. The Shares may be
authorized, but unissued or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless this Plan shall have been terminated, become available for
future grant under this Plan.
4. ADMINISTRATION OF THIS PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. If the Common Stock is
not registered under Section 12 of the Exchange Act, or if permitted by Rule
16b-3 promulgated under the Exchange Act or any successor rule thereto ("Rule
16b-3"), this Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors nor
officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS.
If the Common Stock is not registered under Section 12 of the Exchange Act, then
the administration of this Plan with respect to directors and officers of the
Company shall be pursuant to Section 4(a)(iii), below. Otherwise, with respect
to grants of Options to Outside Directors and Employees who are also officers or
directors of the Company, this Plan shall be administered by (A) the Board if
the Board may administer this Plan in compliance with Rule 16b-3 with respect to
a plan intended to qualify thereunder as a discretionary plan, or (B) a
Committee designated by the Board to administer this Plan, which Committee shall
be constituted in such a manner as to permit this Plan to comply with Rule 16b-3
with respect to a plan intended to qualify thereunder as a discretionary plan.
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer this Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.
(iii) ADMINISTRATION WITH RESPECT TO OTHER EMPLOYEES. With
respect to grants of Options to Employees who are neither directors nor officers
of the Company (or with respect to all Optionees, if the Common Stock is not
registered under Section 12 of the
Page 3 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
Exchange Act), this Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which Committee shall be constituted in such
a manner as to satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable state corporate and
securities laws and of the Code (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer this Plan, all to the extent permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of this
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(j) of this Plan;
(ii) to select the officers, Outside Directors and Employees
to whom Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under this Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of this Plan, of any Option granted hereunder (including, but not
limited to, the exercise price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any Option and/or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount, if any, of any
deemed earnings on any deferred amount during any deferral period);
Page 4 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(x) To prescribe, amend and rescind rules and regulations
relating to this Plan; and
(xi) To make all other determinations deemed necessary or
advisable for administering this Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) GENERAL. Nonstatutory Stock Options may be granted to Employees
and Outside Directors. Incentive Stock Options may be granted only to
Employees. An Employee or Outside Director who has been granted an Option may,
if he or she is otherwise eligible, be granted an additional Option or Options.
(b) DESIGNATION. Each Option shall be designated in the written
Option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company or any Parent
or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) ORDER. For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) AT-WILL EMPLOYMENT. This Plan shall not confer upon any Optionee
any right with respect to continuation of employment with the Company (or Parent
or Subsidiary), nor shall it interfere in any way with his or her right or the
employer's right to terminate his or her employment relationship at any time,
with or without cause.
6. TERM OF PLAN. This Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 18 of this Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of this Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option agreement; provided, however, that in the case of an Incentive Stock
Option, the term
Page 5 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
shall be no more than ten (10) years from the date of grant thereof or such
shorter term as may be provided in the Option agreement; and, in the case of an
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be such price as is determined
by the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant; or
(B) granted to any Employee, the per Share exercise price
shall be no less that 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator; provided that if the
Common Stock is registered under Section 12 of the Exchange Act, then in no
event shall the per Share exercise price be less than ___% of the Fair Market
Value per Share on the date of grant.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) promissory note, (4) other Shares which (A) in the case
of Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market
Page 6 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
Value on the date of exercise equal to the exercise price for the total number
of Shares as to which the Option is exercised, (6) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required to
pay the exercise price, (7) any combination of the foregoing methods of payment,
or (8) such other consideration and method of payment for the issuance of Shares
to the extent permitted under applicable laws.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of this Plan and
at such times and under such conditions as determined by the Administrator and
set forth in the option agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(c) of this Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment shall be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of this Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of
this Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR OUTSIDE DIRECTOR RELATIONSHIP. In
the event of termination of an Optionee's Continuous Status as an Employee or
outside director relationship, such Optionee may, but only within ninety (90)
days (or such other period of time as is determined by the Administrator, with
such determination in the case of an Incentive Stock Option being made at the
time of grant of the Option and not exceeding ninety (90) days) after the date
of such termination (but in no event later than the expiration date of the term
of such Option as set forth in the Option Agreement), exercise his Option to the
extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the
Option at the date-of such termination, or if Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
Page 7 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
(c) DISABILITY OF OPTIONEE. In the event of termination of an
Optionee's Continuous Status as an Employee or outside director relationship as
a result of his or her total and permanent disability (as defined in Section
22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option agreement), by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest,
inheritance or designation (as described in Section 10, below), but only to the
extent the Optionee was entitled to exercise the Option at the date of death.
To the extent the Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTION. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
win or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. Notwithstanding the foregoing,
during his or her lifetime an Optionee may designate a person to exercise the
Option after the Optionee's death, which designation shall be formalized in a
written notice to the Administrator. This designation may be changed from time
to time by the Optionee by giving written notice to the Administrator revoking
any earlier designation and making a new designation.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this section. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
Page 8 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
12. ADJUSTMENTS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under this Plan but as to which no Options have yet
been granted or which have been returned to this Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised,
Page 9 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
the Option will terminate immediately prior to the consummation of such proposed
action. The Board may, in the exercise of its sole discretion in such
instances, declare that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his or her Option as to all
or any part of the Optioned Stock, including Shares as to which the Option would
not otherwise be exercisable.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, in which the stockholders of the Company (as constituted
immediately prior to the transaction own less than 50% of the voting securities
of the surviving, continuing or purchasing entity (or Parent, if any)
immediately following the transaction, each outstanding Option shall become
fully vested and exercisable immediately prior to the consummation of such
transaction. In such case, the Company shall notify the Optionee as soon as
practicable that the Option shall become fully vested and exercisable
immediately prior to the consummation of the transaction and the procedure for
exercising the Option. Any Option not exercised immediately prior to the
consummation of the transaction shall terminate.
13. DATE OF GRANT. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Outside Director
to whom an Option is so granted within a reasonable time after the date of such
grant.
14. AMENDMENT AND TERMINATION OF THIS PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or discontinue this Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any other applicable law or
regulation, including the requirements of any exchange or quotation system on
which the Common Stock is listed or quoted). Such shareholder approval, if
required, shall be obtained in such a manner and to such degree as is required
by the applicable law, rule or regulation.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, suspension or
termination of this Plan shall impair the rights of any Optionee, unless
mutually agreed between the Optionee and the Administrator, which agreement must
be in writing and signed by the Optionee and the Company.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares
Page 10 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, and the requirements of any
stock exchange upon which the Shares may then be vested, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. LIABILITY OF COMPANY.
(a) INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(b) GRANTS EXCEEDING ALLOTTED SHARES. If the Optioned Stock covered
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under this Plan without additional shareholder approval, such Option
shall be void with respect to such excess Option Stock, unless shareholder
approval of an amendment sufficiently increasing the number of Shares subject to
the Plan is timely obtained in accordance with Section 14(b) of this Plan.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. SHAREHOLDER APPROVAL. Continuance of this Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date this Plan is adopted. Such shareholder approval shall be
obtained in the degree and manner required under applicable state and federal
law.
Page 11 - APEX PC SOLUTIONS INC. 1995 EMPLOYEE STOCK PLAN
<PAGE>
EXHIBIT 10.10
APEX PC SOLUTIONS, INC
NONSTATUTORY STOCK OPTION LETTER AGREEMENT
(________ shares)
TO: _________________
DATE: ___________, 199_
The Plan Administrator of the Apex PC Solutions, Inc. (the "Company") 1995
Stock Option Plan (the "Plan") is pleased to inform you that you have been
selected to receive a grant of a nonstatutory stock option under the Plan.
Subject to the terms and conditions set forth below and in the Plan, you are
hereby granted a nonstatutory stock option under the Plan for the purchase of
_______ shares of the Company's Common Stock at an exercise price of $1.47 per
share (to be adjusted for the Company's recently approved two-for-one common
stock split). A copy of the Plan is attached and incorporated into this
Agreement by reference.
1. TERM. The term of the option is ten years from the date of this
Agreement and therefore, to the extent not exercised, will automatically
terminate on ___________ __, 2006, unless sooner terminated.
2. EXERCISE. During your lifetime, only you can exercise the option.
The Plan also provides for exercise of the option by the personal representative
of your estate or the beneficiary thereof following your death. You may use the
Notice of Exercise of Nonstatutory Stock Option in the form attached to this
Agreement when you exercise the option.
3. PAYMENT FOR SHARES. The option may be exercised by the delivery of
cash, personal check (unless the Plan Administrator decides at the time of
exercise not to accept a personal check), bank certified or cashier's check. At
the sole discretion of the Plan Administrator, all or part of the required
payment may be in the form of a promissory note, according to the terms dictated
by the Plan Administrator and the Plan.
4. TERMINATION. If your employment with the Company terminates, vested
portions of outstanding options may be exercised for up to 90 days following the
date of your termination (one year if your termination of employment is the
result of your total and permanent disability or death), and you will not
continue to vest in your options after your termination.
5. TRANSFER OF OPTION. The option is not transferable except by will or
by the applicable laws of descent and distribution. In addition, you may
designate a person to exercise your option after your death by giving a written
notice, in a form approved by the Plan Administrator.
6. VESTING. Your option shall begin vesting _________ __, 1996, with a
portion of
Page 1 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
your option becoming eligible for exercise on the first day of each calendar
month. Specifically, on ____________ __, 1996 you will become vested in
twenty-five percent (25%) (________ shares) of the option shares granted
pursuant to this Agreement, and on the first day of each subsequent calendar
month, you will become vested in one thirty-sixth (1/36th) (_______ shares) of
the remaining option shares granted pursuant to this Agreement. In this manner,
your entire option grant (all _______ shares) will become fully vested and
available for exercise on ______ 1, 2000. You may only exercise your option for
whole shares.
7. SHAREHOLDER AGREEMENT. As a condition to the exercise of any portion
of your option, you will be required to enter into the Company's Shareholders
Agreement. You acknowledge receipt of a copy of the Shareholder Agreement.
8. NO ENLARGEMENT OF RIGHTS. Neither the options nor this Agreement
shall be construed to confer upon you any right to continued employment with or
retention by the Company or to restrict in any way the right of the Company to
terminate your employment.
9. WITHHOLDING OF TAXES. You authorize the Company to withhold, in
accordance with any applicable law, from the compensation payable to you any
taxes required to be withheld by federal, state or local law as a result of the
grant of the options or the issuance of stock pursuant to the exercise of the
options. If you are not employed by the Company at the time the options are
exercised, or if your compensation is insufficient to pay all taxes that the
Company is required to withhold, you will pay to the Company all such amounts as
a condition to the exercise of your option and the issuance of Company shares to
you.
10. APPLICABLE LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Washington.
11. AGREEMENT BINDING ON SUCCESSORS. The terms of this Agreement shall be
binding upon your executors, administrators, heirs, successors, transferees and
assignees.
12. COST OF LITIGATION. In any action at law or in equity to enforce any
of the provisions or rights under this Agreement or the Plan, the unsuccessful
party to such litigation, as determined by the court in a final judgment or
decree, shall pay the successful party or parties all costs, expenses and
reasonable attorneys' fees incurred by the successful party or parties
(including without limitation costs, expenses and fees on any appeals), and if
the successful party recovers judgment in any such action or proceeding, such
costs, expenses and attorneys' fees shall be included as part of the judgment.
13. NECESSARY ACTS. You agree to perform all acts and execute and deliver
any documents that may be reasonably necessary to carry out the provisions of
this Agreement, including but not limited to all acts and documents related to
compliance with federal and/or state securities laws.
Page 2 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
14. COUNTERPARTS. For convenience, this Agreement may be executed in any
number of identical counterparts, each of which shall be deemed a complete
original in itself and may be introduced into evidence or used for any purpose
without the production of any other counterparts.
15. INVALID PROVISIONS. In the event that any provision of this Agreement
is found to be invalid or otherwise unenforceable under applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained in this Agreement invalid or unenforceable, and all such
other provisions shall be given full force and effect to the same extent as
though the invalid and unenforceable provision was not contained in this
Agreement.
YOUR ATTENTION IS DIRECTED TO SECTION 15 OF THE PLAN, WHICH DESCRIBES
CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES LAWS THAT
MUST BE SATISFIED BEFORE THE OPTION CAN BE EXERCISED AND BEFORE THE COMPANY CAN
ISSUE ANY SHARES TO YOU. THE COMPANY HAS NO OBLIGATION TO REGISTER THE SHARES
THAT WOULD BE ISSUED UPON THE EXERCISE OF YOUR OPTION, AND IF IT NEVER REGISTERS
THE SHARES, YOU WILL NOT BE ABLE TO EXERCISE THE OPTION UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. AT THE PRESENT TIME, EXEMPTIONS FROM REGISTRATION
UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY LIMITED AND MIGHT BE
UNAVAILABLE TO YOU PRIOR TO THE EXPIRATION OF THE OPTION. CONSEQUENTLY, YOU
MIGHT HAVE NO OPPORTUNITY TO EXERCISE THE OPTION AND TO RECEIVE SHARES UPON SUCH
EXERCISE.
IN ADDITION, THE PLAN ADMINISTRATOR HAS CONDITIONED THE EXERCISE OF YOUR
OPTION UPON YOUR MAKING CERTAIN REPRESENTATIONS (AT THE TIME OF EXERCISE)
REGARDING YOUR INTENTIONS TO HOLD THE SHARES AS AN INVESTMENT, WITHOUT AN INTENT
TO SELL THE SHARES. AS NOTED ABOVE, YOUR RECEIPT OF SHARES IS ALSO CONTINGENT
ON ENTERING INTO ANY SHAREHOLDERS AGREEMENT THAT EXISTS WITH RESPECT TO THE
COMPANY AT THE TIME OF EXERCISE, WHICH MAY OBLIGATE YOU TO OFFER YOUR SHARES FOR
SALE TO THE COMPANY UPON CERTAIN EVENTS.
Page 3 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this Agreement and return it to the undersigned.
Very truly yours,
Apex PC Solutions, Inc
By
---------------------------------
Its:
-----------------------------
Page 4 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
I, as resident of the State of Washington, accept the nonstatutory stock
options described above (for ________ shares) under the Apex PC Solutions, Inc.
1995 Employee Stock Plan and acknowledge receipt of a copy of this Agreement,
including a copy of the Plan. I have reviewed the Plan and am aware of its
terms, including the provisions of Section 15.
Dated:
----------------------- ------------------------------
Name:
------------------------
By her signature below, your spouse acknowledges that she has read this
Agreement and the Plan and is familiar with the terms and provisions thereof,
and agrees to be bound by all the terms and conditions of this Agreement and the
Plan.
Dated:
----------------------- ------------------------------
Name:
------------------------
Page 5 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
NOTICE OF EXERCISE OF NONSTATUTORY STOCK OPTION
TO: Apex PC Solutions, Inc. (the "Company")
I, a resident of the State of Washington, hereby exercise my nonstatutory
stock option granted pursuant to an Agreement issued by the Company on _______,
199_ (for ________ shares), subject to all the terms and provisions thereof and
of the 1995 Employee Stock Option Plan referred to therein, and notify the
Company of my desire to purchase _________ shares of Common Stock of the Company
at the exercise price of $______ per share.
I also hereby represent that the _____ shares of Common Stock to be
delivered to me pursuant to this exercise are being acquired by me for my own
account, for investment and not with a view to resale or distribution, within
the meaning of the Securities Act of 1933 (the "Securities Act"). I acknowledge
that the shares I will receive have not been registered under the Securities
Act, and therefore the Company will not actually issue the shares to me unless
exists an applicable exemption from the Securities Act and any corresponding
state securities laws. I also acknowledge if I do receive shares, they will
constitute "restricted securities" under the Securities Act, and I am familiar
with the consequences of owning restricted securities.
Finally, I acknowledge that if the Company registers its stock under the
Securities Act in the future, the Company or an underwriter may request that I
agree not to sell or otherwise transfer my shares for a period of time following
the filing of the registration statement. I agree to cooperate with such a
restriction in the future.
Dated:
----------------------- ----------------------------------------
Name:
----------------------------------
Address
---------------------------------
----------------------------------------
----------------------------------------
Taxpayer I.D. Number
Page 6 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
RECEIPT
-----------------------------------------------------------------
Apex PC Solutions, Inc. hereby acknowledges receipt from _____________ of:
/ / Cash
/ / Check (personal, cashier's or bank certified)
/ / Promissory Note for the principal amount of $_______________, with
terms substantially identical to the form note attached hereto as
Exhibit A
in consideration for __________ shares of Common Stock of Apex PC Solutions,
Inc., a Washington corporation.
Date: APEX PC SOLUTIONS, INC.
--------------------
By:
--------------------------------
Its:
-------------------------------
Page 7 - NONSTATUTORY STOCK OPTION LETTER AGREEMENT
<PAGE>
EXHIBIT 10.11
APEX PC SOLUTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
Adopted by the Board of Directors on December 9, 1996,
and effective upon the consummation of an Initial Public Offering
of the Common Stock of Apex PC Solutions, Inc.
<PAGE>
Table of Contents
Page
----
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Account. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Board. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Committee. . . . . . . . . . . . . . . . . . . . . . . . . 1
2.6 Compensation . . . . . . . . . . . . . . . . . . . . . . . 1
2.7 Common Stock . . . . . . . . . . . . . . . . . . . . . . . 2
2.8 Disability . . . . . . . . . . . . . . . . . . . . . . . . 2
2.9 Employee . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.10 Employer . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.11 Employment . . . . . . . . . . . . . . . . . . . . . . . . 2
2.12 Enrollment Date. . . . . . . . . . . . . . . . . . . . . . 3
2.13 Offering . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.14 Participant. . . . . . . . . . . . . . . . . . . . . . . . 3
2.15 Payroll Deduction Authorization Form . . . . . . . . . . . 3
2.16 Plan Administrator . . . . . . . . . . . . . . . . . . . . 3
2.17 Purchase Date. . . . . . . . . . . . . . . . . . . . . . . 3
2.18 Retirement . . . . . . . . . . . . . . . . . . . . . . . . 3
2.19 Share. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.20 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 3
2.21 Valuation Date . . . . . . . . . . . . . . . . . . . . . . 3
2.22 Vested . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Participation. . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Requirements for Participation . . . . . . . . . . . . . . 4
3.3 Cessation of Participation . . . . . . . . . . . . . . . . 5
3.4 Voluntary Participation. . . . . . . . . . . . . . . . . . 5
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Payroll Deduction Authorization. . . . . . . . . . . . . . 5
4.2 Amount of Deductions . . . . . . . . . . . . . . . . . . . 5
4.3 Commencement of Deductions . . . . . . . . . . . . . . . . 5
4.4 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.5 Modification of Authorized Deductions. . . . . . . . . . . 6
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.1 Purchase Date. . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Purchase of Shares . . . . . . . . . . . . . . . . . . . . 6
<PAGE>
5.3 Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.4 Fair Market Value. . . . . . . . . . . . . . . . . . . . . 6
5.5 Unused Contributions . . . . . . . . . . . . . . . . . . . 7
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1 Termination of Employment. . . . . . . . . . . . . . . . . 7
6.2 Termination upon Death, Retirement or Disability within Three
Months of Purchase Date. . . . . . . . . . . . . . . . . . 7
6.3 Designation of Beneficiary . . . . . . . . . . . . . . . . 7
6.4 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.1 Source and Limitation of Shares. . . . . . . . . . . . . . 8
7.2 Delivery of Shares . . . . . . . . . . . . . . . . . . . . 8
7.3 Interest in Shares . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9.1 Rights of the Company. . . . . . . . . . . . . . . . . . . 9
9.2 Recapitalizations. . . . . . . . . . . . . . . . . . . . . 9
9.3 Consolidation or Merger. . . . . . . . . . . . . . . . . . 9
ARTICLE X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10.1 Vacation, Leave or Layoff. . . . . . . . . . . . . . . . . 9
10.2 Military Leave . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
12.1 Amendment and Termination. . . . . . . . . . . . . . . . . 10
12.2 Non-Transferability. . . . . . . . . . . . . . . . . . . . 11
12.3 Limitation on Purchase . . . . . . . . . . . . . . . . . . 11
12.4 Use of Funds . . . . . . . . . . . . . . . . . . . . . . . 11
12.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 11
12.6 No Interest. . . . . . . . . . . . . . . . . . . . . . . . 11
12.7 Registration and Qualification of Shares . . . . . . . . . 11
12.8 Plan Not a Contract of Employment. . . . . . . . . . . . . 11
12.9 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 12
12.11 Plurals. . . . . . . . . . . . . . . . . . . . . . . . . . 12
12.12 Titles . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12.13 References . . . . . . . . . . . . . . . . . . . . . . . . 12
PAGE ii - EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
APEX PC SOLUTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
PURPOSE
The purpose of this Apex PC Solutions, Inc. Employee Stock Purchase Plan
(this "Plan") is to provide a convenient and practical means through which
employees of Apex PC Solutions, Inc. (the "Company") may participate in stock
ownership of the Company. The Company believes this Plan will be to the mutual
benefit of the employees and the Company by creating a greater community of
interest between the Company's stockholders and its employees and by permitting
the Company to compete with other companies in obtaining and retaining the
services of competent employees. The Company intends for this Plan to
constitute an "employee stock purchase plan" within the meaning of Section 423
of the Internal Revenue Code of 1986.
ARTICLE II
DEFINITIONS
The following terms, when capitalized, shall have the meanings specified
below unless the context clearly indicates to the contrary:
2.1 ACCOUNT shall mean each separate account maintained for a Participant
under this Plan, collectively or singly as the context requires. Each Account
shall be credited with a Participant's contributions. A Participant shall be
fully vested in the cash contributions to his or her Account at all times. The
Plan Administrator may create special types of Accounts for administrative
convenience or other reasons.
2.2 BENEFICIARY shall mean a person or entity entitled under Section 6.2
to receive Shares purchased by, and any remaining balance in, a Participant's
Account on the Participant's death.
2.3 BOARD shall mean the Board of Directors of the Company.
2.4 CODE shall mean the Internal Revenue Code of 1986, as amended from
time to time.
2.5 COMMITTEE shall mean the Committee, if any, appointed by the Board of
Directors in accordance with Article XIII.
2.6 COMPENSATION shall mean the total cash compensation (except as
otherwise set forth below) paid to the Employee in the period in question for
services rendered to the Employer while a Participant. Compensation shall
include the salary and wages deferred by an Employee pursuant to a salary
reduction arrangement under any cash or deferred or
PAGE - 1 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
cafeteria plan that is maintained by the Employer and that is intended to
qualify under Sections 401(k) or 125 of the Code. An Employee's Compensation
shall not include (a) severance pay, (b) hiring or relocation bonuses, or (c)
pay in lieu of vacations or sick leave.
2.7 COMMON STOCK shall mean the common stock, no par value, of the
Company.
2.8 DISABILITY shall refer to a mental or physical impairment that is
expected to result in death or which has lasted or is expected to last for a
continuous period of twelve (12) months or more and which prevents the Employee,
in the opinion of the Company and two independent physicians, to perform his or
her duties as an employee of the Company and to engage in any substantial
gainful activity. Disability shall be deemed to have occurred on the first day
after the Company and the two independent physicians furnish their opinion of
Disability to the Plan Administrator.
2.9 EMPLOYEE shall mean an individual who renders services to his or her
Employer pursuant to a continuing, regular employment relationship. A person
rendering services to an Employer purportedly as an independent contractor or
consultant shall not be an Employee for purposes of this Plan.
2.10 EMPLOYER shall mean, both individually and collectively, the Company
and any Subsidiary, or any successor entity that continues this Plan. All
Employees of entities that constitute the Employer shall be treated as employed
by a single entity for all Plan purposes, except that:
(a) No person shall become a Participant except while employed by an
entity that is an Employer;
(b) A Participant shall cease to be a Participant if he or she
transfers to an entity that is not an Employer and ceases to be employed by an
Employer;
(c) An Employer shall cease to be an Employer for purposes of this
Plan, and a Participant who is an Employee of such an Employer shall cease to be
a Participant, upon the happening of any event, or the consummation of any
transaction, which causes the Employer to cease being an Employer, as defined
above; and
(d) Amounts paid by entities other than the Employer shall be ignored
in determining Compensation under this Plan.
In contexts in which actions are required or permitted to be taken or
notices to be given, the Employer shall mean the Company or any successor
corporation.
2.11 EMPLOYMENT shall mean the period during which an individual is an
Employee. Employment shall commence on the day the individual first performs
services for the Employer as an Employee and shall terminate on the day such
services cease as determined under Article VI.
PAGE - 2 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
2.12 ENROLLMENT DATE shall mean the first day of the applicable Offering.
2.13 OFFERING shall mean a period of time established by the Plan
Administrator for the accumulation of payroll deductions for the purchase of
Shares. Offerings shall be each calendar quarter, commencing with the effective
date of this Plan.
2.14 PARTICIPANT shall mean any Employee who is participating in any
Offering under this Plan pursuant to Article III.
2.15 PAYROLL DEDUCTION AUTHORIZATION FORM shall mean the form provided by
the Company for eligible Employees to elect to participate by designating the
rate of his or her Compensation to be contributed to his or her Account through
payroll deductions.
2.16 PLAN ADMINISTRATOR shall mean the Board or the Committee, whichever
shall be administering the Plan from time to time in the discretion of the
Board, as described in Article VIII.
2.17 PURCHASE DATE shall mean the last day of the applicable Offering.
2.18 RETIREMENT shall mean a Participant's termination of Employment on
or after attaining the age of 65 or after the Plan Administrator has determined
that he or she has suffered a Disability.
2.19 SHARE shall mean one share of Common Stock adjusted in accordance
with Section 9.2 (if applicable).
2.20 SUBSIDIARY shall mean any corporation, association or other business
entity at least fifty percent (50%) or more of the total combined voting power
of all classes of stock of which is owned or controlled directly or indirectly
by the Company or one or more of such subsidiary entities or both.
2.21 VALUATION DATE shall mean the date upon which the fair market value
of Shares is to be determined for purposes of setting the price of Shares under
Section 5.3 (that is, the Enrollment Date or the Purchase Dates for each
Offering). If the Enrollment Date is not a date on which the fair market value
may be determined in accordance with Section 5.3, the Valuation Date shall be
the first day after the Enrollment Date for which such fair market value may be
determined. If the Purchase Date is not a date on which the fair market value
may be determined in accordance with Section 5.3, the Valuation Date shall be
the first date prior to the Purchase Date on which such fair market value may be
determined.
2.22 VESTED shall mean non-forfeitable.
PAGE - 3 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
ARTICLE III
EMPLOYEE PARTICIPATION
3.1 PARTICIPATION. Subject to the provisions of this Article III, an
Employee may elect to participate in this Plan, effective as of any Enrollment
Date, by completing and filing a Payroll Deduction Authorization Form as
provided in Section 4.1.
3.2 REQUIREMENTS FOR PARTICIPATION.
(a) An Employee shall be eligible to participate in this Plan on the
first Enrollment Date on which he or she first meets all of the following
requirements:
(i) The Employee's customary period of Employment is for more
than twenty (20) hours per week; and
(ii) The Employee's customary period of Employment is for more
than five (5) months in any calendar year.
(b) Employees who are also directors or officers of the Company may
participate only in accordance with section 16(b) of the Securities Exchange Act
of 1934, as amended, particularly Rule 16b-3 issued thereunder, as in effect
from time to time.
(c) Any eligible Employee may enroll or re-enroll in this Plan as of
the first trading day of any Offering by filing timely written notice of such
participation, subject to the following provisions:
(i) In order to enroll in this Plan initially, an eligible
employee must complete, sign and submit to the Company a Payroll Deduction
Authorization Form. Any Payroll Deduction Authorization Form received by
the Company before the 15th day of the month preceding an Enrollment Date,
or such other deadline established by the Plan Administrator from time to
time, will be effective on that Enrollment Date.
(ii) Absent withdrawal from this Plan pursuant to Section 6.4, a
Participant will automatically be re-enrolled in this Plan on the next
Enrollment Date immediately following the Offering of which he or she is
then a Participant.
(d) A Participant shall become ineligible to participate in this Plan
and shall cease to be a Participant when any of the following occurs:
(i) His or her Employment terminates;
(ii) He or she owns Shares possessing five percent (5%) or more
of the combined voting power or value of all classes of stock of the
Company or a parent or Subsidiary of the Company. For purposes of
determining share ownership, the rules of Section 424(d) of the Code shall
apply and Shares that the Employee may purchase
PAGE - 4 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
under any Vested options or rights to purchase shall be treated as Shares
owned by the Employee; or
(iii) Upon the happening of any event or the consummation of any
transaction which causes the entity of which the Participant is an Employee
to cease being an Employer as defined in Section 2.10.
(e) A Participant shall cease to be a Participant, but shall be
eligible to participate in this Plan with respect to any subsequent
Offering, if he or she notifies the Company in writing of his or her desire
to withdraw from participation in this Plan.
3.3 CESSATION OF PARTICIPATION. A Participant whose participation has
ceased in accordance with Sections 3.2(d) and (e) shall have the rights provided
in Article VI.
3.4 VOLUNTARY PARTICIPATION. Participation in this Plan shall be
voluntary.
ARTICLE IV
PAYROLL DEDUCTIONS
4.1 PAYROLL DEDUCTION AUTHORIZATION. An Employee may contribute to this
Plan only by means of payroll deductions. Other than as set forth in Section
3.2(c)(ii), a Payroll Deduction Authorization Form must be filed with the
enrolling individual's payroll office no later than the fifteenth (15th) day of
the month prior to the Enrollment Date as of which the payroll deductions are to
take effect.
4.2 AMOUNT OF DEDUCTIONS. A Participant may specify the rate at which he
or she desires to contribute to this Plan, which rate shall not be less than one
percent (1%) and not more than ten percent (10%) of the Participant's
Compensation during each pay period in the Offering. For administrative
convenience, the Company may round off Participant contributions to an even
dollar amount, such as the nearest $5.00 increment. A Participant's particular
election shall apply during any period of continuous participation in the Plan,
unless modified or discontinued as provided in Section 4.5 or as otherwise
provided in this Plan. If a payroll deduction cannot be made in whole or in
part because the Participant's pay for the period in question is insufficient to
fund the deduction after having first withheld all other amounts deductible from
his or her pay, the amount that was not withheld cannot be made up by the
Participant nor will it be withheld from subsequent pay checks.
4.3 COMMENCEMENT OF DEDUCTIONS. Payroll deductions for a Participant
shall commence on the Enrollment Date of the Offering for which his or her
Payroll Deduction Authorization Form is effective and shall continue for future
Offerings, unless modified or discontinued as provided in Section 4.5 or as
otherwise provided in this Plan.
4.4 ACCOUNTS. All payroll deductions made for a Participant shall be
credited to his or her Account.
PAGE - 5 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
4.5 MODIFICATION OF AUTHORIZED DEDUCTIONS.
(a) A Participant may at any time discontinue his or her payroll
deductions, effective for all subsequent payroll periods, by completing an
amended Payroll Deduction Authorization Form and filing it with his or her
payroll office. At such time, the Participant may elect to retain previous
payroll deductions in his or her Account and continue participation in this Plan
for subsequent offering or to withdraw from this Plan pursuant to Section 6.4.
(b) For purposes of this Section 4.5, an amended Payroll Deduction
Authorization Form shall be effective for a specific pay period when filed 15
days prior to the start of such period.
ARTICLE V
PURCHASES OF SHARES
5.1 PURCHASE DATE. Unless a Participant terminates participation, as
described in Section 4.5(b), or gives written notice to the Company as provided
in Section 6.4, the Company shall purchase, as of the Purchase Date, the number
of Shares determined pursuant to this Article V.
5.2 PURCHASE OF SHARES. On each Purchase Date, the Company shall, subject
to the limitations of Article VI, apply the amount credited to each
Participant's Account to the purchase of as many full Shares that may be
purchased with such amount at the price set forth in Section 5.3, and shall
issue such Shares to the Participant. Payment for Shares purchased under this
Plan will be made only through payroll withholding in accordance with
Article IV.
5.3 PRICE. The price of Shares to be purchased under Section 5.2 shall be
the lower of:
(a) Eighty-five percent (85%) of the fair market value of the Shares
on the Enrollment Date of the Offering; or
(b) Eighty-five percent (85%) of the fair market value of the Shares
on any Purchase Date of the Offering.
5.4 FAIR MARKET VALUE.
(a) The fair market value of the Shares on any date shall be equal to
the bid price of the Company's Common Stock at the close of business on the
Valuation Date, as reported on the automated quotation system of the NASD or
such other quotation system that supersedes it.
PAGE - 6 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
(b) If (a) is not applicable, the fair market value of the Shares
shall be determined by the Plan Administrator in good faith. Such determination
shall be conclusive and binding on all persons.
5.5 UNUSED CONTRIBUTIONS.
(a) Subject to the limitations of Sections 3.2(e) and 12.3, a
Participant may withdraw from any Offering and apply any or all amounts then
credited to his or her Account to the Offering commencing on the next occurring
Enrollment Date following such withdrawal by re-enrolling in such subsequent
Offering pursuant to Section 3.2(c)(ii).
(b) Provided that a Participant's Employment with the Company has not
terminated and the Participant has not withdrawn from the Plan pursuant to
Article VI, and subject to Section 7.1(b), any amount credited to a
Participant's Account and remaining therein immediately after a Purchase Date
shall be carried forward in such Participant's Account for application on the
next succeeding Purchase Date, subject to the notice provisions of Section 5.1.
ARTICLE VI
TERMINATION AND WITHDRAWAL
6.1 TERMINATION OF EMPLOYMENT. Upon termination of a Participant's
Employment for any reason other than as set forth in Section 6.2, the payroll
deductions credited to such Participant's Account shall be returned to the
Participant. Except as provided in Section 6.2, a Participant shall have no
right under this Plan to acquire Shares upon or after termination of his or her
Employment.
6.2 TERMINATION UPON DEATH, RETIREMENT OR DISABILITY WITHIN THREE MONTHS
OF PURCHASE DATE. Upon termination of the Participant's Employment within the
three-month period preceding a Purchase Date because of his or her death,
Retirement or Disability, the payroll deductions credited to his or her Account
shall be used to purchase Shares as provided in Article V on the next Purchase
Date. Any remaining balance in the Participant's Account shall be returned to
him or her or, in the case of death, any Shares purchased and any remaining
balance shall be transferred to the deceased Participant's Beneficiary, or if
none, to his or her estate.
6.3 DESIGNATION OF BENEFICIARY. Each Participant may designate, revoke
and redesignate Beneficiaries. This action shall be taken in writing on a form
provided by the Plan Administrator and shall be effective upon delivery of the
election to the Plan Administrator.
6.4 WITHDRAWAL. A Participant whose Employment with the Company is
continuing (i.e., has not been terminated as described in Sections 6.1 and 6.2)
may elect to withdraw the entire amount credited to his or her Account and cease
further participation at any time by giving written notice to the Company at
least 15 days prior to the next Purchase Date. The
PAGE - 7 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
amount withdrawn shall be paid to the Participant promptly after receipt of
proper notice of withdrawal and no further payroll deductions shall be made from
his or her compensation unless and until a new Payroll Deduction Authorization
Form is submitted in accordance with Section 4.1.
ARTICLE VII
SHARES PURCHASED UNDER THE PLAN
7.1 SOURCE AND LIMITATION OF SHARES.
(a) The Company has reserved for sale under this Plan ____________
shares of its Common Stock, subject to adjustment upon changes in Capitalization
of the Company as provided in Section 9.2. Shares sold under this Plan may be
newly issued Shares or Shares reacquired in private transactions or open market
purchases, but all Shares sold under this Plan regardless of source shall be
counted against the __________ share limitation.
(b) If there is an insufficient number of Shares to permit the full
exercise of all existing rights to purchase Shares, or if the legal obligations
of the Company prohibit the issuance of all Shares purchasable upon the full
exercise of such rights, the Plan Administrator shall make a pro rata allocation
of the Shares remaining available in as nearly a uniform and equitable manner as
possible, based pro rata on the aggregate amounts then credited to each
Participant's Account. In such event, payroll deductions to be made shall be
reduced accordingly and the Plan Administrator shall give written notice of such
reduction to each Participant affected thereby. Any amount remaining in a
Participant's Account immediately after all available Shares have been purchased
will be promptly remitted to such Participant. Determination by the Plan
Administrator in this regard shall be final, binding and conclusive on all
persons. No deductions shall be permitted under this Plan at any time when no
Shares are available.
7.2 DELIVERY OF SHARES. As promptly as practicable after the Purchase
Date, the Company shall deliver to the Participant the full Shares purchased
with his or her payroll deductions.
7.3 INTEREST IN SHARES. The rights to purchase Shares granted pursuant to
this Plan will in all respects be subject to the terms and conditions of this
Plan, as interpreted by the Plan Administrator from time to time. The
Participant shall have no interest in Shares purchasable under this Plan until
payment for the Shares has been completed at the close of business on the
relevant Purchase Date. This Plan provides only an unfunded, unsecured promise
by the Employer to pay money or property in the future. Except with respect to
the Shares purchased on a Purchase Date, an Employee choosing to participate in
this Plan shall have no greater rights than an unsecured creditor of the
Company. After the purchase of the Shares, the Participant shall be entitled to
all rights of a stockholder of the Company.
PAGE - 8 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
ARTICLE VIII
PLAN ADMINISTRATION
This Plan shall be administered by the Board of Directors, who shall be
vested with full authority to make, administer and interpret all rules and
regulations applicable to this Plan as it deems necessary for purposes of
administering this Plan. This Plan is intended to qualify for the "Stock
Purchase Plan" exemption of Rule 16b-3 of the regulations promulgated under the
Securities Exchange Act. Any determination, decision or action of the Plan
Administrator with respect to the construction, interpretation, administration
or application of this Plan shall be final, conclusive and binding upon all
Participants and any and all persons claiming benefits under this Plan. The
provisions of this Plan shall also be construed so as to extend and limit
participation in a manner consistent with the requirements of Section 423 of the
Code.
ARTICLE IX
CHANGES IN CAPITALIZATION, MERGER, ETC.
9.1 RIGHTS OF THE COMPANY. The grant of a right to purchase Shares
pursuant to this Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or other changes
of its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or transfer all or any part of its divisions, subsidiaries,
business or assets.
9.2 RECAPITALIZATIONS. Subject to any required action by the
stockholders, the number of Shares covered by this Plan as provided in Section
7.1 and the price per share shall be proportionately adjusted for any increase
or decrease in the number of issued Shares of the Company resulting from a
subdivision or consolidation of Shares or the payment of a stock dividend (but
only on the Shares) or any other increase or decrease in the number of such
Shares affected without receipt of consideration by the Company.
9.3 CONSOLIDATION OR MERGER. In the event of the consolidation or merger
of the Employer with or into any other business entity, or the sale by the
Employer of substantially all of its assets, the successor may continue this
Plan by adopting the same by resolution of its board of directors or agreement
of its partners or proprietors. If, within 90 days after the effective date of
a consolidation, merger or sale of assets, the successor corporation,
partnership or proprietorship does not adopt this Plan, this Plan shall be
terminated in accordance with Section 11.1.
ARTICLE X
TERMINATION OF EMPLOYMENT
10.1 VACATION, LEAVE OR LAYOFF. A person's Employment shall not terminate
on account of an authorized leave of absence, sick leave or vacation, or on
account of a military leave described in Section 10.2, or a direct transfer
between Employers. Failure to return to
PAGE - 9 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
work upon expiration of any leave of absence, sick leave or vacation shall be
considered a resignation effective as of the expiration of such leave of
absence, sick leave or vacation.
10.2 MILITARY LEAVE. Any Employee who leaves the Employer directly to
perform services in the Armed Forces of the United States or in the United
States Public Health Service under conditions entitling the Employee to
re-employment rights provided by the laws of the United States, shall be on
military leave. An Employee's military leave shall expire if the Employee
voluntarily resigns from the Employer during the leave or if he or she fails to
make application for re-employment within the period specified by such law for
the preservation of employment rights. In such event, the individual's
employment shall terminate by resignation on the day the military leave expires.
ARTICLE XI
STOCKHOLDER APPROVAL
This Plan is expressly made subject to the approval of the holders of a
majority of the outstanding shares of the Company within 12 months after the
date this Plan is adopted. If this Plan is not so approved by the stockholders
within 12 months after the date this Plan is adopted, this Plan shall not come
into effect. Notwithstanding any other provision of this Plan to the contrary,
no Shares shall actually be issued under this Plan until there has been approval
of this Plan by a majority of the Company's shareholders, as described in this
Article XI. In the event that this Plan becomes effective prior to such
shareholder approval, the Plan Administrator shall record the participation of
each Participant, including the amounts in each Participant's Account and the
number of Shares that each Participant is entitled to purchase, and the
corresponding applicable purchase price, at each Purchase Date, but no actual
purchase and issuance of Shares shall take place prior to shareholder approval.
If shareholder approval is not obtained, as described in this Article XI, then
all amounts held by this Plan under the Participants' Account shall be returned
to the Participants, and this Plan shall be become null and void.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 AMENDMENT AND TERMINATION.
(a) The Board of Directors of the Company may at any time amend this
Plan. An amendment shall require the approval of the Stockholders of the
Company if the amendment would permit the sale of more Shares than are
authorized under Section 7.1, or the amendment otherwise requires shareholder
approval under Section 423 of the Code or Rule 16b of the Securities Exchange
Act.
(b) This Plan is intended to be a permanent program, but an Employer
shall have the right at any time to declare this Plan terminated completely as
to it or as to any of the Employer's divisions, facilities, operational units or
job classifications. Upon such
PAGE - 10 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
termination, amounts credited to the Accounts of Participants with respect to
whom the Plan has been terminated shall be returned to such Participants.
12.2 NON-TRANSFERABILITY. Neither payroll deductions credited to a
Participant's Account nor any rights with regard to the purchase of Shares under
this Plan may be assigned, transferred, pledged or otherwise disposed of in any
way by the Participant except as provided in Section 6.2, and any attempted
assignment, transfer, pledge, or other disposition shall be null and void. The
Company may treat any such act as an election to withdraw funds in accordance
with Section 6.4.
12.3 LIMITATION ON PURCHASE. No Participant may obtain a right to purchase
Shares under this Plan if such right would, upon immediate exercise for shares,
result in that Participant:
(a) owning stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or its
Subsidiaries; or
(b) obtain rights to purchase stock under this Plan or under any
other employee stock purchase plan of the Company or any of its Subsidiaries or
its parents that will accrue at a rate which exceeds $25,000 in fair market
value (determined as of the Enrollment Date) of the stock for each calendar year
in which he or she is a Participant;
both as determined under Section 423(b) of the Code.
12.4 USE OF FUNDS. All payroll deductions received or held by the Company
under this Plan may be used by the Company for any corporate purposes and the
Company shall not be obligated to segregate the payroll deductions.
12.5 EXPENSES. All expenses of administering this Plan shall be borne by
the Company and its Subsidiaries.
12.6 NO INTEREST. No Participant shall be entitled, at any time, to any
payment or credit for interest with respect to or on the payroll deductions
contemplated herein, or on any other assets held hereunder for the Participant's
Account.
12.7 REGISTRATION AND QUALIFICATION OF SHARES. The offering of the Shares
hereunder shall be subject to the effecting by the Company of any registration
or qualification of the Shares under any federal or state law or the obtaining
of the consent or approval of any governmental regulatory body which the Company
shall determine, in its sole discretion, is necessary or desirable as a
condition to, or in connection with, the offering or the issue or purchase of
the Shares covered thereby. The Company shall make every reasonable effort to
effect such registration or qualification or to obtain such consent or approval.
12.8 PLAN NOT A CONTRACT OF EMPLOYMENT. This Plan is strictly a voluntary
undertaking on the part of the Employer and shall not constitute a contract
between the Employer and any Employee, or consideration for an inducement or a
condition of, the employment of
PAGE - 11 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
an Employee. Except as otherwise required by law or any applicable collective
bargaining agreement, nothing contained in this Plan shall give any Employee the
right to be retained in the service of the Employer or to interfere with or
restrict the right of the Employer, which is hereby expressly reserved, to
discharge or retire any Employee at any time, with or without cause and with or
without notice. Except as otherwise required by law, inclusion under this Plan
will not give any Employee any right or claim to any benefit hereunder except to
the extent such right has specifically become fixed under the terms of the Plan.
The doctrine of substantial performance shall have no application to any
Employee, Participant or Beneficiary. Each condition and provision, including
numerical items, has been carefully considered and constitutes the minimum limit
on performance which will give rise to the applicable right.
12.9 NOTICE. All notices or other communications by a Participant to the
Company under or in connection with this Plan shall be deemed to have been duly
given when received by the Plan Administrator. Any notice required by this Plan
to be received by the Company prior to an Enrollment Date, payroll period or
other specified date, and received by the Plan Administrator subsequent to such
date, shall be effective on the next occurring Enrollment Date, payroll period
or other specified date to which such notice applies.
12.10 GOVERNING LAW. This Plan shall be interpreted, administered and
enforced in accordance with the Code, and the rights of Participants, former
Participants, Beneficiaries and all other persons shall be determined in
accordance with it. To the extent that state law is applicable, however, the
laws of the State of Washington shall apply.
12.11 PLURALS. Where the context so indicates, the singular shall include
the plural and vice versa.
12.12 TITLES. Titles of Articles and Sections are provided herein for
convenience only and are not to serve as the basis for interpretation or
construction of this Plan.
12.13 REFERENCES. Unless the context clearly indicates to the contrary,
reference to a Plan provision, statute, regulation or document shall be
construed as referring to any subsequently enacted, adopted or executed
counterpart.
ADOPTED BY THE BOARD OF DIRECTORS ON DECEMBER 9, 1996,
AND EFFECTIVE UPON THE CONSUMMATION OF AN INITIAL
PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK
PAGE - 12 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
EXHIBIT 10.12
[LOGO]
October 24, 1996
Laura Beth Heinrichs
Pioneer Standard
2800 156th Ave. SE Suite 100
Bellevue, WA 98007
Dear Ms. Heinrichs,
Apex PC Solutions, Inc. has selected Pioneer Standard as the vendor of choice
to supply us with the Astec LPT 24 Power Supply.
We anticipate using between * and * units in the next * period commencing
November 1, 1996 based on current orders and forecasted needs by our OEM
customers. We agree to pay * per unit based on this range of quantities.
Pioneer will be the sole provider for this power supply during this period of
time provided: (1) there are no technical performance issues, (2) there are no
material delivery problems and (3) there are no material price reductions in
the industry.
I will work with you on delivery schedules and monthly forecasts. Thank you
for your persistence and effort during this bidding process. I look forward
to a continued mutually beneficial relationship between Apex PC Solutions,
Inc. and Pioneer Standard.
Sincerely,
/s/ MARK W. DONOHUE
Mark W. Donohue
Apex PC Solutions
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
[LETTERHEAD]
cc Doug Bevis
cc Vicki Sunde
<PAGE>
[LETTERHEAD]
October 16, 1996
Kevin Hafer, President and CEO
Apex PC Solutions
20031 142nd Ave. NE
Woodinville, WA 98072
Subject: ASTEC LPT24 Proposal
Dear Mr. Hafer:
Pioneer Standard Electronics is pleased to provide the following quotation in
support of your 1996-97 Power Supply requirements. Our belief is that this
proposal comprehensively addresses all of the important issues we have
previously discussed and represents a high quality, low cost, product
solution supported by an extremely reliable supply chain strategy.
Please find listed below several key elements of our suggested proposal to
support this important component of your system.
I. UNIT PRICING.
After continued discussion with ASTEC - Micro Sales and in recognition of
the cost APEX has incurred to qualify our product into your multiple end
items, Pioneer is pleased to present the below listed special unit pricing:
Part Number Quantity Manufacture Unit Price
-----------------------------------------------------------
LPT24 * ASTEC *
Please note that this represents a significant price reduction from our
original proposal and fully absorbs the cost of qualifying this material.
Our hope is that by this action you will agree that ASTEC and Pioneer are
dedicated business partners who are willing to share in the total cost of
bringing your product to the marketplace.
This pricing is based upon the quantity listed above and is provided in
good faith that this represents the best estimate of your purchases within
a * period. Pioneer Standard terms and conditions will apply.
II. QUARTERLY PRICE REVIEWS.
As the usage of this device could potentially increase via additional
qualifications as well as market conditions change, we would agree to and
recommend performing quarterly price reviews to ensure APEX is receiving
the benefits of current market pricing.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
<PAGE>
III. STOCKING AND INVENTORY PLAN.
Pioneer Standard will bond an agreed upon percentage of your estimated
annual usage within our Central Distribution Center (CDC) in Cleveland,
Ohio. Our CDC is fully ISO9002 certified and this material will be
exclusively isolated for APEX.
In addition to this material and based upon your providing us with a six-
month rolling forecast, Pioneer will pipeline orders with the factory to
replenish this buffer inventory monthly. * of this material will
be stocked locally in Bellevue in order to facilitate immediate response to
any unforeseen demand fluctuations.
All of Pioneer's facilities including the CDC and our local sales office
are ISO9002 certified. We believe strongly that the above steps will
ensure an uninterrupted supply of material to APEX.
IV. MANUFACTURING LOCATIONS.
This material is manufactured by ASTEC in Shenzhen China (Hong Kong):
ASTEC North American Stocking is located in San Diego, CA. Pioneer
Standard stocks this material in both Fremont, CA and Cleveland, Ohio.
V. FINANCIAL STRENGTH RESOURCES.
With 1995 revenue in excess of $1.3 billion, Pioneer Standard represents a
business partner that has the financial strength to support this project as
well as assist in the continued and future growth of APEX.
As Pioneer Standard annual purchases place us as one of our supplier's
largest customers, this affords us with significant visibility and leverage
when preferential and special treatment is required. This added supplier
support can be of significant benefit to APEX by reducing your costs and
liability in the form of price protections, stock rotations, and product
obsolescence.
VI. TECHNICAL SUPPORT.
Pioneer has a strong and ongoing commitment to maintaining technical
support to our customers. In addition to our two component Field
Application Engineers, we also have locally a Regional Power Products
Manager, Dan Graney, who's sole purpose is to provide pre and post
procurement technical support to our power supply customers.
VII. LETTER OF INTENT.
While it will not be necessary for APEX to place a firm fixed contract for
the full quantity listed above, Pioneer Standard and ASTEC respectfully
request that a "Letter of Intent" be issued to Pioneer which would
represent your expressed intent to procure this volume of material over a
* period of time.
All parties would understand that the quantity indicated on the L.O.I.
would be your best estimate and not necessarily be your exact usage over
the specified time frame.
* Subject to confidential treatment request; filed separately with the
Securities and Exchange Commission.
<PAGE>
It is my understanding that your current inventory level for this material is
at a point where product lead time is becoming a concern. If you agree that
we have addressed the major issues involved in using ASTEC and Pioneer to
support these requirements, we would like to respectfully request that an
initial purchase order and Letter of Intent be issued at your earliest
convenience.
On behalf of Pioneer Standard, I would like to thank you for the opportunity
to provide this quotation. We very much appreciate this chance to
potentially expand and further develop our business partnership. We have
tried to be complete with this proposal and hope that you will agree that
pioneer is uniquely qualified to support your product, technical and total
cost reducing initiatives.
If you have any additional questions or require further information, please
don't hesitate to contact either our Branch Manager, Greg Hearn, or me at
206-644-7500.
Very truly yours,
/s/ LAURA BECH HEINRICHS
Laura Beth Heinrichs
Account Manager
cc: Mark Donahue - APEX
Danny Beasley - APEX
Vicki Sunde - APEX
Jim Weatherby - Micro Sales
Louie Aldama - ASTEC
Greg Hearn - Pioneer
Dan Graney - Pioneer
<PAGE>
EXHIBIT 10.13
APEX PC SOLUTIONS, INC.
STOCK AND SUBORDINATED NOTE
PURCHASE AGREEMENT
DATED AS OF DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - PURCHASE AND SALE OF THE SHARES AND THE NOTES.....................1
1.1 The Shares......................................................1
1.2 The Closing of Purchase and Sale of the Shares and Notes........1
1.3 Designated Representative of the Investors......................1
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..................2
2.1 Investment......................................................2
2.2 Authorization...................................................3
2.3 Other...........................................................3
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMPANY AND THE SHAREHOLDERS..4
3.1 Representations and Warranties of the Company and the
Shareholders....................................................4
ARTICLE IV - CONDITIONS PRECEDENT TO INVESTORS' OBLIGATIONS..................12
4.1 Representations and Warranties.................................12
4.2 Absence of Litigation..........................................12
4.3 Performance of Obligations.....................................12
4.4 Documentation at Closing.......................................13
4.5 Material Adverse Change........................................14
4.6 Due Diligence..................................................14
4.7 Financing......................................................14
4.8 Consents, Waivers, etc.........................................14
4.9 Key Person Life Insurance......................................14
ARTICLE V - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS.................................................................15
5.1 Representations and Warranties.................................15
5.2 Absence of Litigation..........................................15
5.3 Performance of Obligations.....................................15
5.4 Payment........................................................15
5.5 Stock Option Plan..............................................15
5.6 S Corporation Agreement........................................15
5.7 Shareholders' Agreement........................................15
5.8 Registration Rights Agreement..................................15
5.9 Financing......................................................16
5.10 Consents, Waivers, etc.........................................16
5.11 Key Person Life Insurance......................................16
ARTICLE VI - COVENANTS OF THE COMPANY........................................16
-i-
<PAGE>
6.1 Affirmative Covenants of the Company other than
Reporting Requirements.........................................16
6.2 Reporting Requirements.........................................19
6.3 Use of Proceeds................................................20
ARTICLE VII - OBLIGATIONS AT THE CLOSING.....................................21
7.1 Deliveries.....................................................21
ARTICLE VIII - NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES.........21
8.1 Survival of Representations and Warranties.....................21
ARTICLE IX - INDEMNIFICATION.................................................21
9.1 Indemnification by the Shareholders............................21
9.2 Claims for Indemnification.....................................22
9.3 Defense by Shareholders........................................22
9.4 Escrow.........................................................22
9.5 Threshold; Ceiling.............................................23
9.6 Exclusive Remedy...............................................23
ARTICLE X - DEFINITIONS AND ACCOUNTING TERMS.................................23
10.1 Certain Defined Terms..........................................23
10.2 Accounting Terms...............................................27
ARTICLE XI - MISCELLANEOUS...................................................27
11.1 No Waiver; Cumulative Remedies.................................27
11.2 No Company Recision............................................27
11.3 Amendments, Waivers and Consents...............................27
11.4 Addresses for Notices, etc.....................................27
11.5 Costs, Expenses and Taxes......................................29
11.6 Binding Effect; Assignment.....................................29
11.7 Prior Agreements...............................................29
11.8 Severability...................................................29
11.9 Governing Law..................................................29
11.10 Headings.......................................................29
11.11 Counterparts...................................................29
11.12 Further Assurances.............................................30
11.13 Independent Counsel............................................30
11.14 Confidentiality................................................30
11.15 Press Release..................................................30
-ii-
<PAGE>
EXHIBITS
Exhibit
Exhibit Name Number
- ------------ -------
Schedule of Investors A
Form of Class A Subordinated Promissory Note B
Disclosure Schedule C
Restated Articles of Incorporation D
By-Laws E
Opinion of Company's Counsel F
Escrow Agreement G
S Corporation Indemnification Agreement H
Shareholders' Agreement I
Registration Rights Agreement J
Employment Agreement K
Voting Agreement L
Employee Invention and Non-Disclosure Agreement M
Form of Class B Subordinated Promissory Note N
-iii-
<PAGE>
STOCK AND SUBORDINATED NOTE PURCHASE AGREEMENT
THIS STOCK AND SUBORDINATED NOTE PURCHASE AGREEMENT (the "Agreement") is
made and entered into as of December 29, 1995, by and among Apex PC Solutions,
Inc., a Washington corporation (the "Company"), Sterling Crum ("Crum"),
Britannia Holdings Limited, a Nevis corporation ("Britannia") (severally,
Britannia and Crum may each be referred to as a "Shareholder," and jointly they
may be referred to as the "Shareholders"), and the entities listed on EXHIBIT A
hereto (the "Investors").
ARTICLE I
PURCHASE AND SALE OF THE SHARES AND THE NOTES
1.1 THE SHARES. Subject to and in reliance upon the representations,
warranties, terms and conditions of this Agreement, the Company hereby agrees to
issue and sell 200,000 shares of Common Stock, no par value, of the Company at a
price of $1.47 per share and 300,000 shares of Series A Convertible Preferred
Stock, no par value, of the Company at a price of $7.35 per share (the "Series A
Preferred Stock") (the shares of Common Stock and the shares of Series A
Preferred Stock to be issued pursuant to this Agreement may be referred to as
the "Shares") and Class A Subordinated Promissory Notes in the aggregate
original principal amount of Ten Million Dollars ($10,000,000.00) and in the
form attached hereto as EXHIBIT B (the "Notes") to the Investors in the
respective amounts and for the price set forth opposite each Investor's name on
EXHIBIT A hereto, and the Investors agree to purchase such Shares and such Notes
from the Company for an aggregate consideration of Twelve Million Four Hundred
Ninety-Nine Thousand Dollars ($12,499,000.00).
1.2 THE CLOSING OF PURCHASE AND SALE OF THE SHARES AND NOTES. The
purchase and sale of the Shares and the Notes shall take place at a closing (the
"Closing") to be held at the office of Davis Wright Tremaine, 2600 Century
Square, 1501 Fourth Avenue, Seattle, Washington 98101, on the date hereof, at
9:00 a.m. (Pacific Standard Time), or on such other date and at such time as may
be mutually agreed upon. At the Closing, the Company will deliver to the
Investors certificates evidencing the Shares and the Notes, all in the amounts
set forth opposite their respective names in EXHIBIT A hereto, against wire
transfers to the account of the Company in payment of a portion of the purchase
price for the Shares and the Notes, in the respective amounts indicated on
EXHIBIT A (the "Purchase Price").
1.3 DESIGNATED REPRESENTATIVE OF THE INVESTORS. The Investors hereby
designate Jeffrey T. Chambers as Designated Representative, authorized to act on
behalf of the Investors with respect to all matters related to this Agreement,
and the Shareholders and the Company shall be entitled to rely, without further
investigation, on the actions of this Designated Representative. The Designated
Representative may be changed by a written instrument executed by all of the
Investors and provided to the Company and the Shareholders in accordance with
Section 11.4 hereof.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
2.1 INVESTMENT. Each Investor, severally but not jointly, represents and
warrants to the Company and the Shareholders that:
(a) The Investor has been advised that the Shares and the Notes have
not been registered under the Securities Act nor qualified under any state
securities laws on the ground, among others, that no distribution or public
offering of the Shares and the Notes is to be effected, and that in this
connection the Company is relying in part on the representations of the
Investors set forth herein.
(b) It is the intention of the Investor to acquire the Shares and the
Notes for its own account and the Shares and the Notes are being and will be
acquired for the purpose of investment and not with a view to distribution or
resale thereof.
(c) The Investor is able to bear the economic risk of an investment
in the Shares and the Notes acquired by it pursuant to this Agreement and can
afford to sustain a total loss on such investment.
(d) The Investor is an experienced and sophisticated investor, is
able to fend for itself in the transactions contemplated by this Agreement, and
has such knowledge and experience in financial and business matters that it is
capable of evaluating the risks and merits of acquiring the Shares and the
Notes. The Investor has had, during the course of this transaction and prior to
its purchase of the Shares and the Notes, the opportunity to ask questions of,
and receive answers from, the Company and its management concerning the Company
and the terms and conditions of this Agreement. The Investor hereby
acknowledges that it or its representatives have received all such information
as it considers necessary for evaluating the risks and merits of acquiring the
Shares and the Notes and for verifying the accuracy of any information furnished
to it or to which it had access. The Investor represents and warrants that the
nature and amount of its investment in connection with the purchase of the
Shares and the Notes is consistent with its investment objectives, abilities and
resources.
(e) The Investor understands that there is no public market for the
Shares or the Notes and that there may never be such a public market, and that
even if a market develops it may never be able to sell or dispose of the Shares
or the Notes and may thus have to bear the risk of its investment for a
substantial period of time, or forever. The Investor is aware that none of the
Shares or the Notes may be sold pursuant to Rule 144 adopted under the
Securities Act unless certain conditions have been met and until such Investor
has held the Shares or the Notes for at least two years. Among the conditions
required for use of Rule 144 is the availability of current information to the
public about the Company. The Investor understands that the Company has not
made such information available and has no present plans to do so.
-2-
<PAGE>
(f) The Investor is an "accredited investor" for purposes of
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act.
(g) The Investor acknowledges that the certificates representing the
Shares shall contain the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN
ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
2.2 AUTHORIZATION. Each Investor, severally but not jointly, further
represents and warrants to the Company and the Shareholders that:
(a) It has duly authorized, executed and delivered this Agreement and
any other agreements and instruments executed in connection herewith.
(b) The Investor is a duly organized and validly existing limited
partnership in good standing under the laws of the jurisdiction in which it was
organized and has all necessary corporate or partnership power and authority and
has taken all corporate or partnership action required to make all the
provisions of this Agreement, and any other agreements and instruments executed
in connection herewith, the valid and enforceable obligations of the Investor.
(c) This Agreement and such other agreements and instruments
constitute the valid and binding obligations of such Investor enforceable
against it in accordance with their respective terms.
(d) No consent or approval of any Person is required in connection
with the execution, delivery and Performance of this Agreement and such other
agreements and instruments by such Investor which has not heretofore been
obtained.
(e) The execution and performance of this Agreement shall not result
in a material default of any material agreements by such Investor.
2.3 OTHER. Each Investor, severally and not jointly, represents and
warrants to the Company and the Shareholders that, except as otherwise set forth
in this Agreement or the Exhibits hereto, no Person has or will have, as a
result of the transactions contemplated by this Agreement, any right, interest
or valid claim upon or against the Company for any commission, fee or other
-3-
<PAGE>
compensation as a finder or broker because of any act or omission by the
Investors, and the Investors agree to indemnify and hold the Company harmless
against any such commissions, fees or other compensation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
COMPANY AND THE SHAREHOLDERS
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS.
The Company and each Shareholder, jointly and severally, represent and warrant
to the Investors that, except as otherwise set forth in the Company Disclosure
Schedule attached hereto as EXHIBIT C (which Disclosure Schedule shall, when
qualifying a representation or warranty, refer specifically to the section
number of the representation or warranty so qualified):
(a) ORGANIZATION AND STANDING OF THE COMPANY. The Company is a duly
organized and validly existing corporation in good standing under the laws of
the jurisdiction in which it is organized and has all requisite corporate power
and authority for the ownership and operation of its properties and for the
carrying on of its business as now conducted and as now proposed to be
conducted. The Company is duly licensed or qualified and in good standing as a
foreign corporation authorized to do business in all jurisdictions in which the
character of the property owned or leased, or the nature of the activities
conducted, by it makes such licensing or qualification necessary and where
failure to qualify would have a material adverse effect upon such corporation.
(b) CORPORATE ACTION.
(i) The Company has all necessary corporate power and authority
and has taken all corporate action required to execute and deliver this
Agreement and any other agreements and instruments executed in connection
herewith. This Agreement and each other agreement executed in connection
herewith has been duly and validly executed and delivered by the Company, and
constitute the valid and enforceable obligations of the Company, enforceable
against the Company in accordance with their respective terms, except where
enforcement may be limited by applicable laws relating to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforceability of creditors' rights generally or the principles governing the
availability of equitable remedies.
(ii) Britannia and Crum have all necessary power and authority
and have taken all action necessary to execute and deliver this Agreement and
any other agreements and instruments executed in connection herewith. This
Agreement and each other agreement executed in connection herewith has been duly
and validly executed and delivered by Britannia and Crum, and constitute the
valid and enforceable obligations of Britannia and Crum, enforceable against
Britannia and Crum in accordance with their respective terms, except where
enforcement may be limited by applicable laws relating to bankruptcy,
insolvency, reorganization, moratorium or similar
-4-
<PAGE>
laws affecting the enforceability of creditors' rights generally or the
principles governing the availability of equitable remedies.
(c) GOVERNMENTAL APPROVAL. No authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with the execution or
delivery by the Company or the Shareholders of, or for the performance by any of
them of their respective obligations under, this Agreement except for filings to
be made, if any, to comply with exemptions from registration or qualification
under federal and state securities laws.
(d) LITIGATION. There is no litigation or governmental proceeding or
investigation pending or threatened against the Company affecting any of its
properties or assets, or against any officer or key employee of the Company or
the Shareholders that might result, either in any case or in the aggregate, in
any material adverse change in the business, operations, affairs or conditions
of the Company or any of its properties or assets, or that might call into
question the validity of this Agreement, any of the Shares or Notes, or any
action taken or to be taken pursuant hereto.
(e) COMPLIANCE WITH OTHER INSTRUMENTS. The Company is in compliance
in all respects with the terms and provisions of its Articles of Incorporation
or Bylaws and in all respects with the terms and provisions of this Agreement
and in all material respects with the terms and provisions of each mortgage,
indenture, lease, agreement and other instrument either (i) relating to
obligations of the Company in excess of $25,000, individually or in the
aggregate, or (ii) relating to patents, licenses, trademarks, service marks,
trade names, copyrights, trade secrets, inventions, processes, designs,
franchises, computer software or other proprietary rights. The Company is in
compliance in respect of all judgments, decrees, governmental orders, statutes,
rules or regulations by which it is bound or to which its properties or assets
are subject. There is no term or provision in any of the foregoing documents
and instruments that the Company believes is reasonably likely to materially
adversely affect the business, assets or financial condition of the Company.
Neither the execution and delivery of this Agreement nor the consummation of any
transaction contemplated hereby has constituted or resulted in or will
constitute or result in a default or violation of any term or provision in the
Articles of Incorporation or Bylaws of the Company and has constituted or
resulted in a default or violation of any term or provision in any documents or
instruments. Each of Britannia and Crum is in compliance in all respects with
the terms and provisions of this Agreement and in all material respects with the
terms and provisions of each mortgage, note, lease, agreement and other
instrument relating to obligations of such party in excess of $25,000 in
aggregate, and, in respect of all judgments, decrees, governmental orders,
statutes, rules or regulations by which it is bound or to which its properties
or assets are subject.
(f) REGISTRATION RIGHTS AND SHAREHOLDER AGREEMENTS. No Person has
any right to cause the Company to file any registration statement under the
Securities Act relating to any securities of the Company or any right to
participate in an offering of securities under any such registration statement.
Except as specifically set forth in this Agreement, there is no voting,
shareholders, co-sale, right of first refusal or similar agreement among the
Company and any
-5-
<PAGE>
holders of any of its equity securities (or instruments convertible or
exercisable into any of its equity securities). To the best knowledge of the
Company, there is no voting, shareholders, co-sale, right of first refusal or
similar agreement, that the Company is not a party to, among any of the holders
of any of the Company's equity securities or instruments convertible or
exercisable into any of the Company's equity securities.
(g) SECURITIES ACT OF 1933. The Company has complied with all
applicable federal and state securities laws in connection with the issuance and
sale of the Shares and the Notes. Neither the Company nor anyone acting on its
behalf has offered or will offer to sell the Shares or the Notes, or similar
securities to, or solicit offers with respect thereto from, or enter into any
preliminary conversations or negotiations relating thereto with, any Person, so
as to bring the issuance and sale of the Shares or the Notes under the
registration provisions of the Securities Act.
(h) NO BROKERS OR FINDERS. The Company and Shareholders have not
taken any action nor failed to take any action and know of no such act or
omission by any Person, which would give rise to any right, interest or valid
claim against or upon the Company for any commission, fee or other compensation
as a finder or broker as a result of the transactions contemplated by this
Agreement.
(i) CAPITALIZATION; STATUS OF CAPITAL STOCK. Immediately preceding
the Closing, the Company will have a total authorized capitalization consisting
of 10,000,000 shares of Common Stock, of which 1,000,000 shares are issued and
outstanding, and 500,000 shares of Preferred Stock, no par value (the "Preferred
Stock"), none of which is issued or outstanding. The Preferred Stock is in two
series. Immediately preceding the Closing, the Company will have authorized
300,000 shares of Series A Preferred Stock, none of which is issued or
outstanding, and 200,000 shares of Series B Redeemable Preferred Stock, none of
which is issued and outstanding. All outstanding shares of Common Stock were
duly authorized and validly issued, are fully paid and nonassessable and were
issued in compliance with all applicable federal and state securities laws. The
Shares, when issued in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable. Immediately preceding
the Closing, the issued and outstanding shares of Common Stock and holders
thereof will be as set forth in the Disclosure Schedule. Prior to the Closing,
the Company will adopt the 1995 Employee Stock Plan in the form attached to the
Disclosure Schedule and shall reserve for issuance thereunder an aggregate of
176,470 shares of Common Stock. Immediately prior to the Closing, Kevin Hafer
("Hafer") will hold an option to purchase 88,235 shares of Common Stock at a
price of $1.47 per share, a copy of which option is attached as an annex to the
Disclosure Schedule and which option shall have been granted pursuant to the
aforementioned 1995 Employee Stock Plan.
Except as set forth herein, there are no options, warrants or rights to
purchase shares of capital stock or other securities authorized, issued or
outstanding, nor is the Company obligated in any other manner to issue shares of
its capital stock or other securities. The Restated Articles of Incorporation
of the Company on file with the Secretary of State of the State of Washington
shall be in the form of EXHIBIT D. The Bylaws of the Company in effect shall be
in the form of EXHIBIT E hereto.
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(j) FINANCIAL STATEMENTS. The Financial Statements of the Company
for the years ended December 31, 1992, 1993 and 1994 as reviewed by Clark Nuber
Co. P.S., and of the Company for the eleven months ended November 22, 1995
(collectively, the "Financial Statements"), copies of which Financial
Statements, along with any officers reports, heretofore have been delivered to
Investors and are attached to the Disclosure Schedule, were prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods presented, subject to year-end adjustments which would
not be materially adverse with respect to the Financial Statements at and for
the period ending November 22, 1995, and fairly present the financial position
and results of operations of the Company for the periods presented.
(k) ABSENCE OF CHANGES. Since November 22, 1995 there has not been
any event occurrence, circumstance, state of facts or condition of any type,
whether or not in the ordinary course of business and whether or not covered by
insurance, that has materially and adversely affected, or might reasonably be
expected to materially and adversely effect, the business, properties, assets,
prospects, or financial condition of the Company.
(l) GOOD AND MARKETABLE TITLE. The Company has good and marketable
title to, or a valid leasehold interest in, its properties and assets in each
case free and clear of all liens, claims, security interests, charges and
encumbrances and the right to use all the assets it presently uses in the
operation of its business. The properties and assets of the Company are in all
material respects in good condition and repair, ordinary wear and tear excepted.
(m) SUBSIDIARIES. The Company does not control, directly or
indirectly, any other corporation, association, partnership or other business
entity or own any shares of capital stock or other securities of any other
Person.
(n) TAXES AND TAX RETURNS.
(i) The Company has duly filed all Tax Returns (as
hereinafter defined) which are required by law to be filed by it; (ii) the
Company has duly paid all Taxes (as hereafter defined) due or claimed to be due
from it (whether or not shown on any Tax Return), and there are no assessments
or claims for payment of Taxes now pending or, to the best knowledge of the
Company, threatened, nor is there any audit of the records of the Company being
made or threatened by any taxing authority; (iii) to the Company's best
knowledge, there are no facts or circumstances which could reasonably be
expected to constitute a basis for assessments or claims for the payment of
additional Taxes with respect to such Tax Returns; (iv) each Tax Return of the
Company previously filed, or to be filed in the future relating to any period up
to the date of Closing, is or will be (as the case may be) correct and complete
in all respects; and (v) the Company is not currently the beneficiary of any
extension of time within which to file any Tax Return. The amounts set up as
provisions for Taxes, if any, on the December 31, 1994 and November 30, 1995
balance sheets of the Company included in the Financial Statements are
sufficient for the payment of all unpaid Taxes of the Company accrued for or
applicable to the periods ended on such date and all years and periods prior
thereto and for which the Company, at those dates, may have been liable. The
Company has properly withheld and paid, or accrued for
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payment, when due, to appropriate state and/or federal authorities, all sales
and use taxes, if any, and all amounts required to be withheld from payments
made to its employees, independent contractors, creditors, Shareholders, or
other third parties and has also paid all employment taxes as required under
applicable laws.
(ii) The Company has not waived any statute of limitation in
respect of any taxes or assessments by any federal, state, county, local,
foreign or other taxing jurisdiction or agreed to any extension of time with
respect to an assessment or deficiency in any tax. The Company has not filed a
consent under Section 341(f) of the Internal Revenue Code of 1986, as amended
(the "Code") concerning collapsible corporations.
(iii) The Company has not made any payments, and is not
obligated to make any payments, nor is the Company a party to any agreement that
under any circumstances could obligate it to make any payments, that would not
be deductible under Section 280G of the Code. The Company has not been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(a)(ii)
of the Code. The Company is not a party to any tax allocation or tax sharing
agreement.
(iv) The Company (i) is not and never has been required to
file a consolidated or combined state or federal income Tax Return with any
other person or entity and (ii) is not liable for the Taxes of any person under
Treas. Reg. Section 1. 1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract or otherwise.
(o) INSURANCE. Included in the Disclosure Schedule is a complete
list of all insurance policies currently maintained by the Company and in
effect, and, with respect to each of such policies, a general description of the
risks covered and claims insured; copies of all of such policies have been
furnished or made available to Investors. The Company has, with responsible and
reputable insurance companies or associates, insurance in such amounts and
covering such risks as is usually carried by companies of similar size engaged
in similar businesses and owning similar properties in the same general areas in
which the Company operates, but in any event in amounts sufficient to allow the
Company to replace any of its properties that might be damaged or destroyed
without additional expenditures by the Company (except for reasonable
deductibles).
(p) CERTAIN TRANSACTIONS. The Company is not indebted, either
directly or indirectly, to any of the officers, directors or shareholders of the
Company, or, to their respective spouses or children, in any amount whatsoever,
other than for payment of salary for services rendered and reasonable expenses,
and none of said officers, directors, shareholders or any members of their
immediate families, are indebted to the Company. None of the Shareholders nor,
to the best knowledge of the Company, any officer, director or other shareholder
of the Company, has any direct or indirect ownership interest in (other than
ownership interests of one percent (1%) or less in companies whose securities
are publicly traded), or any contractual relationship with, any firm,
corporation or other Person with which the Company is Affiliated or with which
the Company has a business relationship, or any firm, corporation or other
Person which competes with the Company. None of the Shareholders, nor, to the
best knowledge of the Company, any officer, director or other
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shareholder of the Company, or any member of their immediate families, are,
directly or indirectly, a party to or otherwise an interested party with respect
to any material contract with the Company.
(q) CONTRACTS AND COMMITMENTS.
(i) Except as expressly contemplated by this Agreement as
of the Closing the Company will not be a party to, or bound by, any currently
effective written or oral:
(A) any contract with any labor union;
(B) contract for the employment of any officer, individual
employee, or other person or entity on a full-time, part-time, consulting or
other basis which, in any way, restricts or limits its right to terminate such
contract at will (other than the existence of any law, public policy, or any
oral discussions, or oral statements of policy which might, under current law,
be interpreted as imposing upon the Company any covenant of good faith and fair
dealing, or otherwise generally restrict the Company's ability to terminate its
employees other than on an "at-will" basis or within sixty (60) days following
delivery of such notice);
(C) agreement or indenture relating to the borrowing of
money or to the mortgaging, pledging, transfer of a security interest, or
otherwise placing a lien on any material asset or material group of assets of
the Company;
(D) guarantee of any obligation;
(E) lease or agreement under which it is the lessee of or
holds or operates any property, real or personal, owned by any other party,
other than leases or agreements under which the aggregate annual rental payments
of the Company do not, in the aggregate, exceed $25,000;
(F) agreement or group of related agreements with the same
party or any group of parties who are affiliated, which requires an aggregate
payment by or to the Company in an amount in excess of (x) with respect to
purchase or sales orders in the ordinary course of business, $50,000, and
(y) with respect to any other contracts, $25,000;
(G) warranty agreement of the Company with respect to
services provided or products sold, licensed or leased by the Company as seller,
licensor or lessor;
(H) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world; or
(I) any other agreement which in the best judgment of the
Company is material to its business.
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(ii) The Company has performed in all material respects all
obligations required to be performed by it and is not in default under, or in
material breach of, or after due inquiry, in receipt of any claim of default
under or breach of, any material agreement, to which it is a party or to which
its assets are subject; the Company has no present expectation or intention of
not fully performing all such obligations; the Company does not have any
knowledge of any material breach or anticipatory breach by the other parties to
any material contract or commitment, to which it is a party or to which any of
its assets is subject; and the Company is not a party to any contract or
contracts which, either individually or in the aggregate, are reasonably likely
to result in a material loss to the Company. There are no warranty claims or
other uninsured claims under completed contracts which is reasonably likely to
involve a material monetary liability which is not reserved against in the
Financial Statements.
(iii) To the best knowledge of the Company, no officer of the
Company is a party to any oral or written contract which prohibits, or
materially restricts or limits his performance of his duties or the fulfillment
of his obligations as an employee and an officer of the Company.
(iv) A true and correct copy of each of the written
contracts referred to in the Disclosure Schedule and a description of the oral
contracts which are referred to in the Disclosure Schedule, together with any
amendments, waivers or other changes thereto, have been supplied to the
Investors' special counsel, Wilson Sonsini Goodrich & Rosati, P.C.
(r) ERISA.
(i) Neither the Company nor any ERISA Affiliates of the
Company maintains or has at any time maintained any employee benefit plan (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), pension, bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other similar
fringe or benefit plans, programs or arrangements (collectively, the "Employee
Plans"). Neither the Company nor any ERISA Affiliate of the Company maintains
or has at any time maintained any Employee Plan for the benefit of any active,
retired or former employee or their spouses or dependents. For purposes of this
Agreement, the term "ERISA Affiliate" shall refer to all members of the group
consisting of all corporations and all trades or businesses (whether or not
incorporated) under common control with the Company within the meaning of
Section 414 of the Code.
(ii) No Employee Plan of the Company or any ERISA Affiliate
of the Company is subject to either Title IV of ERISA or Section 412 of the
Code, and no such Employee Plan has been terminated within the last six years.
The Company and its ERISA Affiliates have administered their respective Employee
Plans in material compliance with the health care continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"). Each Employee Plan of the Company and any ERISA Affiliate of the
Company intended to be qualified under Section 401(a) of the Code has either
obtained a current favorable determination letter as to its qualified status
(including its compliance with the Tax Reform Act of
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1986) from the Internal Revenue Service or still has a remaining period of time
under applicable Treasury Regulations in which to apply for such determination
letter and make amendments necessary to obtain a favorable determination. Each
such Employee Plan has been maintained and administered in all material respects
in compliance with its terms and with the requirements prescribed by all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Employee Plan. All contributions,
premiums or other payments due from the Company or any ERISA Affiliate of the
Company to (or under) any such Employee Plan have been fully paid or adequately
provided for on the Company's or its ERISA Affiliates' most recent financial
statements.
(s) INTELLECTUAL PROPERTY. The Company has sufficient title to and
ownership of, or has sufficient licenses to, all necessary patents, licenses,
trademarks, service marks, trade names, copyrights, trade secrets, inventions,
processes, designs, franchises, computer software and other proprietary rights
necessary for its business as now conducted and as proposed to be conducted,
without any conflict with or infringement of the rights of others. The
Disclosure Schedule sets forth all inventions which are the subject of issued
patents, or an application therefor, which are owned and used or held for use by
the Company and which are material to the business of the Company. The Company
has taken measures it deems reasonable to maintain the confidentiality of the
processes and formulae, research and development results and other know-how of
the Company, the value of which to the Company is contingent upon maintenance of
the confidentiality thereof. The Company has not violated or infringed, and the
Company's business as now conducted and as proposed to be conducted does not and
will not violate or infringe, any of the patents, licenses, trademarks, service
marks, trade names, copyrights, trade secrets or other proprietary rights of any
other person or entity, and the Company has not received any communication or
notice claiming or alleging any such violation or infringement. The Company is
not aware of any third party which is infringing or violating any of the
patents, licenses, trademarks, service marks, trade names, copyrights, trade
secrets or other proprietary rights of the Company. The Company has not granted
any license or option or entered into any agreement of any kind with respect to
the use of its proprietary information, other than licenses to and uses of its
products made in the ordinary course of their business.
(t) ENVIRONMENTAL MATTERS.
(i) Other than Hazardous Materials reasonably necessary for
the conduct of the business of the Company which are properly stored in material
compliance with applicable Environmental Laws, no Hazardous Material is present
on any Company Facility and no reasonable likelihood exists that any Hazardous
Material present on other property will come to be present on a Company Facility
as a result of any action or inaction of the Company.
(ii) The Hazardous Material Activities of the Company have
been conducted in material compliance with applicable Environmental Laws.
(iii) The Disclosure Schedule accurately describes all of the
Environmental Permits currently held by the Company and such Environmental
Permits are all of the
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Environmental Permits necessary for the continued conduct of any Hazardous
Material Activities of the Company as such activities are currently being
conducted. All such Environmental Permits are valid, in full force and effect,
and will survive the Closing. To the best knowledge of the Company, no
circumstances exist which are reasonably likely to cause any Environmental
Permit to be revoked, modified, or rendered non-renewable upon payment of the
permit fee or which are reasonably likely to impose upon the Company the
obligation to obtain any additional Environmental Permit. To the best knowledge
of the Company, all Environmental Permits and all other consents and clearances
required by any Environmental Law or any agreement to which the Company is bound
as a condition to the performance and enforcement of this Agreement or which are
required by any Governmental Authority in connection with the transactions
contemplated by this Agreement have been obtained.
(iv) The Company has transferred or made arrangements for
the disposal of Hazardous Materials only to those Disposal Sites described in
the Disclosure Schedule. No action, proceeding, liability or claim exists or,
to the best knowledge of the Company, is threatened, against the Company or, to
the best knowledge of the Company, any Disposal Site with respect to any
transfer or release of Hazardous Materials to a Disposal Site in connection with
the operations of the Company and, to the best knowledge of the Company, there
is no valid basis for such claim.
(u) COMPLIANCE WITH LAWS. The Company has complied in all material
respects with all applicable United States federal, state, municipal and other
political subdivision or governmental agency statutes, ordinances and
regulations, and the Company has complied in all material respects with all
applicable foreign statutes, ordinances and regulations and with all United
States federal statutes, ordinances and regulations as they apply to doing
business in other countries.
(v) MARGIN REGULATIONS; USE OF PROCEEDS. The Company neither owns
nor intends to acquire any "margin stock" as defined in Regulation G of the
Board of Governors of the Federal Reserve System (12 CFR 207).
(w) DISCLOSURE. No representation, warranty or statement by the
Company or the Shareholders in this Agreement, in any written certificate
required by this Agreement to be furnished to the Investors or their counsel or
in any other document delivered by the Company or the Shareholders to the
Investors contains or will contain any untrue statement of material fact or,
omits or will omit to state a material fact necessary to make the statements
made herein or therein, in the light of the circumstances under which they were
made, not misleading. To the extent that the foregoing representation and
warranty applies to any projections which may have been delivered by the Company
to the Investors, the Company represents only that such projections were
prepared in good faith, that the Company believes that there was at the time of
the preparation of such projections a reasonable basis for such projections, and
that the Company is not aware of any change in its circumstances or other fact
that has occurred that causes it to believe that it will be unable to meet the
forecasts set forth in such projections.
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ARTICLE IV
CONDITIONS PRECEDENT TO INVESTORS' OBLIGATIONS
The obligation of the Investors to purchase and pay for the Shares and the
Notes at the Closing is subject to the following conditions:
4.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company and the Shareholders set forth in Article III hereof
shall be true in all material respects on the date of the Closing.
4.2 ABSENCE OF LITIGATION. There shall be no litigation, whether brought
against the Company, the Investors or either of the Shareholders, seeking to
prevent the consummation of the transactions contemplated by this Agreement, and
no such litigation shall have been threatened nor shall there be in effect any
order restraining or prohibiting the consummation of the transactions
contemplated by this Agreement nor any proceedings pending with respect thereto.
There shall be no pending or threatened litigation, or asserted or unasserted
claims, assessments, or other loss contingencies, materially affecting the
Company, its business, assets or future prospects, other than as disclosed in
the Exhibits delivered pursuant hereto as of the date of this Agreement.
4.3 PERFORMANCE OF OBLIGATIONS. The Company and the Shareholders shall
have performed and complied, in all material respects, with all covenants,
conditions and obligations required by this Agreement to have been performed by
the Company and the Shareholders at or prior to the Closing.
4.4 DOCUMENTATION AT CLOSING. The Investors shall have received prior to
or at the Closing all of the following, each in form and substance satisfactory
to the Investors and their special counsel, and all of the following events
shall have occurred prior to or simultaneous with the Closing hereunder:
(a) A copy of all charter documents of the Company certified by the
Secretary of State of Washington, a certified copy of the resolutions of the
Board of Directors and, if required, the shareholders of the Company evidencing
approval of this Agreement and the other matters contemplated hereby, a
certified copy of the Bylaws of the Company, and certified copies of all
documents evidencing other necessary corporate or other action and governmental
approvals, if any, with respect to this Agreement, the Shares and the Notes.
(b) An opinion of Davis Wright Tremaine, counsel for the Company, as
to the matters set forth on EXHIBIT F hereto.
(c) A certificate of the Secretary or an Assistant Secretary of the
Company stating the names of the officers of the Company authorized to sign this
Agreement and the other documents or certificates to be delivered pursuant to
this Agreement by the Company or any of its officers, together with the true
signatures of such officers. The Investors may conclusively rely on such
certificate until they shall receive a further certificate of the Secretary or
Assistant Secretary of the
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Company cancelling or amending the prior certificate and submitting the
signatures of the officers named in such further certificate.
(d) A certificate from each of the Shareholders, severally and
jointly, and a certificate from the President of the Company, each stating that
the representations and warranties of the Company and the Shareholders contained
in Article III hereof and otherwise made by the Shareholders or the Company in
writing in connection with the transactions contemplated hereby are true and
correct as of the date of Closing and that all conditions required to be
performed by the Company prior to or at the Closing have been performed, and
that no condition or event has occurred or is continuing or will result from the
execution and delivery of this Agreement, which is a breach of a material term
hereof or would constitute a breach of a material term hereof but for the
requirement that notice be given or time elapse or both.
(e) Stock Certificates representing the Shares shall be delivered by
the Company on or prior to the Closing.
(f) The Notes shall be delivered by the Company on or prior to the
Closing.
(g) An Escrow Agreement, in substantially the form attached hereto as
EXHIBIT G (the Escrow Agreement"), shall have been executed and delivered by
the Shareholders, the Company and the escrow agent named therein, and shall be
in full force and effect and binding upon the parties thereto.
(h) An S Corporation Indemnification Agreement, in substantially the
form attached hereto as EXHIBIT H (the "S Corporation Agreement"), shall have
been executed and delivered by Crum and the Company and shall be in full force
and effect and binding upon the parties thereto.
(i) A Shareholders' Agreement, in substantially the form attached
hereto as EXHIBIT I (the "Shareholders' Agreement"), shall have been executed
and delivered by the Shareholders, Hafer and the Company and shall be in full
force and effect and binding upon the parties thereto.
(j) A Registration Rights Agreement, in substantially the form
attached hereto as EXHIBIT J (the "Registration Rights Agreement"), shall have
been executed and delivered by the Company.
(k) An Employment Agreement, in substantially the form attached
hereto as EXHIBIT K, shall have been executed and delivered by the Company and
Hafer.
(l) A Voting Agreement, in substantially the form attached hereto as
EXHIBIT L, shall have been executed and delivered by the Company and Hafer.
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(m) The 1995 Employee Stock Plan, in the form attached to the
Disclosure Schedule, shall have been duly adopted by the Company, and an
aggregate of 176,470 shares of Common Stock shall have been reserved for
issuance pursuant thereto.
4.5 MATERIAL ADVERSE CHANGE. There shall not have been, subsequent to
November 30, 1995, any material adverse change in the financial condition of the
business of the Company, or its assets, liabilities, business, results of
operations, prospects or customer, supplier or employee relations.
4.6 DUE DILIGENCE. The Investors and their representatives shall have
completed their business, legal and accounting due diligence investigation and
Investors shall be satisfied, in their sole discretion, with the results
thereof.
4.7 FINANCING. The Company shall have obtained bank, or other
institutional lender, financing, satisfactory to the Investors and the Company,
providing for loan proceeds of not less than Eight Million Dollars ($8,000,000)
net to the Company.
4.8 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Shareholders and
the Company shall have obtained all consents or waivers, if any, necessary to
execute and deliver this Agreement, to sell and issue the Shares and the Notes,
and to carry out the transactions contemplated hereby, and all such consents and
waivers shall be in full force and effect. All corporate and other action and
governmental filings necessary to effect the terms of this Agreement and other
agreements and instruments executed and delivered by the Company in connection
herewith shall have been made or taken, except for any post-sale filing that may
be required under federal and state securities laws. In addition to the
documents set forth above, the Company shall have provided the Investors any
other information or copies of documents that they may reasonably request.
4.9 KEY PERSON LIFE INSURANCE. The Company shall have obtained term key
person life insurance payable to the Company in the amount of $5,000,000 on the
life of Kevin Hafer.
ARTICLE V
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
THE COMPANY AND THE SHAREHOLDERS
The obligations of the Company to consummate the sale and issuance of the
Shares and the Notes to the Investors at the Closing and of the Shareholders and
the Company to perform their other obligations under this Agreement shall be
subject to the fulfillment, at or prior to the Closing, unless waived by the
Shareholders and the Company, of each of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by the Investors in this Agreement shall have been true and correct at and
as of the date hereof, and they shall be true and correct at and as of the
Closing with the same force and effect as though made at and as of that time.
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5.2 ABSENCE OF LITIGATION. There shall be no litigation, whether brought
against the Company, the Investors or either of the Shareholders, seeking to
prevent the consummation of the transactions contemplated by this Agreement, and
no such litigation shall have been threatened nor shall there be in effect any
order restraining or prohibiting the consummation of the transactions
contemplated by this Agreement nor any proceedings pending with respect thereto.
There shall be no pending or threatened litigation, or asserted or unasserted
claims, assessments, or other loss contingencies, materially affecting the
Company, its business, assets or future prospects, other than as disclosed in
the Exhibits delivered pursuant hereto as of the date of this Agreement.
5.3 PERFORMANCE OF OBLIGATIONS. The Investors shall have performed and
complied, in all material respects, with all of their covenants, conditions and
obligations required by this Agreement to be performed or complied with by them
at or prior to the Closing.
5.4 PAYMENT. The Company shall have received payment in full from the
Investors for the Shares and the Notes, in the respective amounts set forth in
EXHIBIT A hereto.
5.5 STOCK OPTION PLAN. The 1995 Employee Stock Plan reserving 176,470
shares of Common Stock for issuance thereunder shall have been duly adopted by
the Company.
5.6 S CORPORATION AGREEMENT. The S Corporation Agreement shall have been
executed and delivered by Crum.
5.7 SHAREHOLDERS' AGREEMENT. The Shareholders' Agreement shall have been
executed and delivered by Hafer and the Investors.
5.8 REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement
shall have been executed and delivered by the Investors.
5.9 FINANCING. The Company shall have obtained bank, or other
institutional lender, financing, satisfactory to the Investors and the Company,
providing for loan proceeds of not less than Eight Million Dollars ($8,000,000)
net to the Company.
5.10 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Shareholders and
the Company shall have obtained all consents or waivers, if any, necessary to
execute and deliver this Agreement, to sell and issue the Shares and the Notes,
and to carry out the transactions contemplated hereby, and all such consents and
waivers shall be in full force and effect. All corporate and other action and
governmental filings necessary to effect the terms of this Agreement and other
agreements and instruments executed and delivered by the Company in connection
herewith shall have been made or taken, except for any post-sale filing that may
be required under federal and state securities laws.
5.11 KEY PERSON LIFE INSURANCE. The Company shall have obtained term key
person life insurance payable to the Company in the amount of $5,000,000 on the
life of Kevin Hafer.
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ARTICLE VI
COVENANTS OF THE COMPANY
6.1 AFFIRMATIVE COVENANTS OF THE COMPANY OTHER THAN REPORTING
REQUIREMENTS. Without limiting any other covenants and provisions hereof, the
Company covenants and agrees that, after the Closing and for so long as any of
the Shares or the Notes remain outstanding, the Company will perform and observe
the following covenants and provisions and will cause each Subsidiary (if any)
to perform and observe such of the following covenants and provisions as are
applicable to such Subsidiary, and will not, without approval of holders of
sixty-six and two thirds percent (66 2/3%) in interest of each of the Shares (or
Common Stock issued upon conversion of the Shares) and the Notes, amend or
revise any terms of this Section 6.1:
(a) PAYMENT OF TAXES AND TRADE DEBT. The Company will pay and
discharge, and cause each Subsidiary to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits or business, or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and all lawful claims, which, if
unpaid, might result in a lien or charge upon any properties of the Company or
any Subsidiary, provided that neither the Company nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim that is being
contested in good faith and by appropriate proceedings if the Company or the
applicable Subsidiary shall have set aside on its books adequate reserves with
respect thereto as shall be determined by its Board of Directors. The Company
will pay and cause each Subsidiary to pay, when due, or in conformity with
customary trade terms, all lease obligations, all trade debt, and all other
Indebtedness incident to the operations of the Company or its Subsidiary, except
such as are being contested in good faith and by appropriate proceedings if the
Company or the applicable Subsidiary shall have set aside on its books adequate
reserves with respect thereto as shall be determined by its Board of Directors.
(b) MAINTENANCE OF INSURANCE. The Company will maintain, and cause
each Subsidiary to maintain, with responsible and reputable insurance companies
or associations, insurance in such amounts and covering such risks as is usually
carried by companies of similar size engaged in similar businesses and owning
similar properties in the same general areas in which the Company or such
Subsidiary operates, but in any event in amounts sufficient to allow the Company
or applicable Subsidiary to replace any of their properties that might be
damaged or destroyed without additional expenditures by the Company or its
Subsidiary (except for reasonable deductibles). During the period that he is
employed by the Company, the Company shall maintain term key-man life insurance
payable to the Company in the amount of $5,000,000 on the life of Kevin Hafer,
with the proceeds of such insurance payable to the Company.
(c) PRESERVATION OF CORPORATE EXISTENCE. The Company will preserve
and maintain its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified as a foreign
corporation in each jurisdiction in which such qualification is necessary or
desirable in view of its business and operations or the ownership of its
properties. The Company will preserve and maintain all material licenses and
other rights to
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use patents, processes, licenses, trademarks, trade names, inventions,
intellectual property rights or copyrights owned or possessed by it and
necessary to the conduct of its business.
(d) COMPLIANCE WITH LAWS. The Company will comply, and cause each
Subsidiary to comply, in all material respects with all applicable laws, rules,
regulations and orders of any United States federal or state governmental
authority, the noncompliance with which could materially adversely affect the
business or condition, financial or otherwise, of the Company and its
Subsidiaries, taken as a whole, except non-compliance being contested in good
faith through appropriate proceedings so long as the Company or the applicable
Subsidiary shall have set up sufficient reserves, if any, required under
generally accepted accounting principles, consistently applied, with respect to
such items. The Company will use its best efforts to comply, and cause each
Subsidiary to comply, in all material respects with all applicable foreign laws,
rules, regulations and orders of any foreign governmental authority,
noncompliance with which could materially adversely affect its business or
condition, financial or otherwise, of the Company and its Subsidiaries, taken as
a whole, except non-compliance being contested in good faith through appropriate
proceedings so long as the Company or the applicable Subsidiary shall have set
up sufficient reserves, if any, required under generally accepted accounting
principles, consistently applied, with respect to such items.
(e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company will keep,
and cause each Subsidiary to keep, adequate records and books of account, in
which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection within its
business shall be made.
(f) MAINTENANCE OF PROPERTIES, ETC. The Company will maintain and
preserve, and cause each Subsidiary to maintain and preserve, all of its
properties necessary or useful in the proper conduct of its business, in good
repair, working order and condition, ordinary wear and tear excepted.
(g) COMPENSATION. The Company will prepare and submit to, and obtain
the approval of the Board of Directors a compensation policy for its officers,
which shall contain guidelines for reasonable levels of salary and other
employment benefits, and which shall be periodically updated, and comply with
such compensation policy in making all compensation offers to new officers and
compensation changes to existing officers, of which all cash compensation and
equity compensation offers or changes shall be subject to the approval of the
Board of Directors.
(h) NEW DEVELOPMENTS. The Company will cause all material
technological or other proprietary developments, inventions, discoveries or
improvements by the employees of the Company to be fully documented in
accordance with the prevailing appropriate industrial professional standards,
where possible and appropriate, in the judgment of the Board of Directors, to
file and prosecute United States and foreign patent applications relating to and
protecting such developments on behalf of the Company.
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(i) BUDGETS AND BOARD APPROVAL. The Company will prior to the
commencement of each fiscal year, prepare and submit to the Board of Directors a
budget and operating plan for the upcoming fiscal year, including projections or
forecasts of capital and operating expenses, cash flow, and profits and losses,
all itemized in reasonable detail and obtain the approval of such budget and
plan by the Board of Directors not more than sixty (60) days following the end
of the prior fiscal year.
(j) EMPLOYEE INVENTION AND NON-DISCLOSURE AGREEMENT. The Company
will use its best efforts to cause each officer, Key Employee, consultant and
other personnel, including employees, agents and contractors, who have
contributed to or participated in the conception and development of the
intellectual property on behalf of the Company, and all employees now or
hereafter employed by the Company or any Subsidiary promptly to execute an
agreement substantially in the form of EXHIBIT M hereto or in such other form as
is approved by the Board of Directors.
(k) FINANCINGS. The Company will promptly, fully and in detail,
inform the Board of Directors in advance of any commitments or contracts
relating to financing of any nature in which the Company pledges corporate
assets, other than under purchase money security interests secured only by the
assets purchased with such financing in the ordinary course of business.
(l) BOARD OF DIRECTORS; INDEMNIFICATION. The Board of Directors
shall consist of not less than three (3) directors. The articles of
incorporation and bylaws of the Company shall at all times provide for the
indemnification of the directors of the Company to the fullest extent provided
by the law of the jurisdiction in which the Company is organized. Prior to such
time as the Company effects the first and underwritten public offering of its
Common Stock, the Company will obtain and maintain directors and officers
liability insurance with limits of not less than $10,000,000. The Company shall
pay for reasonable travel and living expenses of the members of the Board of
Directors who are not employees of the Company in attending meetings of the
Board of Directors and committees thereof and in conducting other business on
behalf of the Company.
(m) SUBORDINATION OF CLASS B NOTES. The Company shall not take any
action that would eliminate or reduce the full subordination of the Class B
Notes to the Notes. The Company shall take all necessary and desirable action
to maintain such subordination.
6.2 REPORTING REQUIREMENTS. The Company will furnish the following to
each Shareholder and to each holder who owns of record or beneficially any Notes
or Shares.
(a) as soon as available, and in any event within twenty (20) days
after the end of each fiscal month of the Company, Consolidated balance sheets
of the Company and its Subsidiaries as of the end of such month and Consolidated
statements of income and of statements of cash flow of the Company and its
Subsidiaries for the period ending with such month, setting forth in each case
in comparative form the corresponding figures for the corresponding period of
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the prior fiscal year and the corresponding figures from the Company's budget
and operating plan, all in reasonable detail and duly certified by the chief
executive officer or chief financial officer of the Company as having been
prepared in accordance with generally accepted accounting principles
consistently applied except for a lack of customary year end disclosures and
year end adjustments;
(b) as soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Company, a copy of the annual audit
report for such year for the Company and its Subsidiaries, including therein
consolidated balance sheets of the Company and its Subsidiaries as of the end of
such fiscal year and consolidated statements of income and retained earnings and
of statements of cash flow of the Company and its Subsidiaries for such fiscal
year, setting forth in each case in comparative form the corresponding figures
for the preceding fiscal year, and the corresponding figures from the Company's
budget and operating plan all duly certified by a "Big Six" independent public
accounting firm selected by the Company's Board of Directors;
(c) at the time of delivery of each monthly and annual statement, a
certificate, executed by the chief executive officer or chief financial officer
of the Company, in the case of monthly statements, and the Company's independent
public accountants, in the case of annual statements, stating that such officer
or accountants, as the case may be, has no knowledge of any default by the
Company or any Subsidiary in the performance or observance of any of the
provisions of this Agreement or, if such officer or accountant has such
knowledge, specifying such default and the nature thereof;
(d) promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, materially
affecting the Company and the Subsidiaries when considered as a whole;
(e) at least thirty (30) days prior to the commencement of each
fiscal year of the Company, a copy of the initial operating plan and budget
provided for in Section 6.1(i);
(f) copies of all materials provided to the committees of the Board
of Directors, and to any such holder or Person who is not a member of the Board
of Directors copies of all materials provided to the Board of Directors;
(g) promptly after sending, making available or filing the same, all
reports and financial statements that the Company or any Subsidiary sends or
makes available to the Shareholders of the Company or for documents publicly
filed with the Securities and Exchange Commission under the Exchange Act; and
(h) all other information respecting the business, properties or the
condition or operations, financial or otherwise, of the Company or any of its
Subsidiaries that any Investor may from time to time reasonably request.
6.3 USE OF PROCEEDS; REPRESENTATIONS AND WARRANTIES OF BRITANNIA.
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(a) Promptly following the Closing, the Company will use $12,499,000
of the proceeds from the sale and issuance of the Shares and the Notes to redeem
from Britannia 500,000 shares of Common Stock for an aggregate price of
$22,499,000, consisting of cash in the aggregate amount of $12,499,000 and Class
B Subordinated Promissory Notes in the form attached hereto as EXHIBIT N (the
"Class B Notes") in the aggregate original principal amount of Ten Million
Dollars ($10,000,000.00). The Company and the Shareholders agree and
acknowledge that the Class B Notes are, by their terms, subordinated to the
Notes, that the Notes are considered Senior Debt pursuant to the terms of the
Class B Notes and that the holders of the Notes are entitled to the benefits of
Section 2 of the Class B Notes. The purchase and redemption of Britannia's
shares of Common Stock shall take place at the Closing, and at the Closing,
Britannia shall deliver to the Company certificates evidencing 500,000 shares of
Common Stock, duly endorsed in blank and in good order for transfer, against
wire transfer to the account of Britannia in payment of the purchase price for
the shares of Common Stock redeemed in the amount of Twelve Million Four
Hundred and Ninety-Nine Thousand Dollars ($12,499,000), net of the Two Million
Five Hundred Thousand Dollars ($2,500,000) to be placed into escrow in
accordance with Section 9.4 hereof and net of any other amounts withheld and
paid by the Company to third parties on behalf of Britannia pursuant to written
instructions from Britannia.
(b) Britannia represents and warrants to the Company and the
Investors that:
(i) Britannia owns of record and beneficially 850,000
shares of Common Stock;
(ii) All consents, approvals, authorizations, and orders
necessary for the sale and delivery of such shares of Common Stock to the
Company have been obtained, and Britannia has, and immediately prior to the
Closing will have, full right, power, authority and capacity to sell, sign,
transfer and deliver such shares of Common Stock to the Company pursuant to this
Agreement; and
(iii) Britannia has, and immediately prior the Closing, will
have, good and marketable title to such shares of Common Stock free and clear of
all liens, claims, security interests, charges, options, or other encumbrances
of any kind, and at the Closing, will deliver such shares of Common Stock to the
Company free and clear of all liens, claims, security interests, charges,
options, or other encumbrances of any kind.
ARTICLE VII
OBLIGATIONS AT THE CLOSING
7.1 DELIVERIES. At the Closing, the parties hereto shall also execute and
deliver all agreements and instruments referred to in Articles IV and V hereof
and otherwise provided herein.
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ARTICLE VIII
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement or any other instrument or document delivered
in connection herewith or therewith, shall survive the execution of this
Agreement until the thirtieth (30th) day following the publication by the
Company of audited financial statements for the year ended December 31, 1996
(the "Expiration Date"); PROVIDED, HOWEVER, that if, at any time prior to the
Expiration Date, any Investor (acting in good faith) delivers to any of the
Shareholders a written notice alleging the existence of an inaccuracy in or a
breach of any of the representations and warranties made by the Company and the
Shareholders (and setting forth in reasonable detail the basis for such
Investor's belief that such an inaccuracy or breach may exist) and asserting a
claim for recovery under Article IX based on such alleged inaccuracy or breach,
then the claim asserted in such notice shall survive the Expiration Date until
such time as such claim is fully and finally resolved. Such representations and
warranties shall not be limited or otherwise affected by or as a result of any
information furnished to or any investigation made by or knowledge of, any of
the Investors or their representatives.
ARTICLE IX
INDEMNIFICATION
9.1 INDEMNIFICATION BY THE SHAREHOLDERS. Subject to the limitations set
forth in this Article IX, the Shareholders shall each indemnify and hold
harmless the Investors and their respective officers, directors, employees,
successors and assigns in respect of any and all claims, actions, suits or other
proceedings and any and all losses, costs, expenses, liabilities, fines,
penalties, interest and damages, whether or not arising out of any claim,
action, suit or other proceeding (and including reasonable counsel and
accountants' fees and expenses and all other reasonable costs and expenses of
investigation, defense or settlement of claims and amounts paid in settlement)
incurred by, imposed on or borne by the Investors or the Company ("Damages")
resulting from the breach of any of the representations, warranties or covenants
made by the Company or the Shareholders in this Agreement or in any other
document or instrument delivered in connection herewith. The Shareholders
acknowledge and agree that, if the Company suffers, incurs or otherwise becomes
subject to any Damages as a result of or in connection with any inaccuracy in or
breach of any representation, warranty, covenant or obligation, then the
Investors also shall be deemed, by virtue of their ownership of the stock of
the Company, to have incurred Damages as a result of and in connection with such
inaccuracy or breach in the same amount and to the same extent as has the
Company. The Shareholders shall be jointly and severally liable for any
indemnification liability of either of the Shareholders under this Article.
9.2 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for
indemnification hereunder, the Investors shall promptly notify the Shareholders
of the claim and, when known, the facts constituting the basis for such claim;
provided that the Investors' failure to give such notice shall not affect any
rights or remedies of the Investors hereunder with respect to indemnification
for
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Damages except to the extent that the Shareholders are materially prejudiced
thereby. In the event of any claim for indemnification hereunder resulting from
or in connection with any claim or legal proceedings by a third party, the
notice to the Shareholders shall specify, if known, the amount or an estimate of
the amount of the liability arising therefrom. The Investors shall not settle
or compromise any claim by a third party for which they are entitled to
indemnification hereunder, without the prior written consent of the Shareholders
(which shall not be unreasonably withheld) unless suit shall have been
instituted against them and the Shareholders shall not have taken control of
such suit after notification thereof as provided in Section 9.3 of this
Agreement. Any Shareholder who is required to hold harmless, indemnify,
compensate or reimburse any Investor pursuant to this Article IX with respect to
any Damages also shall be liable to such Investor for interest on the amount of
such Damages (for the period commencing as of the date on which such Damages
were incurred and ending on the date on which the liability of such Shareholder
to such Investor is fully satisfied by such Shareholder) at a floating rate
equal to the sum of (a) the rate of interest publicly announced by Bank of
America, N.T. & S.A. from time to time as its prime, base or reference rate plus
(b) four percent (4%).
9.3 DEFENSE BY SHAREHOLDERS. In connection with any claim giving rise to
indemnity hereunder or resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Shareholders at
their sole cost and expense may, upon written notice to the Investors, assume
the defense of any such claim or legal proceeding if they acknowledge to the
Investors in writing their obligations to indemnify the Investors with respect
to all elements of such claim, and thereafter diligently conduct the defense
thereof with counsel reasonably acceptable to the Investors. The Investors
shall be entitled to participate in (but not control) the defense of any such
action with their counsel and at their own expense. If the Shareholders do not
assume or fail to conduct in a diligent manner the defense of any such claim or
litigation resulting therefrom, (a) the Investors may defend against such claim
or litigation, in such manner as they may deem appropriate, including, but not
limited to, settling such claim or litigation, after giving notice of the same
to the Shareholders, on such terms as the Investors may deem appropriate, and
(b) the Shareholders shall be entitled to participate in (but not control) the
defense of such action, with their counsel and at their own expense. If the
Shareholders thereafter seek to question the manner in which the Investors
defended such third party claim or the amount or nature of any such settlement,
the Shareholders shall have the burden to prove by a preponderance of the
evidence that the Investors did not defend or settle such third party claim in a
reasonably prudent manner. Each party agrees to cooperate fully with the other
such cooperation to include, without limitation, attendance at depositions and
the provision of relevant documents as may be reasonably requested by the
Shareholders, provided that the Shareholders will hold the Investors harmless
from all of their expenses, including reasonable attorneys' fees, incurred in
connection with such cooperation by the Investors.
9.4 ESCROW. At the Closing, Two Million Five Hundred Thousand Dollars
($2,500,000) shall be deposited by the Company in escrow (the "Escrow Fund") in
accordance with the Escrow Agreement. The Investors shall have the right to be
paid in respect of indemnification claims under this Article IX from the Escrow
Fund.
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9.5 THRESHOLD; CEILING.
(a) The Shareholders shall not be required to make any
indemnification payment pursuant to Section 9.1 until such time as the total
amount of all Damages (including the Damages arising from such inaccuracy or
breach and all other Damages arising from any other inaccuracies in or breaches
of any representations or warranties) that have been directly or indirectly
suffered or incurred by any one or more of the Investors, or to which any one or
more of the Investors has or have otherwise become subject, exceeds One Hundred
Thousand Dollars ($100,000.00) in the aggregate.
(b) The maximum liability of the Shareholders under Section 9.1 shall
be equal to Two Million Five Hundred Thousand Dollars ($2,500,000.00).
9.6 EXCLUSIVE REMEDY. The remedies provided in this Article IX shall be
exclusive as to any claims by a party (including the Investors and their
assigns) with respect to a breach of any representation or warranty set forth in
this Agreement or in any other document or instrument delivered in connection
herewith and shall preclude assertion by any party of any other rights or the
seeking of any other remedies against another party with respect to any such
breach of a representation or warranty; PROVIDED, HOWEVER, that nothing in this
Section 9.6 shall limit rights or remedies expressly provided for in this
Agreement, rights or remedies pursuant to federal or state securities laws or
rights or remedies which, as a matter of applicable law or public policy, cannot
be limited or waived.
ARTICLE X
DEFINITIONS AND ACCOUNTING TERMS
10.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Affiliate" (and, with a correlative meaning, "AFFILIATED") shall
mean, with respect to any Person, any other Person that directly, or through one
or more intermediaries, controls or is controlled by or is under common control
with such first Person, and, if such a Person is an individual, any member of
the immediate family of such individual and any trust whose principal
beneficiary is such individual or one or more members of such immediate family
and any Person who is controlled by any such member or trust. As used in this
definition, "control" (including, with correlative meanings, "controlled by" and
"under common control with") shall mean possession, directly or indirectly, of
power to direct or cause the direction of management or policies (whether
through ownership of securities or partnership or other ownership interests, by
contract or otherwise), and "immediate family" shall mean parents, spouse and
children.
"Agreement" means this Preferred Stock and Subordinated Note Purchase
Agreement as from time to time amended and in effect between the parties.
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"Any Public Offering" means and includes the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of Common Stock for the
account of the Company.
"Board of Directors" shall mean the then present members of the Board
of Directors of the Company.
"Common Stock" includes (a) the Company's Common Stock, no par value,
as authorized on the date of this Agreement, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after the
date hereof, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall ordinarily, in the
absence of contingencies, be entitled to vote for the election of directors of
the Company (even though the right so to vote has been suspended by the
happening of such a contingency), and (c) any other securities into which or for
which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
"Company" means and shall include Apex PC Solutions, Inc., a
Washington corporation, and its successors and assigns.
"Company Facility" shall mean any real property asset (including the
land, the improvements and fixtures thereon and the ambient air ground water and
surface water thereof), that the Company owns, operates, occupies, controls or
leases as of the date of this Agreement.
"Consolidated" when used with reference to any term defined herein
shall mean that term as applied to the accounts of the Company and its
Subsidiaries consolidated in accordance with generally accepted accounting
principles, consistently applied, after eliminating intercompany items and
minority interests.
"Debt Securities" means and includes (i) any debt security of the
Company that by its terms is convertible into or exchangeable for any equity
security of the Company that is a combination of debt and equity, or (ii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any such debt security of the Company.
"Disposal Site" shall mean a landfill, incinerator, disposal agent,
waste hauler or recycler of Hazardous Materials.
"Environmental Law" means any Law pertaining to land use, air, soil,
surface water, groundwater (including the protection, cleanup, removal,
remediation or damage thereof), public or employee health or safety or any other
environmental matter, including, without limitation, the following laws as the
same may be amended from time to time: (a) Clean Air Act (42 U.S.C. Section
7401, et seq.); (b) Clean Water Act (33 U.S.C. Section 1251, et seq.); (c)
Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.); (d)
Comprehensive Environmental Response
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Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); (e) Safe
Drinking Water Act (42 U.S.C. Section 300f, et seq.); (f) Toxic Substances
Control Act (15 U.S.C. Section 2601, et seq.); (g) Rivers and Harbors Act (33
U.S.C. Section 401, et seq.); (h) Endangered Species Act (16 U.S.C. Section
1531, et seq.); and (i) Occupational Safety and Health Act (29 U.S.C. Section
651, et seq.); together with any other foreign or domestic laws (federal, state,
provincial or local) relating to Hazardous Materials of Hazardous Materials
Activities.
"Environmental Permit" shall mean any approval, permit, license,
clearance or consent required to be obtained from any Person or any Governmental
Authority with respect to a Hazardous Materials Activity which is or was
conducted by the Company, its Subsidiaries or any of their past or present
subsidiaries.
"Exchange Act" means the Securities Exchange Act of 1934 and the rules
and regulations of the Securities and Exchange Commission (or of any other
federal agency then administering the Exchange Act) thereunder, all as the same
shall be in effect at the time.
"Governmental Authority" means any local, state, federal, foreign or
international governmental authority, agency or entity, including, but not
limited to, any court, commission, tribunal or panel having jurisdiction over
the matter at issue.
"Hazardous Material" shall mean any material or substance that is
prohibited or regulated by any Environmental Law or that has been designated by
any Governmental Authority to be radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment, including without limitation
asbestos, petroleum, radon gas, and radioactive matter.
"Hazardous Materials Activity" shall mean the handling,
transportation, transfer, recycling, storage, use, treatment, manufacture,
investigation, removal, remediation, release, exposure of others to, sale, or
distribution of any Hazardous Material or any product containing a Hazardous
Material.
"Indebtedness" means all obligations, contingent and otherwise, which
should, in accordance with generally accepted accounting principles,
consistently applied, be classified upon the obligor's balance sheet as
liabilities, excluding any liabilities in respect of deferred federal or state
income taxes, but in any event including, without limitation, liabilities
secured by any mortgage on property owned or acquired subject to such mortgage,
whether or not the liability secured thereby shall have been assumed, and also
including, without limitation, (i) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others, whether or not the
same are or should be so reflected in said balance sheet, except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business and (ii) the present value of
any lease payments due under leases required to be capitalized in accordance
with applicable Statements of Financial Accounting Standards, determined by
discounting all such payments at the interest rate determined in accordance with
applicable Statements of Financial Accounting Standards.
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"Investors" means and shall include the persons listed on EXHIBIT A
hereto.
"Key Employee" means and includes the Chairman of the Board of
Directors, the President, any Vice-President and the Chief Financial Officer of
the Company or any Subsidiary, or any person who is not an officer of the
Company or any Subsidiary and is in charge of one or more of the following
functions: sales, marketing, production, or engineering and technical
development or any other position or employee so designated by the Board of
Directors of the Company or any employee with access to the confidential
information of the Company.
"Law" means any national, international, state, or local law, statute,
rule, regulation, ordinance, requirement for approval or permit, judgment,
injunction, decree of any court of applicable jurisdiction, or any treaty,
international understanding, or other rule which has the force of law,
including, without limitation, any Environmental Law.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, trust, or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Qualified Public Offering" means and includes the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act, covering the offer and sale of Common Stock for the
account of the Company from which the aggregate net proceeds to the Company
exceed $15,000,000 and in which the price per share is at least $10.00 per share
(such amount to be equitably adjusted whenever there shall occur a stock split,
combination, reclassification or other similar event affecting the Common
Stock).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Securities and Exchange Commission (or of any other
federal agency then administering the Securities Act) thereunder, all as the
same shall be in effect at the time.
"Senior Debt" means all Indebtedness of the Company (which is not
convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, including any extensions or
renewals thereof, whether outstanding on the date hereof or thereafter created
or incurred.
"Subsidiary" or "Subsidiaries" means any corporation, 50% or more of
the outstanding voting stock of which shall at the time be owned by the Company
or by one or more Subsidiaries, or any other entity or enterprise, 50% or more
of the equity of which shall at the time be owned by the Company or by one or
more Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise profits, withholding,
social security, unemployment, disability, real property, personal
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property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Wholly-Owned Subsidiary" or "Wholly-Owned Subsidiaries" means any
corporation, 100% of the outstanding voting stock of which shall at the time be
owned by the Company or by one or more Wholly-Owned Subsidiaries, or any other
entity or enterprise, 100% of the equity of which shall at the time be owned by
the Company or by one or more Wholly-Owned Subsidiaries.
10.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles, consistently applied, and all other financial data submitted
pursuant to this Agreement shall be prepared and calculated in accordance with
such principles.
ARTICLE XI
MISCELLANEOUS
11.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of
any Investor, or any other holder of the Preferred Stock, in exercising any
right, power or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy hereunder. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
11.2 NO COMPANY RECISION. The Company specifically waives any rights to
rescind any transaction contemplated by this Agreement, unless the Investors
fail to pay the amounts owing to the Company at the Closing, when due or on
demand.
11.3 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement to
the contrary notwithstanding, changes in or additions to this Agreement may be
made, and compliance with any covenant or provision herein or therein set forth
may be omitted or waived, upon the written consent of the Company, each of the
Shareholders and the Designated Representative. Any waiver or consent may be
given subject to satisfaction of conditions stated therein and any waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
11.4 ADDRESSES FOR NOTICES, ETC. Any notices and other communications
required or permitted under this Agreement shall be effective if in writing and
delivered personally or sent by telecopier, Federal Express or registered or
certified mail, postage prepaid, addressed as follows:
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If to the Shareholders, to:
Sterling Crum
6560 125th Avenue, N.E.
Kirkland, Washington 98033
Telecopier: (206) 822-7844
and
Britannia Holdings Limited
Kings House, The Grange, St. Peter Port
Guernsey, Channel Islands GY1 2QJ
Telecopier: 44-1481-724116
If to the Company, to: Apex PC Solutions, Inc.
20031 142nd Avenue, N.E.
Woodinville, Washington 98072
Attn: Mr. Kevin Hafer
Telecopier: (206) 402-9494
with a copy to: Samuel F. Saracino, Esq.
Davis Wright Tremaine
2600 Century Square
1501 Fourth Avenue
Seattle, Washington 98101
Telecopier: (206) 628-7040
If to the Investors, to: the name(s) and address set forth on EXHIBIT A
hereto.
with a copy to: Jeffrey D. Saper, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Telecopier: (415) 493-6811
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<PAGE>
Unless otherwise specified herein, such notices or other communications
shall be deemed effective (a) on the date delivered, if delivered personally,
(b) two business days after being sent, if sent by Federal Express or other
commercial overnight delivery service, (c) one business day after being sent, if
sent by telecopier with confirmation of good transmission and receipt, and
(d) three business days after being sent, if sent by registered or certified
mail. Each of the parties herewith shall be entitled to specify another address
by giving notice as aforesaid to each of the other parties hereto.
11.5 COSTS, EXPENSES AND TAXES. The Company agrees to pay on demand the
reasonable fees and out-of-pocket expenses of professional advisors incurred by
the Investors in connection with the investigation, preparation, execution and
delivery of this Agreement and the other instruments and documents to be
delivered hereunder and the transactions contemplated hereby and thereby,
including the fees and out-of-pocket expenses of Wilson Sonsini Goodrich &
Rosati, P.C., special counsel for the Investors. Notwithstanding the foregoing,
if the Closing does not occur for any reason, then the Company shall not be
responsible to pay any costs and expenses of the Investors in connection with
the investigation, preparation, execution and delivery of this Agreement and the
other instruments and documents to be delivered hereunder and the transactions
contemplated hereby and thereby. In addition, if the Closing occurs, the
Company shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Agreement and the
purchase of the Shares and agrees to save the Investors harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and filing fees.
11.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Company, the Shareholders and the Investors and
their respective successors and assigns, except that no party shall have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the other parties; provided, however, that the holders of the
Notes and the Class B Notes may, subject to compliance with applicable
securities laws, assign the Notes and the Class B Notes, respectively.
11.7 PRIOR AGREEMENTS. This Agreement constitutes the entire agreement
between the parties and supersedes any prior understandings or agreements
concerning the subject matter hereof.
11.8 SEVERABILITY. The invalidity or unenforceability of any provision
hereto shall in no way affect the validity or enforceability of any other
provision.
11.9 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington.
11.10 HEADINGS. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
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<PAGE>
11.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
11.12 FURTHER ASSURANCES. From and after the date of this Agreement, upon
the request of the Investors, the Company and each Subsidiary shall execute and
deliver such instruments, documents and other writings as may be necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement.
11.13 INDEPENDENT COUNSEL.
(a) The Shareholders have had the opportunity to be represented by
counsel of their choosing in the negotiation and execution of this Agreement and
have not relied upon counsel for the Company, Davis Wright Tremaine, or counsel
for the Investors, Wilson Sonsini Goodrich & Rosati, P.C., with respect to any
matter relating hereto.
(b) The Company has been represented by Davis Wright Tremaine in the
negotiation and execution of this Agreement and has not relied on any other
legal counsel with respect to any matter relating thereto.
11.14 CONFIDENTIALITY. Until the date of Closing, any information
relating to the terms of this Agreement and the transactions contemplated hereby
shall be treated as confidential and shall not be disclosed, by any of the
parties hereto, to a third party without the consent of the Board of Directors
of the Company and the mutual consent of the Investors.
11.15 PRESS RELEASE. No party hereto shall release a press release
relating to this Agreement or any of the transactions or documents contemplated
hereby without first submitting a copy of such press release to the other
parties hereto and obtaining the prior approval of such other parties to any
such press release, which approval shall not be unreasonably withheld.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
COMPANY: APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
-----------------------------------
Kevin Hafer, President
SHAREHOLDERS: /s/ Sterling Crum
----------------------------------------
Sterling Crum
BRITANNIA HOLDINGS LIMITED
By: /s/ Patrick Adrian Blin
-----------------------------------
Name: Patrick Adrian Blin
Title: Director
[Signature Page to Stock and Subordinated Note Purchase Agreement]
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<PAGE>
INVESTORS: ADVENT VII L.P.
By: TA Associates VII L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
ADVENT ATLANTIC AND PACIFIC II L.P.
By: TA Associates AAP II Partners, its General
Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
ADVENT NEW YORK L.P.
By: TA Associates VI L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, Managing Director
TA VENTURE INVESTORS LIMITED PARTNERSHIP
By: /s/ Jeffrey T. Chambers
----------------------------------------
Jeffrey T. Chambers, General Partner
[Signature Page to Stock and Subordinated Note Purchase Agreement]
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<PAGE>
Exhibit 10.14
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CLASS A SUBORDINATED PROMISSORY NOTE
$6,000,000.00 December 29, 1995
Woodinville, Washington
FOR VALUE RECEIVED, APEX PC SOLUTIONS, INC., a Washington corporation,
having offices at 20031 142nd Avenue, NE, Woodinville, Washington 98072
(hereinafter, the "Company"), hereby promises to pay to Advent VII L.P. (the
"Payee"), or its assigns, at 45 Milk Street, Boston, Massachusetts 02109, or at
such other place as may be designated by the Payee from time to time by notice
to the Company, the principal sum of Six Million Dollars ($6,000,000.00),
together with accrued interest from the date hereof on the unpaid principal
balance at a rate equal to seven percent (7%) per annum (subject to adjustment
as set forth in Section 7 hereof). Such principal and interest shall be paid in
accordance with the terms of paragraph 1 below, in cash, or by wire transfer to
such account as the Payee shall direct, in immediately available funds and in
lawful currency of the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable
to the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on March 31, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable on the
consummation of a "Qualified Liquidity Event," as such term is defined herein;
PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall not have
been consummated on or before December 28, 2000, then all outstanding principal
shall be paid in two (2) equal installments of $3,000,000.00 each, on
December 28, 2000 and December 28, 2001; PROVIDED that, notwithstanding the
foregoing, payment of all principal amounts to the Payee shall be delayed until
the amount of Senior Debt then outstanding is less than Two Million Dollars
($2,000,000);
<PAGE>
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean either (a) a bona fide, firm commitment underwriting pursuant
to a registration statement on Form S-1 under the Securities Act of 1933, as
amended, the public offering price of which was not less than $10.00 per share
(adjusted to reflect subsequent stock dividends, stock splits (a "Qualified
Public Offering") and in which the net proceeds to the Company equal or exceed
Twenty Million Dollars ($20,000,000); or (b) any merger or consolidation with,
or sale, assignment, lease or other disposition of or voluntarily parting with
control of, all or substantially all, the assets of the Company to any person,
including the entering into of any joint venture, licensing or conveyance of
material patent rights or technology rights to any third party; other than any
such transaction in which the holders of the voting securities of the Company
prior to such transaction are the holders immediately after such transaction of
more than 50% of the voting securities of the surviving entity or a parent of
the surviving entity and the surviving entity expressly assumes the obligations
under this Note.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the States of California and Washington are authorized or
required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Subordinated Note Purchase Agreement (the "Agreement") dated of even date
herewith by and among the Company, the Payee and certain other individuals and
entities and is subject to the terms and conditions of the Agreement.
Capitalized terms not otherwise defined herein shall have the definition set
forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee
and successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof, subject to the following
limitation: The principal amount of the Senior Debt shall not exceed Eleven
Million Dollars ($11,000,000).
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors
and assigns, covenants and agrees, and the Payee and successor holders of this
Note by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, to the extent and in the manner hereinafter set forth, to the prior
payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they or
any of them, may proceed to enforce
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<PAGE>
such provisions against the Company or against the holder of this Note without
the necessity of joining the Company as a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency
or bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except securities that are subordinated to Senior Debt to at
least the same extent as this Note) or other property, shall be made on account
of this Note; and any such payment or distribution, except securities that are
subordinated and junior in right of payment to the payment of all Senior Debt
then outstanding in terms of substantially the same tenor as this Section 3,
which would, but for the provisions hereof, be payable or deliverable in respect
of the Note shall be paid or delivered directly to the holders of Senior Debt
(or their duly authorized representatives), in the proportions in which they
hold the same, until all Senior Debt shall have been paid in full, and every
holder of this Note by becoming a holder hereof shall have designated and
appointed the holder or holders of Senior Debt (and their duly authorized
representatives) as his or its agents and attorneys-in-fact to, demand, sue for,
collect and receive such Senior Debt holder's ratable share of all such payments
and distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any necessary
proof of claim thereof, in the name of the holders of this Note or otherwise, as
such Senior Debt holders (or their authorized representatives) may determine to
be necessary or appropriate for the enforcement of this Section 3. Each of the
Payee and successor holders of this Note, by its acceptance hereof, agrees to
execute, at the request of the Company, a separate agreement with any holder of
Senior Debt on the terms set forth in this Section 3, but acknowledges that such
a separate agreement shall not be necessary in order to enable the holders of
the Senior Debt to enforce their rights hereunder.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the
event that:
(A) Any default occurs in the payment of the principal of
or interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
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<PAGE>
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event
that any default by the Company under the terms of the Senior Debt occurs (other
than a default in the payment of the principal of or interest on any Senior
Debt), then, upon receipt by the Company and the Payee of a written notice of
such default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee; PROVIDED that, if U.S. Bank of Washington, National
Association, and its successors and assigns ("U.S. Bank") holds more than 25% of
the Senior Debt then outstanding, no holder of Senior Debt other than U.S. Bank
shall have the right to provide a Blockage Notice. Each holder of Senior Debt
may send one or more Blockage Notices, except as otherwise provided above, but
payments hereunder may not be blocked by the holders of Senior Debt for more
than 180 days during any 360-day period. The terms of this Section 3(b)(iii)
shall not apply if the maturity of any Senior Debt has been accelerated by any
holder thereof because of a default if such acceleration has not been rescinded
or said Senior Debt has not been paid, but rather, the provisions of Section
3(b)(ii) shall apply. Other than as set forth in Sections 3(b)(ii) and
3(b)(iii), past and current interest and principal on this Note shall by paid by
the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or
distribution shall be paid or delivered to any holder of this Note in violation
or contravention of the terms of this subordination, before all Senior Debt
shall have been paid in full, such payment or distribution shall be held in
trust for and paid and delivered ratably to the holders of Senior Debt (or their
duly authorized representatives), until all Senior Debt shall have been paid in
full or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. Unless and until all Senior Debt
shall have been paid in full, the original or any subsequent holder of this Note
will not commence or join with any other creditor or creditors of the Company in
commencing any bankruptcy, reorganization or insolvency proceedings against the
Company. At any meeting of creditors of the Company or in the event of any
proceeding, voluntary or involuntary, for the distribution, division or
application of all or part of the assets of the Company or its proceeds thereof,
whether such proceeding be for the liquidation, dissolution or winding up of the
Company or the business of a receivership, insolvency or bankruptcy proceeding,
an assignment for the benefit of creditors or a proceeding by or against the
Company for relief under any bankruptcy, reorganization or insolvency law or any
law relating to the relief of debtors, readjustment of indebtedness,
reorganization, arrangement, composition or extension or otherwise, if all
Senior Debt has not been paid in full at the time, the holders of the Senior
Debt are hereby authorized at any such meeting or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant
to or in connection with this Note, either in their own names or the name or
names of any holder of this Note; and
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<PAGE>
(B) To collect any assets of the Company distributed,
divided or applied by way of dividend or payment, or any securities issued on
account of this Note (other than securities containing subordinating provisions
at least as favorable to the holders of Senior Debt as those contained in this
Note) and apply the same, or the proceeds of any realization upon the same that
the holders of the Senior Debt elect to effect, to Senior Debt until all Senior
Debt shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 3 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or
future holder of Senior Debt to enforce subordination of this Note pursuant to
the provisions of this Section 3 shall not at any time be prejudiced or impaired
by any act or failure to act on the part of the Company or any such other holder
of Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security of
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of Section 1 and
this Section 3, may not be amended or waived in any manner that is detrimental
to any Senior Debt without the consent of the holders of a majority in principal
amount of then existing Senior Debt (which majority must include U.S. Bank of
Washington, National Association, and its successors and assigns ("U.S. Bank")
if U.S. Bank holds at least 25% of the Senior Debt then outstanding).
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior
Debt" shall mean (A) all Indebtedness to U.S. Bank arising out of or related to
that certain credit agreement entered into between the Company and U.S. Bank and
dated December 28, 1995, as amended, renewed, or restated from time to time (the
"Credit Agreement"); and (B) all other Indebtedness of the Company (which is not
convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof which is not by its terms subordinate and junior to or on a parity with
this Note; PROVIDED, that the principal of such Indebtedness described in this
subpart (B) shall not exceed an
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<PAGE>
amount equal to $11,000,000 less the principal amount of the Indebtedness that
constitutes Senior Debt under subpart (A).
The term "Indebtedness" shall mean the obligations of the Company
in respect of the principal, interest, fees, charges and expenses, whether
direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will
execute and deliver any other documents evidencing the subordination of this
Note to Senior Debt that may be reasonably requested by the Company or the
holders of a majority in principal amount of then existing Senior Debt so long
as none of the provisions contained in such documents diminish the rights of
Payee in any manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future
holder of any Senior Debt to enforce subordination as herein provided shall at
any time in any way be prejudiced or impaired by any good faith act or good
faith failure to act by such holder, or by any noncompliance by the Company,
with the terms and provisions and covenants herein (other than the failure of
such holder or the Company to give notice of default under Sections 3(b)(ii) and
3(b)(iii) hereof) regardless of any knowledge thereof any such holder may have
or otherwise be charged with. The provisions of this Section 3 are intended to
be for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
(xii) NO PREPAYMENT. Notwithstanding any provisions of
this Note to the contrary, the Company shall not make and the Payee shall not
accept any payment of principal of this Note or any prepayment of interest on
this Note until the amount of Senior Debt then outstanding is less than Two
Million Dollars ($2,000,000);
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest
remains unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder; and/or (ii) any written notification given to
the Company by any holder of Senior Debt that an event of default has occurred
under the Senior Debt loan documents, or that such holder has declared the
Senior Debt owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable
advance notice, during normal business hours, and without undue disruption of
the business of the Company, to visit, and inspect any of the properties,
corporate books and financial records of the Company, to make copies of such
books and records, and to discuss the affairs, finances, and accounts of the
Company with the principal officers of the Company.
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<PAGE>
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 6.2 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events constitutes an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to actual acceleration of the maturity of such Senior Debt in a
principal amount in excess of $1,000,000, singularly or in the aggregate;
PROVIDED, HOWEVER, that in the event that the event of default under the terms
of the Senior Debt is waived or tolled, the Event of Default hereunder shall be
waived or tolled for a similar duration;
(iii) A material default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 5 of this Note which has not been cured within thirty (30)
days after notice thereof from the Payee;
(iv) (A) The Company shall commence any voluntary case,
proceeding or other action under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
the Company, or seeking to adjudicate the Company as bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to the Company or its
debts, or seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the Company
shall make a general assignment for the benefit of its creditors; or (B) there
shall have been
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<PAGE>
commenced against the Company any involuntary case, proceeding or other action
of a nature referred to in clause (A) above and such involuntary case or
proceeding shall remain undismissed and unstayed for a period of sixty (60)
consecutive days; or (C) there shall have been commenced against the Company any
case, proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
the Company's assets which shall not have been vacated, discharged or stayed or
bonded pending appeal within sixty (60) consecutive days from the entry thereof;
or (D) the Company shall have taken any action in furtherance of or acquiescence
in any of the acts set forth in clauses (A), (B), or (C) above; or (E) the
Company shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due;
(v) All or any substantial part of the Company's assets
shall be (y) destroyed by fire or other casualty and shall not have been
substantially reconstructed within a period of one (1) year, unless the Company
shall have received or be entitled to receive insurance benefits with respect to
such assets in an amount equal to at least eighty percent (80%) of the fair
market value of such assets at the time of destruction or (z) condemned, seized
or otherwise appropriated, or custody or control of such assets shall be assumed
by any governmental agency or by any court of competent jurisdiction at the
instance of any governmental agency, and shall be retained for a period of sixty
(60) days, unless the Company shall have received or be entitled to receive
compensation for such assets in an amount equal to at least eighty percent (80%)
of the fair market value of such assets on the date of such condemnation,
seizure or other appropriation;
(vi) Other than an Event of Default of the nature specified
in Paragraphs 6(a)(i) and (ii) above, a default by the Company in the
performance or observance of any material covenant, agreement or condition
contained in the Agreement which, if such event is subject to being cured, has
not been cured within thirty (30) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under
any evidence of indebtedness for borrowed money of the Company in a principal
amount in excess of $1,000,000 (other than the Senior Debt and trade payables
incurred in the ordinary course of business), whether such indebtedness now
exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in the event
that the event of default of such indebtedness is waived or tolled, the Event of
Default hereunder shall be waived or tolled for a similar duration); or
(viii) If a judgment of $1,000,000 or more shall be entered
against the Company, and if, within ninety (90) days after entry thereof, such
judgment shall not be discharged or execution thereof stayed pending appeal, or
if, within (30) days after the expiration of said stay, such judgment shall not
be discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in
Paragraph 6(a)(iv) which shall be continuing, the unpaid principal amount of and
accrued interest on this Note shall immediately become due and payable; and
(ii) if such Event of Default is any other Event of Default which shall be
continuing,
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the Payee may, by written notice to the Company, declare this Note to be
forthwith due and payable, whereupon this Note shall become forthwith due and
payable, both as to principal and accrued interest, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived, anything contained in this Note to the contrary notwithstanding.
7. INTEREST RATE ADJUSTMENTS.
(a) In the event that any Payment of principal or interest provided
for herein is not paid by the Company when due, then the Company shall pay to
the Payee a late charge in an amount equal to 13% per annum. Such late charge
shall be applied only to those installments of principal and interest not paid
when due (including the entire unpaid principal balance of this Note, in the
event that the Payee shall have the right to exercise its rights and remedies
hereunder) computed from the date payment was due to the date of actual payment.
(b) In the event of a Qualified Public Offering that does not qualify
as a Qualified Liquidity Event, from and after the closing of the Qualified
Public Offering the unpaid principal balance of this Note shall bear interest at
a rate equal to ten percent (10%) per annum.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment
of all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion of the outstanding principal balance
of this Note, together with accrued interest to the date of prepayment on the
principal amount prepaid. Any partial prepayment of principal shall be applied
in reduction of the outstanding installments of principal hereof, in inverse
order of stated maturity.
(b) In the event of the completion of a Qualified Public Offering
that qualifies as a Qualified Liquidity Event, then subject to any contrary
provision of the Senior Debt, the net proceeds to the Company of such public
offering shall, upon receipt by the Company, first be applied toward payment of
the outstanding principal balance of this Note, which prepayment of principal
shall be accompanied by payment of all unpaid accrued interest thereon. Any
such prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
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<PAGE>
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall
be restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Washington without
giving effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
-------------------------------------------
Kevin Hafer, President
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<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CLASS A SUBORDINATED PROMISSORY NOTE
$3,291,200.00 December 29, 1995
Woodinville, Washington
FOR VALUE RECEIVED, APEX PC SOLUTIONS, INC., a Washington corporation,
having offices at 20031 142nd Avenue, NE, Woodinville, Washington 98072
(hereinafter, the "Company"), hereby promises to pay to Advent Atlantic and
Pacific II L.P. (the "Payee"), or its assigns, at 45 Milk Street, Boston,
Massachusetts 02109, or at such other place as may be designated by the Payee
from time to time by notice to the Company, the principal sum of Three Million
Two Hundred Ninety-One Thousand Two Hundred Dollars ($3,291,200.00), together
with accrued interest from the date hereof on the unpaid principal balance at a
rate equal to seven percent (7%) per annum (subject to adjustment as set forth
in Section 7 hereof). Such principal and interest shall be paid in accordance
with the terms of paragraph 1 below, in cash, or by wire transfer to such
account as the Payee shall direct, in immediately available funds and in lawful
currency of the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable
to the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on March 31, 1996;
(ii) All principal and any accrued and unpaid interest, and
any and all other obligations due and owing under this Note, shall be payable on
the consummation of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before December 28, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $1,645,600.00 each, on
December 28, 2000 and December 28, 2001; PROVIDED that, notwithstanding the
foregoing, payment
<PAGE>
of all principal amounts to the Payee shall be delayed until the amount of
Senior Debt then outstanding is less than Two Million Dollars ($2,000,000);
(iii) For purposes of this Note, the term "Qualified
Liquidity Event" shall mean either (a) a bona fide, firm commitment
underwriting pursuant to a registration statement on Form S-1 under the
Securities Act of 1933, as amended, the public offering price of which was
not less than $10.00 per share (adjusted to reflect subsequent stock
dividends, stock splits (a "Qualified Public Offering") and in which the net
proceeds to the Company equal or exceed Twenty Million Dollars ($20,000,000);
or (b) any merger or consolidation with, or sale, assignment, lease or other
disposition of or voluntarily parting with control of, all or substantially
all, the assets of the Company to any person, including the entering into of
any joint venture, licensing or conveyance of material patent rights or
technology rights to any third party; other than any such transaction in
which the holders of the voting securities of the Company prior to such
transaction are the holders immediately after such transaction of more than
50% of the voting securities of the surviving entity or a parent of the
surviving entity and the surviving entity expressly assumes the obligations
under this Note.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the States of California and Washington are authorized or
required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain
Stock and Subordinated Note Purchase Agreement (the "Agreement") dated of
even date herewith by and among the Company, the Payee and certain other
individuals and entities and is subject to the terms and conditions of the
Agreement. Capitalized terms not otherwise defined herein shall have the
definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee
and successor holders of this Note, for the benefit of the holders of the
Senior Debt, acknowledge and agree that the payment of all or any portion of
the outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof, subject to the following
limitation: The principal amount of the Senior Debt shall not exceed Eleven
Million Dollars ($11,000,000).
(b) TERMS OF SUBORDINATION. The Company, for itself, its
successors and assigns, covenants and agrees, and the Payee and successor
holders of this Note by its acceptance hereof likewise covenant and agree,
that payment of the principal of and interest on this Note shall be
subordinated in right of payment, to the extent and in the manner hereinafter
set forth, to the prior payment in full of all Senior Debt (as hereinafter
defined), at any time outstanding. The provisions
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of this Section 3 shall constitute a continuing representation to all Persons
who, in reliance upon such provisions, become the holders of or continue to
hold Senior Debt, and such provisions are made for the benefit of the holders
of Senior Debt, and such holders are hereby made obligees hereunder the same
as if their names were written herein as such, and they or any of them, may
proceed to enforce such provisions against the Company or against the holder
of this Note without the necessity of joining the Company as a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any
insolvency or bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection therewith, relating
to the Company or to its property, or, in the event of any proceedings for
voluntary liquidation, dissolution or other winding up of the Company or
marshalling of its assets or any composition with creditors of the Company,
whether or not involving insolvency or bankruptcy, then and in any such event
all Senior Debt shall be paid in full before any payment or distribution of
any character, whether in cash, securities (except securities that are
subordinated to Senior Debt to at least the same extent as this Note) or
other property, shall be made on account of this Note; and any such payment
or distribution, except securities that are subordinated and junior in right
of payment to the payment of all Senior Debt then outstanding in terms of
substantially the same tenor as this Section 3, which would, but for the
provisions hereof, be payable or deliverable in respect of the Note shall be
paid or delivered directly to the holders of Senior Debt (or their duly
authorized representatives), in the proportions in which they hold the same,
until all Senior Debt shall have been paid in full, and every holder of this
Note by becoming a holder hereof shall have designated and appointed the
holder or holders of Senior Debt (and their duly authorized representatives)
as his or its agents and attorneys-in-fact to, demand, sue for, collect and
receive such Senior Debt holder's ratable share of all such payments and
distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any
necessary proof of claim thereof, in the name of the holders of this Note or
otherwise, as such Senior Debt holders (or their authorized representatives)
may determine to be necessary or appropriate for the enforcement of this
Section 3. Each of the Payee and successor holders of this Note, by its
acceptance hereof, agrees to execute, at the request of the Company, a
separate agreement with any holder of Senior Debt on the terms set forth in
this Section 3, but acknowledges that such a separate agreement shall not be
necessary in order to enable the holders of the Senior Debt to enforce their
rights hereunder.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the
event that:
(A) Any default occurs in the payment of the principal of
or interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
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<PAGE>
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the
event that any default by the Company under the terms of the Senior Debt
occurs (other than a default in the payment of the principal of or interest
on any Senior Debt), then, upon receipt by the Company and the Payee of a
written notice of such default and payment blockage from the holder of any
Senior Debt ("Blockage Notice") and for a period commencing on the date of
the Blockage Notice and extending until the earlier of (A) the date that the
default giving rise to the Blockage Notice is cured, (B) 180 days after the
date of the Blockage Notice, or (C) such Senior Debt is paid in full
("Blockage Period"), no payment of principal or of interest on this Note
shall be made by the Company or demanded or accepted by Payee; PROVIDED that,
if U.S. Bank of Washington, National Association, and its successors and
assigns ("U.S. Bank") holds more than 25% of the Senior Debt then
outstanding, no holder of Senior Debt other than U.S. Bank shall have the
right to provide a Blockage Notice. Each holder of Senior Debt may send one
or more Blockage Notices, except as otherwise provided above, but payments
hereunder may not be blocked by the holders of Senior Debt for more than 180
days during any 360-day period. The terms of this Section 3(b)(iii) shall
not apply if the maturity of any Senior Debt has been accelerated by any
holder thereof because of a default if such acceleration has not been
rescinded or said Senior Debt has not been paid, but rather, the provisions
of Section 3(b)(ii) shall apply. Other than as set forth in Sections
3(b)(ii) and 3(b)(iii), past and current interest and principal on this Note
shall by paid by the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or
distribution shall be paid or delivered to any holder of this Note in
violation or contravention of the terms of this subordination, before all
Senior Debt shall have been paid in full, such payment or distribution shall
be held in trust for and paid and delivered ratably to the holders of Senior
Debt (or their duly authorized representatives), until all Senior Debt shall
have been paid in full or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. Unless and until all Senior Debt
shall have been paid in full, the original or any subsequent holder of this
Note will not commence or join with any other creditor or creditors of the
Company in commencing any bankruptcy, reorganization or insolvency
proceedings against the Company. At any meeting of creditors of the Company
or in the event of any proceeding, voluntary or involuntary, for the
distribution, division or application of all or part of the assets of the
Company or its proceeds thereof, whether such proceeding be for the
liquidation, dissolution or winding up of the Company or the business of a
receivership, insolvency or bankruptcy proceeding, an assignment for the
benefit of creditors or a proceeding by or against the Company for relief
under any bankruptcy, reorganization or insolvency law or any law relating to
the relief of debtors, readjustment of indebtedness, reorganization,
arrangement, composition or extension or otherwise, if all Senior Debt has
not been paid in full at the time, the holders of the Senior Debt are hereby
authorized at any such meeting or in any such proceeding:
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(A) To enforce claims comprising, arising under, pursuant
to or in connection with this Note, either in their own names or the name or
names of any holder of this Note; and
(B) To collect any assets of the Company distributed,
divided or applied by way of dividend or payment, or any securities issued on
account of this Note (other than securities containing subordinating provisions
at least as favorable to the holders of Senior Debt as those contained in this
Note) and apply the same, or the proceeds of any realization upon the same that
the holders of the Senior Debt elect to effect, to Senior Debt until all Senior
Debt shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3
are intended solely for the purpose of defining the relative rights of the
Payee, on the one hand, and the holders of Senior Debt, on the other hand.
Nothing contained in this Section 3, or elsewhere in this Note, is intended
to or shall impair, as between the Company, its creditors other than the
holders of Senior Debt, and the Payee, the obligation of the Company, which
is unconditional and absolute, to pay to the Payee the principal of and
interest on this Note as and when the same shall become due and payable in
accordance with the terms thereof, or to affect the relative rights of the
Payee and creditors of the Company other than the holders of the Senior Debt,
nor shall anything herein or therein prevent Payee from accepting any payment
with respect to this Note or exercising all remedies otherwise permitted by
applicable law upon default under this Note, subject to the rights, if any,
under this Section 3 of the holders of Senior Debt to receive cash, property
or securities of the Company received by the Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or
future holder of Senior Debt to enforce subordination of this Note pursuant
to the provisions of this Section 3 shall not at any time be prejudiced or
impaired by any act or failure to act on the part of the Company or any such
other holder of Senior Debt, including without limitation, any forbearance,
waiver, consent, compromise, amendment, extension, renewal, or taking or
release of security of or in respect of any Senior Debt, or by noncompliance
by the Company with the terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of Section 1
and this Section 3, may not be amended or waived in any manner that is
detrimental to any Senior Debt without the consent of the holders of a
majority in principal amount of then existing Senior Debt (which majority
must include U.S. Bank of Washington, National Association, and its
successors and assigns ("U.S. Bank") if U.S. Bank holds at least 25% of the
Senior Debt then outstanding).
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term
"Senior Debt" shall mean (A) all Indebtedness to U.S. Bank arising out of or
related to that certain credit agreement entered into between the Company and
U.S. Bank and dated December 28, 1995, as amended, renewed, or restated from
time to time (the "Credit Agreement"); and (B) all other Indebtedness of the
Company (which is not convertible into equity securities of the Company and
is not issued in conjunction with equity securities of the Company or options
or warrants to purchase equity securities of the Company) for money borrowed
from banks or other institutional or commercial
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<PAGE>
finance lenders, whether outstanding on the date hereof or thereafter created
or incurred, and all extensions and renewals thereof which is not by its
terms subordinate and junior to or on a parity with this Note; PROVIDED, that
the principal of such Indebtedness described in this subpart (B) shall not
exceed an amount equal to $11,000,000 less the principal amount of the
Indebtedness that constitutes Senior Debt under subpart (A).
The term "Indebtedness" shall mean the obligations of the
Company in respect of the principal, interest, fees, charges and expenses,
whether direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it
will execute and deliver any other documents evidencing the subordination of
this Note to Senior Debt that may be reasonably requested by the Company or
the holders of a majority in principal amount of then existing Senior Debt so
long as none of the provisions contained in such documents diminish the
rights of Payee in any manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or
future holder of any Senior Debt to enforce subordination as herein provided
shall at any time in any way be prejudiced or impaired by any good faith act
or good faith failure to act by such holder, or by any noncompliance by the
Company, with the terms and provisions and covenants herein (other than the
failure of such holder or the Company to give notice of default under
Sections 3(b)(ii) and 3(b)(iii) hereof) regardless of any knowledge thereof
any such holder may have or otherwise be charged with. The provisions of
this Section 3 are intended to be for the benefit of, and shall be
enforceable directly by, the holders of the Senior Debt, without any act or
notice of acceptance hereof or reliance thereon.
(xii) NO PREPAYMENT. Notwithstanding any provisions of
this Note to the contrary, the Company shall not make and the Payee shall not
accept any payment of principal of this Note or any prepayment of interest on
this Note until the amount of Senior Debt then outstanding is less than Two
Million Dollars ($2,000,000);
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest
remains unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence
of any Event of Default hereunder; and/or (ii) any written notification given
to the Company by any holder of Senior Debt that an event of default has
occurred under the Senior Debt loan documents, or that such holder has
declared the Senior Debt owed to such holder to be immediately due and
payable; and
(b) Permit any representative(s) of the Payee, upon reasonable
advance notice, during normal business hours, and without undue disruption of
the business of the Company, to visit, and inspect any of the properties,
corporate books and financial records of the Company, to
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<PAGE>
make copies of such books and records, and to discuss the affairs, finances,
and accounts of the Company with the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest
remains unpaid under this Note, the Company shall not, without the prior
consent of the Payee, take the actions contained in the covenants set forth
in Section 6.2 of the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other
than with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt,
purchase money financing, capitalized leases, trade payables incurred in the
ordinary course of business or debt which is subordinated to the debt
evidenced by this Note) except in a manner and amount reasonably satisfactory
to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to
the Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events constitutes an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of
the Senior Debt after giving effect to any grace periods expressly provided
therein which gives rise to actual acceleration of the maturity of such
Senior Debt in a principal amount in excess of $1,000,000, singularly or in
the aggregate; PROVIDED, HOWEVER, that in the event that the event of default
under the terms of the Senior Debt is waived or tolled, the Event of Default
hereunder shall be waived or tolled for a similar duration;
(iii) A material default by the Company in the performance
or observance of any of the non-monetary covenants and agreements of the
Company contained in Section 5 of this Note which has not been cured within
thirty (30) days after notice thereof from the Payee;
(iv) (A) The Company shall commence any voluntary case,
proceeding or other action under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to the Company, or seeking to adjudicate the Company as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution,
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<PAGE>
composition or other relief with respect to the Company or its debts, or
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Company shall make a general assignment for the benefit of its creditors; or
(B) there shall have been commenced against the Company any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and
such involuntary case or proceeding shall remain undismissed and unstayed for
a period of sixty (60) consecutive days; or (C) there shall have been
commenced against the Company any case, proceeding or other action seeking
issuance of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of the Company's assets which shall not
have been vacated, discharged or stayed or bonded pending appeal within sixty
(60) consecutive days from the entry thereof; or (D) the Company shall have
taken any action in furtherance of or acquiescence in any of the acts set
forth in clauses (A), (B), or (C) above; or (E) the Company shall be unable
to, or shall admit in writing its inability to, pay its debts as they become
due;
(v) All or any substantial part of the Company's assets
shall be (y) destroyed by fire or other casualty and shall not have been
substantially reconstructed within a period of one (1) year, unless the
Company shall have received or be entitled to receive insurance benefits with
respect to such assets in an amount equal to at least eighty percent (80%) of
the fair market value of such assets at the time of destruction or (z)
condemned, seized or otherwise appropriated, or custody or control of such
assets shall be assumed by any governmental agency or by any court of
competent jurisdiction at the instance of any governmental agency, and shall
be retained for a period of sixty (60) days, unless the Company shall have
received or be entitled to receive compensation for such assets in an amount
equal to at least eighty percent (80%) of the fair market value of such
assets on the date of such condemnation, seizure or other appropriation;
(vi) Other than an Event of Default of the nature
specified in Paragraphs 6(a)(i) and (ii) above, a default by the Company in
the performance or observance of any material covenant, agreement or
condition contained in the Agreement which, if such event is subject to being
cured, has not been cured within thirty (30) days after notice thereof from
the Payee;
(vii) A default under any bond, debenture or note or under
any evidence of indebtedness for borrowed money of the Company in a principal
amount in excess of $1,000,000 (other than the Senior Debt and trade payables
incurred in the ordinary course of business), whether such indebtedness now
exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in the
event that the event of default of such indebtedness is waived or tolled, the
Event of Default hereunder shall be waived or tolled for a similar duration);
or
(viii) If a judgment of $1,000,000 or more shall be entered
against the Company, and if, within ninety (90) days after entry thereof,
such judgment shall not be discharged or execution thereof stayed pending
appeal, or if, within (30) days after the expiration of said stay, such
judgment shall not be discharged.
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(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and
accrued interest on this Note shall immediately become due and payable; and
(ii) if such Event of Default is any other Event of Default which shall be
continuing, the Payee may, by written notice to the Company, declare this
Note to be forthwith due and payable, whereupon this Note shall become
forthwith due and payable, both as to principal and accrued interest, without
presentment, demand, protest or any other notice of any kind, all of which
are hereby expressly waived, anything contained in this Note to the contrary
notwithstanding.
7. INTEREST RATE ADJUSTMENTS.
(a) In the event that any Payment of principal or interest provided
for herein is not paid by the Company when due, then the Company shall pay to
the Payee a late charge in an amount equal to 13% per annum. Such late charge
shall be applied only to those installments of principal and interest not paid
when due (including the entire unpaid principal balance of this Note, in the
event that the Payee shall have the right to exercise its rights and remedies
hereunder) computed from the date payment was due to the date of actual payment.
(b) In the event of a Qualified Public Offering that does not qualify
as a Qualified Liquidity Event, from and after the closing of the Qualified
Public Offering the unpaid principal balance of this Note shall bear interest at
a rate equal to ten percent (10%) per annum.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment
of all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion of the outstanding principal balance
of this Note, together with accrued interest to the date of prepayment on the
principal amount prepaid. Any partial prepayment of principal shall be applied
in reduction of the outstanding installments of principal hereof, in inverse
order of stated maturity.
(b) In the event of the completion of a Qualified Public Offering
that qualifies as a Qualified Liquidity Event, then subject to any contrary
provision of the Senior Debt, the net proceeds to the Company of such public
offering shall, upon receipt by the Company, first be applied toward payment of
the outstanding principal balance of this Note, which prepayment of principal
shall be accompanied by payment of all unpaid accrued interest thereon. Any
such
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prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall
be restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Washington without
giving effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that
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the Company may not transfer any of its rights or obligations hereunder
without the prior written consent of the Payee.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
------------------------------------
Kevin Hafer, President
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CLASS A SUBORDINATED PROMISSORY NOTE
$600,000.00 December 29, 1995
Woodinville, Washington
FOR VALUE RECEIVED, APEX PC SOLUTIONS, INC., a Washington corporation,
having offices at 20031 142nd Avenue, NE, Woodinville, Washington 98072
(hereinafter, the "Company"), hereby promises to pay to Advent New York L.P.
(the "Payee"), or its assigns, at 45 Milk Street, Boston, Massachusetts
02109, or at such other place as may be designated by the Payee from time to
time by notice to the Company, the principal sum of Six Hundred Thousand
Dollars ($600,000.00), together with accrued interest from the date hereof on
the unpaid principal balance at a rate equal to seven percent (7%) per annum
(subject to adjustment as set forth in Section 7 hereof). Such principal and
interest shall be paid in accordance with the terms of paragraph 1 below, in
cash, or by wire transfer to such account as the Payee shall direct, in
immediately available funds and in lawful currency of the United States of
America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable
to the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September
and December commencing on March 31, 1996;
(ii) All principal and any accrued and unpaid interest, and
any and all other obligations due and owing under this Note, shall be payable on
the consummation of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before December 28, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $300,000.00 each, on
December 28, 2000 and December 28, 2001; PROVIDED that, notwithstanding the
foregoing, payment of all principal amounts to the Payee shall be delayed until
the amount of Senior Debt then outstanding is less than Two Million Dollars
($2,000,000);
<PAGE>
(iii) For purposes of this Note, the term "Qualified
Liquidity Event" shall mean either (a) a bona fide, firm commitment underwriting
pursuant to a registration statement on Form S-1 under the Securities Act of
1933, as amended, the public offering price of which was not less than $10.00
per share (adjusted to reflect subsequent stock dividends, stock splits (a
"Qualified Public Offering") and in which the net proceeds to the Company equal
or exceed Twenty Million Dollars ($20,000,000); or (b) any merger or
consolidation with, or sale, assignment, lease or other disposition of or
voluntarily parting with control of, all or substantially all, the assets of the
Company to any person, including the entering into of any joint venture,
licensing or conveyance of material patent rights or technology rights to any
third party; other than any such transaction in which the holders of the voting
securities of the Company prior to such transaction are the holders immediately
after such transaction of more than 50% of the voting securities of the
surviving entity or a parent of the surviving entity and the surviving entity
expressly assumes the obligations under this Note.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the States of California and Washington are authorized or
required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Subordinated Note Purchase Agreement (the "Agreement") dated of even date
herewith by and among the Company, the Payee and certain other individuals and
entities and is subject to the terms and conditions of the Agreement.
Capitalized terms not otherwise defined herein shall have the definition set
forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee
and successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof, subject to the following
limitation: The principal amount of the Senior Debt shall not exceed Eleven
Million Dollars ($11,000,000).
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors
and assigns, covenants and agrees, and the Payee and successor holders of this
Note by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, to the extent and in the manner hereinafter set forth, to the prior
payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
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<PAGE>
hereunder the same as if their names were written herein as such, and they or
any of them, may proceed to enforce such provisions against the Company or
against the holder of this Note without the necessity of joining the Company as
a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency
or bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except securities that are subordinated to Senior Debt to at
least the same extent as this Note) or other property, shall be made on account
of this Note; and any such payment or distribution, except securities that are
subordinated and junior in right of payment to the payment of all Senior Debt
then outstanding in terms of substantially the same tenor as this Section 3,
which would, but for the provisions hereof, be payable or deliverable in respect
of the Note shall be paid or delivered directly to the holders of Senior Debt
(or their duly authorized representatives), in the proportions in which they
hold the same, until all Senior Debt shall have been paid in full, and every
holder of this Note by becoming a holder hereof shall have designated and
appointed the holder or holders of Senior Debt (and their duly authorized
representatives) as his or its agents and attorneys-in-fact to, demand, sue for,
collect and receive such Senior Debt holder's ratable share of all such payments
and distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any necessary
proof of claim thereof, in the name of the holders of this Note or otherwise, as
such Senior Debt holders (or their authorized representatives) may determine to
be necessary or appropriate for the enforcement of this Section 3. Each of the
Payee and successor holders of this Note, by its acceptance hereof, agrees to
execute, at the request of the Company, a separate agreement with any holder of
Senior Debt on the terms set forth in this Section 3, but acknowledges that such
a separate agreement shall not be necessary in order to enable the holders of
the Senior Debt to enforce their rights hereunder.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the
event that:
(A) Any default occurs in the payment of the principal of
or interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such
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<PAGE>
events by the holder of such Senior Debt) or demanded or accepted by Payee
(provided that the Company has received written notice of such events by the
holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event
that any default by the Company under the terms of the Senior Debt occurs (other
than a default in the payment of the principal of or interest on any Senior
Debt), then, upon receipt by the Company and the Payee of a written notice of
such default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee; PROVIDED that, if U.S. Bank of Washington, National
Association, and its successors and assigns ("U.S. Bank") holds more than 25% of
the Senior Debt then outstanding, no holder of Senior Debt other than U.S. Bank
shall have the right to provide a Blockage Notice. Each holder of Senior Debt
may send one or more Blockage Notices, except as otherwise provided above, but
payments hereunder may not be blocked by the holders of Senior Debt for more
than 180 days during any 360-day period. The terms of this Section 3(b)(iii)
shall not apply if the maturity of any Senior Debt has been accelerated by any
holder thereof because of a default if such acceleration has not been rescinded
or said Senior Debt has not been paid, but rather, the provisions of Section
3(b)(ii) shall apply. Other than as set forth in Sections 3(b)(ii) and
3(b)(iii), past and current interest and principal on this Note shall by paid by
the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or
distribution shall be paid or delivered to any holder of this Note in violation
or contravention of the terms of this subordination, before all Senior Debt
shall have been paid in full, such payment or distribution shall be held in
trust for and paid and delivered ratably to the holders of Senior Debt (or their
duly authorized representatives), until all Senior Debt shall have been paid in
full or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. Unless and until all Senior Debt
shall have been paid in full, the original or any subsequent holder of this Note
will not commence or join with any other creditor or creditors of the Company in
commencing any bankruptcy, reorganization or insolvency proceedings against the
Company. At any meeting of creditors of the Company or in the event of any
proceeding, voluntary or involuntary, for the distribution, division or
application of all or part of the assets of the Company or its proceeds thereof,
whether such proceeding be for the liquidation, dissolution or winding up of the
Company or the business of a receivership, insolvency or bankruptcy proceeding,
an assignment for the benefit of creditors or a proceeding by or against the
Company for relief under any bankruptcy, reorganization or insolvency law or any
law relating to the relief of debtors, readjustment of indebtedness,
reorganization, arrangement, composition or extension or otherwise, if all
Senior Debt has not been paid in full at the time, the holders of the Senior
Debt are hereby authorized at any such meeting or in any such proceeding:
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(A) To enforce claims comprising, arising under, pursuant
to or in connection with this Note, either in their own names or the name or
names of any holder of this Note; and
(B) To collect any assets of the Company distributed,
divided or applied by way of dividend or payment, or any securities issued on
account of this Note (other than securities containing subordinating provisions
at least as favorable to the holders of Senior Debt as those contained in this
Note) and apply the same, or the proceeds of any realization upon the same that
the holders of the Senior Debt elect to effect, to Senior Debt until all Senior
Debt shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 3 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or
future holder of Senior Debt to enforce subordination of this Note pursuant to
the provisions of this Section 3 shall not at any time be prejudiced or impaired
by any act or failure to act on the part of the Company or any such other holder
of Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security of
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of Section 1
and this Section 3, may not be amended or waived in any manner that is
detrimental to any Senior Debt without the consent of the holders of a majority
in principal amount of then existing Senior Debt (which majority must include
U.S. Bank of Washington, National Association, and its successors and assigns
("U.S. Bank") if U.S. Bank holds at least 25% of the Senior Debt then
outstanding).
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior
Debt" shall mean (A) all Indebtedness to U.S. Bank arising out of or related to
that certain credit agreement entered into between the Company and U.S. Bank and
dated December 28, 1995, as amended, renewed, or restated from time to time (the
"Credit Agreement"); and (B) all other Indebtedness of the Company (which is not
convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial
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<PAGE>
finance lenders, whether outstanding on the date hereof or thereafter created
or incurred, and all extensions and renewals thereof which is not by its
terms subordinate and junior to or on a parity with this Note; PROVIDED, that
the principal of such Indebtedness described in this subpart (B) shall not
exceed an amount equal to $11,000,000 less the principal amount of the
Indebtedness that constitutes Senior Debt under subpart (A).
The term "Indebtedness" shall mean the obligations of the Company
in respect of the principal, interest, fees, charges and expenses, whether
direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will
execute and deliver any other documents evidencing the subordination of this
Note to Senior Debt that may be reasonably requested by the Company or the
holders of a majority in principal amount of then existing Senior Debt so long
as none of the provisions contained in such documents diminish the rights of
Payee in any manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future
holder of any Senior Debt to enforce subordination as herein provided shall at
any time in any way be prejudiced or impaired by any good faith act or good
faith failure to act by such holder, or by any noncompliance by the Company,
with the terms and provisions and covenants herein (other than the failure of
such holder or the Company to give notice of default under Sections 3(b)(ii) and
3(b)(iii) hereof) regardless of any knowledge thereof any such holder may have
or otherwise be charged with. The provisions of this Section 3 are intended to
be for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
(xii) NO PREPAYMENT. Notwithstanding any provisions of
this Note to the contrary, the Company shall not make and the Payee shall not
accept any payment of principal of this Note or any prepayment of interest on
this Note until the amount of Senior Debt then outstanding is less than Two
Million Dollars ($2,000,000);
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest
remains unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder; and/or (ii) any written notification given to
the Company by any holder of Senior Debt that an event of default has occurred
under the Senior Debt loan documents, or that such holder has declared the
Senior Debt owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable
advance notice, during normal business hours, and without undue disruption of
the business of the Company, to visit, and inspect any of the properties,
corporate books and financial records of the Company, to
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make copies of such books and records, and to discuss the affairs, finances,
and accounts of the Company with the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 6.2 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events constitutes an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to actual acceleration of the maturity of such Senior Debt in a
principal amount in excess of $1,000,000, singularly or in the aggregate;
PROVIDED, HOWEVER, that in the event that the event of default under the terms
of the Senior Debt is waived or tolled, the Event of Default hereunder shall be
waived or tolled for a similar duration;
(iii) A material default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 5 of this Note which has not been cured within thirty (30)
days after notice thereof from the Payee;
(iv) (A) The Company shall commence any voluntary case,
proceeding or other action under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
the Company, or seeking to adjudicate the Company as bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution,
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composition or other relief with respect to the Company or its debts, or
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Company shall make a general assignment for the benefit of its creditors; or
(B) there shall have been commenced against the Company any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and
such involuntary case or proceeding shall remain undismissed and unstayed for
a period of sixty (60) consecutive days; or (C) there shall have been
commenced against the Company any case, proceeding or other action seeking
issuance of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of the Company's assets which shall not
have been vacated, discharged or stayed or bonded pending appeal within sixty
(60) consecutive days from the entry thereof; or (D) the Company shall have
taken any action in furtherance of or acquiescence in any of the acts set
forth in clauses (A), (B), or (C) above; or (E) the Company shall be unable
to, or shall admit in writing its inability to, pay its debts as they become
due;
(v) All or any substantial part of the Company's assets
shall be (y) destroyed by fire or other casualty and shall not have been
substantially reconstructed within a period of one (1) year, unless the Company
shall have received or be entitled to receive insurance benefits with respect to
such assets in an amount equal to at least eighty percent (80%) of the fair
market value of such assets at the time of destruction or (z) condemned, seized
or otherwise appropriated, or custody or control of such assets shall be assumed
by any governmental agency or by any court of competent jurisdiction at the
instance of any governmental agency, and shall be retained for a period of sixty
(60) days, unless the Company shall have received or be entitled to receive
compensation for such assets in an amount equal to at least eighty percent (80%)
of the fair market value of such assets on the date of such condemnation,
seizure or other appropriation;
(vi) Other than an Event of Default of the nature specified in
Paragraphs 6(a)(i) and (ii) above, a default by the Company in the performance
or observance of any material covenant, agreement or condition contained in the
Agreement which, if such event is subject to being cured, has not been cured
within thirty (30) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or
under any evidence of indebtedness for borrowed money of the Company in a
principal amount in excess of $1,000,000 (other than the Senior Debt and trade
payables incurred in the ordinary course of business), whether such indebtedness
now exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in the event
that the event of default of such indebtedness is waived or tolled, the Event of
Default hereunder shall be waived or tolled for a similar duration); or
(viii) If a judgment of $1,000,000 or more shall be
entered against the Company, and if, within ninety (90) days after entry
thereof, such judgment shall not be discharged or execution thereof stayed
pending appeal, or if, within (30) days after the expiration of said stay, such
judgment shall not be discharged.
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(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and
accrued interest on this Note shall immediately become due and payable; and
(ii) if such Event of Default is any other Event of Default which shall be
continuing, the Payee may, by written notice to the Company, declare this
Note to be forthwith due and payable, whereupon this Note shall become
forthwith due and payable, both as to principal and accrued interest, without
presentment, demand, protest or any other notice of any kind, all of which
are hereby expressly waived, anything contained in this Note to the contrary
notwithstanding.
7. INTEREST RATE ADJUSTMENTS.
(a) In the event that any Payment of principal or interest provided
for herein is not paid by the Company when due, then the Company shall pay to
the Payee a late charge in an amount equal to 13% per annum. Such late charge
shall be applied only to those installments of principal and interest not paid
when due (including the entire unpaid principal balance of this Note, in the
event that the Payee shall have the right to exercise its rights and remedies
hereunder) computed from the date payment was due to the date of actual payment.
(b) In the event of a Qualified Public Offering that does not qualify
as a Qualified Liquidity Event, from and after the closing of the Qualified
Public Offering the unpaid principal balance of this Note shall bear interest at
a rate equal to ten percent (10%) per annum.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment
of all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion of the outstanding principal balance
of this Note, together with accrued interest to the date of prepayment on the
principal amount prepaid. Any partial prepayment of principal shall be applied
in reduction of the outstanding installments of principal hereof, in inverse
order of stated maturity.
(b) In the event of the completion of a Qualified Public Offering
that qualifies as a Qualified Liquidity Event, then subject to any contrary
provision of the Senior Debt, the net proceeds to the Company of such public
offering shall, upon receipt by the Company, first be applied toward payment of
the outstanding principal balance of this Note, which prepayment of principal
shall be accompanied by payment of all unpaid accrued interest thereon. Any
such
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<PAGE>
prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall
be restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Washington without
giving effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that
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the Company may not transfer any of its rights or obligations hereunder
without the prior written consent of the Payee.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
--------------------------------
Kevin Hafer, President
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<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CLASS A SUBORDINATED PROMISSORY NOTE
$108,800.00 December 29, 1995
Woodinville, Washington
FOR VALUE RECEIVED, APEX PC SOLUTIONS, INC., a Washington corporation,
having offices at 20031 142nd Avenue, NE, Woodinville, Washington 98072
(hereinafter, the "Company"), hereby promises to pay to TA Venture Investors
Limited Partnership (the "Payee"), or its assigns, at 45 Milk Street, Boston,
Massachusetts 02109, or at such other place as may be designated by the Payee
from time to time by notice to the Company, the principal sum of One Hundred
Eight Thousand Eight Hundred Dollars ($108,800.00), together with accrued
interest from the date hereof on the unpaid principal balance at a rate equal
to seven percent (7%) per annum (subject to adjustment as set forth in
Section 7 hereof). Such principal and interest shall be paid in accordance
with the terms of paragraph 1 below, in cash, or by wire transfer to such
account as the Payee shall direct, in immediately available funds and in
lawful currency of the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable
to the Payee as follows:
(i) Interest shall accrue from the date hereof and
shall be payable quarterly in arrears on the last day of each March, June,
September and December commencing on March 31, 1996;
(ii) All principal and any accrued and unpaid
interest, and any and all other obligations due and owing under this Note,
shall be payable on the consummation of a "Qualified Liquidity Event," as
such term is defined herein; PROVIDED, HOWEVER, in the event that a Qualified
Liquidity Event shall not have been consummated on or before December 28,
2000, then all outstanding principal shall be paid in two (2) equal
installments of $54,400.00 each, on December 28, 2000 and December 28, 2001;
PROVIDED that, notwithstanding the foregoing, payment
<PAGE>
of all principal amounts to the Payee shall be delayed until the amount of
Senior Debt then outstanding is less than Two Million Dollars ($2,000,000);
(iii) For purposes of this Note, the term "Qualified
Liquidity Event" shall mean either (a) a bona fide, firm commitment
underwriting pursuant to a registration statement on Form S-1 under the
Securities Act of 1933, as amended, the public offering price of which was
not less than $10.00 per share (adjusted to reflect subsequent stock
dividends, stock splits (a "Qualified Public Offering") and in which the net
proceeds to the Company equal or exceed Twenty Million Dollars ($20,000,000);
or (b) any merger or consolidation with, or sale, assignment, lease or other
disposition of or voluntarily parting with control of, all or substantially
all, the assets of the Company to any person, including the entering into of
any joint venture, licensing or conveyance of material patent rights or
technology rights to any third party; other than any such transaction in
which the holders of the voting securities of the Company prior to such
transaction are the holders immediately after such transaction of more than
50% of the voting securities of the surviving entity or a parent of the
surviving entity and the surviving entity expressly assumes the obligations
under this Note.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the States of California and Washington are authorized or
required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain
Stock and Subordinated Note Purchase Agreement (the "Agreement") dated of
even date herewith by and among the Company, the Payee and certain other
individuals and entities and is subject to the terms and conditions of the
Agreement. Capitalized terms not otherwise defined herein shall have the
definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee
and successor holders of this Note, for the benefit of the holders of the
Senior Debt, acknowledge and agree that the payment of all or any portion of
the outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof, subject to the following
limitation: The principal amount of the Senior Debt shall not exceed Eleven
Million Dollars ($11,000,000).
(b) TERMS OF SUBORDINATION. The Company, for itself, its
successors and assigns, covenants and agrees, and the Payee and successor
holders of this Note by its acceptance hereof likewise covenant and agree,
that payment of the principal of and interest on this Note shall be
subordinated in right of payment, to the extent and in the manner hereinafter
set forth, to the prior payment in full of all Senior Debt (as hereinafter
defined), at any time outstanding. The provisions
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<PAGE>
of this Section 3 shall constitute a continuing representation to all Persons
who, in reliance upon such provisions, become the holders of or continue to
hold Senior Debt, and such provisions are made for the benefit of the holders
of Senior Debt, and such holders are hereby made obligees hereunder the same
as if their names were written herein as such, and they or any of them, may
proceed to enforce such provisions against the Company or against the holder
of this Note without the necessity of joining the Company as a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any
insolvency or bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection therewith, relating
to the Company or to its property, or, in the event of any proceedings for
voluntary liquidation, dissolution or other winding up of the Company or
marshalling of its assets or any composition with creditors of the Company,
whether or not involving insolvency or bankruptcy, then and in any such event
all Senior Debt shall be paid in full before any payment or distribution of
any character, whether in cash, securities (except securities that are
subordinated to Senior Debt to at least the same extent as this Note) or
other property, shall be made on account of this Note; and any such payment
or distribution, except securities that are subordinated and junior in right
of payment to the payment of all Senior Debt then outstanding in terms of
substantially the same tenor as this Section 3, which would, but for the
provisions hereof, be payable or deliverable in respect of the Note shall be
paid or delivered directly to the holders of Senior Debt (or their duly
authorized representatives), in the proportions in which they hold the same,
until all Senior Debt shall have been paid in full, and every holder of this
Note by becoming a holder hereof shall have designated and appointed the
holder or holders of Senior Debt (and their duly authorized representatives)
as his or its agents and attorneys-in-fact to, demand, sue for, collect and
receive such Senior Debt holder's ratable share of all such payments and
distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any
necessary proof of claim thereof, in the name of the holders of this Note or
otherwise, as such Senior Debt holders (or their authorized representatives)
may determine to be necessary or appropriate for the enforcement of this
Section 3. Each of the Payee and successor holders of this Note, by its
acceptance hereof, agrees to execute, at the request of the Company, a
separate agreement with any holder of Senior Debt on the terms set forth in
this Section 3, but acknowledges that such a separate agreement shall not be
necessary in order to enable the holders of the Senior Debt to enforce their
rights hereunder.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In
the event that:
(A) Any default occurs in the payment of the
principal of or interest on any Senior Debt and during the continuance of
such default until such payment has been made or such default has been cured
or waived in writing by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is
accelerated by any holder thereof because of a default with respect thereto
and until such acceleration has been rescinded or said Senior Debt has been
paid;
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<PAGE>
then and during the continuance of any of such events no payment of principal
of or interest on this Note shall be made by the Company (provided that the
Company has received written notice of such events by the holder of such
Senior Debt) or demanded or accepted by Payee (provided that the Company has
received written notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the
event that any default by the Company under the terms of the Senior Debt
occurs (other than a default in the payment of the principal of or interest
on any Senior Debt), then, upon receipt by the Company and the Payee of a
written notice of such default and payment blockage from the holder of any
Senior Debt ("Blockage Notice") and for a period commencing on the date of
the Blockage Notice and extending until the earlier of (A) the date that the
default giving rise to the Blockage Notice is cured, (B) 180 days after the
date of the Blockage Notice, or (C) such Senior Debt is paid in full
("Blockage Period"), no payment of principal or of interest on this Note
shall be made by the Company or demanded or accepted by Payee; PROVIDED that,
if U.S. Bank of Washington, National Association, and its successors and
assigns ("U.S. Bank") holds more than 25% of the Senior Debt then
outstanding, no holder of Senior Debt other than U.S. Bank shall have the
right to provide a Blockage Notice. Each holder of Senior Debt may send one
or more Blockage Notices, except as otherwise provided above, but payments
hereunder may not be blocked by the holders of Senior Debt for more than 180
days during any 360-day period. The terms of this Section 3(b)(iii) shall
not apply if the maturity of any Senior Debt has been accelerated by any
holder thereof because of a default if such acceleration has not been
rescinded or said Senior Debt has not been paid, but rather, the provisions
of Section 3(b)(ii) shall apply. Other than as set forth in Sections
3(b)(ii) and 3(b)(iii), past and current interest and principal on this Note
shall by paid by the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or
distribution shall be paid or delivered to any holder of this Note in
violation or contravention of the terms of this subordination, before all
Senior Debt shall have been paid in full, such payment or distribution shall
be held in trust for and paid and delivered ratably to the holders of Senior
Debt (or their duly authorized representatives), until all Senior Debt shall
have been paid in full or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. Unless and until all Senior
Debt shall have been paid in full, the original or any subsequent holder of
this Note will not commence or join with any other creditor or creditors of
the Company in commencing any bankruptcy, reorganization or insolvency
proceedings against the Company. At any meeting of creditors of the Company
or in the event of any proceeding, voluntary or involuntary, for the
distribution, division or application of all or part of the assets of the
Company or its proceeds thereof, whether such proceeding be for the
liquidation, dissolution or winding up of the Company or the business of a
receivership, insolvency or bankruptcy proceeding, an assignment for the
benefit of creditors or a proceeding by or against the Company for relief
under any bankruptcy, reorganization or insolvency law or any law relating to
the relief of debtors, readjustment of indebtedness, reorganization,
arrangement, composition or extension or otherwise, if all Senior Debt has
not been paid in full at the time, the holders of the Senior Debt are hereby
authorized at any such meeting or in any such proceeding:
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<PAGE>
(A) To enforce claims comprising, arising under,
pursuant to or in connection with this Note, either in their own names or the
name or names of any holder of this Note; and
(B) To collect any assets of the Company
distributed, divided or applied by way of dividend or payment, or any
securities issued on account of this Note (other than securities containing
subordinating provisions at least as favorable to the holders of Senior Debt
as those contained in this Note) and apply the same, or the proceeds of any
realization upon the same that the holders of the Senior Debt elect to
effect, to Senior Debt until all Senior Debt shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section
3 are intended solely for the purpose of defining the relative rights of the
Payee, on the one hand, and the holders of Senior Debt, on the other hand.
Nothing contained in this Section 3, or elsewhere in this Note, is intended
to or shall impair, as between the Company, its creditors other than the
holders of Senior Debt, and the Payee, the obligation of the Company, which
is unconditional and absolute, to pay to the Payee the principal of and
interest on this Note as and when the same shall become due and payable in
accordance with the terms thereof, or to affect the relative rights of the
Payee and creditors of the Company other than the holders of the Senior Debt,
nor shall anything herein or therein prevent Payee from accepting any payment
with respect to this Note or exercising all remedies otherwise permitted by
applicable law upon default under this Note, subject to the rights, if any,
under this Section 3 of the holders of Senior Debt to receive cash, property
or securities of the Company received by the Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or
future holder of Senior Debt to enforce subordination of this Note pursuant
to the provisions of this Section 3 shall not at any time be prejudiced or
impaired by any act or failure to act on the part of the Company or any such
other holder of Senior Debt, including without limitation, any forbearance,
waiver, consent, compromise, amendment, extension, renewal, or taking or
release of security of or in respect of any Senior Debt, or by noncompliance
by the Company with the terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of Section 1
and this Section 3, may not be amended or waived in any manner that is
detrimental to any Senior Debt without the consent of the holders of a
majority in principal amount of then existing Senior Debt (which majority
must include U.S. Bank of Washington, National Association, and its
successors and assigns ("U.S. Bank") if U.S. Bank holds at least 25% of the
Senior Debt then outstanding).
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term
"Senior Debt" shall mean (A) all Indebtedness to U.S. Bank arising out of or
related to that certain credit agreement entered into between the Company and
U.S. Bank and dated December 28, 1995, as amended, renewed, or restated from
time to time (the "Credit Agreement"); and (B) all other Indebtedness of the
Company (which is not convertible into equity securities of the Company and
is not issued in conjunction with equity securities of the Company or options
or warrants to purchase equity securities of the Company) for money borrowed
from banks or other institutional or commercial
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<PAGE>
finance lenders, whether outstanding on the date hereof or thereafter created
or incurred, and all extensions and renewals thereof which is not by its
terms subordinate and junior to or on a parity with this Note; PROVIDED, that
the principal of such Indebtedness described in this subpart (B) shall not
exceed an amount equal to $11,000,000 less the principal amount of the
Indebtedness that constitutes Senior Debt under subpart (A).
The term "Indebtedness" shall mean the obligations of the
Company in respect of the principal, interest, fees, charges and expenses,
whether direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it
will execute and deliver any other documents evidencing the subordination of
this Note to Senior Debt that may be reasonably requested by the Company or
the holders of a majority in principal amount of then existing Senior Debt so
long as none of the provisions contained in such documents diminish the
rights of Payee in any manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or
future holder of any Senior Debt to enforce subordination as herein provided
shall at any time in any way be prejudiced or impaired by any good faith act
or good faith failure to act by such holder, or by any noncompliance by the
Company, with the terms and provisions and covenants herein (other than the
failure of such holder or the Company to give notice of default under
Sections 3(b)(ii) and 3(b)(iii) hereof) regardless of any knowledge thereof
any such holder may have or otherwise be charged with. The provisions of
this Section 3 are intended to be for the benefit of, and shall be
enforceable directly by, the holders of the Senior Debt, without any act or
notice of acceptance hereof or reliance thereon.
(xii) NO PREPAYMENT. Notwithstanding any provisions of
this Note to the contrary, the Company shall not make and the Payee shall not
accept any payment of principal of this Note or any prepayment of interest on
this Note until the amount of Senior Debt then outstanding is less than Two
Million Dollars ($2,000,000);
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest
remains unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence
of any Event of Default hereunder; and/or (ii) any written notification given
to the Company by any holder of Senior Debt that an event of default has
occurred under the Senior Debt loan documents, or that such holder has
declared the Senior Debt owed to such holder to be immediately due and
payable; and
(b) Permit any representative(s) of the Payee, upon reasonable
advance notice, during normal business hours, and without undue disruption of
the business of the Company, to visit, and inspect any of the properties,
corporate books and financial records of the Company, to
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<PAGE>
make copies of such books and records, and to discuss the affairs, finances,
and accounts of the Company with the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest
remains unpaid under this Note, the Company shall not, without the prior
consent of the Payee, take the actions contained in the covenants set forth
in Section 6.2 of the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other
than with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt,
purchase money financing, capitalized leases, trade payables incurred in the
ordinary course of business or debt which is subordinated to the debt
evidenced by this Note) except in a manner and amount reasonably satisfactory
to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to
the Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events constitutes an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion
of any installment of principal, interest or other monetary sum payable under
this Note and such failure to pay continues for five days after the same
shall be due and payable;
(ii) An event of default has occurred under the terms
of the Senior Debt after giving effect to any grace periods expressly
provided therein which gives rise to actual acceleration of the maturity of
such Senior Debt in a principal amount in excess of $1,000,000, singularly or
in the aggregate; PROVIDED, HOWEVER, that in the event that the event of
default under the terms of the Senior Debt is waived or tolled, the Event of
Default hereunder shall be waived or tolled for a similar duration;
(iii) A material default by the Company in the
performance or observance of any of the non-monetary covenants and agreements
of the Company contained in Section 5 of this Note which has not been cured
within thirty (30) days after notice thereof from the Payee;
(iv) (A) The Company shall commence any voluntary
case, proceeding or other action under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to the Company, or seeking to adjudicate the Company as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution,
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<PAGE>
composition or other relief with respect to the Company or its debts, or
seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Company shall make a general assignment for the benefit of its creditors; or
(B) there shall have been commenced against the Company any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and
such involuntary case or proceeding shall remain undismissed and unstayed for
a period of sixty (60) consecutive days; or (C) there shall have been
commenced against the Company any case, proceeding or other action seeking
issuance of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of the Company's assets which shall not
have been vacated, discharged or stayed or bonded pending appeal within sixty
(60) consecutive days from the entry thereof; or (D) the Company shall have
taken any action in furtherance of or acquiescence in any of the acts set
forth in clauses (A), (B), or (C) above; or (E) the Company shall be unable
to, or shall admit in writing its inability to, pay its debts as they become
due;
(v) All or any substantial part of the Company's
assets shall be (y) destroyed by fire or other casualty and shall not have
been substantially reconstructed within a period of one (1) year, unless the
Company shall have received or be entitled to receive insurance benefits with
respect to such assets in an amount equal to at least eighty percent (80%) of
the fair market value of such assets at the time of destruction or (z)
condemned, seized or otherwise appropriated, or custody or control of such
assets shall be assumed by any governmental agency or by any court of
competent jurisdiction at the instance of any governmental agency, and shall
be retained for a period of sixty (60) days, unless the Company shall have
received or be entitled to receive compensation for such assets in an amount
equal to at least eighty percent (80%) of the fair market value of such
assets on the date of such condemnation, seizure or other appropriation;
(vi) Other than an Event of Default of the nature
specified in Paragraphs 6(a)(i) and (ii) above, a default by the Company in
the performance or observance of any material covenant, agreement or
condition contained in the Agreement which, if such event is subject to being
cured, has not been cured within thirty (30) days after notice thereof from
the Payee;
(vii) A default under any bond, debenture or note or
under any evidence of indebtedness for borrowed money of the Company in a
principal amount in excess of $1,000,000 (other than the Senior Debt and
trade payables incurred in the ordinary course of business), whether such
indebtedness now exists or shall hereafter be created, which default gives
rise to actual acceleration of the maturity of such indebtedness (provided
that, in the event that the event of default of such indebtedness is waived
or tolled, the Event of Default hereunder shall be waived or tolled for a
similar duration); or
(viii) If a judgment of $1,000,000 or more shall be
entered against the Company, and if, within ninety (90) days after entry
thereof, such judgment shall not be discharged or execution thereof stayed
pending appeal, or if, within (30) days after the expiration of said stay,
such judgment shall not be discharged.
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<PAGE>
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and
accrued interest on this Note shall immediately become due and payable; and
(ii) if such Event of Default is any other Event of Default which shall be
continuing, the Payee may, by written notice to the Company, declare this
Note to be forthwith due and payable, whereupon this Note shall become
forthwith due and payable, both as to principal and accrued interest, without
presentment, demand, protest or any other notice of any kind, all of which
are hereby expressly waived, anything contained in this Note to the contrary
notwithstanding.
7. INTEREST RATE ADJUSTMENTS.
(a) In the event that any Payment of principal or interest
provided for herein is not paid by the Company when due, then the Company
shall pay to the Payee a late charge in an amount equal to 13% per annum.
Such late charge shall be applied only to those installments of principal and
interest not paid when due (including the entire unpaid principal balance of
this Note, in the event that the Payee shall have the right to exercise its
rights and remedies hereunder) computed from the date payment was due to the
date of actual payment.
(b) In the event of a Qualified Public Offering that does not
qualify as a Qualified Liquidity Event, from and after the closing of the
Qualified Public Offering the unpaid principal balance of this Note shall
bear interest at a rate equal to ten percent (10%) per annum.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the
payment of all or any portion of the outstanding principal amount of this
Note and all interest thereon shall be and hereby is pari passu in right of
payment and in all other respects to the Class A Subordinated Promissory
Notes of the Company issued pursuant to the Agreement. In the event that the
Payee receives payments in excess of its pro rata share of the Company's
payments to the holders of all of the Class A Subordinated Promissory Notes,
then the Payee shall hold in trust all such excess payments for the benefit
of the payees under the other Class A Subordinated Promissory Notes and shall
pay such amounts held in trust to such other holders upon demand by such
holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or
times after the date hereof, all or any portion of the outstanding principal
balance of this Note, together with accrued interest to the date of
prepayment on the principal amount prepaid. Any partial prepayment of
principal shall be applied in reduction of the outstanding installments of
principal hereof, in inverse order of stated maturity.
(b) In the event of the completion of a Qualified Public Offering
that qualifies as a Qualified Liquidity Event, then subject to any contrary
provision of the Senior Debt, the net proceeds to the Company of such public
offering shall, upon receipt by the Company, first be applied toward payment
of the outstanding principal balance of this Note, which prepayment of
principal shall be accompanied by payment of all unpaid accrued interest
thereon. Any such
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<PAGE>
prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee
shall be restored to their former respective positions and rights hereunder,
and any Event of Default waived shall be deemed to be cured and not
continuing; but no such waiver shall extend to any subsequent or other Event
of Default or impair any right consequent thereon except to the extent
expressly provided in such waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges herein provided are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications
under this Note shall be given in the same manner as provided in the
Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and
then interpreted in accordance with the laws of the State of Washington
without giving effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed
in favor of the holder hereof in order to effectuate the provisions hereof
and of said instruments; and the invalidity of any provision hereof or
thereof in any jurisdiction shall not affect the validity or enforceability
of any other provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the
Payee shall be entitled to collect from the Company such reasonable
attorneys' fees as may be incurred by the Payee in collecting or attempting
to collect any amount due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature
of interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure
to the benefit of the Company and the Payee and their respective successors
and assigns; PROVIDED, HOWEVER, that
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the Company may not transfer any of its rights or obligations hereunder
without the prior written consent of the Payee.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its duly authorized officers as of the day and year first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
-----------------------------------
Kevin Hafer, President
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<PAGE>
EXHIBIT 10.15
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD,
ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CLASS B SUBORDINATED PROMISSORY NOTE
$10,000,000 December 29, 1995
Woodinville, Washington
FOR VALUE RECEIVED, APEX PC SOLUTIONS, INC., a Washington corporation,
having offices at 20031 142nd Avenue, NE, Woodinville, Washington 98072
(hereinafter, the "Company"), hereby promises to pay to Britannia Holdings
Limited, a Nevis corporation (the "Payee"), or its assigns, at Post Office Box
615, Kings House, The Grange, St. Peter Port, Guernsey, Channel Islands GY1 2QJ,
or at such other place as may be designated by the Payee from time to time by
notice to the Company, the principal sum of Ten Million Dollars ($10,000,000),
together with accrued interest from the date hereof on the unpaid principal
balance at a rate equal to seven percent (7%) per annum (subject to adjustment
as set forth in Section 5 hereof). Such principal and interest shall be paid in
accordance with the terms of paragraph 1 below, in cash, or by wire transfer to
such account as the Payee shall direct, in immediately available funds and in
lawful currency of the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable
to the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on March 31, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable on the
consummation of a "Qualified Liquidity Event," as such term is defined herein;
PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall not have
been consummated on or before December 28, 2000, then all outstanding principal
shall be paid in two (2) equal installments of $5,000,000 each, on December 28,
2000 and December 28, 2001; PROVIDED that, notwithstanding the foregoing,
payment of all principal amounts to
<PAGE>
the Payee shall be delayed until the amount of Senior Debt then outstanding is
less than Two Million Dollars ($2,000,000);
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean either (a) a bona fide, firm commitment underwriting pursuant
to a registration statement on Form S-1 under the Securities Act of 1933, as
amended, the public offering price of which was not less than $10.00 per share
(adjusted to reflect subsequent stock dividends, stock splits (a "Qualified
Public Offering") and in which the net proceeds to the Company equal or exceed
Twenty Million Dollars ($20,000,000); or (b) any merger or consolidation with,
or sale, assignment, lease or other disposition of or voluntarily parting with
control of, all or substantially all, the assets of the Company to any person,
including the entering into of any joint venture, licensing or conveyance of
material patent rights or technology rights to any third party; other than any
such transaction in which the holders of the voting securities of the Company
prior to such transaction are the holders immediately after such transaction of
more than 50% of the voting securities of the surviving entity or a parent of
the surviving entity and the surviving entity expressly assumes the obligations
under this Note.
(iv) Notwithstanding anything to the contrary in this Note,
payments (including, without limitation, payments of principal and interest)
shall be made on this Note only if and to the extent that any such payments can
be made under RCW 23B.06.400.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the States of California and Washington are authorized or
required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
(c) WITHHOLDING TAXES. Notwithstanding the foregoing, payments made
hereunder shall be subject to all applicable withholding taxes considered to be
payable in the reasonable judgement of the Company and the Payee shall indemnify
and hold the Company harmless from any United States, federal or state
withholding tax imposed with respect to payments of interest or principal under
this Note. In the event of an assessment by any taxing authority against the
Company for withholding tax, the Payee shall promptly pay to the Company as a
contribution to the capitol of the Company the amout of the assessment for
payment by the Company to the taxing authority.
2. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee and
successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof.
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors
and assigns, covenants and agrees, and the Payee and successor holders of this
Note by its acceptance hereof likewise
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<PAGE>
covenants and agrees, that payment of the principal of and interest on this Note
shall be subordinated in right of payment, to the extent and in the manner
hereinafter set forth, to the prior payment in full of all Senior Debt (as
hereinafter defined), at any time outstanding. The provisions of this Section 2
shall constitute a continuing representation to all Persons who, in reliance
upon such provisions, become the holders of or continue to hold Senior Debt, and
such provisions are made for the benefit of the holders of Senior Debt, and such
holders are hereby made obligees hereunder the same as if their names were
written herein as such, and they or any of them, may proceed to enforce such
provisions against the Company or against the holder of this Note without the
necessity of joining the Company as a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except securities that are subordinated to Senior Debt to at
least the same extent as this Note) or other property, shall be made on account
of this Note; and any such payment or distribution, except securities that are
subordinated and junior in right of payment to the payment of all Senior Debt
then outstanding in terms of substantially the same tenor as this Section 2,
which would, but for the provisions hereof, be payable or deliverable in respect
of the Note shall be paid or delivered directly to the holders of Senior Debt
(or their duly authorized representatives), in the proportions in which they
hold the same, until all Senior Debt shall have been paid in full, and every
holder of this Note by becoming a holder hereof shall have designated and
appointed the holder or holders of Senior Debt (and their duly authorized
representatives) as his or its agents and attorneys-in-fact to, demand, sue for,
collect and receive such Senior Debt holder's ratable share of all such payments
and distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any necessary
proof of claim thereof, in the name of the holders of this Note or otherwise, as
such Senior Debt holders (or their authorized representatives) may determine to
be necessary or appropriate for the enforcement of this Section 2. Each of the
Payee and successor holders of this Note, by its acceptance hereof, agrees to
execute, at the request of the Company, a separate agreement with any holder of
Senior Debt on the terms set forth in this Section 2, but acknowledges that such
a separate agreement shall not be necessary in order to enable the holders of
the Senior Debt to enforce their rights hereunder.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the event
that:
(A) Any default occurs in the payment of the principal of
or interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
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<PAGE>
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event
that any default by the Company under the terms of the Senior Debt occurs (other
than a default in the payment of the principal of or interest on any Senior
Debt), then, upon receipt by the Company and the Payee of a written notice of
such default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee. Each holder of Senior Debt may send one or more Blockage
Notices, but payments hereunder may not be blocked by the holders of Senior Debt
for more than 180 days during any 360-day period. The terms of this Section
2(b)(iii) shall not apply if the maturity of any Senior Debt has been
accelerated by any holder thereof because of a default if such acceleration has
not been rescinded or said Senior Debt has not been paid, but rather, the
provisions of Section 2(b)(ii) shall apply. Other than as set forth in Sections
2(b)(ii) and 2(b)(iii), past and current interest and principal on this Note
shall by paid by the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or
distribution shall be paid or delivered to any holder of this Note in violation
or contravention of the terms of this subordination, before all Senior Debt
shall have been paid in full, such payment or distribution shall be held in
trust for and paid and delivered ratably to the holders of Senior Debt (or their
duly authorized representatives), until all Senior Debt shall have been paid in
full or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. Unless and until all Senior Debt shall
have been paid in full, the original or any subsequent holder of this Note will
not commence or join with any other creditor or creditors of the Company in
commencing any bankruptcy, reorganization or insolvency proceedings against the
Company. At any meeting of creditors of the Company or in the event of any
proceeding, voluntary or involuntary, for the distribution, division or
application of all or part of the assets of the Company or its proceeds thereof,
whether such proceeding be for the liquidation, dissolution or winding up of the
Company or the business of a receivership, insolvency or bankruptcy proceeding,
an assignment for the benefit of creditors or a proceeding by or against the
Company for relief under any bankruptcy, reorganization or insolvency law or any
law relating to the relief of debtors, readjustment of indebtedness,
reorganization, arrangement, composition or extension or otherwise, if all
Senior Debt has not been paid in full at the time, the holders of the Senior
Debt are hereby authorized at any such meeting or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant
to or in connection with this Note, either in their own names or the name or
names of any holder of this Note; and
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<PAGE>
(B) To collect any assets of the Company distributed,
divided or applied by way of dividend or payment, or any securities issued on
account of this Note (other than securities containing subordinating provisions
at least as favorable to each of the holders of Senior Debt as those contained
in this Note) and apply the same, or the proceeds of any realization upon the
same that the holders of the Senior Debt elect to effect, to Senior Debt until
all Senior Debt shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 2 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 2, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 2 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or future
holder of Senior Debt to enforce subordination of this Note pursuant to the
provisions of this Section 2 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such other holder of
Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security of
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of Section 1 and
this Section 2, may not be amended or waived in any manner that is detrimental
to any Senior Debt without the consent of the holders of a majority in principal
amount of then existing Senior Debt (which majority must include U.S. Bank of
Washington, National Association, and its successors and assigns ("U.S. Bank")
if U.S. Bank holds at least 25% of the Senior Debt then outstanding).
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior
Debt" shall mean (A) all Indebtedness to U.S. Bank arising out of or related to
that certain credit agreement entered into between the Company and U.S. Bank and
dated December 28, 1995, as amended, renewed, or restated from time to time (the
"Credit Agreement"); and (B) all other Indebtedness of the Company (which is not
convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed (1) from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof, which is not by its terms subordinate and junior to or on a parity with
this Note and (2) pursuant to Class A Subordinated Promissory Notes of the
Company dated of even date herewith, and all extensions and renewals thereof.
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<PAGE>
The term "Indebtedness" shall mean the obligations of the Company
in respect of the principal, interest, fees, charges and expenses, whether
direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will
execute and deliver any other documents evidencing the subordination of this
Note to Senior Debt that may be reasonably requested by the Company or the
holders of Senior Debt so long as none of the provisions contained in such
documents diminish the rights of Payee in any manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future
holder of any Senior Debt to enforce subordination as herein provided shall at
any time in any way be prejudiced or impaired by any noncompliance by the
Company, with the terms and provisions and covenants herein regardless of any
knowledge thereof any such holder may have or otherwise be charged with. The
provisions of this Section 3 are intended to be for the benefit of, and shall be
enforceable directly by, the holders of the Senior Debt, without any act or
notice of acceptance hereof or reliance thereon.
(xii) NO PREPAYMENT. Notwithstanding any provisions of this
Note to the contrary, the Company shall not make and the Payee shall not accept
any payment of principal of this Note or any prepayment of interest on this Note
until the amount of Senior Debt then outstanding is less than Two Million
Dollars ($2,000,000);
3. AFFIRMATIVE COVENANTS. For as long as any principal or interest
remains unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder; and/or (ii) any written notification given to
the Company by any holder of Senior Debt that an event of default has occurred
under the Senior Debt loan documents, or that such holder has declared the
Senior Debt owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable
advance notice, during normal business hours, and without undue disruption of
the business of the Company, to visit, and inspect any of the properties,
corporate books and financial records of the Company, to make copies of such
books and records, and to discuss the affairs, finances, and accounts of the
Company with the principal officers of the Company.
4. EVENTS OF DEFAULT.
(a) Each or any of the following events constitutes an "Event of
Default" under this Note:
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<PAGE>
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to actual acceleration of the maturity of such Senior Debt in a
principal amount in excess of $1,000,000, singularly or in the aggregate;
PROVIDED, HOWEVER, that in the event that the event of default under the terms
of the Senior Debt is waived or tolled, the Event of Default hereunder shall be
waived or tolled for a similar duration;
(iii) A material default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 3 of this Note which has not been cured within thirty (30)
days after notice thereof from the Payee;
(iv) (A) The Company shall commence any voluntary case,
proceeding or other action under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
the Company, or seeking to adjudicate the Company as bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to the Company or its
debts, or seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the Company
shall make a general assignment for the benefit of its creditors; or (B) there
shall have been commenced against the Company any involuntary case, proceeding
or other action of a nature referred to in clause (A) above and such involuntary
case or proceeding shall remain undismissed and unstayed for a period of sixty
(60) consecutive days; or (C) there shall have been commenced against the
Company any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of the Company's assets which shall not have been vacated,
discharged or stayed or bonded pending appeal within sixty (60) consecutive days
from the entry thereof; or (D) the Company shall have taken any action in
furtherance of or acquiescence in any of the acts set forth in clauses (A), (B),
or (C) above; or (E) the Company shall be unable to, or shall admit in writing
its inability to, pay its debts as they become due;
(v) All or any substantial part of the Company's assets shall
be (y) destroyed by fire or other casualty and shall not have been substantially
reconstructed within a period of one (1) year, unless the Company shall have
received or be entitled to receive insurance benefits with respect to such
assets in an amount equal to at least eighty percent (80%) of the fair market
value of such assets at the time of destruction or (z) condemned, seized or
otherwise appropriated, or custody or control of such assets shall be assumed by
any governmental agency or by any court of competent jurisdiction at the
instance of any governmental agency, and shall be retained for a period of sixty
(60) days, unless the Company shall have received or be entitled to receive
compensation for such assets in an amount equal to at least eighty percent (80%)
of the fair market value of such assets on the date of such condemnation,
seizure or other appropriation;
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<PAGE>
(vi) Other than an Event of Default of the nature specified in
Paragraphs 6(a)(i) and (ii) above, a default by the Company in the performance
or observance of any material covenant, agreement or condition contained in the
Agreement which, if such event is subject to being cured, has not been cured
within thirty (30) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under any
evidence of indebtedness for borrowed money of the Company in a principal amount
in excess of $1,000,000 (other than the Senior Debt and trade payables incurred
in the ordinary course of business), whether such indebtedness now exists or
shall hereafter be created, which default gives rise to actual acceleration of
the maturity of such indebtedness (provided that, in the event that the event of
default of such indebtedness is waived or tolled, the Event of Default hereunder
shall be waived or tolled for a similar duration); or
(viii) If a judgment of $1,000,000 or more shall be entered
against the Company, and if, within ninety (90) days after entry thereof, such
judgment shall not be discharged or execution thereof stayed pending appeal, or
if, within (30) days after the expiration of said stay, such judgment shall not
be discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in
Paragraph 6(a)(iv) which shall be continuing, the unpaid principal amount of and
accrued interest on this Note shall immediately become due and payable; and
(ii) if such Event of Default is any other Event of Default which shall be
continuing, the Payee may, by written notice to the Company, declare this Note
to be forthwith due and payable, whereupon this Note shall become forthwith due
and payable, both as to principal and accrued interest, without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived, anything contained in this Note to the contrary
notwithstanding.
5. INTEREST RATE ADJUSTMENTS.
(a) In the event that any Payment of principal or interest provided
for herein is not paid by the Company when due, then the Company shall pay to
the Payee a late charge in an amount equal to 13% per annum. Such late charge
shall be applied only to those installments of principal and interest not paid
when due (including the entire unpaid principal balance of this Note, in the
event that the Payee shall have the right to exercise its rights and remedies
hereunder) computed from the date payment was due to the date of actual payment.
(b) In the event of a Qualified Public Offering that does not qualify
as a Qualified Liquidity Event, from and after the closing of the Qualified
Public Offering the unpaid principal balance of this Note shall bear interest at
a rate equal to ten percent (10%) per annum.
6. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment
of all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the other Class B Subordinated Promissory Notes of the
Company that may be issued from time to time. In the event that the Payee
receives payments in
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<PAGE>
excess of its pro rata share of the Company's payments to the holders of all of
the Class B Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class B
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
7. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion of the outstanding principal balance
of this Note, together with accrued interest to the date of prepayment on the
principal amount prepaid. Any partial prepayment of principal shall be applied
in reduction of the outstanding installments of principal hereof, in inverse
order of stated maturity.
(b) In the event of the completion of a Qualified Public Offering
that qualifies as a Qualified Liquidity Event, then subject to any contrary
provision of the Senior Debt, the net proceeds to the Company of such public
offering shall, upon receipt by the Company, first be applied toward payment of
the outstanding principal balance of this Note, which prepayment of principal
shall be accompanied by payment of all unpaid accrued interest thereon. Any
such prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
8. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall
be restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
9. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising
any right, remedy, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
10. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
11. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Washington without
giving effect to conflict of laws principles of such state.
12. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the
-9-
<PAGE>
invalidity of any provision hereof or thereof in any jurisdiction shall not
affect the validity or enforceability of any other provision or of such
provisions in any other jurisdiction.
13. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
14. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
15. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
APEX PC SOLUTIONS, INC.,
a Washington corporation
By: /s/ Kevin Hafer
-------------------------------------
Kevin Hafer, President
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<PAGE>
Exhibit 11.1
Apex PC Solutions, Inc.
Computation of Pro Forma Income Per Share
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended ----------------------------
December 31, September 30
1995 1995 September 30
(Pro Forma) (Pro Forma) 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 2,343,515 $ 2,058,772 $ 2,779,924
------------ ------------ ------------
------------ ------------ ------------
Shares used in calculating pro forma
income per share
Weighted average common shares
outstanding 8,000,000 8,000,000 5,600,000
Net effect of conversion of Series A
Convertible Stock to Common Stock,
calculated using the treasury stock
method at the offering price of $10
per share, and treated as outstanding
for the entire period 2,179,500 2,179,500 2,179,500
Net effect of stock options granted
during the 12 months prior to this
offering at less than the offering
price, calculated using the treasury
stock method at the offering price of
$10 per share, and treated as
outstanding for the entire period 1,340,027 1,340,027 1,340,027
------------ ------------ ------------
Total shares 11,519,527 11,519,527 9,119,527
------------ ------------ ------------
------------ ------------ ------------
Pro forma income per share $0.20 $0.18 $0.30
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<PAGE>
Consent of Independent Accountants
We consent to the inclusion in this registration statement on Form SB-2 (File
No. ) of our report dated December 9, 1996 on our audits of the
financial statements of Apex PC Solutions, Inc. We also consent to the
reference to our firm under the caption "Experts."
Seattle, Washington
December 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APEX PC SOLUTIONS INC. FOR THE YEAR ENDED DECEMBER 31,
1995 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 SEP-30-1996
<PERIOD-START> JAN-01-1995 OCT-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 2,676 1,563
<SECURITIES> 0 0
<RECEIVABLES> 4,529 6,319
<ALLOWANCES> 30 130
<INVENTORY> 1,258 1,418
<CURRENT-ASSETS> 8,618 9,532
<PP&E> 285 548
<DEPRECIATION> 86 164
<TOTAL-ASSETS> 9,048 10,158
<CURRENT-LIABILITIES> 3,968 2,150
<BONDS> 25,615 25,615
1,000 1,000
2,205 2,205
<COMMON> 295 344
<OTHER-SE> (24,043) (21,169)
<TOTAL-LIABILITY-AND-EQUITY> 9,048 10,158
<SALES> 19,671 23,267
<TOTAL-REVENUES> 19,671 23,267
<CGS> 10,636 13,516
<TOTAL-COSTS> 5,298 4,117
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 30 100
<INTEREST-EXPENSE> 216 1,450
<INCOME-PRETAX> 3,551 4,215
<INCOME-TAX> (52) 1,435
<INCOME-CONTINUING> 3,603 2,780
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,603 2,780
<EPS-PRIMARY> .20 .30
<EPS-DILUTED> .20 .30
</TABLE>
