<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996.
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------
THE KINETICS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------
DELAWARE 1623 77-0423998
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
3080 RAYMOND STREET
SANTA CLARA, CALIFORNIA 95054
(408) 727-7740
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
WILLIAM A. BIANCO, JR.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
THE KINETICS GROUP, INC.
3080 RAYMOND STREET
SANTA CLARA, CALIFORNIA 95054
(408) 727-7740
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------
COPIES TO:
ERIC J. LAPP JONATHAN K. LAYNE
CHERYL K. HOUSE SCOTT J. CALFAS
WILLIAM R. SCHREIBER TIMOTHY D. BLANTON
GRAY CARY WARE & FREIDENRICH GIBSON, DUNN & CRUTCHER LLP
A PROFESSIONAL CORPORATION 333 S. GRAND AVENUE
400 HAMILTON AVENUE LOS ANGELES, CALIFORNIA 90071
PALO ALTO, CALIFORNIA 94301 (213) 229-7000
(415) 328-6561
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
NUMBER OF SHARES MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 4,255,000 $16.00 $68,080,000 $20,631
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 555,000 shares reserved for the over-allotment option granted to
the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act.
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 SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<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 ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1996
PROSPECTUS
3,700,000 SHARES
[LOGO OF KINETICS, INC.]
COMMON STOCK
--------
Of the 3,700,000 shares of Common Stock offered hereby (the "Offering"),
3,050,000 shares are being sold by The Kinetics Group, Inc. (the "Company" or
"Kinetics") and 650,000 shares are being sold by certain stockholders (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price will be between $14.00 and $16.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock quoted on the Nasdaq National Market under the symbol "KNTX," subject to
official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- -----------------------------------------------------------------
Total(3) $ $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $750,000, which are payable by the
Company.
(3) The Company and certain of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 244,353 and 310,647
additional shares of Common Stock, respectively, solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively.
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
--------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT SECURITIES CORPORATION
, 1997
<PAGE>
[Three dimensional computer-aided-design model of modular biotechnology
process skid]
KINETICS: "THE MECHANISM BY WHICH A PHYSICAL OR CHEMICAL CHANGE IS EFFECTED"
KSI is a registered trademark of the Company, and Kinetics, bioKINETICS,
Quality Assurance Management and QAM are trademarks of the Company. All other
trade names, trademarks and service marks are trade names, trademarks or
service marks of the respective companies that utilize them.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
INTERNAL
semiconductor
HIGH PURITY CRAFTSMAN UTILIZING
INFRARED PLASTIC FUSION TECHNOLOGY
FOR AN ULTRA PURE DE-IONIZED WATER
SYSTEM.
COMPLEX INSTALLATION OF
SEMICONDUCTOR PROCESS EQUIPMENT.
INSTALLED ULTRA HIGH
PURITY SPECIALTY GAS
SYSTEMS.
HELIUM LEAK DETECTION ENSURES THE INTEGRITY OF A HIGH PURITY GAS SYSTEM.
KINETICS
[Five photographs of the Company's high-purity Semiconductor process systems.]
<PAGE>
GATEFOLD
biotechnology and pharmaceutical
WATER FOR INJECTION PURIFIED WATER
AND CLEAN STEAM ARE CRUCIAL FOR
BIOTECH AND PHARMACEUTICAL
MANUFACTURING.
[LOGO] KINETICS
MEDIA TANKS PREPARE THE
NUTRIENTS USED FOR CELL GROWTH
IN A BIOTECH MANUFACTURING
FACILITY.
THE DESIGN AND
INSTALLATION OF A WATER
FOR INJECTION SYSTEM IS
AMONG THE MOST EVALUATED
AREAS DURING A FOOD AND
DRUG ADMINISTRATION
INSPECTION.
VALIDATED SYSTEMS ARE THE LIFEBLOOD OF BIOTECH FACILITIES.
[Four photographs of the Company's biotechnology and pharmaceutical process
systems.]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should carefully
consider the information set forth under "Risk Factors." Unless otherwise
indicated, all information in this Prospectus, including financial information,
shares and per share data: (i) gives effect to a three-for-four reverse stock
split to be effected upon closing of the Offering, (ii) reflects the conversion
of all outstanding shares of Preferred Stock into an aggregate of 1,775,107
shares of Common Stock, which will occur automatically upon closing of the
Offering, (iii) reflects the conversion and reconstitution of all outstanding
shares of Class A Common Stock and Class B Common Stock into an aggregate of
7,567,500 shares of Common Stock, which will occur upon closing of the
Offering, (iv) reflects the net exercise of all outstanding warrants into an
aggregate of 189,312 shares of Common Stock and (v) assumes the Underwriters'
over-allotment option is not exercised. References herein to "Kinetics" and the
"Company" include certain predecessors and subsidiaries, unless the context
otherwise requires. References in this Prospectus to a specific fiscal year of
the Company refer to the 12 months ended September 30 of the designated year.
THE COMPANY
Kinetics is the leading provider of sophisticated high-purity process piping
systems for the semiconductor, pharmaceutical and biotechnology industries.
Kinetics offers its customers turnkey solutions by providing, as a complement
to its specialty high-purity contracting business, comprehensive and
technically advanced engineering and design services, quality assurance and
control services, program management services, and manufacturing of specialty
components. Operations and sales efforts are conducted from its strategically
located facilities throughout the United States and at several international
sites.
Within the semiconductor industry, the Company provides its services
primarily to industry leading manufacturers of integrated circuits and
semiconductor original equipment manufacturers. Generally, high-purity process
piping systems in semiconductor manufacturing facilities ("fabs") distribute
gases, water and chemicals from generating equipment or storage tanks to the
process manufacturing equipment. In pharmaceutical and biotechnology
facilities, high-purity process piping systems are used both to transfer
product through various stages of manufacturing and to distribute gases, water
and chemicals that support manufacturing.
The Company prides itself on its ability to secure repeat business with its
customers on both new construction and retrofit projects. In fiscal 1996, 89%
of revenues were derived from repeat customers. The Company's semiconductor
customers currently include AMD, DEC, Hyundai, Intel, LAM Research, LSI Logic,
Lucent Technologies, Motorola, Rockwell, SGS Thomson Semiconductor and Texas
Instruments. The Company's pharmaceutical and biotechnology customers currently
include Alcon, Bayer, Chiron, Genentech, Genetics Institute, IDEC, Merck, Ortho
Diagnostics and Warner Lambert.
The Company was founded in 1971 by William A. Bianco, Jr., its current
chairman and chief executive officer. The Company initially provided high-
purity process piping services to the early Silicon Valley semiconductor
companies and focused primarily on this regional market until 1990. Recognizing
the growth opportunity in the semiconductor industry and the opportunity to
apply high-purity process piping technology to other rapidly growing and
capital intensive industries, the Company began expanding its operations into
the pharmaceutical and biotechnology markets in the United States. The Company
has also expanded geographically throughout the United States as well as at
selected international locations. Concurrent with its expansion, the Company
developed high-end value-added services such as engineering and quality
assurance to respond to the changing construction and manufacturing strategies
of its customers. Through these actions, the Company has acquired the capital
equipment, fabrication facilities, engineering database and highly trained
personnel to serve these rapidly growing industries and has developed the
capability to perform turnkey high-purity process piping system projects.
3
<PAGE>
The Company has increased its revenues to $278.4 million for fiscal 1996 from
$145.5 million for fiscal 1994, and income from operations to $16.0 million
from $6.4 million during that period, representing compound annual growth rates
of 38.3% and 58.6%, respectively, while growing its business solely through
internal expansion. With its experience in the design, fabrication and
installation of high-purity process piping systems in sophisticated
manufacturing facilities, its accumulated resources, and its financial
accomplishments, Kinetics believes it has a strong competitive advantage and is
uniquely positioned as a key supplier to meet the technological challenges and
growth of the semiconductor, pharmaceutical and biotechnology industries.
The Company is committed to strengthening its position as a high-quality
provider of sophisticated high-purity process piping systems, as well as
expanding into the broader process systems market, for the semiconductor,
pharmaceutical and biotechnology industries while increasing its revenues and
profitability. To achieve these objectives, the Company has adopted a strategy
consisting of the following key elements:
. Increase Market Share. The Company intends to further increase its
market share by opening and expanding branch offices, leveraging
existing customer relationships, investing in fabrication and cleanroom
facilities, acquiring capital equipment, and continuing to hire and
train personnel. The Company also plans to broaden its customer base by
increasing its direct sales force and by pursuing strategic alliances
with specialty gas and high-purity water providers.
. Expand Its Turnkey and Design/Build Operations. The Company believes
that its turnkey and design/build operations will allow it to provide
its customers with higher quality systems within a shortened project
cycle time, while significantly expanding the range of services offered
by the Company beyond its traditional contractor services. The Company
has recently formed two subsidiaries to focus on the development of its
turnkey and design/build operations: microKINETICS to focus on the
semiconductor industry and bioKINETICS to focus on the biotechnology
industry.
. Further Develop Its International Operations. The Company plans to
provide to international customers its complete range of value-added
services, make additional strategic investments in local fabrication
facilities, capital equipment and marketing resources, and hire and
train local personnel. As a result of its extensive domestic experience
and its relationships with major international manufacturers, the
Company believes it is well-positioned to execute its international
expansion plans.
. Leverage Its Investment in Quality Leadership. The Company intends to
continue to develop, refine and market its industry-leading proprietary
standard operating procedures ("SOPs"). These SOPs allow the Company to
effectively compete for projects requiring fast-track schedules, custom
design, extensive documentation and contamination-free installation
procedures, and to consistently perform its work anywhere in the world.
The Company has an extensive knowledge base regarding the requirements
and expectations of various regulatory bodies, including the FDA. The
Company is committed to continuing to understand and interpret the
evolving requirements of these regulatory bodies and is in the process
of applying for ISO 9000 certification to aid the Company's
international expansion efforts.
. Reduce Operating Costs and Increase Operating Efficiencies. The Company
has identified and will continue to seek additional "best practice"
techniques and is committed to implementing them throughout its entire
organization. Such techniques include the increased use of its
proprietary management software, consolidation of key suppliers in an
effort to increase purchasing power, and consolidation of fabrication
and administration into selected regional centers in order to reduce
costs and increase operating efficiencies.
. Develop Specialty Products. The Company has successfully introduced
several product lines over the past two years, including semiconductor
valve assemblies and portable high-purity gas and liquid analysis carts.
The Company plans to grow these product lines and introducing new
products to meet the needs of its existing customer base.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock being offered by:
The Company..................................... 3,050,000 shares
The Selling Stockholders........................ 650,000 shares
Common Stock to be outstanding after the Offering.. 12,581,919 shares(1)
Use of Proceeds.................................... To fund domestic and
international expansion,
including operations,
facilities and equipment,
as well as potential
acquisitions; repayment of
debt; working capital; and
general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol............. KNTX
</TABLE>
- --------
(1) Excludes (i) 1,016,249 shares of Common Stock issuable upon exercise of
options outstanding as of December 10, 1996 with a weighted average
exercise price of $6.71 per share, (ii) 350,000 shares of Common Stock
reserved for issuance upon exercise of options that may be granted in the
future under the Company's 1997 Stock Option Plan (the "Option Plan"), and
(iii) 250,000 shares of Common Stock reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"). See
"Capitalization," "Management--Benefit Plans" and Note 6 of Notes to the
Company's Consolidated Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $66,691 $94,897 $145,473 $229,933 $278,423
Costs of revenues............. 57,256 82,611 125,307 194,875 230,748
------- ------- -------- -------- --------
Gross profit.................. 9,435 12,286 20,166 35,058 47,675
Selling, general and
administrative expenses...... 8,701 10,928 13,807 22,384 31,673
------- ------- -------- -------- --------
Income from operations........ 734 1,358 6,359 12,674 16,002
Other income (expense):
Other income, net............ 396 1,376 115 331 944
Interest expense............. (575) (583) (1,084) (749) (1,068)
------- ------- -------- -------- --------
Other income (expense), net.. (179) 793 (969) (418) (124)
------- ------- -------- -------- --------
Income before income taxes.... 555 2,151 5,390 12,256 15,878
Provision for income
taxes(1)..................... 249 968 2,426 5,517 7,147
------- ------- -------- -------- --------
Net income(1)................. $ 306 $ 1,183 $ 2,964 $ 6,739 $ 8,731
======= ======= ======== ======== ========
Pro forma net income per
common share(2).............. $ 0.87
========
Shares used in computing pro
forma net income per common
share(2)..................... 10,043
Supplemental pro forma net
income per common share(3)... $ 0.83
========
Shares used in computing
supplemental pro forma net
income per common share(3)... 11,011
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 8,844 $ 37,142
Total assets........................................... 98,979 127,277
Long-term debt and capital lease obligations, net of
current maturities.................................... 12,155 --
Redeemable convertible preferred stock................. 9,164 --
Stockholders' equity................................... 18,615 69,577
</TABLE>
- --------
(1) Prior to May 31, 1995 the Company had elected to be taxed under Subchapter
S of the Internal Revenue Code under which federal income taxes on the
Company's earnings accrued directly to its stockholders. The Company
terminated its S Corporation status on that date and became taxable as a
corporation under Subchapter C of the Internal Revenue Code. The provision
for income taxes for fiscal 1992, 1993, 1994 and 1995 are presented on a
pro forma basis as if the Company had been taxed as a C Corporation for
each year presented. The provision for income taxes for fiscal 1996, during
which the Company was taxed as a C Corporation for the entire year, is
presented on a historical basis. The Company's historical provison for
income taxes in fiscal 1992, 1993, 1994 and 1995 and historical net income
for fiscal 1992, 1993, 1994 and 1995 were $23,000, $56,000, $535,000 and
$2,902,000 and $532,000, $2,095,000, $4,855,000 and $9,354,000,
respectively.
(2) Pro forma net income per common share for the year ended September 30, 1996
is computed using the weighted average number of shares of Common Stock
outstanding, including dilutive common equivalent shares from stock options
and warrants (using the treasury stock method) and also gives effect to the
assumed conversion of all outstanding shares of redeemable convertible
Preferred Stock into Common Stock upon the closing of the Offering (using
the as-if-converted method.) See Note 1 of Notes to Consolidated Financial
Statements.
(3) Supplemental pro forma net income per common share and shares used in
computing supplemental pro forma net income per common share give effect to
the intended use of approximately $13.5 million of the net proceeds of the
Offering to retire existing indebtedness, as if such repayment had occurred
at the beginning of fiscal 1996.
(4) Gives effect to the receipt and application of the net proceeds from the
sale of 3,050,000 shares of Common Stock offered by the Company hereby (at
an assumed Offering price of $15.00 per share) and also gives effect to the
assumed conversion of all outstanding shares of redeemable convertible
Preferred Stock into Common Stock upon the closing the Offering. See "Use
of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below, as well as those
discussed elsewhere in this Prospectus. In addition to the other information
in this Prospectus, the following factors should be considered carefully in
evaluating an investment in the Common Stock offered by this Prospectus.
DEPENDENCE ON SEMICONDUCTOR, PHARMACEUTICAL AND BIOTECHNOLOGY MARKETS
The Company has derived substantially all of its revenues to date from sales
to companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and its future growth is critically dependent on
sales within these industries. The success of the Company's customers and
potential customers is linked to economic conditions in these respective
industries, which in turn are each subject to intense competitive pressures
and are affected by overall economic conditions. The semiconductor industry in
particular has historically been, and will likely continue to be, cyclical in
nature and vulnerable to general downturns in the economy. In addition,
because the Company's process piping systems and services generally are
incorporated into major manufacturing facilities of its customers, any
instability or downturns in these industries, which may cause customers to
delay, cancel or reduce any planned expenditures for such systems and services
or exit the industry, may adversely affect the Company. There can be no
assurance that the Company will be able to continue its revenue growth or
sustain its profitability on a quarterly or annual basis or that its results
of operations will not be adversely affected by downturns in the
semiconductor, pharmaceutical or biotechnology industries.
USE OF ESTIMATES IN RECOGNIZING REVENUES AND GROSS PROFIT; PERCENTAGE-OF-
COMPLETION METHOD OF ACCOUNTING
The Company performs its services under either a fixed-price contract, cost-
type contract, or time-and- materials contract. Revenues and gross profit from
contracts are recognized using the percentage-of-completion method. For each
contract, the ratio of costs incurred to the Company's estimates of total
anticipated project cost is used to determine revenues and gross profit.
Revisions in cost and profit estimates made during the course of the project
are reflected in the accounting period in which the information that requires
revision becomes known. A provision is made for the entire amount of any
estimated future losses on contracts at the time the loss becomes known.
Actual gross profit on contracts may differ from estimates used by the Company
in recording gross profit on contracts in progress, and such differences could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company includes in revenues an amount equal to
costs incurred attributable to contract claims only when realization of such
revenues is probable and the amount is determinable. The Company applies its
best efforts in preparing the estimates that are used to recognize gross
profit. If incorrect estimates are used, the Company may improperly recognize
gross profit over the course of performing the project. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects that its future operating results will fluctuate
significantly as a result of numerous factors, including the Company's success
in obtaining and performing new contracts, the timing of new contracts, market
acceptance of the Company's high-purity process piping systems, the emergence
of new industry standards, customer cancellations, the mix of contract types,
competition, the evolving and unpredictable nature of the markets for the
Company's high-purity process piping systems, and general economic conditions.
In particular, fixed-price contracts generally have higher gross profit
margins than cost-type contracts or time-and-
7
<PAGE>
materials contracts and revenues from its subsidiary, Quality Assurance
Management, Inc. ("QAM"), and generally have higher gross profit margins than
other revenues. In addition, the Company has historically operated with a
moderate order backlog. As a result, quarterly sales and operating results
depend in part on the volume and timing of contracts received and performed
within the quarter, which are difficult to forecast. A significant portion of
the Company's revenue in any quarter is typically derived from significant
sales to a limited number of customers. Any significant deferral or
cancellation of purchases of the Company's systems and services could have a
material adverse effect on the Company's business, operating results and
financial condition in any particular quarter, and to the extent that
significant contracts are performed earlier or later than expected, operating
results for subsequent quarters may be adversely affected. In addition, a
significant portion of the Company's expenses are relatively fixed in advance
based in large part on the Company's forecast of future sales. If revenues are
below expectations in any given quarter, the adverse impact of the shortfall
on the Company's operating results may be magnified by the Company's inability
to adjust spending to compensate for the shortfall. The Company may also
reduce prices or increase spending in response to competition or elect to
pursue new market opportunities. Because of these factors, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance. As a result of the foregoing factors, the
Company's operating results and stock price may be subject to significant
volatility, particularly on a quarterly basis. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ABILITY TO MAINTAIN GROWTH
In the past few years, the Company has experienced substantial growth
through internal expansion and the Company plans to continue to grow in this
manner. A significant portion of this growth has been as a result of the
growth of the semiconductor industry, supplemented recently by the Company's
expansion in servicing the pharmaceutical and biotechnology industries. The
Company has also recently expanded its focus to include design and
design/build capabilities. Furthermore, the Company may use a portion of the
net proceeds of the Offering for potential acquisitions. The Company's growth,
and the resulting need to integrate new operations economically and
efficiently, has required, and will continue to require, significant
management, production, technical, financial and other resources. The
Company's ability to manage its growth successfully will also require the
Company to continue to expand and improve its operations, management and
financial control systems on a timely basis. There can be no assurance that
the Company will be able to expand into additional industry sectors, to manage
its growth effectively or to integrate new operations into the Company, and
any failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY CUSTOMERS
A significant portion of the Company's revenues is derived from a small
number of customers, which consist of both facility owners and general
contractors. Revenues derived from the Company's services to its five largest
facility owners in each year accounted for approximately 58%, 45%, and 41% of
the Company's revenues during the fiscal years ended September 30, 1994, 1995
and 1996, respectively. Sales to its five largest general contractor customers
accounted for 25.8% of the Company's revenues during the fiscal year ended
September 30, 1996. In addition, 19.5% of the Company's backlog at September
30, 1996 was comprised of orders from the Company's five largest facility
owner customers. The Company's projects are typically completed within a six
to fifteen month period from when the contract is initially executed. As these
projects are completed, business from these customers will decline
substantially unless they undertake additional projects incorporating the
Company's services. Furthermore, in 1996, 89% of the Company's revenues were
derived from repeat customers. If additional projects are not initiated by
existing customers, the performance of the Company will depend to a greater
extent on securing business from new customers. While the Company is
continually pursuing new customer opportunities, there can be no assurance
that the Company will be successful in its sales and marketing efforts, and
any significant weakening in customer demand would have a material adverse
effect on the Company. See "Business--Customers and Marketing" and "--
Backlog."
8
<PAGE>
FIXED-PRICE CONTRACTS AND GUARANTEED MAXIMUM PRICE CONTRACTS
The Company's strategy is to negotiate primarily either fixed-price or
guaranteed maximum price contracts. The pricing of fixed-price contracts
requires accurate cost estimation in order to be profitable and therefore
involves more risk than time-and-materials contracts, as unanticipated costs
may result in reduced profit or even a loss for the Company if the cost of the
project exceeds the fee. Guaranteed maximum price contracts are performed on a
cost basis, but the final fee cannot exceed the guaranteed price negotiated
with the customer. If the total actual cost of the contract exceeds the
guaranteed maximum price, then the Company will bear all or a portion of the
excess cost. In those cases where the total actual cost and fee are less than
the guaranteed price, the Company may share the savings on a predetermined
basis with the customer. There can be no assurance that the Company's pricing
methods will not result in losses to the Company. See "Business--Contracts and
Pricing."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its engineering, technical, management, sales and marketing
personnel. The Company has few employment contracts with its key personnel.
The Company believes that its future success will depend in large part upon
its ability to attract and retain highly-skilled engineering, technical,
management, sales and marketing personnel. However, there can be no assurance
that the Company will be successful at hiring or retaining these personnel.
Failure to recruit, hire, train and retain key management and technical
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management."
POTENTIAL FOR PRODUCT LIABILITY AND WARRANTY CLAIMS
Certain of the Company's high-purity process piping systems are used in
potentially hazardous manufacturing environments, including, without
limitation, semiconductor, pharmaceutical and biotechnology facilities.
Although the Company has not incurred any significant product liability claims
to date, any catastrophic occurrences in excess of insurance limits at
locations where the Company's systems are used could in the future result in
significant product liability claims against the Company.
In addition, the Company under certain contracts with its customers must use
new materials or processes for pipe system fabrication. The failure of any
such materials or processes could result in significant replacement or
reworking costs on a project. Warranty claims against the Company could in the
future result in significant reworkings which may have a material adverse
effect on the Company's business, operating results and financial condition.
COMPETITION
The high-purity process piping systems industry is fragmented and highly
competitive on a regional basis. The Company's competition in the design and
fabrication of high-purity process piping systems generally consists of a
number of domestic piping systems installation and fabrication companies and
divisions of large industrial firms in the international sector. In the future
the Company's competition may include specialty gas providers, water system
providers and engineering and construction firms. The Company's primary
domestic competitors are Dynamic Systems, Inc., Fullman Company and Therma
Corporation. Its primary international competitors are Mannesman AG, Mercury
and Jordan Lang. The Company believes that the majority of its business is
awarded based on reputation, previous project experience, the ability to meet
system specifications and project deadlines, and price. Some of the Company's
current and potential competitors, especially in the international sector,
have greater financial, technical, marketing and other resources than the
Company. See "Business--Competition."
9
<PAGE>
INTERNATIONAL CONTRACTS, OPERATIONS AND EXPANSION; FOREIGN EXCHANGE RISK
To date, a small portion of the Company's revenues and earnings have been
attributable to its operations in international markets, and the Company
expects international revenues and operations to increase and substantially
contribute to the Company's growth and earnings in the future. The success of
the Company's sales to, operations in and expansion into international markets
depends on numerous factors, many of which are beyond its control. Such
factors include, but are not limited to, economic conditions in the foreign
countries in which the Company operates and to which it sells its systems and
services and the lack of well-developed legal systems in certain of such
countries. In addition, international contracts, operations and expansion may
increase the Company's exposure to certain risks inherent in doing business
outside the United States, including slower payment cycles, unexpected changes
in regulatory requirements and tariffs, potentially adverse tax consequences,
currency fluctuations, restrictions on the repatriation of profits and assets,
compliance with foreign laws and standards and political risks. Although the
majority of the Company's international contracts with respect to
international sales to date have been denominated in United States dollars,
the Company from time to time enters into contracts denominated in a foreign
currency without escalation provisions, thereby subjecting itself to foreign
exchange risks. The Company may hedge such contracts denominated in
particularly volatile currencies. Furthermore, the Company's ability to obtain
international contracts is impacted by the relative strength or weakness of
the United States dollar relative to foreign currencies.
POSSIBLE WORK STOPPAGE
Certain of the Company's employees in the United States are represented by
the Steamfitters and Pipefitters Union (the "Union"). See "Business--
Employees." While the Company believes that its current relationship with its
employees and the Union is generally good, a lengthy strike or work stoppage
at any of the Company's facilities could have a material adverse effect on the
Company's business, operating results and financial condition.
CONTROL BY MANAGEMENT; CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
Immediately after the Offering, the officers and directors of the Company
beneficially will, in the aggregate, own approximately 69% of the outstanding
shares of Common Stock. Consequently, these persons will be able to exercise
effective control over corporate actions and the outcomes of matters requiring
a stockholder vote, including the election of directors. In addition, the
Company's Bylaws and indemnity agreements provide that the Company will
indemnify officers and directors against losses they may incur in legal
proceedings resulting from their service to the Company. Certain provisions of
the Company's Restated Certificate of Incorporation and Bylaws and certain
other contractual provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of these provisions allow the Company to issue
Preferred Stock with rights senior to those of the Common Stock without any
further vote or action by the stockholders, eliminate the right of
stockholders to act by written consent, eliminate cumulative voting and impose
various procedural and other requirements which could make it more difficult
for stockholders to effect certain corporate actions. These provisions could
also have the effect of delaying or preventing a change in control of the
Company. See "Principal and Selling Stockholders," "Description of Capital
Stock--Preferred Stock" and "Description of Capital Stock--Delaware Law and
Charter Provisions."
ABSENCE OF PUBLIC MARKET AND POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the Company
and the Representatives of the Underwriters, and may not be indicative of the
market price for the Common Stock after the Offering. The market price for
shares of the Common Stock may be highly volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the
Company's operating results, announcements
10
<PAGE>
of technological innovations, new products or new contracts by the Company or
its competitors, conditions and trends in the semiconductor, pharmaceutical,
biotechnology, process piping and other industries, changes in financial
estimates by securities analysts, general market conditions and other factors.
Any shortfall in revenues or net income from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market after the Offering could adversely affect prevailing market prices for
the Common Stock. The 3,700,000 shares of Common Stock offered hereby will be
freely tradeable without restriction in the public market. Taking into account
restrictions imposed by the Securities Act of 1933, as amended (the
"Securities Act"), rules promulgated by the Securities and Exchange Commission
thereunder and lock-up agreements between each of the stockholders and Smith
Barney Inc., all of the remaining 8,881,919 shares will be eligible for sale
beginning 180 days after the date of this Prospectus, subject to volume and
other restrictions of Rule 144 and Rule 701 under the Securities Act. Smith
Barney Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the shares subject to such lock-up agreements.
Upon the closing of the Offering, holders of 8,826,919 shares of Common Stock
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. In addition, the Company intends to file a
registration statement on Form S-8 under the Securities Act approximately 180
days after the date of this Prospectus to register an aggregate of 1,616,249
shares of Common Stock issued or reserved for issuance under its 1997 Stock
Option Plan, its 1997 Employee Stock Purchase Plan, its 1996 Key Employee
Stock Option Plan and certain other outstanding options. As of December 10,
1996, options were outstanding to purchase 1,016,249 shares at a weighted
average exercise price per share of $6.71. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
DILUTION
Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution in the net tangible book value of the Common Stock from
the initial public offering price. To the extent outstanding options to
purchase the Company's Common Stock are later exercised, there will be further
dilution. See "Dilution."
ABSENCE OF DIVIDENDS
To date, the Company has not paid any cash dividends on its Common Stock or
Preferred Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. In addition, the Company is subject to
certain prohibitions on the payment of dividends under the terms of its
existing credit facilities. See "Dividend Policy."
11
<PAGE>
THE COMPANY
On February 23, 1996, The Kinetics Group, Inc. was incorporated under the
laws of the state of Delaware for the purpose of holding the stock of Kinetic
Systems, Inc. ("KSI") and its affiliated entities. KSI was originally founded
as a partnership in California in 1971, and was incorporated in California in
1973. The Company currently owns, either directly or through another wholly
owned subsidiary, 16 subsidiaries, including the following: KSI; Quality
Assurance Management, Inc., a California corporation; bioKINETICS, Inc., a
Delaware corporation; and microKINETICS, Inc., a California corporation. The
Company's principal executive offices are located at 3080 Raymond Street,
Santa Clara, California 95054 and its telephone number at that location is
(408) 727-7740.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 3,050,000
shares of Common Stock offered by the Company hereby are estimated to be $41.8
million after deducting underwriting discounts and commissions and other
expenses payable by the Company and assuming an initial public offering price
per share of $15.00. The Company will not receive any of the proceeds from the
sale of the shares of Common Stock offered by the Selling Stockholders. The
Company expects to use a portion of the net proceeds to fund domestic and
international expansion, including operations, facilities and equipment, as
well as potential acquisitions, for which there are currently no agreements
pending. The Company intends to use approximately $13.5 million of the net
proceeds to repay indebtedness. The Company expects to use the remainder of
the net proceeds for working capital and other general corporate purposes. The
amounts and timing of expenditures for each purpose may vary significantly
depending upon a number of factors, including changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances and other factors. Pending such uses, the Company
intends to invest the net proceeds from this offering in investment grade,
interest-bearing instruments.
Of the indebtedness to be repaid, (i) approximately $8.0 million represents
advances under a $$22.5 million line of credit which the Company entered into
with a bank on April 12, 1996, bears interest at 1.75% above LIBOR and expires
on April 15, 1998, (ii) approximately $4.5 million represents advances under a
$5.0 million note payable from a bank, bears interest at 0.5% above a bank
index rate which approximates the prime rate and expires on March 1, 2001 and
(iii) several capital lease obligations which have an aggregate borrowing
limit of $1.75 million bear interest at rates ranging from 8% to 11% and
expire from 1997 to 2001. Borrowings under the bank line of credit were used
for working capital and the note payable and capital lease indebtedness were
used for capital equipment acquisitions.
DIVIDEND POLICY
The Company has not paid any dividends on the Common Stock and currently
anticipates that, for the foreseeable future, any earnings will be retained
for the development of the Company's business. In addition, the Company is
subject to certain prohibitions on the payment of dividends under the terms of
existing credit facilities.
12
<PAGE>
CAPITALIZATION
The following table sets forth the Company's short-term indebtedness and
capitalization as of September 30, 1996, and as adjusted to give effect to the
Offering (after deducting underwriting discounts and commissions and estimated
offering expenses) and application of the estimated net proceeds therefrom and
gives effect to the assumed conversion of all outstanding shares of redeemable
convertible Preferred Stock into Common Stock upon the closing of the
Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1).................... $ 1,957 $ 612
Long-term debt, less current maturities(1)................. 12,155 --
Redeemable convertible preferred stock, $0.001 par value,
4,000,000 shares authorized, 2,484,181 shares issued and
outstanding actual; no shares issued or outstanding as
adjusted.................................................. 9,164 --
Stockholders' equity:
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized; no shares issued or outstanding actual or as
adjusted................................................ -- --
Common Stock, $0.001 par value; 30,000,000 shares
authorized; 7,500,000 shares issued and outstanding
actual; 40,000,000 shares authorized as adjusted;
12,514,419 shares issued and outstanding as
adjusted(2)............................................. 8 13
Additional paid-in capital............................... 10,802 61,759
Retained earnings........................................ 7,805 7,805
------- -------
Total stockholders' equity............................. 18,615 69,577
------- -------
Total capitalization................................. $41,891 $70,189
======= =======
</TABLE>
- --------
(1) Includes borrowings under bank line of credit, note payable to bank, and
obligations under capital leases.
(2) Excludes (i) 1,016,249 shares of Common Stock issuable upon exercise of
options outstanding as of September 30, 1996 with a weighted average
exercise price of $6.71 per share, (ii) 350,000 shares of Common Stock
reserved for issuance upon exercise of options that may be granted in the
future under the Option Plan and (iii) 250,000 shares of Common Stock
reserved for issuance under the Purchase Plan. Includes 189,312 shares of
Common Stock which will be issued upon the net exercise of outstanding
warrants at or prior to the closing date of the Offering. Also excludes
options to purchase 67,500 shares that were exercised subsequent to
September 30, 1996. See "Management--Benefit Plans" and Note 6 of Notes to
Consolidated Financial Statements.
13
<PAGE>
DILUTION
As of September 30, 1996, the Company's pro forma net tangible book value
was approximately $27.8 million, or $2.94 per share of Common Stock. Net
tangible book value per share represents the Company's total assets less
intangible assets and total liabilities divided by the number of shares of
Common Stock outstanding. Without taking into account any other changes in net
tangible book value after September 30, 1996, other than to give effect to the
Offering at an assumed initial public offering price of $15.00 per share and
the receipt by the Company of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company as of September 30, 1996 would
have been approximately $69.6 million or $5.56 per share. This represents an
immediate increase in net tangible book value of $2.62 per share to existing
stockholders and an immediate dilution of $9.44 per share to purchasers of
shares of Common Stock in the Offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share as of September
30, 1996................................................... $2.94
Increase per share attributable to new investors............ 2.62
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 5.56
------
Dilution per share to new investors........................... $9.44
======
</TABLE>
The following table summarizes as of September 30, 1996, after giving effect
to the Offering, the differences between existing stockholders and purchasers
of shares of Common Stock in the Offering 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:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1)(2) CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,464,419 75.6% $ 9,000,000 16.4% $ 0.95
New investors.............. 3,050,000 24.4% 45,750,000 83.6 $15.00
---------- ----- ----------- -----
Total.................... 12,514,419 100.0% $54,750,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The foregoing tables assume no exercise of stock options after September
30, 1996 and assumes exercise of all outstanding warrants upon the closing
of the Offering. As of September 30, 1996, there were outstanding options
to purchase an aggregate of 1,083,749 shares of Common Stock at a weighted
average exercise price per share of $6.37. To the extent these options are
exercised, there will be further dilution to the new public investors.
Subsequent to September 30, 1996, 67,500 shares were issued upon the
exercise of outstanding stock options at an exercise price of $1.33. See
"Capitalization," "Management--Stock Plans and Agreements," "Description
of Capital Stock--Warrants," and Note 6 of Notes to Consolidated Financial
Statements.
(2) The above table is based on ownership as of September 30, 1996, as
adjusted for assumed net exercise of all outstanding warrants upon closing
of the Offering. Sales by the Selling Stockholders in the Offering will
reduce the number of shares held by existing stockholders to 8,814,419
shares, or 70.4% (8,503,772 shares and 66.7% if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after the Offering, and will increase the number
of shares held by new investors to 3,700,000 shares, or 29.6% (4,255,000
shares and 33.3% if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock outstanding after
the Offering. See "Principal and Selling Stockholders."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data as of September 30, 1996
and for each of the three fiscal years in the period ended September 30, 1996
presented below have been derived from, except as described herein, and are
qualified by reference to the Company's consolidated financial statements
which have been audited by Ernst & Young LLP, independent auditors and are
included elsewhere in this Prospectus. The selected historical financial data
for the fiscal year ended September 30, 1993 presented below have been derived
from, except as described herein, the Company's consolidated financial
statements, not included in this Prospectus, which have been audited by Ernst
& Young LLP, independent auditors. The selected historical combined financial
data for the fiscal year ended September 30, 1992 presented below have been
derived, except as described herein from and are qualified by reference to
from the Company's consolidated financial statements, not included in this
Prospectus, which have been audited by other independent auditors. The
provisions for income taxes and net income for fiscal 1992, 1993, 1994 and
1995 are presented on a pro forma basis and have not been derived from the
audited consolidated financial statements for the respective years. The data
presented below should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $66,691 $94,897 $145,473 $229,933 $278,423
Costs of revenues............ 57,256 82,611 125,307 194,875 230,748
------- ------- -------- -------- --------
Gross profit................. 9,435 12,286 20,166 35,058 47,675
Selling, general and
administrative expenses..... 8,701 10,928 13,807 22,384 31,673
------- ------- -------- -------- --------
Income from operations....... 734 1,358 6,359 12,674 16,002
Other income (expense):
Other income, net.......... 396 1,376 115 331 944
Interest expense........... (575) (583) (1,084) (749) (1,068)
------- ------- -------- -------- --------
Other income (expense), net.. (179) 793 (969) (418) (124)
------- ------- -------- -------- --------
Income before income taxes... 555 2,151 5,390 12,256 15,878
Provision for income tax-
es(1)....................... 249 968 2,426 5,517 7,147
------- ------- -------- -------- --------
Net income(1)................ $ 306 $ 1,183 $ 2,964 $ 6,739 $ 8,731
======= ======= ======== ======== ========
Pro forma net income per com-
mon share(2)................ $ 0.87
========
Shares used in computing pro
forma net income per common
share(2).................... 10,043
Supplemental pro forma net
income per common share(3).. $ 0.83
========
Shares used in computing
supplemental pro forma net
income per common share(3).. 11,011
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 8,844 $ 37,142
Total assets.......................................... 98,979 127,277
Long-term debt and capital lease obligations, net of
current maturities................................... 12,155 --
Redeemable convertible preferred stock................ 9,164 --
Stockholders' equity.................................. 18,615 69,577
</TABLE>
15
<PAGE>
- --------
(1) Prior to May 31, 1995 the Company had elected to be taxed under Subchapter
S of the Internal Revenue Code under which federal income taxes on the
Company's earnings accrued directly to its stockholders. The Company
terminated its S Corporation status on that date and became taxable as a
corporation under Subchapter C of the Internal Revenue Code. The provision
for income taxes for fiscal 1992, 1993, 1994 and 1995 are presented on a
pro forma basis as if the Company had been taxed as a C Corporation for
each year presented. The provision for income taxes for fiscal 1996,
during which the Company was taxed as a C Corporation for the entire year,
is presented on a historical basis. The Company's historical provision for
income taxes in fiscal 1992, 1993, 1994 and 1995 and historical net income
for fiscal 1992, 1993, 1994 and 1995 were $23,000, $56,000, $535,000, and
$2,902,000 and $532,000, $2,095,000, $4,855,000 and $9,354,000,
respectively.
(2) Pro forma net income per common share for the year ended September 30,
1996 is computed using the weighted average number of shares of Common
Stock outstanding during each period, including dilutive common equivalent
shares from stock options and warrants (using the treasury stock method)
and also gives effect to the assumed conversion of all outstanding shares
of redeemable convertible Preferred Stock into Common Stock upon the
closing of the Company's initial public offering (using the as-if-
converted method.) See Note 1 of Notes to Consolidated Financial
Statements.
(3) Supplemental pro forma net income per common share and shares used in
computing supplemental pro forma net income per common share give effect
to the intended use of approximately $13.5 million of the net proceeds of
this Offering to retire existing indebtedness, as if such repayment had
occurred at the beginning of fiscal 1996.
(4) Gives effect to the receipt and application of the net proceeds from the
sale of 3,050,000 shares of Common Stock offered by the Company hereby (at
an assumed initial public offering price of $15.00 per share) and also
gives effect to the assumed conversion of all outstanding shares of
redeemable convertible Preferred Stock into Common Stock upon the closing
of the Offering. See "Use of Proceeds" and "Capitalization."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
An investment in the shares of Common Stock offered hereby is speculative in
nature and involves a high degree of risk. In addition to the other
information contained in the Prospectus, the factors set forth under "Risk
Factors" should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements. Discussions containing such
forward-looking statements may be found in the material set forth under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as in the Prospectus generally.
Actual events or results may differ materially from those discussed herein.
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus.
OVERVIEW
Kinetics is the leading provider of sophisticated high-purity process piping
systems for the semiconductor, pharmaceutical and biotechnology industries.The
Company was founded in 1971 by William A. Bianco, Jr., its current chairman
and chief executive officer. The Company initially provided high-purity
process piping services to the early Silicon Valley semiconductor companies
and focused primarily on this regional market until 1990. Recognizing the
growth opportunity in the semiconductor industry and the opportunity to apply
high-purity process piping technology to other rapidly growing and capital
intensive industries, the Company expanded its operations into the
pharmaceutical and biotechnology markets in the United States. Concurrent with
its geographic expansion, the Company developed high-end value-added services
such as engineering and quality assurance to respond to the changing
construction and manufacturing strategies of its customers. Through these
actions, the Company has acquired the capital equipment, fabrication
facilities, engineering database and highly trained personnel to serve these
rapidly growing industries and has developed the capability to perform turnkey
high-purity process piping system projects. The Company recently began
establishing select international operations.
The Company intends to further expand its operations by adding three
complementary capabilities:
.Increase turnkey or design-build projects
.Provide a wide range of quality control and quality assurance products and
services
.Further enhance the manufacturing of specialty components
The Company is further investing in critical support functions, such as
information technology, project estimation and human resource related
programs.
CONTRACT ACCOUNTING AND REVENUE RECOGNITION
The Company performs its services under fixed-price contracts, cost-type
contracts, and time-and-materials contracts: (i) A fixed-price contract
provides for a single price for the total amount of work to be performed on a
project. (ii) A cost-type contract provides for reimbursement of allowable or
otherwise defined costs incurred, plus a fee for the services. Cost-type
contracts take a variety of forms, including a maximum price of reimbursement
that is guaranteed by the Company for the services to be performed. These
contracts often contain terms specifying reimbursable costs, overhead recovery
percentages and fees. The fee may be fixed or based on a percentage of the
reimbursable costs. (iii) A time-and-materials contract generally provides for
reimbursement to the Company on the basis of direct labor hours at fixed
hourly rates, cost of materials and other specified costs. The fee may be
included in the hourly rates or may be based on a percentage of the
reimbursable costs. Each contract type may include a provision for retention.
Retention represents amounts withheld from contract progress billings until
satisfactory project completion and generally ranges from five to ten percent
of the total contract amount.
17
<PAGE>
Revenues and gross profit from contracts are recognized using the
percentage-of-completion method. For each contract, the ratio of cost incurred
to the Company's estimates of total anticipated project cost is used to
determine revenues and gross profit. Revisions in cost and profit estimates
made during the course of the project are reflected in the accounting period
in which the information that requires revision becomes known. A provision is
made for the entire amount of any estimated future losses on contracts at the
time the loss becomes known. Actual gross profit on contracts may differ from
estimates used by the Company in recording gross profit on contracts in
progress, and such differences could have a material adverse effect on the
Company's business, operating results and financial condition. The Company
includes in contract revenues an amount equal to costs incurred attributable
to contract claims only when realization of such revenue is probable and the
amount is determinable.
The pricing of fixed-price contracts requires accurate cost estimation in
order to be profitable and therefore involves more risk than time-and-
materials contracts, as unanticipated costs may result in reduced profit or
even a loss for the Company if the cost of the project exceeds the expected
revenue. Guaranteed maximum price contracts are performed on a cost basis, but
the final fee cannot exceed the guaranteed price negotiated with the customer.
If the total actual cost of the contract exceeds the guaranteed maximum price,
then the Company will bear all or a portion of the excess cost. In those cases
where the total actual cost and fee are less than the guaranteed price, the
Company may share the savings on a predetermined basis with the customer.
There can be no assurance that the Company's pricing methods will not result
in losses to the Company. See "Risk Factors--Fixed-Price Contracts and
Guaranteed Maximum Price Contracts."
RESULTS OF OPERATIONS
The following table sets forth results of operations as a percentage of the
Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues............................ 100.0% 100.0% 100.0%
Costs of revenues................... 86.1 84.8 82.9
---------- ---------- ----------
Gross profit........................ 13.9 15.2 17.1
Selling, general and administrative
expenses........................... 9.5 9.7 11.4
---------- ---------- ----------
Income from operations.............. 4.4 5.5 5.7
---------- ---------- ----------
Income before income taxes.......... 3.7 5.3 5.7
Provision for income taxes(1)....... 0.4 1.2 2.6
---------- ---------- ----------
Net income.......................... 3.3% 4.1% 3.1%
========== ========== ==========
</TABLE>
- --------
(1) Represents income taxes on a historical basis. Prior to May 31, 1995, the
Company had elected to be taxed under Subchapter S of the Internal Revenue
Code and the Company's earnings were not subject to federal income taxes.
The Company terminated its S Corporation status on that date and became
taxable as a corporation under Subchapter C of the Internal Revenue Code.
Accordingly, no provision for federal income taxes has been made for
fiscal 1994 and a portion of fiscal 1995. The income tax provisions for
those years do include state income taxes.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September
30, 1995
Revenues. For fiscal 1996, revenues increased to $278.4 million from $229.9
million for fiscal 1995, an increase of 21.1%. The increase was primarily due
to an increase in the number of domestic semiconductor projects in fiscal 1995
in existing regions as well as expansion into new regions such as Texas,
Oregon and the southeast United States and, to a lesser extent, increased
revenues from the Company's subsidiary, QAM. Revenues derived from
pharmaceutical and biotechnology projects as a percentage of total revenues
during fiscal 1996 did not significantly change from fiscal 1995.
18
<PAGE>
Gross profit. Gross profit increased to $47.7 million for fiscal 1996 from
$35.1 million for fiscal 1995, an increase of $12.6 million. The gross margin
for fiscal 1996 increased to 17.1% from 15.2% in fiscal 1995. The increase in
gross margin was attributable primarily to improved performance on domestic
semiconductor projects which resulted from the Company's greater ability to
leverage its increasing size to obtain a greater number of fixed-price
contracts rather than cost-type or time-and-materials contracts and to obtain
more favorable pricing from suppliers. To a lesser extent the increase was due
to an increase in revenues from QAM. Fixed-price contracts and revenues from
QAM generally have higher gross profit margins and other revenues. These
improvements in gross profit margins for fiscal 1996 were partially offset by
losses of $3.2 million from the Company's four largest projects that had
losses in fiscal 1996 compared to losses of $2.0 million from the four largest
projects that had losses in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $31.7 million for fiscal 1996 from $22.4
million for fiscal 1995. The $9.3 million increase was due primarily to the
expansion of international operations in Western Europe, Israel, China,
Singapore and Mexico; opening of new offices and facilities in Portland,
Oregon and Colorado Springs, Colorado; significant expansion of facilities in
Texas and the New England region; and the opening and start-up of bioKINETICS,
Inc., the pharmaceutical and biotechnology design/build subsidiary of the
Company. Selling, general and administrative expenses increased to 11.4% of
revenues for fiscal 1996 from 9.7% for fiscal 1995 as the Company expanded in
anticipation of possible future growth.
Interest expense. Interest expense increased to $1.1 million for fiscal 1996
from $0.7 million for fiscal 1995, primarily due to increased borrowing on the
Company's revolving credit facility to support the Company's business
expansion and increased term debt to acquire capital equipment.
Provision for income taxes. The Company's effective tax rate increased to
45.0% for fiscal 1996 from 23.7% for fiscal 1995. Effective May 31, 1995, the
Company terminated its S Corporation election and became taxable as a C
Corporation. The federal income tax on the Company's operations was an
obligation of the individual stockholders and was not included in the
Company's results of operations for the first eight months of fiscal 1995.
Fiscal Year ended September 30, 1995 Compared to Fiscal Year Ended September
30, 1994
Revenues. For the fiscal year ended September 30, 1995 revenues increased to
$229.9 million from $145.5 million for the fiscal year ended September 30,
1994, an increase of 58.0%. The increase was primarily due to an increase in
the number of domestic semiconductor projects and an increase in the size of
certain of these projects. Revenues derived from pharmaceutical and
biotechnology projects as a percentage of total revenues during fiscal 1995
did not significantly change from fiscal 1994.
Gross profit. Gross profit increased to $35.1 million for fiscal 1995 from
$20.2 million for fiscal 1994, an increase of $14.9 million. The gross margin
for fiscal 1995 increased to 15.2% from 13.9% for fiscal 1994. The increase in
gross margin was due to improved pricing opportunities on contracts with
domestic semiconductor customers the ability which resulted from the Company's
greater ability to leverage its increasing size to obtain a greater number of
fixed-price contracts rather than cost-type or time-and-materials contracts
and to obtain more favorable pricing from suppliers. To a lesser extent, the
increase was due to reductions in insurance costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $22.4 million for fiscal 1995 from $13.8
million for fiscal 1994. The $8.6 million increase was due primarily to the
expansion of offices and fabrication facilities in the domestic market,
international marketing and sales, and the expansion of corporate support
services, such as accounting, information technology and human resources.
Selling, general and administrative expenses increased to 9.7% of revenues in
fiscal 1995 from 9.5% in fiscal 1994 as the Company expanded in anticipation
of future growth.
19
<PAGE>
Interest expense. Interest expense decreased to $0.7 million for fiscal 1995
from $1.1 million for fiscal 1994, primarily due to the pay down of certain
debt together with investment of the proceeds from the Company's $9.0 million
preferred stock private placement in June 1995.
Provision for income taxes. The Company's effective tax rate increased to
23.7% for fiscal 1995 from 9.9% for fiscal 1994. Prior to May 31, 1995, the
Company was treated as an S Corporation for tax reporting purposes.
Accordingly, the effective tax rate for fiscal 1995 of 23.7% reflects a
provision for taxes from June 1, 1995 through September 30, 1995, plus a small
provision for certain state statutory income taxes incurred by the Company
while it was an S Corporation. The statutory state income tax effective rate
in fiscal 1994 was 9.9%.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited statement of operations data for
each of the Company's last eight fiscal quarters and the percentage of the
Company's revenues represented by each line item reflected therein. This
information has been prepared on the same basis as the audited financial
statements contained herein and, in management's opinion, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED:
---------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $62,550 $60,503 $51,131 $55,749 $59,155 $73,372 $70,867 $75,029
Income from opera-
tions................. 4,226 3,483 3,037 1,928 3,316 4,382 3,767 4,537
Net income (1)......... 3,805 2,708 1,698 1,143 1,919 2,431 2,054 2,327
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES FOR THE QUARTER ENDED:
---------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Income from opera-
tions................. 6.8 5.8 5.9 3.5 5.6 6.0 5.3 6.0
Net income(1).......... 6.1 4.5 3.3 2.1 3.2 3.3 2.9 3.1
</TABLE>
- --------
(1) Includes income taxes on a historical basis. Prior to May 31, 1995, the
Company had elected to be taxed under Subchapter S of the Internal Revenue
Code and the Company's earnings were not subject to federal income taxes.
The Company terminated its S Corporation status on that date and became
taxable as a corporation under Subchapter C of the Internal Revenue Code.
Accordingly, no provision for federal income taxes has been made for the
quarters ended December 31, 1994, March 31, 1995 and a portion of June 30,
1995. The income tax provisions for those quarters do include state income
taxes.
The Company expects that its future operating results will fluctuate
significantly as a result of numerous factors, including the Company's success
in obtaining and performing new contracts, the timing of new contracts, market
acceptance of the Company's high-purity process piping systems, the emergence
of new industry standards, customer cancellations, the mix of contract types,
competition, the evolving and unpredictable nature of the markets for the
Company's high-purity process piping systems, and general economic conditions.
In addition, the Company has historically operated with a moderate order
backlog. As a result, quarterly sales and operating results depend in part on
the volume and timing of contracts received and performed within the quarter,
which are difficult to forecast. A significant portion of the Company's
revenue in any quarter is typically derived from significant sales to a
limited number of customers. Any significant deferral or cancellation of
purchases of the Company's systems and services could have a material adverse
effect on the Company's business, operating results and financial condition in
any particular quarter, and to the extent that significant contracts are
performed
20
<PAGE>
earlier or later than expected, operating results for subsequent quarters may
be adversely affected. In addition, a significant portion of the Company's
expenses are relatively fixed in advance based in large part on the Company's
forecast of future sales. If revenues are below expectations in any given
quarter, the adverse impact of the shortfall on the Company's operating
results may be magnified by the Company's inability to adjust spending to
compensate for the shortfall. The Company may also reduce prices or increase
spending in response to competition or elect to pursue new market
opportunities. Because of these factors, the Company believes that period-to-
period comparisons of its operating results are not necessarily meaningful and
that such comparisons should not be relied upon as indications of future
performance. As a result of the foregoing factors, the Company's operating
results and stock price may be subject to significant volatility, particularly
on a quarterly basis. See "Risk Factors--Potential Fluctuations in Quarterly
Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital expenditure
requirements primarily from cash from operations, borrowings and proceeds from
the private sale of Preferred Stock.
The Company's operating activities provided net cash of $10.0 million, $15.8
million and $4.9 million during fiscal 1994, fiscal 1995, and fiscal 1996,
respectively. The increase in net cash provided by operations in fiscal 1995
as compared to fiscal 1994 was primarily attributable to increases in net
income and billings in excess of costs and estimated earnings on contracts in
progress and smaller increases in receivables compared to the previous year.
The decrease in net cash provided by operations in fiscal 1996 as compared to
fiscal 1995 was primarily attributable to an increase in receivables and a
smaller increase in billings in excess of costs and estimated earnings on
contracts in progress compared to the previous year.
The Company's investing activities used net cash of $2.8 million, $6.4
million and $8.5 million during fiscal 1994, fiscal 1995 and fiscal 1996,
respectively. The increases in net cash used by investing activities were
primarily attributable to increases in acquisition of capital equipment and
the expansion of fabrication capabilities in leased facilities.
The Company's financing activities used $6.6 million and $1.7 million in
fiscal 1994 and fiscal 1995, respectively, and provided $4.0 million in fiscal
1996. The decrease in net cash used by financing activities in fiscal 1995 as
compared to fiscal 1994 was primarily attributable to the proceeds from the
issuance of Preferred Stock in fiscal 1995 partially offset by increases in
distributions to stockholders. The increase in net cash provided by financing
activities in fiscal 1996 as compared to fiscal 1995 was primarily
attributable to net borrowings under a revolving credit line in fiscal 1996.
The Company believes that net proceeds from the sale of the Common Stock
offered hereby, together with its cash and cash equivalent balance of $8.8
million as of September 30, 1996, cash generated from operations, if any, and
the Company's revolving credit facility will be sufficient to meet its working
capital and other cash requirements for at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations, such as equipment and
improvements and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The Company will adopt FAS 121 in
the first quarter of fiscal 1997. Based on current circumstances, management
does not believe the effect of such adoption will be material.
21
<PAGE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation," which established a fair-value-based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies who elect not to adopt the new method of accounting. The Company will
be required to adopt FAS 123 in fiscal year 1997. The Company's intention is to
continue to account for employee stock awards in accordance with APB Opinion
No.25 and to adopt the disclosure only alternative described in FAS 123.
22
<PAGE>
INDUSTRY OVERVIEW
INTRODUCTION
The Company estimates that the market for high-purity process systems for
calendar 1996 is approximately $7 billion, of which approximately $2 billion
is related to high-purity process piping. These markets are driven primarily
by three technologically sophisticated manufacturing industries:
semiconductor, pharmaceutical and biotechnology, each of which requires the
highest levels of technological complexity and manufacturing cleanliness. Each
of these industries has unique system performance requirements, but a critical
common element is that manufacturing success is dependent upon the ability to
control the level of contaminants that come into contact with the product
during the course of manufacturing within very narrow, specified tolerances.
The systems installed by the Company are critical to the manufacturing
operation, transporting and controlling material consumed and produced during
the manufacturing process. Generally, high-purity process piping systems in a
semiconductor manufacturing facility ("fab") distribute gases, water and
chemicals from generating equipment or storage tanks to the process
manufacturing equipment. In pharmaceutical and biotechnology facilities, high-
purity process piping systems are used both to transfer product through
various stages of manufacturing through final completion and to distribute
gases, water and chemicals that support the manufacturing process.
SEMICONDUCTOR INDUSTRY
Semiconductors are the basic building blocks used to create an increasing
variety of electronic products and systems. As semiconductor product
performance has improved and size and cost have decreased, semiconductor
products have expanded beyond their original primary applications in computer
systems to applications such as telecommunications systems, automotive
products, consumer goods and industrial automation and control systems.
Semiconductors are often classified as either discrete devices (such as
individual diodes or transistors) or integrated circuits (in which thousands
of functions are combined on a single chip of silicon to form a more complex
circuit). Integrated circuits are generally further broken down between logic
and memory chips. The geometry on these chips has become smaller and
increasingly more complex as more and more circuits are compressed onto a
single chip. Current semiconductor manufacturing geometries of less than 0.5
microns (2/100,000 inches) are not uncommon. Contaminant particles even a
fraction of this size can disrupt both the manufacturing process and the
eventual operation of the circuit and render the chip useless. As a result,
ultra-high levels of purity are required of the gases, chemicals and fluids
that come into contact with the computer chip during manufacturing. To ensure
this high level of purity, the high-purity process piping systems are
generally first pre-fabricated in cleanrooms and subsequently installed into
the facility under strict protocols. Protocol standards are established to
optimize control of contamination. The systems are typically made from high
quality stainless steel and plastics which are joined using automatic welding
equipment designed to reduce particle generation.
A typical semiconductor fab generally contains 60,000 to 80,000 square feet
of cleanroom manufacturing space. It is composed of three primary elements:
the building infrastructure and basic services; the semiconductor and
analytical equipment ("tools"); and the generation and distribution of the
chemicals, gases and water used by the tools. The life cycle of a fab
typically conforms to the following sequence: (i) base, which consists of
building shell and basic utility and electrical services ("Phase I"); (ii)
pilot hook-up, which includes the first set of tools and their process
qualification ("Phase II"); (iii) ramp hook-up, during which additional tools
are connected and qualified to meet production targets ("Phase III"); (iv)
sustaining hook-up to meet production requirements ("Phase IV"); and (v)
ongoing retrofit of the facility to accommodate a different product or a new
generation of manufacturing technology ("Phase V").
Due to the large capacity and stringent manufacturing requirements of
current semiconductor fabs, total capital investment for new construction and
capital equipment is often in excess of $1 billion per fab. Such a large
investment, coupled with rapid product obsolescence, typically accelerates
construction and start-up schedules. As time-to-market has become more
important and costs have escalated, semiconductor manufacturers have adopted
non-traditional project delivery approaches in an effort to become more
efficient. Prime examples
23
<PAGE>
of these approaches are design/build contracts and specialty gas, chemical and
water supplier "point-of-use" delivery guarantees. Representative contracts
over the life cycle of a facility often follow a similar sequence:
REPRESENTATIVE HIGH-PURITY PROCESS PIPING SYSTEMS
IN SEMICONDUCTOR FAB BUILD-OUT(1)
<TABLE>
<CAPTION>
CONSTRUCTION
PHASE I II III IV V
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SCOPE Base Pilot Hook-Up Ramp Hook-Up Sustaining Hook-Up Retro-Fit
- ----------------------------------------------------------------------------------------
CLIENT Construction Construction Owner Owner Owner or
Manager or Manager or Construction
Specialty Specialty Manager(3)
Supplier Supplier
- ----------------------------------------------------------------------------------------
PERCENT OF
BUILD-OUT
REVENUE (2) 30% 10% 40% 20% N/A(3)
- ----------------------------------------------------------------------------------------
DURATION 6 months 6 months 1 year 1 year 6 months
</TABLE>
(1) The time periods for each contract and the amount of investment vary
depending upon the specific requirements of the project.
(2) Represents approximate percentage of total high-purity process piping
system costs incurred in such Phase on typical semiconductor project
build-out.
(3) Depending upon their extent, Phase V facility retrofits could be
contracted with a construction manager or directly with the owner and
could range from several hundred thousand dollars to tens of millions of
dollars per project.
PHARMACEUTICAL INDUSTRY
The manufacture of human pharmaceuticals is closely regulated by the U.S.
Food and Drug Administration (the "FDA") which is responsible for protecting
the public against false therapeutic claims or adulterated drug products. In
order to meet the stringent requirements of the FDA regarding drug purity and
safety, manufacturers of finished pharmaceuticals employ many of the same
sophisticated installation methods and materials as the semiconductor
industry. Specifically, high quality stainless steel or plastic piping is
joined in both industries using automatic welding equipment designed to reduce
contamination. Pharmaceutical manufacturers are particularly concerned with
microbial contamination of their drug products. Due to the relatively
unpredictable nature of microbial entry and growth in pharmaceutical
manufacturing systems, there are many subtle design and installation
requirements that must be incorporated into high-purity process piping
systems. These and other requirements fall under a set of federal regulations
known as current Good Manufacturing Practices ("cGMP") and require extensive
documentation and system testing known as "validation."
Pharmaceutical manufacturing operations for which high-purity process piping
system installation is critical are generally found in those traditional
pharmaceutical products that use biological products in their formulation
(such as vaccines and blood-derived therapeutics) and in the final product
processing steps of injectable products. For these operations, product
processing generally takes place in tanks and equipment which must remain free
of contamination. High-purity process piping in these facilities is used
primarily for the product distribution systems and for the high-purity water,
steam and gas generation and distribution networks which support the
manufacturing process.
Pharmaceutical companies are introducing new products as well as building
and upgrading existing manufacturing facilities to meet increasing product
demand and to comply with rigorous regulatory standards. The recent
consolidations in the pharmaceutical industry and the subsequent transfers and
spin-offs of product
24
<PAGE>
lines have also created opportunity for high-purity process piping system
providers and designers. A typical pharmaceutical facility contract is
implemented over approximately nine months.
BIOTECHNOLOGY INDUSTRY
Biotechnology has created new markets with significant growth potential
through the development and advancement of genetic engineering. The
biotechnology industry includes human therapeutics and diagnostics,
agricultural products, industrial chemicals and non-medical diagnostics. As a
result of its stringent purity, installation and manufacturing requirements,
the biotechnology sector involved with human therapeutics
("biopharmaceuticals") has generated significant demand for high-purity
process piping systems. Biopharmaceuticals are anticipated to produce the
highest portion of biotechnology revenues over the next decade.
Biopharmaceutical producers are subject to the same FDA requirements as
pharmaceutical manufacturers for demonstrating the safety, purity and efficacy
of their products through documentation, process validation and clinical
trials. Approximately 20 biopharmaceutical products have been approved by the
FDA and are currently being marketed in the United States and approximately
250 are currently in clinical trials.
Biopharmaceutical products are primarily manufactured through mammalian cell
culture or bacterial or yeast fermentation, followed by sophisticated
separation and purification processes. These processes are performed by
complex high-purity process piping systems which are either built-in-place or
contained on portable frames ("skids") to allow for manufacturing flexibility.
Similar to pharmaceutical manufacturing facilities, high-purity process piping
systems in biotechnology facilities are also used for the product distribution
systems and for the high-purity water, steam and gas generation and
distribution networks which support the manufacturing process.
Biopharmaceutical manufacturing operations take place in controlled
environments where the physical space within the plant is often limited and
congested with equipment. The coordination challenges associated with this
congestion, together with the complexity, quality assurance and validation
documents, and fast track schedule, have caused biopharmaceutical
manufacturers to pursue non-traditional project delivery approaches. The main
alternative approach is to assign single source accountability to the high-
purity process piping specialty contractor for all aspects of design,
installation and documentation. A typical biopharmaceutical facility contract
is implemented over approximately 12 months.
Biopharmaceutical or pharmaceutical manufacturing facilities do not tend to
follow the same phased installation approach as semiconductor facilities. They
are typically designed and constructed as one integrated manufacturing
operation in the following sequence: conceptual design, preliminary
engineering, detailed design, fabrication, installation, and systems start-up,
commissioning and validation.
INTERNATIONAL MARKETS
Trade regulations and the growth of the international marketplace are
resulting in increased foreign manufacturing of semiconductor, pharmaceutical
and biopharmaceutical products. To meet product specifications, regulatory
requirements, and international manufacturing standards, as well as to permit
worldwide product distribution, international facilities are increasingly
subject to comparable quality and performance requirements as in the United
States.
CAPITAL SPENDING PATTERNS
Demand for high-purity process piping systems tracks the capital spending
patterns of the semiconductor, pharmaceutical and biotechnology industries.
Capital spending is driven by rising demand for industry products, as well as
by regulatory and technological change, which requires replacement and
manufacturing upgrades. DataQuest, Chemical Engineering News and Genetic
Engineering News each respectively estimates annual revenue growth over the
next decade for the semiconductor, pharmaceutical and biopharmaceutical
industries at 15%, 10% and 13%, respectively.
25
<PAGE>
For its internal planning purposes, the Company estimates the size of the
market for high-purity process piping systems based upon the percentage of
overall capital spending typically allocated to these systems. For the
semiconductor industry, the Company estimates that approximately 20% of
capital spending on facilities is for high-purity process piping systems. For
the pharmaceutical industry, the Company estimates that 50% of total capital
spending is for blood product, vaccine and pharmaceutical finishing facilities
where purity levels are critical, and high-purity process piping systems
represent an average of 33% of the cost of these facilities. For the
biopharmaceutical industry, the Company estimates that 70% of capital spending
is directed at pilot and commercial manufacturing facilities, and high-purity
process piping systems represent an average of 33% of the cost of these
facilities. The Company estimates that the overall market for high purity
process systems for calendar 1996 is approximately $7 billion, of which
approximately $2 billion is related to high-purity process piping.
26
<PAGE>
BUSINESS
COMPANY OVERVIEW
Kinetics is the leading provider of sophisticated high-purity process piping
systems for the semiconductor, pharmaceutical and biotechnology industries.
Kinetics offers its customers turnkey solutions by providing, as a complement
to its specialty high-purity contracting business, comprehensive and
technically advanced engineering and design services, quality assurance and
control services, program management services, and manufacturing of specialty
components. Operations and sales efforts are conducted from its strategically
located facilities throughout the United States and at several international
sites. The Company has used its commitment to quality, innovation and agility
to become the largest specialty contractor of high-purity process piping
systems in the United States.
Within the semiconductor industry, the Company provides its services
primarily to industry leading manufacturers of integrated circuits and
semiconductor original equipment manufacturers. Generally, high-purity process
piping systems in semiconductor fabs distribute gases, water and chemicals
from generating equipment or storage tanks to the process manufacturing
equipment. In pharmaceutical and biotechnology facilities, high-purity process
piping systems are used both to transfer product through various stages of
manufacturing and to distribute gases, water and chemicals that support
manufacturing.
The Company prides itself on its ability to secure repeat business with
these and other customers on both new construction and retrofit projects. In
1996, 89% of revenues were derived from repeat customers. The Company's
semiconductor customers currently include AMD, DEC, Hyundai, Intel, LAM
Research, LSI Logic, Lucent Technologies, Motorola, Rockwell, SGS Thomson
Semiconductor and Texas Instruments. The Company's pharmaceutical and
biotechnology customers currently include Alcon, Bayer, Chiron, Genentech,
Genetics Institute, IDEC, Merck, Ortho Diagnostics and Warner Lambert.
The Company was founded in 1971 by William A. Bianco, Jr., its current
chairman and chief executive officer. The Company initially provided high-
purity process piping services to the early Silicon Valley semiconductor
companies and focused primarily on this regional market until 1990.
Recognizing the growth opportunity in the semiconductor industry and the
opportunity to apply high-purity process piping technology to other rapidly
growing and capital intensive industries, the Company began expanding its
operations into the pharmaceutical and biotechnology markets in the United
States. The Company has also expanded geographically throughout the United
States as well as in selected international locations. Concurrent with its
geographic expansion, the Company developed high-end value-added services such
as engineering and quality assurance to respond to the changing construction
and manufacturing strategies of its customers. Through these actions, the
Company has acquired the capital equipment, fabrication facilities,
engineering database and highly trained personnel to serve these rapidly
growing industries and has developed the capability to perform turnkey high-
purity process piping system projects.
The Company has increased its revenues to $278.4 million for fiscal 1996
from $145.5 million for fiscal 1994, and income from operations to $16.0
million from $6.4 million during that period, representing compound annual
growth rates of 38.3% and 58.6%, respectively, while growing its business
solely through internal expansion. With its experience in the design,
fabrication and installation of high-purity process piping systems in
sophisticated manufacturing facilities, its accumulated resources, and its
financial accomplishments, Kinetics believes it has a strong competitive
advantage and is uniquely positioned as a key supplier to meet the
technological challenges and growth of the semiconductor, pharmaceutical and
biotechnology industries.
BUSINESS STRATEGY
The semiconductor, pharmaceutical and biotechnology industries are rapidly
changing and fast growing. Manufacturing facilities are becoming larger and
more technologically complex. Purity requirements and quality standards
established by the manufacturer for new and existing facilities are rising in
order to achieve both advanced product specifications and improved product
yield. A substantial portion of the Company's revenues is
27
<PAGE>
derived through contracts requiring work to be performed in cleanroom
environments. In addition, critical systems are being installed over shorter
schedules due to the large investments required and rapid product obsolescence.
The Company is committed to strengthening its position as a high-quality
provider of sophisticated high-purity process piping, as well as expanding into
the broader process systems market, for the semiconductor, pharmaceutical and
biotechnology industries while increasing its revenues and profitability. To
achieve these objectives, the Company has adopted a strategy consisting of the
following key elements.
. Increase Market Share. The Company intends to further increase its market
share by opening and expanding branch offices, leveraging existing
customer relationships, investing in fabrication and cleanroom
facilities, acquiring capital equipment, and continuing to hire and train
personnel. The Company also plans to broaden its customer base by
increasing its direct sales force and by pursuing strategic alliances
with specialty gas and high-purity water providers.
. Expand Its Turnkey and Design/Build Operations. The Company believes that
its turnkey and design/build operations will allow it to provide its
customers with higher quality systems within a shortened project cycle
time, while significantly expanding the range of services offered by the
Company beyond its traditional contractor services. The Company's turnkey
and design/build operations include such services as quality assurance
and quality control; conceptual and detailed design and engineering;
critical component manufacturing; systems start-up, commissioning and
validation; program management; and ongoing preventive maintenance. The
Company has recently formed two subsidiaries to focus on the development
of its turnkey and design/build operations: microKINETICS to focus on the
semiconductor industry and bioKINETICS to focus on the biotechnology
industry.
. Further Develop Its International Operations. The Company plans to
provide to international customers its complete range of value-added
services, make additional strategic investments in local fabrication
facilities, capital equipment and marketing resources, and hire and train
local personnel. As a result of its extensive domestic experience and its
relationships with major international manufacturers, the Company
believes it is well-positioned to execute its international expansion
plans. To date, the Company has opened fabrication facilities in Mexico,
France and Israel (through a partnering investment), and has begun
construction of a cleanroom in the People's Republic of China.
. Leverage Its Investment in Quality Leadership. The Company has invested
significant time and capital in the development of proprietary SOPs. The
Company intends to continue to develop, refine and market these industry-
leading SOPs. These SOPs allow the Company to effectively compete for
projects requiring fast-track schedules, custom design, extensive
documentation and contamination-free installation procedures, and to
consistently perform its work anywhere in the world. The Company has an
extensive knowledge base regarding the requirements and expectations of
various regulatory bodies, including the FDA. The Company is committed to
continuing to understand and interpret the evolving requirements of these
regulatory bodies and is in the process of applying for ISO 9000
certification to aid the Company's international expansion efforts.
. Reduce Operating Costs and Increase Operating Efficiencies. The Company
has identified and will continue to seek additional "best practice"
techniques and is committed to implementing them throughout its entire
organization. Such techniques include the increased use of its
proprietary management software, consolidation of key suppliers in an
effort to increase purchasing power, and consolidation of fabrication and
administration into selected regional centers in order to reduce costs
and increase operating efficiencies.
. Develop Specialty Products. The Company has successfully introduced
several product lines over the past two years, including semiconductor
valve assemblies and portable high-purity gas and liquid analysis carts.
The Company plans to grow these product lines and introduce new products
to meet the needs of its existing customer base.
28
<PAGE>
SERVICES AND PRODUCTS
To meet the evolving needs of the high-purity process piping market, the
Company has developed a wide range of services and products. The Company's
orders and contracts range from several thousand to tens of millions of
dollars and vary from components and fabricated assemblies to entire
manufacturing systems.
.High-Purity Process Piping Systems
The Company's core business is the fabrication and installation of
sophisticated high-purity process piping systems. The Company procures
or manufactures highly polished stainless steel components and welds
them into assemblies, installs them into facilities and tests them
against acceptance standards which typically define levels of
contamination in the low parts per billion. The piping assemblies must
meet strict purity and documentation requirements and are typically
pre-fabricated at the Company's cleanroom and other fabricating
facilities or on construction sites in cleanrooms. In order to meet the
strict requirements for welding, the Company uses automatic orbital
welding machines which employ microprocessors to control all aspects of
the welding operation. The Company currently owns more than 250 welding
machines and associated equipment, representing a $22 million
investment, which the Company believes is more than any of its
competitors. The Company typically does not manufacture commodity pipes
or fittings.
For some of its customers, the Company provides installation services
based upon a "traditional" project delivery approach in which an
outside engineering firm provides the detailed installation documents
and procedures. However, for the majority of its customers, the Company
provides the detailed installation documents and procedures based upon
general design criteria provided by the customer's engineer (the
"design-assist" approach). This approach typically results in a
compressed project schedule and a reduction in technical issues
encountered during construction. Due to the rapid, technology-driven
changes in the semiconductor, pharmaceutical and biotechnology
industries, the design-assist approach has gained wide acceptance
because it takes advantage of the installer's field experience with the
latest construction techniques and materials, which are difficult to
reflect fully in contract plans and specifications. In the
pharmaceutical and biotechnology industries in particular, the
Company's knowledge of current FDA guidelines and expectations helps
owners avoid costly rework and delays. To meet the engineering
requirements of this approach, Kinetics has developed the industry's
largest group of high-purity process piping systems designers and
engineers. The designs are realized using sophisticated design software
to create three dimensional piping system models which are then used to
generate detailed fabrication and installation drawings. This automated
design approach reduces the fabrication lead time and project cycle
time through tighter material control.
.Turnkey and Design/Build
The Company also provides completely operational and commissioned
process piping systems based upon general performance requirements
obtained from the end-user. The Company has the ability to provide
either built-in-place systems or skids. The turnkey and design/build
approaches are becoming increasingly popular as owners are attempting
to decrease project costs and shorten the project schedule while at the
same time limiting their in-house project management and engineering
staffs. Under these project delivery approaches, the Company assumes
single source accountability. Successful execution of these projects
requires a tightly integrated program management system, as well as
experienced engineers, designers, installers and program managers. The
Company has recently expanded its engineering and program management
capabilities in the pharmaceutical and biotechnology markets through
the hiring of 20 additional highly qualified managers, engineers and
designers. The Company believes that turnkey and design/build will be
its fastest growing project delivery approaches in the next three
years, and as a result, has recently formed bioKINETICS, a wholly owned
Company subsidiary, to focus on these opportunities. At the same time,
the Company is continuing to develop design/build capabilities in the
semiconductor market through its microKINETICS subsidiary.
.Products and Other Services
Additional revenues are generated from sales to third-parties of
products and services related to the Company's core business. These
include quality assurance services provided by its QAM
29
<PAGE>
subsidiary, gas control assemblies and isolation boxes for
semiconductor manufacturing facilities, and polished stainless steel
fittings and tubing for each of the semiconductor, pharmaceutical and
biotechnology markets. In addition, the Company manufactures and sells
portable testing and analysis carts for on-line monitoring of purity
levels in critical process gases and liquids used in semiconductor and
pharmaceutical production.
MARKETS
The Company's principal markets are the semiconductor, pharmaceutical and
biotechnology industries, for which it performs new construction, retrofit and
expansion of high-purity process piping systems contained in highly
sophisticated manufacturing and testing facilities, both in the United States
and internationally.
The following table presents the Company's revenues by industry for the
fiscal years ended September 30, 1994, 1995 and 1996 (in millions):
<TABLE>
<CAPTION>
REVENUES FOR
YEAR ENDED SEPTEMBER 30,
--------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
INDUSTRY SECTOR
Semiconductor..................................... $ 104.9 $ 165.2 $ 204.5
Pharmaceutical.................................... 14.8 29.7 25.4
Biotechnology..................................... 17.9 26.6 27.2
Other(1).......................................... 7.9 8.4 21.2
-------- -------- --------
$ 145.5 $ 229.9 $ 278.3
======== ======== ========
</TABLE>
- --------
(1) Includes fiber-optics, HVAC and general manufacturing.
The Company's international revenues, which have increased from insignificant
levels in fiscal 1995 to $6.7 million in fiscal 1996, are currently being
derived from activities at its facilities in the United States, Mexico and
Israel. The Company believes that planned fabrication facilities in strategic
international locations are necessary to support sales and marketing efforts as
well as project execution and performance. Accordingly, the Company is
currently constructing cleanroom fabrication facilities in France, Israel and
the People's Republic of China. Scheduled completion for all three locations is
the first half of calendar 1997. It is anticipated that additional
international facilities will be added in accordance with project opportunities
and increasing global demand for the Company's systems and services.
CONTRACTS AND PRICING
The Company obtains project awards on either a competitive bid or negotiated
basis. Contracts are typically awarded by semiconductor, pharmaceutical and
biotechnology companies; gas, water and chemical suppliers; or construction and
engineering firms. The awarding of contracts is based on reputation, previous
project experience, ability to meet system specifications and project
deadlines, and price. The Company performs its services under either a fixed-
price contract, cost-type contract, or time-and-materials contract, which
represented 62%, 12% and 26%, respectively, of the Company's fiscal 1996
revenues.
Fixed-Price. A fixed-price contract provides for a single price for the total
amount of work to be performed on a project.
Cost-Type. A cost-type contract provides for reimbursement of allowable or
otherwise defined costs incurred, plus a fee for the services. Cost-type
contracts take a variety of forms, including a maximum price of reimbursement
that is guaranteed by the Company for the services to be performed.
30
<PAGE>
Time-and-Materials. A time-and-materials contract generally provides for
reimbursement to the Company on the basis of direct labor hours at fixed
hourly rates, cost of materials, and other specified costs. A fee may be
included in the hourly rates or may be based on a percentage of the
reimbursable costs.
Each contract type may include a provision for retention. Retention
represents amounts withheld from contract progress billings until satisfactory
project completion and generally ranges from five to ten percent of the total
contract amount.
CUSTOMERS AND MARKETING
The Company's customers are principally semiconductor, pharmaceutical and
biotechnology companies; gas, water and chemical suppliers to these
industries; and construction and engineering firms.
Sales and marketing is principally conducted through the Company's direct
sales force, which consists of sales and estimating personnel that are located
at both the Company's headquarters and its 13 regional offices. International
sales are performed by the Company's direct international sales force
currently headquartered in the United States and by representatives of
partnering companies. The Company is in the process of hiring direct sales
personnel and engaging independent representatives located in strategic
international locations. The Company's direct sales force is currently
composed of 40 sales, marketing and estimating personnel. The Company's sales
force is paid a base salary plus an annual discretionary or performance based
bonus. See "Risk Factors--Dependence on Key Customers" and "Business--
Backlog."
In fiscal 1996, the Company's top five customers accounted for 40.8% of
total revenues, of which AMD and Rockwell accounted for 12.9% and 10.7%,
respectively. The following is a list of the Company's top 25 customers by
revenues (representing approximately 81% of the Company's revenues), each of
which accounted for more than $2.5 million in revenues in fiscal 1996:
Air Liquide Genentech Motorola
Alcon Harris NEC
AMD Hexfet Ortho Diagnostics
AT&T IBM Rockwell
Bayer Intel SGS Thomson Semiconductor
Chiron Kurita Texas Instruments
DEC LAM Research Twinstar
Fujitsu LSI Logic
Genencor Micron
A significant portion of the Company's revenues is derived from a small
number of customers, which consist of both facility owners and general
contractors. Revenues derived from the Company's services to its five largest
facility owners in each year accounted for approximately 58%, 45%, and 41% of
the Company's revenues during the fiscal years ended September 30, 1994, 1995
and 1996, respectively. Sales to its five largest general contractor customers
accounted for 25.8% of the Company's revenues during the fiscal year ended
September 30, 1996. In addition, 19.5% of the Company's backlog at September
30, 1996 was comprised of orders from the Company's five largest facility
owner customers in backlog. The Company's projects are typically completed
within a six to fifteen month period from when the contract is initially
executed. As these projects are completed, business from these customers will
decline substantially unless they undertake additional projects incorporating
the Company's services. Furthermore, in fiscal 1996, 89% of the Company's
revenues were derived from repeat customers. If additional projects are not
initiated by existing customers, the performance of the Company will depend to
a greater extent on securing business from new customers. While the Company is
continually pursuing new customer opportunities, there can be no assurance
that the Company will be successful in its sales and marketing efforts, and
any significant weakening in customer demand would have a material adverse
effect on the Company. See "Risk Factors--Dependence on Key Customers."
31
<PAGE>
BACKLOG
The Company's projects generally require delivery of high-purity process
piping systems over a period of six to fifteen months. The Company includes in
its backlog only the unbilled portion of projects that are covered by a signed
contract. As a result, the full value of projects is often not included in the
Company's backlog upon project inception because written commitments are
generally received by the Company as certain phases of the project are finally
priced. Once the Company is awarded a project, it is not unusual for the
project scope to increase. This additional work is not included in backlog
until an executed change order or a new contract is received and approved by
the Company. Backlog is therefore not a useful indicator of the aggregate
revenue the Company expects to receive from any contract. Typically, the
Company completes virtually all of its backlog within one year; however, a
small portion of turnkey or design/build projects may remain in the Company's
backlog close to fifteen months because the Company is performing the
engineering and installation for the project.
On occasion, customers will cancel or delay projects for reasons beyond the
Company's control. Upon such notice, project values are decreased in the
Company's backlog to include only the estimated value of the work to be
completed in the immediate future. Historically, project cancellations or
delays have not had a significant effect on the Company's backlog. The
cancellation rate is generally low because the installation of high-purity
process piping systems generally occurs in the final phases in the
construction of a major manufacturing facility and are essential to the
operation of the facility. In 1996, however, two large contracts totaling
approximately $40 million were canceled and removed from backlog.
The Company estimated its backlog at approximately $100.6 million at
September 30, 1996. This compares to approximately $127.0 million (including
$34 million that was subsequently canceled) and $99.3 million at September 30,
1995 and 1994, respectively. The Company estimates that 98% of its backlog at
September 30, 1996 will be completed in fiscal 1997. The Company does not
consider backlog to be a useful indicator of its future revenue performance in
any given year.
RAW MATERIALS AND SUPPLIERS
The Company's principal raw materials are stainless steel, plastic, copper
and carbon steel piping and specialty valves, fittings and components, which
it obtains from a number of domestic and foreign primary producers and
distributors. The Company believes that it is not generally dependent on any
one of its suppliers for raw materials, that the market is extremely
competitive and that its relationships with its suppliers are good. Because of
the large volumes of materials purchased, the Company is able to negotiate
advantageous purchase prices for stainless steel, plastic piping and specialty
valves and fittings. Certain items are kept in stock at each of the Company's
facilities and are transported between facilities and construction sites as
required. In contrast, more specialized materials are obtained from suppliers
when required for a project. To date, the Company has not experienced any
significant shortages or delays in obtaining materials.
Historically, the price for stainless steel materials has fluctuated. In
order to protect itself from such fluctuations, at the time of obtaining a
contract, the Company generally obtains fixed price commitments from its
suppliers for most of the stainless steel items necessary to perform the
project.
INDUSTRY CERTIFICATION
The Company has internal policies and procedures to assure a consistently
high level of system quality. In addition to its own SOPs, the Company must
operate under regulations and specifications set forth by various industry
associations and governmental bodies.
The American Society of Mechanical Engineers ("ASME") and the American
National Standards Institute ("ANSI") publish codes and standards that are
applicable to the Company's projects. The ASME Code B31.3 "Chemical Piping"
sets forth engineering requirements necessary for the safe design and
construction of piping installations typically found in semiconductor,
pharmaceutical and biotechnology plants. This code prescribes
32
<PAGE>
requirements for materials and components, design, fabrication, assembly,
erection, examination, inspection, and testing of piping. Many referenced ANSI
standards further define materials and procedures for specific applications.
The semiconductor industry has a set of standards set by the Semiconductor
Equipment Manufacturers Institute that define in detail much of the
installation requirements for piping and equipment. The pharmaceutical and
biotechnology industries also have industry groups, such as the International
Society for Pharmaceutical Engineers, which provide design and installation
guidelines.
The FDA administers and enforces the regulations of CFR 210 and 211
regarding cGMP as applicable to the pharmaceutical industry. The systems
designed and installed by the Company must be able to repeatedly and reliably
produce a regulated product meeting the safety, identity, strength, quality,
and purity characteristics the drug product is represented to possess. In
order to retain its position as the industry leader, the Company has begun the
ISO 9000 certification process through its subsidiary, QAM, and anticipates
completing the process by mid-1997.
COMPETITION
The high-purity process piping systems industry is fragmented and highly
competitive on a regional basis. The Company's competition in the design and
fabrication of high-purity process piping systems generally consists of a
number of domestic piping systems installation and fabrication companies and
divisions of large industrial firms in the international sector. In the future
the Company's competition may include specialty gas providers, water system
providers and engineering and construction firms. The Company's primary
domestic competitors are Dynamic Systems, Inc., Fullman Company, and Therma
Corporation. Its primary international competitors are Mannesman AG, Mercury
and Jordan Lang. The Company believes that the majority of its business is
awarded based on reputation, previous project experience, ability to meet
system specifications and project deadlines, and price. Some of the Company's
current and potential competitors, especially in the international sector,
have greater financial and other resources than the Company. See "Business--
Competition."
EMPLOYEES
At September 30, 1996, the Company employed 1,859 full-time employees, of
whom 1,248 were represented by the Steamfitters and Pipefitters Union (the
"Union") and 611 of whom were non-union. Of the 611 non-union employees, 166
worked in project management, 130 worked in central administration, 120 worked
in engineering, 107 worked in quality assurance, 48 worked in accounting,
finance and tax, and 40 worked in marketing and sales.
The Company believes that the current relationship with its employees and
the Union is generally good and is not aware of any circumstances that are
likely to result in a work stoppage at any of its facilities.
SAFETY
The Company performs most of its services on construction sites at its
customers' locations, many of which are operating facilities employing
hazardous chemicals and processes. In order to operate successfully in this
environment, the Company has developed and implemented highly effective
policies and procedures to protect the health and safety of its personnel. Its
safety department operates independently of its installation crews and reports
directly to senior management. Weekly safety meetings, periodic inspections,
surprise visits, and a safety incentive plan have contributed to incidence
rates for the Company which the Company believes are not only very low for
high-purity process piping system providers, but for the construction industry
as a whole.
PROPERTIES
All of the Company's properties are leased. Its corporate headquarters,
located in Santa Clara, California, is a building of approximately 34,000
square feet. The Company has 21 branch offices, one warehouse and four other
facilities located in 10 states, one U.S. territory, Mexico and Israel (a
partnering facility).
33
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages as of December 10, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive
Officers:
William A. Bianco, Jr. .... 57 Chairman of the Board, Chief Executive Officer
and Director
David J. Shimmon........... 38 President, Chief Operating Officer, Chief
Financial Officer and Director
Marie R. Bianco............ 56 Executive Vice President and Director
Martin M. Jelenko.......... 51 Director
Jeffrey L. Ott............. 34 Director
Key Employees:
Michael R. Cables.......... 44 Senior Vice President, Southwest Operations
Julien C. Frost............ 55 Senior Vice President, KSI International
John Gelles, III........... 43 Vice President, Texas Operations
Kurt P. Gilson............. 34 Senior Vice President, Corporate Planning
Robert D. Hoover........... 39 President, Quality Assurance Management
Richard B. Hughes.......... 44 Senior Vice President, National Labor
Frank J. Knoll............. 48 President, bioKINETICS
J. Thomas Land............. 51 Senior Vice President, Northern California
Operations
Michael P. Lynch........... 50 Senior Vice President, Estimating and Sales
Ian W. MacLaren............ 39 Senior Vice President, Sales
Robert N. Mathisen......... 40 Senior Vice President, East Coast Operations
Steven P. Nickerson........ 34 Senior Vice President, Tax and Regulatory
Affairs
Daniel C. Rubin............ 33 Senior Vice President, Marketing and Sales
Carter E. Wicks............ 31 Senior Vice President, Accounting and
Information Technology
</TABLE>
William A. Bianco, Jr., founder of the Company, has served as Chief
Executive Officer and as a Director of the Company since its inception in
1971. Mr. Bianco has been Chairman of the Board since 1980. Prior to founding
the Company, Mr. Bianco was Plant Manager of Air Products & Chemicals, Inc., a
specialty gas company. Mr. Bianco serves on the Board of Directors of the
Mechanical Contractors Association and the Joint Apprenticeship Training
Council.
David J. Shimmon has served as President of the Company since March 1996, as
the Chief Operating Officer and as a Director of the Company since joining the
Company in October 1990, as the Chief Financial Officer of the Company since
1991 and served as Executive Vice President of the Company from October 1990
to March 1996. Prior to joining the Company, Mr. Shimmon practiced as a
Certified Public Accountant with Frank, Rimmerman & Company and Arthur Young &
Company, Certified Public Accountants, providing auditing, management
consulting and operations consulting services.
Marie R. Bianco has served as Executive Vice President and as a director
since joining the Company in 1989. Mrs. Bianco has developed human resources
policies and procedures to meet the needs of the Company's growth, and is also
the Plan Administrator of The Kinetic Systems, Inc. 401(k) Plan. Prior to
joining the Company, Mrs. Bianco was a legal assistant with Hoge, Fenton,
Jones & Appel, Inc. and Ropers, Majeski et al. for fifteen years.
34
<PAGE>
Martin M. Jelenko has served as a Director of the Company since 1995. He has
served as a consultant to BT Capital Partners, Inc. ("BT Capital") from
September 1996 to December 1996 and is currently a principal at Houlihan,
Lokey, Howard & Zukin, an equity investment and investment banking firm. From
January 1992 to August 1996, he was a Managing Director with BT Capital. From
1989 to January 1992, he served as Chief Executive Officer of Maiden Lane
Associates, a private equity investment firm. Mr. Jelenko has served as a
Director of Strouds, a specialty softgoods retailer, from 1987 to 1992 and
from 1994 to the present. Mr. Jelenko also serves as a Director of RXI
Holdings.
Jeffrey L. Ott has served as a Director of the Company since December 1996.
Mr. Ott has been a Managing Director with BT Capital Partners, Inc. since
early 1996. For the two years prior to joining BT Capital Partners, Inc., Mr.
Ott was a Managing Director with BT Securities, where he was responsible for
the convertible and equity-linked capital markets effort worldwide. Mr. Ott
joined Bankers Trust Co. in August 1988.
Michael R. Cables has served as Vice President of Operations and Senior Vice
President of Operations since 1994, as Southern California Operations Manager
from 1988 to 1994 and as a labor supervisor from 1986 to 1988. He is
responsible for opening and supervising branch offices in Arizona, Colorado
and Mexico and for developing apprenticeship training programs.
Julien Frost has served as Senior Vice President, International Operations
since October 1996, as Senior Vice President of Operations from August 1994 to
October 1996, and as Vice President of Operations from January 1989 to August
1994. Mr. Frost also sponsors the Company's Corporate Safety Program, and acts
as Project Director for large stand-alone projects throughout the world.
John Gelles served as Vice President of Texas Operations since October 1996,
as Assistant Branch Manager for Texas Operations from 1994 to October 1996 and
as a Senior Project Manager from January 1989 to 1994.
Kurt P. Gilson has served as Senior Vice President of Corporate Planning
since October 1996, as Vice President of Technical Services from August 1994
to October 1996 and as a project manager from 1988 to August 1994.
Robert D. Hoover has served as Senior Vice President since October 1996, as
Vice President of Quality Assurance Management from November 1994 to October
1996 and as Manager of Quality Assurance from February 1989 to November 1994.
Prior to joining the Company, he authored the high-purity piping installation
and testing procedures for the Sematech consortium and has remained active in
establishing industry standards.
Richard B. Hughes has served as Senior Vice President since October 1996, as
Vice President of National Labor since August 1994 and as Labor Manager since
October 1988.
Frank J. Knoll has served as President of bioKINETICS since August 1996.
From 1990 to 1995 he held several positions at Life Sciences International, an
engineering and construction management company, most recently as President.
Mr. Knoll has over twenty-five years of experience in the design and
construction of high technology manufacturing facilities with significant
experience in the biotechnology and pharmaceutical industries.
J. Thomas Land has served as Senior Vice President of Northern California
Operations since October 1996, as Vice President of Berkeley Operations since
August 1992, as Division Manager of the Berkeley Division since August 1992
and as a Senior Project Manager from October 1988 to August 1992.
Michael P. Lynch has served as Senior Vice President of Sales and Estimating
since October 1996, as Vice President of Sales from August 1994 to October
1996 and as Marketing Manager from October 1988 to August 1994.
Ian W. MacLaren has served as Senior Vice President of Sales since October
1996, as Vice President of Sales from August 1994 to October 1996 and as the
Lead Bid Sponsor from October 1989 to August 1994.
35
<PAGE>
Mr. MacLaren is a registered Professional Engineer and is an active national
board member of the International Society of Pharmaceutical Engineers.
Robert N. Mathisen has served as Senior Vice President of East Coast
Operations since October 1996, as Vice President of Operations from August
1994 to October 1996 and as New England branch manager from 1990 to August
1994.
Steven P. Nickerson has served as Senior Vice President since October 1996,
as Vice President of Tax and Regulatory Affairs from 1994 to October 1996 and
as Tax Manager from July 1991 to February 1993. From February 1993 to 1994, he
was Tax Manager of Maxtor Corporation, a disc drive manufacturer. Mr.
Nickerson is a member of the Tax Executive Institute, the California Society
of CPAs and the American Institute of Certified Public Accountants.
Daniel C. Rubin has served as Senior Vice President of Sales and Marketing
since October 1996, as Vice President of Marketing from August 1994 to October
1996, and as Manager of East Coast Business Development from October 1989 to
August 1994. From 1986 to 1988 he was sales manager for Critical Components, a
manufacturer and distributor of high-purity components to the semiconductor
industry.
Carter E. Wicks has served as Senior Vice President since October 1996, as
Vice President of Accounting and Information Technology from August 1994 to
October 1996, and as Manager of Accounting from July 1990 to August 1994.
Prior to joining the Company, he was at Frank, Rimmerman and Company, most
recently as an audit and information systems manager. Mr. Wicks holds active
memberships with several organizations, including the Construction Financial
Management Association, The American Institute of Certified Public
Accountants, The California Society of Certified Public Accountants and The
Association of Certified Fraud Examiners.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of directors. Mr. Bianco
and Ms. Bianco are married. There are no other family relationships among the
directors or officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, currently composed of
Mr. Jelenko and Mr. Ott, which makes recommendations to the Board concerning
salaries and incentive compensation for officers and employees of the Company.
The Board of Directors also has an Audit Committee, currently composed of
Mr. Jelenko and Mr. Ott, which reviews the results and scope of the audit and
other accounting related services.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although non-employee directors are reimbursed for
their out-of-pocket expenses incurred in attending Board and committee
meetings.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company during the fiscal year ended
September 30, 1996, by the Chief Executive Officer of the Company and the
other most highly compensated executive officers whose total salary and bonus
for the fiscal year ended September 30, 1996 exceeded $100,000 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
--------------------------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C>
William A. Bianco, Jr.......... $235,200 $200,000 $16,686 $167,291(2)
Chairman of the Board and
Chief Executive Officer
David J. Shimmon............... 196,000 200,000 8,250 9,440(3)
President, Chief Operating
Officer and
Chief Financial Officer
Marie R. Bianco................ 90,000 100,000 12,250 --
Executive Vice President
</TABLE>
- --------
(1) Represents lease payments on an automobile and related insurance premiums.
(2) Represents (i) $100,428 for life insurance premiums, (ii) $66,113 which
represents the cash surrender value of the insurance policy (as determined
in accordance with the rules of the Securities and Exchange Commission)
and (iii) $750 in matching 401(k) plan contributions by the Company.
(3) Represents (i) $8,690 for life insurance premiums and (ii) $750 in
matching 401(k) plan contributions by the Company.
None of the executive officers were granted options to purchase shares of
the Company's Common Stock in fiscal 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee until December 1996, prior
to which all decisions concerning executive compensation were made by the
entire Board, of which Mr. Bianco, Mr. Shimmon and Ms. Bianco are members. The
Compensation Committee currently consists of Mr. Jelenko and Mr. Ott. The
Company has entered into certain transactions with Mr. Bianco and Mr. Shimmon.
See "Certain Transactions."
STOCK PLANS AND AGREEMENTS
1996 Key Employee Stock Option Plan.
The 1996 Key Employee Stock Option Plan of the Company (the "Key Employee
Option Plan") provides for the grant of stock options to officers and other
key employees of the Company and its subsidiaries. Options are nonstatutory
stock options and are not intended to satisfy the requirements of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). All options
granted under the Key Employee Option Plan must be granted by August 16, 2006.
The Key Employee Option Plan is administered by the Board of Directors or a
committee thereof. Subject to the provisions of the Key Employee Option Plan,
the Board or committee has the authority to select the persons to whom options
are granted and determine the terms of each option, including (i) the number
of shares of Common Stock covered by the option, (ii) when the option becomes
exercisable, (iii) the option exercise price, which must be at least 100% of
the fair market value of a share of Common Stock as of the date of grant and
(iv) the duration of the option. Generally, options granted under the Key
Employee Option Plan are immediately exercisable but remain subject to
repurchase by the Company for all exercised unvested shares under a vesting
schedule established by the Board or committee. The options are generally
exercisable with 10% exercisable on the date of grant and one tenth of the
option on each anniversary from one to nine years. The Company's repurchase
right will terminate upon certain changes in control of the Company unless the
outstanding options are assumed or replaced by the acquiring corporation or
if, following certain changes in control of the Company,
37
<PAGE>
the option holder is terminated without cause or resigns following
"constructive termination" as defined in the Key Employee Option Plan. All
options are nontransferable other than by will or the laws of descent and
distribution. With the Company's consent, the stock options may be transferred
to a beneficiary or beneficiaries in the event of the optionee's death, to the
extent the option granted is exercisable.
As of December 10, 1996, 337,499 options to purchase shares of Common Stock
were outstanding and no shares remained available for future option grants
under the Key Employee Option Plan. The Company does not intend to issue any
future options under the Key Employee Option Plan.
1997 Stock Option Plan.
The 1997 Stock Option Plan (the "Option Plan") was adopted by the Company's
Board of Directors in December 1996, subject to approval by the Company's
stockholders. The Option Plan of the Company provides for the grant of stock
options to employees (including officers), directors and consultants of the
Company and its subsidiaries. Options may be incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or nonstatutory stock options, although incentive stock options may be
granted only to employees. All options granted under the Option Plan must be
granted by December 6, 2006.
The Option Plan is administered by the Board of Directors or a committee
thereof. Subject to the provisions of the Option Plan, the Board or committee
has the authority to select the persons to whom options are granted and
determine the terms of each option, including (i) the number of shares of
Common Stock covered by the option, (ii) when the option becomes exercisable,
(iii) the option exercise price, which, in the case of incentive stock options,
must be at least 100% of the fair market value of a share of Common Stock as of
the date of grant, and, in the case of nonstatutory stock options must be at
least 85% of the fair market value of a share of Common Stock as of the date of
grant, and (iv) the duration of the option (which, in the case of incentive
stock options, may not exceed ten years). Generally, options granted under the
Option Plan are immediately exercisable but remain subject to repurchase by the
Company for all exercised unvested shares under a vesting schedule established
by the Board or committee. The Company's repurchase right will terminate upon
certain changes in control of the Company unless the outstanding options are
assumed or replaced by the acquiring corporation or if, following certain
changes in control of the Company, the option holder is terminated without
cause or resigns following "constructive termination" as defined in the Option
Plan. All incentive stock options are nontransferable other than by will or the
laws of descent and distribution. With the Company's consent, nonstatutory
stock options may be transferred to an optionee's immediate family, a trust for
his or her benefit or a partnership in which only the optionee and immediate
family members are partners.
As of December 10, 1996, no options to purchase shares of Common Stock were
outstanding and 350,000 shares remained available for future option grants
under the Option Plan.
Stock Option Agreements
The Company has entered into non-qualified option agreements with
approximately 20 employees and one consultant, providing for the purchase of an
aggregate of 746,250 shares of Common Stock of the Company, of which options to
purchase 678,750 shares were outstanding as of December 10, 1996. Such
agreements provide for vesting periods of up to six years with an option term
of ten years. The per share exercise price of such options was at least 100% of
the fair market value of a share of Common Stock as of the respective dates of
grant.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in December 1996, subject to
approval by the Company's stockholders. A total of 250,000 shares of Common
Stock has been reserved for issuance under the Purchase Plan. The Purchase
Plan, which is intended to qualify under Section 423 of the Code, is
administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors of the Company) who
have completed at least one year of service with the Company or any subsidiary
designated by the Board for
38
<PAGE>
participation in the Purchase Plan are eligible to participate in the Purchase
Plan if they are customarily employed for more than 20 hours per week and more
than five months per year. The Purchase Plan will be implemented by sequential
twenty-four month offerings. The Company has not yet offered or sold shares of
Common Stock to employees pursuant to the Purchase Plan, but intends to
initiate the first offering under the Purchase Plan concurrent with the
Offering. The initial offering period will terminate on April 30, 1999.
Thereafter, offering periods will begin on May 1 and November 1 of each year.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation.
The price at which stock may be purchased under the Purchase Plan is equal to
85% of the lower of the fair market value of the Company's Common Stock on the
first day or the last day of each offering period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company. In addition, participants generally may not purchase more than 5,000
shares in an offering or stock having a value (measured at the beginning of
the offering) greater than $25,000 in any calendar year.
CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into a First Amended and Restated Voting Trust
Agreement Regarding Shares Issued to David J. Shimmon (the "Shimmon Voting
Trust Agreement") initially effective as of April 1, 1996 and amended by the
First Amendment thereto dated as of December 1, 1996 with William A. Bianco,
Jr., as the voting trustee, and David J. Shimmon. Pursuant to the Shimmon
Voting Trust Agreement, Mr. Shimmon has transferred his right to vote his
shares of Common Stock of the Company to Mr. Bianco. The Shimmon Voting Trust
Agreement shall terminate on the first to occur of: (i) the date Mr. Bianco
ceases to be employed by the Company, for any or no reason, (ii) the date 50%
or more of the voting securities of the Company are transferred to a third
party or parties pursuant to one transaction or a series of related
transactions or (iii) June 30, 1999. The Shimmon Voting Trust Agreement
provides that any transfer of Mr. Shimmon's shares of Common Stock of the
Company will require approval by both Mr. Shimmon and Mr. Bianco.
The Company has entered into a Second Amended and Restated Voting Trust
Agreement Regarding Shares Issued to the Bianco Family 1991 Trust (the "Bianco
Voting Trust Agreement") effective as of December 1, 1996 with David J.
Shimmon, William A. Bianco and the Bianco Family 1991 Trust dated February 1,
1991 (the "Bianco Family Trust"), pursuant to which Mr. Shimmon would have the
power to vote the shares held by the Bianco Family Trust at such time as Mr.
Bianco ceases to be employed by the Company if as of such date Mr. Shimmon (i)
is employed by the Company and (ii) is a stockholder of the Company. The
Bianco Voting Trust Agreement shall terminate on the first to occur of: (i)
the date Mr. Shimmon is no longer employed by the Company, for any or no
reason, (ii) the date 50% or more of the voting securities of the Company are
transferred to a third party or parties pursuant to one transaction or a
series of related transactions or (iii) April 1, 2006. The Bianco Voting Trust
Agreement provides that any transfer of the Bianco Family Trust's shares of
Common Stock of the Company will require approval of both Mr. Bianco and Mr.
Shimmon.
39
<PAGE>
CERTAIN TRANSACTIONS
On June 26, 1995 the Company sold an aggregate of 2,250,000 shares of Series
A Preferred Stock (without giving effect to the conversion of the Preferred
Stock or the three-for-four reverse stock split) at a price of $4.00 per share
to BT Capital Partners, Inc. ("BT Capital"). Pursuant to the Company's
Certificate of Incorporation, as of December 10, 1996, the Company had issued
to BT Capital Series B Preferred Stock dividends of 234,181 shares (without
giving effect to the conversion of the Preferred Stock or the three-for-four
reverse stock split). Upon the consummation of this Offering, the shares of
Series A Preferred Stock and Series B Preferred Stock will convert into
1,687,500 and 87,607 shares of Common Stock, respectively.
During the three years ended September 30, 1996, the Company made a series
of loans and advances to William A. Bianco, Jr. in the aggregate amounts of
$495,172 and $417,446, respectively. Such loans had been repaid, with interest
at 8%, as of September 30, 1996, and all advances had been repaid as of
October 31, 1996. Mr. Bianco currently has no outstanding indebtedness to the
Company.
During the three years ended September 30, 1996, the Company made a series
of loans and advances to David J. Shimmon in the aggregate amounts of $262,395
and $295,042, respectively. Such loans had been repaid, with interest at 8%,
as of September 30, 1996, and all advances had been repaid as of October 31,
1996. Mr. Shimmon currently has no outstanding indebtedness to the Company.
All transactions between the Company and its officers, directors, principal
stockholders and other affiliates have been and will be on terms no less
favorable to the Company than could be obtained from unaffiliated parties. The
Company has no outstanding loans to officers, directors, principal
stockholders or other affiliates other than advances of reimbursable expenses.
All such future transactions will be approved by a majority of the Company's
independent and disinterested directors.
The Company has entered employment agreements with William A. Bianco, Jr.,
Marie R. Bianco, and David J. Shimmon effective as of July 31, 1994 which
expire on October 31, 1999. The agreements provide for employment at-will,
with severance pay if the employee is terminated without cause. The severance
pay equals six months of the employee's then-current annual salary, and is
payable in twelve equal monthly installments. The agreements also provide for
an annual cost-of-living increase equal to the greater of 2% or the percent
increase in the Consumer Price Index.
The Company's Certificate of Incorporation limits 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 the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions that may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors; and officers' insurance if available on reasonable terms.
For a description of the compensation of officers of the Company and the
eligibility of officers and directors of the Company to participate in the
Company's employee benefit plans, see "Management--Executive Compensation" and
"--Stock Plans."
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock at December 10, 1996 (except as otherwise noted) with
respect to (i) each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each Named Executive
Officer and director of the Company, (iii) all executive officers and
directors as a group and (iv) all Selling Stockholders. Each of the following
stockholders has sole voting and investment power with respect to shares
beneficially owned by such stockholder, except to the extent that authority is
shared by spouses under applicable law or as otherwise noted.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER OFFERING
------------------------ --------------------------
BENEFICIAL SHARES TO
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENTAGE(2) BE OFFERED SHARES PERCENTAGE(2)(3)
- --------------------------------------- ---------- ------------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C>
William A. Bianco,
Jr.(4).................. 6,000,000 55.6% 170,000 5,830,000 42.1%
Marie R. Bianco(4)....... 6,000,000 55.6 170,000 5,830,000 42.1
David J. Shimmon(5)...... 1,500,000 15.6 -- 1,500,000 11.9
Jeffrey L. Ott(6)........ 1,775,107 18.6 375,000 1,400,107 14.1
Martin M. Jelenko........ -- -- -- -- --
All executive officers
and directors as
a group (5 persons)(4)-
(6)..................... 9,275,107 86.0 545,000 8,730,107 69.3
BT Capital Partners,
Inc.(6)
130 Liberty Street
New York, NY 10006...... 1,775,107 18.6 375,000 1,400,107 14.1
L.H. Friend, Weinress,
Frankson
& Presson, Inc.(7)
3333 Michelson Drive,
Suite 650
Irvine, CA 92716....... 99,878 1.0 60,210 39,668 *
Gregory E. Presson(7)
25 Bridgeport
Newport Coast,
CA 92657................ 99,878 1.0 60,210 39,668 *
George M. Sundheim
c/o Doty & Sundheim
A Professional
Corporation at Law
420 Florence Street,
Suite 200
Palo Alto, California
94301.................. 67,500 * 12,500 55,000 *
Silicon Valley Bank(8)
3003 Tasman Drive
Santa Clara, CA 95054... 60,437 * 24,790 35,647 *
Christopher P.
Halloran(9)
14 Klamath
Irvine, CA 92715........ 28,997 * 7,500 21,497 *
</TABLE>
- --------
* Represents less than 1%
(1) Unless otherwise indicated, the address of each of the individuals named
in the table is: c/o The Kinetics Group, 3080 Raymond Street, Santa Clara,
CA 95054.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants from the
Company held by that person that are currently exercisable, or become
exercisable within 60 days following December 10, 1996, are deemed
outstanding. However, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person.
41
<PAGE>
(4) Represents shares owned by Bianco Family 1991 Trust. Mr. Bianco and Ms.
Bianco are trustees of the Bianco Family 1991 Trust and, therefore, may be
deemed to be beneficial owners of such shares. All of such shares are
subject to the Bianco Voting Trust Agreement. Includes 1,125,000 shares of
Common Stock which are subject to an option which has been granted to David
J. Shimmon which is exercisable at $1.11 per share and expires on June 30,
2001. Excludes 1,500,000 shares beneficially owned by David J. Shimmon and
held by William A. Bianco, Jr., Voting Trustee under the Shimmon Voting
Trust Agreement; Mr. Bianco and Ms. Bianco disclaim beneficial ownership of
all such shares. If the Underwriters' over-allotment option is exercised in
full, an additional 50,000 shares would be offered for sale in the Offering
See "Management--Change of Control Arrangements."
(5) Mr. Shimmon's shares are held of record by William A. Bianco, Jr., Voting
Trustee under the Shimmon Voting Trust Agreement. Excludes 6,000,000 shares
held in The Bianco Family 1991 Trust, which are subject to the Bianco
Voting Trust Agreement. See "Management--Change of Control Arrangements."
Excludes 1,125,000 shares of Common Stock which are subject to an option
from the Bianco Family 1991 Trust which is exercisable at $1.11 per share.
(6) Represents 1,775,107 shares held by BT Capital Partners, Inc. ("BT
Capital"). Mr. Ott is a Managing Director of BT Capital and disclaims
beneficial ownership of such shares. If the Underwriters' over-allotment
option is exercised in full, an additional 225,000 shares would be offered
for sale in the Offering.
(7) Includes 57,994 shares held by L. H. Friend, Weinress, Frankson & Presson
("L.H. Friend") and 41,884 shares held by Gregory E. Presson, who is a
general partner at L.H. Friend, of which 32,000 shares are being offered
for sale by L.H. Friend and 27,810 shares are being offered by Mr. Presson.
Represents shares issuable upon the exercise of outstanding warrants at the
assumed initial public offering price of $15.00 per share.
(8) Represents shares issuable upon the net exercise of outstanding warrants at
an assumed initial public offering price of $15.00 per share. If the
Underwriters' over-allotment option is exercised in full, an additional
35,647 shares would be offered for sale in the offering.
(9) Represents shares issuable upon the net exercise of outstanding warrant at
an assumed public offering price of $15.00 per share.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, $0.001 par value and 2,000,000 shares of Preferred Stock, $0.001
par value.
COMMON STOCK
Excluding the shares of Common Stock to be issued upon the conversion of all
outstanding Preferred Stock prior to the Offering and 189,312 shares of Common
Stock to be issued upon the net exercise of certain outstanding warrants prior
to the closing of the Offering, there were 7,567,500 shares of Common Stock
outstanding held of record by three stockholders at December 10, 1996.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefore, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to the prior
liquidation rights of any outstanding Preferred Stock. Upon the closing of the
Offering, the Common Stock will have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of Common Stock are, and the
shares offered by the Company in this Offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into 1,775,107 shares of Common Stock and automatically
retired. Thereafter, the Board of Directors will be authorized, without
further stockholder approval, to issue up to 2,000,000 shares of Preferred
Stock in one or more series. Each series of Preferred Stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors.
The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of the Common Stock or could adversely affect the rights and
powers, including voting rights, of the holders of the Common Stock. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Common Stock. As of the closing of this offering, no
shares of Preferred Stock will be outstanding and the Company currently has no
plans to issue any shares of Preferred Stock. See "Principal and Selling
Stockholders."
WARRANTS
In connection with a loan to the Company, in June 1995 the Company issued to
Silicon Valley Bank a warrant for the purchase of shares of Series B Preferred
Stock. The warrant expires on June 25, 2000, is currently exercisable for
93,750 shares of the Company's Common Stock at an exercise price of $5.33 per
share and contains a net exercise provision. See "Principal and Selling
Stockholders."
In connection with services provided to the Company during its private
placement in June 1995, the Company issued to L.H. Friend, Weinress, Frankson
& Presson ("L.H. Friend") a warrant for the purchase of shares of Series B
Preferred Stock. The warrant expires on June 25, 2000, was originally
exercisable for 199,912 shares of the Company's Common Stock at an exercise
price of $5.33 per share and contains a net exercise provision. L.H. Friend
transferred 109,952 warrant shares to certain affiliates of L.H. Friend. See
"Principal and Selling Stockholders."
43
<PAGE>
REGISTRATION RIGHTS
Following the sale of the shares of Common Stock offered hereby, the holders
of approximately 8,725,107 shares issuable upon conversion of the outstanding
shares of Preferred Stock and shares held by founders of the Company and their
transferees will have certain rights to register those shares under the
Securities Act of 1933, as amended. If the Company registers any of its Common
Stock either for its own account or for the account of other securityholders,
the holders of such shares are entitled to include their shares of Common
Stock in the registration, subject to certain marketing and other limitations.
Beginning six months after the closing of this Offering, the holders of at
least 51% of such shares may request on one occasion that the Company use its
best efforts to register such shares for public resale subject to certain
conditions and limitations. For example, the Company may, in certain
circumstances, defer such registration, and the underwriters involved in such
registrations have the right, subject to certain limitations, to limit the
number of shares included in such registrations. The holders of such shares,
may also require the Company to register all or a portion of their registrable
securities on Form S-3 when use of such form becomes available to the Company,
provided, such registered shares represent at least 1% of the Company's Common
Stock then outstanding. The costs and expenses of such registrations (other
than underwriting discounts and commissions) will be borne by the Company.
The holders of approximately 101,812 shares issuable upon the exercise of
the outstanding warrants will also have certain rights to register those
shares under the Securities Act of 1933, as amended. If the Company registers
any of its Common Stock either for its own account or for the account of other
securityholders, the holders of such shares are entitled to include their
shares of Common Stock in the registration, subject to certain conditions and
limitations, for example, the Company need not register such shares if (i) it
would result in the reduction of the number of shares to be sold by other
holders of rights to register shares of the Company or (ii) such shares are
saleable pursuant to Rule 144 or other rules or regulations promulgated by the
Securities and Exchange Commission. All fees, costs and expenses of such
registrations (other than underwriting discounts and commissions) will be
borne by the Company.
The holders of options to purchase 337,499 shares have the right to require
the Company to register their securities on a Registration Statement on Form
S-8. Approximately 180 days after the date of this Prospectus, the Company
intends to file a registration statement on Form S-8 to register these and
other securities.
DELAWARE LAW AND CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentiality
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the
44
<PAGE>
interested stockholder; (iv) any transaction involving the corporation that
has the effect of increasing the proportionate share of the stock of any class
or series of the corporation beneficially owned by the interested stockholder;
or (v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Restated Certificate of Incorporation, which will become
effective upon consummation of the Offering, will require that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing. In addition, special meetings of
the stockholders of the Company may be called only by the Board of Directors
or by the holders of not less than ten percent of all the shares entitled to
cast votes at the meeting. The Restated Certificate of Incorporation which
will become effective upon consummation of this offering will provide that a
director may be removed from the Board of Directors with or without cause, but
only by the affirmative vote of the holders of at least a majority of the
voting power of all of the then-outstanding shares of capital stock of the
corporation entitled to vote generally in the election of directors, voting
together as a single class, and that certain amendments of the Company's
Restated Certificate of Incorporation, and all amendments by the stockholders
of the Company's Amended and Restated Bylaws, require the approval of holders
of at least 66 2/3% of the voting power of all outstanding shares. These
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer and Trust. Its telephone number is (303) 298-5370.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after this Offering. Sales of
substantial amounts of Common Stock in the public market after this Offering,
or the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to
raise capital through an offering of equity securities.
After this Offering, the Company will have outstanding 12,581,919 shares of
Common Stock (12,826,272 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 3,700,000 shares offered hereby
(4,255,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable in the public market without restriction under
the Securities Act, unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act.
The remaining 8,881,919 shares of Common Stock outstanding upon completion
of this Offering will be "restricted securities" as that term is defined in
Rule 144 ("Restricted Shares"). The Restricted Shares were issued and sold by
the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Shares may be sold in the
public market only if they are registered or if any qualify for an exemption
from registration under Rules 144 or 701 under the Securities Act, which are
summarized below.
Pursuant to certain "lock-up" agreements, all of the executive officers,
directors, stockholders and certain employees of the Company, have agreed not
to offer, sell, pledge, contract to sell, grant any option to purchase or
otherwise dispose of any such shares for a period of 180 days from the date of
this Prospectus. The Company has also entered into an agreement with the
representatives of the Underwriters that it will not offer, sell or otherwise
dispose of Common Stock for a period of 180 days from the date of this
Prospectus, other than pursuant to existing stock option plans. As a result of
such lock-up agreements, 8,826,919 and 55,000 of the Restricted Shares will be
eligible for immediate sale beginning 181 days after the date of this
Prospectus subject to certain volume, manner of sale and other limitations
under Rule 144 and Rule 701, respectively.
Following the expiration of such lock-up periods, certain shares issued upon
exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to
Rule 701 under the Securities Act. Rule 701 permits resales of such shares in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144 as currently in effect, beginning on , 1997 (90 days after
the date of this Prospectus), a person (or persons whose shares of the Company
are aggregated) who has beneficially owned Restricted Shares for at least two
years (including the holding period of any prior owner who is not an affiliate
of the Company) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock (approximately 126,000 shares
immediately after this Offering), or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least three years (including the holding period of any prior
owner who is not an affiliate of the Company) is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
As of December 10, 1996, options to purchase a total of 1,016,249 shares of
Common Stock were outstanding. All of such shares are subject to lock-up
agreements for a period of 180 days from the date of this Prospectus. As of
September 30, 1996, 350,000 shares were available for future option grants
under the Option Plan. Moreover, in December 1996, the Company adopted,
subject to stockholder approval, the Option Plan and the Purchase Plan, under
which 350,000 shares and 250,000 shares, respectively, have been reserved for
issuance.
46
<PAGE>
The Company intends to file after the effective date of this Offering a
Registration Statement on Form S-8 to register an aggregate of 1,616,249
shares of Common Stock reserved for issuance under its Option Plan and
Purchase Plan. Such Registration Statement will become effective automatically
upon filing. Shares issued under the foregoing plans, after the filing of
Registration Statement on Form S-8, may be sold in the open market, subject,
in the case of certain holders, to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by the Company. In addition, after this Offering, holders of
approximately 8,826,919 shares of Common Stock and options to purchase
approximately 337,499 shares of Common Stock will be entitled to certain
rights to cause the Company to register the sale of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights."
47
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Stockholders have agreed
to sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Smith Barney Inc. .............................................
Donaldson, Lufkin & Jenrette Securities Corporation............
BT Securities Corporation......................................
---------
Total........................................................ 3,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such Shares are taken.
The Underwriters, for whom Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and BT Securities Corporation are acting as the
Representatives, propose to offer part of the shares directly to the public at
the initial public offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which
represents a concession not in excess of $ per share under the initial
public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial offering of the shares to the public, the public
offering price and such concessions may be changed by the Representatives. The
Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
The Company and certain of the Selling Stockholders have granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 244,353 and 310,647, respectively, additional
shares of Common Stock, at the initial public price set forth on the cover
page of this Prospectus, minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the Offering. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in
the preceding table bears to the total number of shares listed in such table.
The Company, its officers and directors, the Selling Stockholders and all
other stockholders of the Company have agreed that, for a period of 180 days
from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock of the Company or any securities
convertible into, or exercisable or exchangeable for, Common Stock of the
Company.
Prior to this Offering, there has not been a public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Shares of Common Stock included in this offering has been determined by
negotiations between the Company, the Selling Stockholders, and the
Representatives. Among the factors considered in determining such price were
the history of and prospects for the Company's business
48
<PAGE>
and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the past and
present revenues and earnings of the Company, the prospects for growth of the
Company's revenues and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to the
Company.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933.
Under the Rules of the National Association of Securities Dealers, Inc.
("NASD"), when an NASD member such as BT Securities Corporation ("BT
Securities") participates in the distribution of equity securities of a
company with which an affiliate of the member has a conflict of interest, the
public offering price can be no higher than that recommended by a "qualified
independent underwriter" (as defined in NASD Rule 2720)(a "QIU") meeting
certain standards. BT Capital Partners, Inc. ("BT Capital"), an affiliate of
BT Securities, owns 10% or more of the preferred equity of the Company and
following completion of the Offering will own in excess of 10% of the Common
Stock of the Company, and based thereon, has a conflict of interest with
respect to the distribution of the equity securities of the Company within the
meaning of the Rules of the NASD. Jeffrey L. Ott, a director of the Company,
is a Managing Director of BT Capital. Accordingly, Smith Barney Inc. has
agreed to serve as QIU in this Offering and to recommend a price in compliance
with the Rule 2720 of the NASD.
LEGAL MATTERS
The validity of the issuance of the Common Stock will be passed upon for the
Company and the Selling Stockholders by Gray Cary Ware & Freidenrich, a
Professional Corporation, Palo Alto, California. Gibson, Dunn & Crutcher LLP,
Los Angeles, California, is acting as counsel for the Underwriters in
connection with certain legal matters relating to the Common Stock offered
hereby.
EXPERTS
The consolidated financial statements of The Kinetics Group, Inc. as of
September 30, 1996, and 1995, and for each of the three years in the period
ended September 30, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.
49
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any amendments thereto) on
Form S-1 under the Securities Act with respect to the Units offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including the exhibits
thereto and the financial statements and notes filed as a part thereof, as
well as such reports and other information filed with the Commission, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
thereof may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. Such reports and other information may also be
inspected without charge at a Web site maintained by the Commission. The
address of such site is http://www.sec.gov.
50
<PAGE>
THE KINETICS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Audited Financial Statements
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The Kinetics Group, Inc.
We have audited the accompanying consolidated balance sheets of The Kinetics
Group, Inc. as of September 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period 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 consolidated financial position of The Kinetics
Group, Inc. at September 30, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
San Francisco, California
December 12, 1996
------------
The foregoing report is in the form that will be signed upon completion of
stockholder approval of the three-for-four reverse stock split and amendment
of the Certificate of Incorporation described in Note 6 to the consolidated
financial statements.
San Francisco, California
December 12, 1996
F-2
<PAGE>
THE KINETICS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
SEPTEMBER 30 EQUITY
--------------- SEPTEMBER 30,
1995 1996 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 8,438 $ 8,844
Restricted cash................................ -- 1,031
Receivables:
Currently due, less allowance for doubtful
accounts of $600 in 1995 and $1,200 in
1996........................................ 35,932 46,841
Retention, due upon completion of contracts.. 4,640 7,191
Other........................................ 483 259
Costs and estimated earnings in excess of
billings on contracts in progress............. 6,670 10,542
Inventories.................................... 2,380 2,490
Deferred income taxes.......................... 657 1,369
Prepaid expenses and other current assets...... 112 297
------- -------
Total current assets............................ 59,312 78,864
Equipment and improvements, net................. 12,501 18,050
Receivables from stockholders................... 1,367 260
Other assets.................................... 2,370 1,805
------- -------
Total assets.................................... $75,550 $98,979
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $23,449 $24,754
Accrued expenses............................... 7,109 8,679
Accrued taxes on income........................ 2,846 6,003
Billings in excess of costs and estimated
earnings on contracts in progress............. 14,989 16,975
Current portion of note payable to bank........ -- 647
Current portion of capital lease obligations... 2,257 1,310
------- -------
Total current liabilities....................... 50,650 58,368
Borrowings under bank line of credit............ -- 8,000
Note payable to bank, less current portion...... -- 3,861
Capital lease obligations, less current
portion........................................ 1,019 294
Deferred income taxes........................... 418 677
Commitments and contingent liabilities
Redeemable convertible preferred stock, $.001
par value; 4,000 shares authorized, 2,295 and
2,484 shares issued and outstanding at
September 30, 1995 and 1996, respectively,
(redemption and liquidation preference--$9,936
at September 30, 1996) (pro forma--none issued
and outstanding)............................... 8,232 9,164 $ --
Stockholders' equity:
Common stock, $.001 par value; 30,000 shares
authorized; 7,500 shares issued and
outstanding at September 30, 1995 and 1996
(pro forma--9,275 shares issued and
outstanding).................................. 8 8 9
Additional paid-in capital..................... 10,802 10,802 19,965
Retained earnings.............................. 4,421 7,805 7,805
------- ------- -------
Total stockholders' equity...................... 15,231 18,615 $27,779
------- ------- =======
Total liabilities and stockholders' equity...... $75,550 $98,979
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE KINETICS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $145,473 $229,933 $278,423
Cost of revenues................................ 125,307 194,875 230,748
-------- -------- --------
Gross profit.................................... 20,166 35,058 47,675
Selling, general and administrative expenses.... 13,807 22,384 31,673
-------- -------- --------
Income from operations.......................... 6,359 12,674 16,002
Other income (expense):
Other income, net............................. 115 331 944
Interest expense.............................. (1,084) (749) (1,068)
-------- -------- --------
Income before income taxes...................... 5,390 12,256 15,878
Provision for income taxes...................... 535 2,902 7,147
-------- -------- --------
Net income...................................... 4,855 9,354 8,731
Dividends and accretion on redeemable
convertible preferred stock.................... -- (214) (932)
-------- -------- --------
Net income applicable to common stockholders.... $ 4,855 $ 9,140 $ 7,799
======== ======== ========
Pro forma net income per common share........... $ 0.87
========
Shares used in computing pro forma net income
per common share............................... 10,043
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE KINETICS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30,
1993......................... 7,500 $ 8 $ 437 $ 6,518 $ 6,963
Combination and acquisition
of affiliated companies.... -- -- 30 (160) (130)
Distributions of Subchapter
S corporation earnings to
common stockholders........ -- -- -- (1,198) (1,198)
Net income.................. -- -- -- 4,855 4,855
----- --- ------- -------- -------
Balances at September 30,
1994......................... 7,500 8 467 10,015 10,490
Combination and acquisition
of affiliated companies.... -- -- 35 142 177
Distributions of Subchapter
S corporation earnings to
common stockholders........ -- -- -- (4,575) (4,575)
Reclassification of retained
earnings upon conversion
from Subchapter S to C
Corporation status......... -- -- 10,300 (10,300) --
Issuance of Series B
redeemable convertible
preferred stock as in-kind
dividends.................. -- -- -- (180) (180)
Accretion of Series A
redeemable convertible
preferred stock............ -- -- -- (35) (35)
Net income.................. -- -- -- 9,354 9,354
----- --- ------- -------- -------
Balances at September 30,
1995......................... 7,500 8 10,802 4,421 15,231
Distributions of Subchapter
S corporation earnings to
common stockholders........ -- -- -- (4,415) (4,415)
Issuance of Series B
redeemable convertible
preferred stock as in-kind
dividends.................. -- -- -- (757) (757)
Accretion of Series A
redeemable convertible
preferred stock............ -- -- -- (175) (175)
Net income.................. -- -- -- 8,731 8,731
----- --- ------- -------- -------
Balances at September 30,
1996......................... 7,500 $ 8 $10,802 $ 7,805 $18,615
===== === ======= ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE KINETICS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 4,855 $ 9,354 $ 8,731
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 1,558 3,373 4,948
Deferred income taxes............................. -- (239) (453)
Other............................................. (9) 112 --
Changes in operating assets and liabilities, net
of effect of combined and acquired companies:
Receivables..................................... (9,241) (7,338) (13,236)
Costs and estimated earnings in excess of
billings on contracts in progress.............. (1,701) (3,162) (3,872)
Inventories..................................... (119) (913) (110)
Prepaid expenses and other current assets, net.. (89) 349 (185)
Other noncurrent receivables.................... (93) -- 794
Accounts payable, trade and subcontractors...... 6,104 3,182 1,305
Billings in excess of costs and estimated
earnings on contracts in progress.............. 5,883 7,159 1,986
Accrued expenses................................ 2,851 3,923 4,977
------- ------- --------
Net cash provided by operating activities.......... 9,999 15,800 4,885
INVESTING ACTIVITIES
Purchase of equipment and improvements............. (3,145) (5,660) (8,099)
Investment in foreign entity....................... -- (500) (336)
Combination and acquisition of affiliated
companies......................................... (139) (75) --
Receivables from stockholders...................... 700 (750) 1,107
Other assets....................................... (215) 555 (143)
Restricted cash.................................... -- -- (1,031)
------- ------- --------
Net cash used in investing activities.............. (2,799) (6,430) (8,502)
FINANCING ACTIVITIES
Issuance of redeemable convertible preferred stock,
net of issuance costs............................. -- 8,018 --
Outstanding checks in excess of bank balances...... (301) -- --
Borrowings under bank line of credit............... 5,331 13,500 15,350
Repayments of borrowings under bank line of
credit............................................ (8,248) (16,950) (7,350)
Borrowings under note payable to bank.............. -- -- 4,549
Repayments of note payable to bank and capital
lease obligations................................. (2,232) (1,677) (4,111)
Distributions to stockholders...................... (1,198) (4,574) (4,415)
------- ------- --------
Net cash (used in) provided by financing
activities........................................ (6,648) (1,683) 4,023
------- ------- --------
Increase in cash and cash equivalents.............. 552 7,687 406
Cash and cash equivalents at beginning of year..... 199 751 8,438
------- ------- --------
Cash and cash equivalents at end of year........... $ 751 $ 8,438 $ 8,844
======= ======= ========
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest.......................................... $ 1,126 $ 754 $ 1,068
======= ======= ========
Income taxes...................................... $ 46 $ 832 $ 4,468
======= ======= ========
Supplemental disclosures of noncash investing and
financing activities:
Capital lease obligations incurred................ $ 1,780 $ 863 $ 2,398
======= ======= ========
Series B redeemable convertible preferred stock
issued as in-kind dividends...................... $ -- $ 180 $ 757
======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Kinetics Group, Inc. provides high purity process piping systems for the
semi-conductor, pharmaceutical, and biotechnology industries. The Company
offers its clients turnkey solutions by providing, as a complement to its
specialty high-purity contracting business, engineering and design services,
quality assurance and control services, program management services and
manufacturing of specialty components.
The Kinetics Group, Inc. was incorporated on February 23, 1996. On March 31,
1996, The Kinetics Group, Inc. acquired all of the capital stock of Kinetic
Systems, Inc. and its affiliated entities (predecessor businesses), all of
which became wholly owned subsidiaries of The Kinetics Group, Inc. in a
reorganization transaction. The accompanying consolidated financial statements
include the financial position and results of operations of The Kinetics
Group, Inc. and its wholly owned subsidiaries for dates and periods subsequent
to the reorganization. For dates and periods prior to the reorganization the
financial statements include the financial position and results of operations
of Kinetic Systems, Inc. and its affiliated entities (predecessor businesses)
presented on a combined basis. The common stock accounts of the affiliated
entities have been included in additional paid-in capital during the periods
for which combined financial statements are presented.
The ownership interests in The Kinetics Group, Inc. resulting from the
reorganization were substantially the same as those in Kinetic Systems, Inc.
The affiliated entities that were acquired in the reorganization, which had
similar stockholder interests to those of Kinetic Systems, Inc., provided
design, engineering and other services to customers of Kinetic Systems, Inc.,
but were not significant to the combined financial position or results of
operations of Kinetic Systems, Inc. The Kinetics Group, Inc. and its
predecessor businesses are referred to as the "Company" in the financial
statements and accompanying notes.
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CONTRACT OPERATIONS
The Company performs its services under fixed-price, cost-type and time-and-
materials contracts. Each contract type may include a provision for retention,
which represents amounts withheld from contract progress billings until
satisfactory project completion. Retention generally ranges from five to ten
percent of the total contract amount.
Revenues and gross profit from contracts are recognized under the
percentage-of-completion method, under which an estimated percentage of each
contract, based on the ratio of costs incurred to the Company's estimates of
total anticipated costs, is applied to the total estimated project gross
profit. Revisions in cost and profit estimates made during the course of the
work are reflected in the accounting period in which the facts that require
the revision become known. A provision is made currently for the entire amount
of any estimated future losses on contracts. Actual gross profit on contracts
may differ from estimates used by the Company in recording gross profit on
contracts in progress and such differences could be material to the financial
statements. The Company includes in contract revenues an amount equal to costs
incurred attributable to contract claims, when realization of such revenue is
probable and the amount is determinable.
F-7
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The classification of current assets and current liabilities is determined
based on the Company's contract cycle. The length of the Company's contracts
generally varies from six to fifteen months with the majority being completed
within one year. Accordingly, current assets and current liabilities include
amounts related to construction contracts in progress which may not be received
or paid within one year. Management estimates that of the $7,191,000 in
retentions included in receivables at September 30, 1996, approximately 60%
will be collected in fiscal year 1997.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of demand deposit accounts with
two banks.
CONCENTRATION OF CREDIT RISK
The Company's contracts are primarily with large multinational companies in
the semiconductor, pharmaceutical and biotechnology industries. Substantially
all of the Company's revenues and earnings are derived from contracts within
the United States. Foreign and export revenues were less than 10% of total
revenues in each of fiscal 1994, 1995 and 1996.
One customer accounted for 11%, 12% and 13% and other single customers
accounted for 25%, 10% and 10% of the Company's revenues in fiscal 1994, 1995
and 1996, respectively. Accounts receivable, including retentions, from two
customers represented 11% and 10% of total contract receivables at
September 30, 1996 (12% and 11% from two different customers at
September 30, 1995).
The Company extends credit based on evaluation of the customer's financial
condition and, generally, does not require collateral. However, the Company has
certain lien rights with respect to the related projects. The Company maintains
reserves for estimated collection losses on its accounts receivable. Actual
collection losses may differ from management's estimates, and such differences
could be material to the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, borrowings under the bank line of credit, note payable to
bank and capital lease obligations approximate fair value. Fair value of the
Company's debt instruments is estimated based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
INVENTORIES
Inventories, which consist of construction materials and supplies which have
not been charged to specific contracts, are stated at the lower of cost (first-
in, first-out method) or fair value.
DEPRECIATION AND AMORTIZATION
Construction equipment, clean room manufacturing facilities, vehicles, and
office furniture and fixtures are depreciated over their estimated useful
lives, which range from three to seven years, using the straight-line method.
Amortization on capitalized leased equipment is included in depreciation and
amortization in the financial statements.
Leasehold improvements are amortized over the shorter of the lease term or
their estimated useful life.
F-8
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations, such as equipment and
improvements and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The Company will adopt FAS 121 in
the first quarter of fiscal 1997. Based on current circumstances, management
does not believe the effect of such adoption will be material.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-
Based Compensation," which established a fair-value-based method of accounting
for stock-based compensation plans and requires additional disclosures for
those companies who elect not to adopt the new method of accounting. The
Company will be required to adopt FAS 123 in fiscal 1997. The Company's
intention is to continue to account for employee stock awards in accordance
with APB Opinion No. 25 and to adopt the disclosure only alternative described
in FAS 123.
PRO FORMA NET INCOME PER SHARE
Except as noted below, pro forma net income per share for the year ended
September 30, 1996 is computed using the weighted average number of shares of
common stock outstanding during each period, including dilutive common
equivalent shares from stock options and warrants (using the treasury stock
method) and also gives effect to the assumed conversion of all outstanding
shares of redeemable convertible preferred stock into common stock upon the
closing of the Company's initial public offering (using the as-if-converted
method.) Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares issued by the Company at prices
below the initial public offering price during the twelve-month period prior
to the initial public offering have been included in the calculation as if
they were outstanding for the full fiscal year (using the treasury stock
method).
Historical earnings per share is not presented since such amounts are not
deemed meaningful as a result of the Company's status as a Subchapter S
corporation prior to May 31, 1995 (Note 4) and the significant change in the
Company's capital structure (Note 6) that will occur in connection with the
initial public offering of its common stock.
F-9
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL STATEMENT INFORMATION
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------
1995 1996
------- -------
<S> <C> <C>
Construction equipment..................................... $13,466 $19,042
Clean room manufacturing facilities........................ 1,958 2,669
Vehicles................................................... 1,169 1,232
Office furniture and fixtures.............................. 2,836 5,429
Improvements............................................... 1,807 3,361
------- -------
21,236 31,733
Less accumulated depreciation and amortization............. (8,735) (13,683)
------- -------
$12,501 $18,050
======= =======
</TABLE>
RECEIVABLES FROM STOCKHOLDERS
Receivables from stockholders consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1995 1996
------ -----
<S> <C> <C>
Unsecured notes receivable, interest at 8%, payable on
demand...................................................... $ 852 $ --
Advances..................................................... 465 260
Accrued interest............................................. 50 --
------ -----
Total........................................................ $1,367 $ 260
====== =====
</TABLE>
Amounts receivable from stockholders at September 30, 1996 were repaid in
October 1996.
OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------
1995 1996
------ ------
<S> <C> <C>
Noncurrent receivables........................................ $1,091 $ 297
Investment in foreign company................................. 750 836
Cash surrender value of life insurance........................ 292 358
Other......................................................... 237 314
------ ------
Total......................................................... $2,370 $1,805
====== ======
</TABLE>
During fiscal years 1995 and 1996, the Company purchased approximately 10%
of the outstanding capital stock of a privately held foreign company which
manufactures specialty pipe fittings for $836,000 in cash. The investment has
been recorded at cost.
F-10
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTS PAYABLE
Accounts payable consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------
1995 1996
------- -------
<S> <C> <C>
Trade...................................................... $19,416 $21,373
Subcontractors............................................. 4,033 3,381
------- -------
$23,449 $24,754
======= =======
</TABLE>
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------
1995 1996
------ ------
<S> <C> <C>
Compensation and related benefits............................. $5,782 $7,802
Other accrued expenses........................................ 1,327 877
------ ------
$7,109 $8,679
====== ======
</TABLE>
3. BANK CREDIT FACILITIES
In April 1996, the Company entered into a loan agreement with a bank which
provides a revolving line of credit under which the Company may borrow up to a
maximum of $22,500,000 with interest at the bank's reference rate (8.25% at
September 30, 1996) or other interest rate options which the Company may
select. The line of credit may also be used to finance letters of credit up to
a maximum of $5,000,000. Borrowings under the line of credit are secured by
the Company's receivables, inventories, equipment and improvements. The
agreement expires on April 15, 1998. Under the provisions of the agreement,
the Company is required to meet certain financial and nonfinancial covenants.
The Company was not in compliance with certain financial covenants as of June
30, 1996, for which it obtained a waiver of noncompliance from the bank. The
Company was in compliance with those financial covenants, as amended, as of
September 30, 1996. The agreement also restricts the payment of dividends. At
September 30, 1996, the Company had $8,000,000 in outstanding borrowings and
no outstanding letters of credit under the agreement.
The Company also has a term note facility with another bank which provides
for maximum borrowings of $5,000,000 to finance equipment purchases.
Borrowings under the facility bear interest at 0.5% over the bank's prime rate
(8.25% at September 30, 1996) and are payable in equal monthly installments
from February 1997 through February 2000. The agreement covering the term note
facility requires the Company to comply with certain financial and
nonfinancial covenants. The agreement also restricts the payment of dividends.
Borrowings as of September 30, 1996, which amounted to $4,508,000 are
repayable as follows: fiscal year 1997 $647,000; fiscal year 1998 $1,127,000;
fiscal year 1999 $1,127,000; fiscal year 2000 $1,127,000; and fiscal year 2001
$480,000. Prior to April 1996, the Company's revolving credit facility was
maintained with this bank. At September 30, 1996, the Company had $1,031,000
in outstanding letters of credit which were not assumed under the new credit
facility. The Company maintains $1,031,000 in a restricted cash account with
this bank to secure the outstanding letters of credit.
F-11
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes," under which the liability method
is used in accounting for income taxes. Deferred tax assets and liabilities
are determined based on the differences between financial reporting and the
tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Prior to June 1, 1995, the Company elected to be taxed as an S Corporation
for federal income tax purposes, whereby the income tax effects of the
Company's activities accrued directly to its shareholders. Adoption of SFAS
109 in fiscal 1994 did not require establishment of deferred income taxes
since no material differences between financial reporting and the tax basis of
assets and liabilities existed at that time. On May 31, 1995, the Company
terminated its S Corporation election and deferred income taxes under the
provisions of SFAS 109 were established at that date.
The provision for income taxes for fiscal 1994 consists principally of state
income taxes imposed on the Company as an S Corporation. For fiscal 1995, the
Company was treated as an S Corporation for a portion of the year and taxed as
a C Corporation for the remainder of the year.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 1,812 $ 6,085
State......................................... 535 1,329 1,515
------- ------- -------
535 3,141 7,600
Deferred:
Federal....................................... -- (187) (415)
State......................................... -- (52) (38)
------- ------- -------
-- (239) (453)
------- ------- -------
$ 535 $ 2,902 $ 7,147
======= ======= =======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
as a result of the following differences (in thousands):
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income tax at the federal statutory rate........ $ 1,923 $ 4,167 $ 5,399
Effect of Subchapter S election................. (1,923) (2,424) --
State income taxes (net of federal benefit, if
any)........................................... 535 1,121 975
Other, net...................................... -- 38 773
------- ------- -------
$ 535 $ 2,902 $ 7,147
======= ======= =======
</TABLE>
F-12
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred income tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER
30
----------
1995 1996
---- -----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................................ $222 $ 444
Accrued expenses............................................... 395 650
State income taxes............................................. 40 275
Other, net..................................................... 41 35
---- -----
698 1,404
Deferred tax liabilities:
Depreciation................................................... 459 712
---- -----
Net deferred tax assets.......................................... $239 $ 692
==== =====
</TABLE>
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1995, the Company issued 2,250,000 shares of Series A preferred
stock for $9,000,000 in cash less issuance costs of $982,000. The excess of
the redemption value over the carrying value is being accreted by periodic
charges to retained earnings over the life of the issue.
The holders of the Series A preferred stock are entitled to receive
cumulative dividends at the rate of 8% per annum. Dividends are payable each
quarter beginning on September 30, 1995 and must be paid prior to any common
stock dividends. Dividends are being paid in shares of Series B preferred
stock through June 1997 and are to be paid in cash thereafter. As a result of
such dividends, 45,000 and 234,181 shares of Series B preferred stock were
outstanding as of September 30, 1995 and 1996, respectively. Beginning July 1,
2002, the dividend rate will increase annually by one-tenth of the previous
year rate. Prior to any redemption, any unpaid dividends must be paid in full.
Upon any mandatory redemption, all accrued but unpaid dividends must be paid.
Each share of Series A and Series B preferred stock is convertible at any
time into common stock at the option of the holder. The number of common
shares into which each share of Series A preferred stock is convertible is
0.75, subject to adjustment based on antidilution provisions. The number of
common shares into which each share of Series B preferred stock is convertible
is 0.3741, subject to adjustment and antidilution provisions. At September 30,
1996, the outstanding shares of Series A and B preferred stock were
convertible into 1,775,107 shares of common stock. The Series A preferred
stock is mandatorily convertible upon the closing of a qualified public
offering under the Securities Act of 1933.
The Company must redeem all shares of Series A and Series B preferred stock
at a price of $4.00 per share upon the sale or other disposition of all or
substantially all of the Company's assets or any transaction of merger or
consolidation which includes the Company or any sale of equity securities
where the current stockholders would own less than 50% of the Company.
Beginning July 1, 2002, the Company may redeem all or any portion of the
shares of Series A and Series B preferred stock outstanding at a price of
$4.00 per share plus unpaid cumulative dividends.
F-13
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The holders of Series A and Series B preferred stock have restricted voting
rights. However, in the event of any default under the terms of the preferred
stock purchase agreement by the Company without remedy, the Series A and
Series B preferred stockholders may elect a majority to the Board of Directors
and assume voting rights. Also in the event of any such default, the Series A
and Series B preferred stock is redeemable at a price of $4.00 per share plus
unpaid cumulative dividends.
The holders of Series A and Series B preferred stock have liquidation
preferences of $4.00 per share plus any dividends in arrears with respect to
such stock upon the winding up or dissolution of the Company.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
Pursuant to a stockholder agreement that terminates upon a qualified initial
public offering of the Company's common stock, the Company may be obligated to
repurchase the common shares of one stockholder upon death, disability or
termination of employment. The purchase price is to be the greater of $500,000
or ten percent of the Company's earnings before interest and income taxes, as
defined, for the preceding four fiscal quarters. At September 30, 1996, this
stockholder owned 1,500,000 shares of the Company's common stock. The
stockholder agreement also provides that under certain circumstances the
Company may have the right to repurchase the capital stock of certain
stockholders upon their death, termination or notification of intention to
sell their shares, subject to the priority rights of other stockholders to
acquire such shares.
COMMON STOCK WARRANTS
In connection with the issuance of preferred stock and a loan, the Company
issued warrants to its financial advisors and a bank to purchase 293,662
shares of common stock at a purchase price of $5.33 per share. These warrants
are exercisable over a five-year period ending June 25, 2000.
STOCK OPTIONS
The Company's 1996 Key Employee Stock Option Plan provided for the issuance
of options to employees (including officers), directors and consultants to
purchase up to 337,499 shares of common stock.
The Plan is administered by the Board of Directors or a committee thereof.
Subject to the provisions of the Plans, the Board or committee has the
authority to select the persons to whom options are granted and determine the
terms of each option, including the number of shares of common stock covered
by the option, when the option becomes exercisable, the option exercise price,
which, in the case of incentive stock options, must be at least 100% of the
fair market value of a share of common stock as of the date of grant, and, in
the case of nonstatutory stock options must be at least 85% of the fair market
value of a share of common stock as of the date of grant, and the duration of
the option (which, in the case of incentive stock options, may not exceed ten
years). Generally, options granted under the Plan are immediately exercisable
but remain subject to repurchase by the company for all exercised unvested
shares under a vesting schedule established by the Board or committee. The
Company's repurchase right terminates upon certain changes in control.
The Company has also entered into non-qualified option agreements with
certain employees and one consultant which provide for the purchase of an
aggregate of 746,250 shares of common stock. Such agreements provide for
vesting periods of up to six years with an option term of ten years.
F-14
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1996 Key Employee Stock Option Plan and agreements is
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
COMMON SHARES PER SHARE
------------- --------------
<S> <C> <C>
Options outstanding at September 30, 1994 -- $ --
Options granted.............................. 615,000 1.33
--------- --------------
Options outstanding at September 30, 1995...... 615,000 1.33
Options granted.............................. 468,749 10.00 - 19.33
--------- --------------
Options outstanding at September 30, 1996...... 1,083,749 $ 1.33 - 19.33
========= ==============
</TABLE>
At September 30, 1996, options under the non-qualified option agreements to
purchase 183,500 common shares were vested and unexercised. All options under
the 1996 Key Employee Option Plan are exercisable but all exercised unvested
shares under the vesting schedule remain subject to repurchase by the Company
(none exercised as of September 30, 1996). No further shares were available
for grant under the Plan.
PROPOSED PUBLIC OFFERING OF COMMON STOCK
On December 6, 1996, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock in an
initial public offering. If the offering is consummated as presently
anticipated, 2,484,181 shares of redeemable convertible preferred stock,
Series A and B, will automatically convert into 1,775,107 shares of common
stock, based upon the shares of redeemable convertible preferred stock
outstanding at September 30, 1996. Unaudited pro forma stockholders' equity,
as adjusted for the assumed conversion of the redeemable convertible preferred
stock, is disclosed in the accompanying consolidated balance sheet.
STOCK SPLIT
On December 6, 1996, the Board of Directors approved, subject to stockholder
approval, a three-for-four reverse stock split of issued and outstanding
common stock. All common shares in the accompanying consolidated financial
statements have been retroactively adjusted to reflect the stock split.
CAPITAL STOCK
On December 6, 1996, the Board of Directors adopted amendments to the
Company's Certificate of Incorporation, subject to stockholder approval, under
which the number of shares of authorized common stock will be increased to
40,000,000 shares and the Board of Directors will be authorized, without
further stockholder approval, to issue up to 2,000,000 shares of Preferred
Stock in one or more series. Each series of Preferred Stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors.
1997 STOCK OPTION PLANS
On December 6, 1996, the 1997 Stock Option Plan was adopted by the Board of
Directors, subject to stockholder approval. The Plan provides for the grant of
incentive stock options, nonqualifying stock options and stock purchase
rights. A total of 350,000 shares of common stock have been reserved for
issuance under the plan.
F-15
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On December 6, 1996, the 1997 Employee Stock Purchase Plan was adopted by
the Board of Directors, subject to stockholder approval. Under the Plan,
250,000 shares of common stock have been reserved for issuance. The Plan
allows for eligible employees to purchase stock at 85% of the lower of the
fair market value of the Company's common stock as of the first day of each
six-month offering period or the fair market value of the stock at the end of
the offering period. The Plan will be implemented by sequential 24-month
offerings, with each offering period divided into four consecutive six-month
purchase periods. The initial offering period will commence concurrent with
its initial public offering of common stock.
7. EMPLOYEE BENEFIT PLANS
The Company provides pension and health and welfare benefits to employees
who are members of the Steamfitters and Pipefitters Union under multiemployer
defined benefit plans. Approximately 67% of the Company's full-time workforce
is represented by the union. Contributions were $2,809,000, $4,926,000 and
$5,259,000 to the union pension plans and $3,321,000, $5,802,000 and
$6,478,000 to the health and welfare plans for fiscal 1994, 1995 and 1996,
respectively.
The Company maintains a retirement plan under Section 401(k) of the Internal
Revenue Code, which covers nonunion employees who meet certain eligibility
requirements. Contributions by the Company, which are made at the discretion
of the Board of Directors, are funded and charged against operations as
accrued. Benefits under the plan vest in varying annual percentages depending
on the employee's hire date, with the employee becoming fully vested after the
fifth year of service. Employee contributions are fully vested at all times.
The Company contributed $122,000 to the Plan during fiscal 1996, $100,000
during fiscal 1995 and made no contribution in fiscal 1994.
F-16
<PAGE>
THE KINETICS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under
noncancelable operating leases and certain construction equipment under
capital leases. Future minimum payments under noncancelable operating leases
with terms greater than one year and capital leases at September 30, 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Fiscal year:
1997................................................... $1,852 $1,384
1998................................................... 1,580 300
1999................................................... 1,046 11
2000................................................... 484 7
2001................................................... 293 4
and thereafter......................................... 559 --
------ ------
Total minimum lease payments............................. $5,814 1,706
======
Less amounts representing interest 102
------
Present value of minimum lease payments (including $1,310
recorded as a current liability)........................ $1,604
======
</TABLE>
Rent expense was approximately $1,475,000, $1,173,000 and $1,460,000 for
fiscal years 1994, 1995 and 1996, respectively.
The Company is a party to various claims and legal proceedings arising out
of the normal course of business, including claims made by project owners and
subcontractors. Management believes that resolution of these matters will not
have a material adverse effect on the financial position of the Company.
However, if not resolved favorably, these matters could have a significant
financial impact on the Company in the period or periods in which they are
resolved.
F-17
<PAGE>
QAM
Quality Assurance Management
Data analysis of high purity
systems utilizing QAM's ultra high
purity analytical test cart.
Inspection of materials for use in ultra
high purity gas systems.
A QAM technician
assuring the quality
of a pharmaceutical
weld utilizing a video
borescope.
Quality Assurance Management, Inc., (QAM)
is a leading provider of quality
assurance/quality control services to the
semiconductor, biotechnology, pharmaceutical,
and fiber-optics industries.
QAM's ultra pure water analytical
test cart.
Four Photographs depicting aspects of work performed by the Company's
QAM subsidiary as described above
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 11
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Industry Overview........................................................ 23
Business................................................................. 27
Management............................................................... 34
Certain Transactions..................................................... 40
Principal and Selling Stockholders....................................... 41
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 46
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Available Information.................................................... 50
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE OFFERING), 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,700,000 SHARES
LOGO
[LOGO OF KINETICS, INC.]
COMMON STOCK
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
BT SECURITIES CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All amounts shown are estimates
except for the registration fee, the NASD filing fee and the Nasdaq National
Market fee.
<TABLE>
<CAPTION>
TO BE PAID
BY REGISTRANT
-------------
<S> <C>
Registration fee............................................ $ 20,631
NASD filing fee............................................. 7,308
Nasdaq National Market fee.................................. 48,787
Blue sky qualification fees and expenses.................... 15,000
Printing and engraving expenses............................. 61,000
Legal fees and expenses other than blue sky................. 230,000
Accounting fees and expenses................................ 300,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous............................................... 52,274
--------
Total..................................................... $750,000
========
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Company's Certificate of
Incorporation, as amended, and Bylaws provide that the Company shall indemnify
its directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition,
the Company intends to enter into separate indemnification agreements with its
directors, officers and certain employees which would require the Company,
among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising
from willful misconduct of a culpable nature) and to maintain directors' and
officers' liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Company and its officers and directors may be
sufficiently broad to permit indemnification of the Company's officers and
directors for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Within the past three years, the Company has sold and issued the
following unregistered securities:
(1) On June 26, 1995, Registrant issued 2,250,000 shares of Series A
Preferred Stock (without giving effect to the conversion of the Preferred
Stock or the three-for-four reverse stock split) to one stockholder for
$4.00 per share, or an aggregate of $9,000,000.
(2) On June 26, 1995, Registrant issued four warrants for the right to
purchase up to an aggregate of 293,662 shares of Series B Common Stock
(without giving effect to the conversion of the Preferred Stock or the
three-for-four reverse stock split), which have an exercise price of $5.33
per share.
II-1
<PAGE>
(3) From June 1995 to October 1996, Registrant issued options to purchase
an aggregate of 1,083,749 shares of Common Stock; of this total no shares
have been exercised.
(b) The issuances of securities described in Item 15(a)(1) and (2) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The issuances of securities described in Item 15(a)(3)
were deemed to be exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement (draft dated December 12, 1996)
3.1 Certificate of Incorporation
3.2 By-Laws
3.3 Form of Second Amended and Restated Certificate of Incorporation
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation
10.1@ 1997 Stock Option Plan and forms of stock option agreements used
thereunder
10.2@ 1997 Employees Stock Purchase Plan and form of subscription agreement
used thereunder
10.3 1996 Key Employees Stock Option Plan
10.4 First Amended and Restated Registration Rights Agreement between the
Company and BT Capital Partners, Inc. dated April 1, 1996
10.5 Second Amended and Restated Voting Trust Agreement Regarding Shares
Issued to The Bianco Family 1991 Trust among David J. Shimmon, the
Bianco Trust, William A. Bianco, Jr., the Company and Doty & Sundheim
dated December 1, 1996
10.6 First Amended and Restated Voting Trust Agreement Regarding Shares
Issued to David J. Shimmon among William A. Bianco, Jr., David J.
Shimmon, the Company and Doty & Sundheim dated April 1, 1996, as
amended by First Amendment dated December 1, 1996
10.7 Lease between the Company and Newpark Leasing Company, a California
partnership, dated July 31, 1989 and amended February 26, 1993
10.8 Lease between the Company and Potpourri Shopper Inc. dated July 11,
1996
10.9@ Form of Indemnity Agreement
10.10 Business Loan Agreement among Bank of America National Trust and
Savings Association, the Company, KSI Mfg. & Services, Inc., and
Kinetic Systems International, Inc. dated April 12, 1996
10.11*@ Employment Agreement between the Company and William A. Bianco dated
July 31, 1994, as amended.
10.12*@ Employment Agreement between the Company and Marie R. Bianco dated
July 31, 1994, as amended.
10.13*@ Employment Agreement between the Company and David J. Shimmon dated
July 31, 1994, as amended.
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Gray Cary Ware & Freidenrich, A Professional Corporation
(included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4 hereof)
27* Financial Data Schedule (available in EDGAR format only)
</TABLE>
- --------
*To be filed by amendment.
@Represents a management compensatory plan of arrangement.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this Offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
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 of filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Palo
Alto, County of Santa Clara, State of California, on the 12th day of December,
1996.
The Kinetics Group, Inc.
William A. Bianco, Jr.
By: _________________________________
WILLIAM A. BIANCO, JR.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William A. Bianco, Jr. and David J.
Shimmon, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Registration Statement (including post-
effective amendments), and any and all Registration Statements filed pursuant
to Rule 462 under the Securities Act of 1933, as amended, in connection with
or related to the offering contemplated by this Registration Statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
William A. Bianco, Jr. Chairman of the December 12, 1996
- ------------------------------------- Board, Chief
WILLIAM A. BIANCO, JR. Executive Officer
and Director
(Principal
Executive Officer)
David J. Shimmon President, Chief December 12, 1996
- ------------------------------------- Operating Officer,
DAVID J. SHIMMON Chief Financial
Officer and
Director (Principal
Financial and
Accounting Officer)
Marie R. Bianco Executive Vice December 12, 1996
- ------------------------------------- President and
MARIE R. BIANCO Director
Martin M. Jelenko Director December 12, 1996
- -------------------------------------
MARTIN M. JELENKO
Jeffrey L. Ott Director December 12, 1996
- -------------------------------------
JEFFREY L. OTT
</TABLE>
II-4
<PAGE>
SCHEDULE II
THE KINETICS GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE
BEGINNING CHARGES TO CHARGES TO AS OF END
OF PERIOD COST AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
------------- ----------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Year ended September 30,
1994
Allowance for doubtful
accounts............... $150,000 $ 97,833 -- $ (97,833) $ 150,000
Year ended September 30,
1995
Allowance for doubtful
accounts............... 150,000 848,318 -- (398,318) 600,000
Year ended September 30,
1996
Allowance for doubtful
accounts............... 600,000 675,000 -- (75,000) 1,200,000
</TABLE>
<PAGE>
EXHIBIT INDEX
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement (draft dated December 12, 1996)
3.1 Certificate of Incorporation
3.2 By-Laws
3.3 Form of Second Amended and Restated Certificate of Incorporation
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation
10.1@ 1997 Stock Option Plan and forms of stock option agreements used
thereunder
10.2@ 1997 Employee Stock Purchase Plan and form of subscription agreement
used thereunder
10.3 1996 Key Employees Stock Option Plan
10.4 First Amended and Restated Registration Rights Agreement between the
Company and BT Capital Partners, Inc. dated April 1, 1996
10.5 Second Amended and Restated Voting Trust Agreement Regarding Shares
Issued to The Bianco Family 1991 Trust among David J. Shimmon, the
Bianco Trust, William A. Bianco, Jr., the Company and Doty & Sundheim
dated December 1, 1996
10.6 First Amended and Restated Voting Trust Agreement Regarding Shares
Issued to David J. Shimmon among William A. Bianco, Jr., David J.
Shimmon, the Company and Doty & Sundheim dated April 1, 1996, as
amended by First Amendment dated December 1, 1996
10.7 Lease between the Company and Newpark Leasing Company, a California
partnership, dated July 31, 1989 and amended February 26, 1993
10.8 Lease between the Company and Potpourri Shopper Inc. dated July 11,
1996
10.9@ Form of Indemnity Agreement
10.10 Business Loan Agreement among Bank of America National Trust and
Savings Association, the Company, KSI Mfg. & Services, Inc., and
Kinetic Systems International, Inc. dated April 12, 1996
10.11*@ Employment Agreement between the Company and William A. Bianco dated
July 31, 1994, as amended.
10.12*@ Employment Agreement between the Company and Marie R. Bianco dated
July 31, 1994, as amended.
10.13*@ Employment Agreement between the Company and David J. Shimmon dated
July 31, 1994, as amended.
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2* Consent of Gray Cary Ware & Freidenrich, A Professional Corporation
(included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4 hereof)
27* Financial Data Schedule (available in EDGAR format only)
</TABLE>
- --------
*To be filed by amendment.
@Represents a management compensatory plan or arrangement.
<PAGE>
EXHIBIT 1.1
Proof of December 12, 1996
3,700,000 Shares
THE KINETICS GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1997
--------------------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT SECURITIES CORPORATION
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
The Kinetics Group, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell an aggregate of 3,050,000 shares of its common stock, $0.001
par value per share, to the several Underwriters named in Schedule II hereto
(the "Underwriters") and the persons named in Part A of Schedule I hereto (as
identified on Schedule I hereto, the "Indemnifying Selling Stockholders" and the
"Other Selling Stockholders," collectively, the "Selling Stockholders") propose
to sell to the several Underwriters an aggregate of 650,000 shares of common
stock of the Company. The Company and the Selling Stockholders are hereinafter
sometimes referred to as the "Sellers". The Company's common stock, $0.001 par
value, is hereinafter referred to as the "Common Stock" and the 3,050,000 shares
of Common Stock to be issued and sold to the Underwriters by the Company and the
650,000 shares of Common Stock to be sold to the Underwriters by the Selling
Stockholders are hereinafter referred to as the "Firm Shares". The Company and
the Selling Stockholders listed in Part B of Schedule I hereto also propose to
sell to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 555,000 shares (the "Additional Shares") of Common
Stock. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares."
<PAGE>
Prior to the consummation of the sale of the Shares as contemplated by this
Agreement, the Company shall have effected (i) the conversion of all the
outstanding shares of the Company's Preferred Stock, Series A (the "Series A
Preferred Stock") and Preferred Stock, Series B (the "Series B Preferred Stock,"
and collectively with the Series A Preferred, the "Preferred Stock") into Common
Stock. The conversion of the Preferred Stock into Common Stock shall occur
simultaneously with the effectiveness of the Registration Statement (as defined
below), and (ii) the conversion of all the outstanding shares of the Company's
Class A Common Stock and Class B Common Stock into Common Stock. The conversion
of the Class A Common Stock and Class B Common Stock into Common Stock shall
occur simultaneously with the closing of the Offering. Additionally,
immediately prior to the consummation of the sale of the Shares as contemplated
by this Agreement, the Company shall have effected a 3 for 4 reverse stock split
pursuant to the filing of a restated certificate of incorporation in the State
of Delaware. The redemption of the Preferred Stock, the conversion of the Class
A Common Stock and the Class B Common Stock, the reverse stock split and the
other transactions contemplated in connection therewith are herein referred to
collectively as the "Conversion Transactions."
The Company and the Selling Stockholders wish to confirm as follows their
respective agreements with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-_______) under the
Act (the "registration statement"), including a prospectus subject to completion
relating to the Shares. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. Any registration
statement filed pursuant to Rule 462(b) under the Act is herein referred to as
the "Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the 462(b) Registration Statement. The
term "Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended
2
<PAGE>
from time to time prior to the date of the Prospectus. For purposes of this
Agreement, all references to the Registration Statement, the Prospectus, the
Prepricing Prospectus or any amendment or supplement to any of the foregoing
shall be deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
2. Agreements to Sell and Purchase. Subject to such adjustments as you may
-------------------------------
determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $_________ per Share (the "purchase price per share"), the number of
Firm Shares which bears the same proportion to the aggregate number of Firm
Shares to be issued and sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms and
conditions set forth herein, to sell to each Underwriter and, upon the basis of
the representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, each Underwriter, severally and not jointly, agrees to purchase
from each Selling Stockholder at the purchase price per share that number of
Firm Shares which bears the same proportion to the number of Firm Shares set
forth opposite the name of such Selling Stockholder in Schedule I hereto as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholders.
The Company and the Selling Stockholders listed in Part B of Schedule I
hereto also agree, subject to all the terms and conditions set forth herein, to
sell to the Underwriters, and, upon the basis of the representations, warranties
and agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company and the Selling Stockholders listed
in Part B of Schedule I hereto, at the purchase price per share, pursuant to an
option (the "over-allotment option") which may be exercised at any time and from
time to time prior to 9:00 P.M., New York City time, on the 30th day after the
date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of ________________ shares from the
Company and up to an aggregate of ________________ shares from the Selling
Stockholders listed in Part B of Schedule I hereto (the maximum number of
Additional Shares which each of them agrees to sell upon the exercise by the
Underwriters of the over-allotment option is set forth opposite their respective
names in Part B of Schedule I). Additional Shares may be purchased only for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares.
3
<PAGE>
The number of Additional Shares which the Underwriters elect to
purchase upon any exercise of the over-allotment option shall be provided by the
Company and by each Selling Stockholder who has agreed to sell Additional Shares
in proportion to the respective maximum numbers of Additional Shares which the
Company and each such Selling Stockholder has agreed to sell. Upon any exercise
of the over-allotment option, each Underwriter, severally and not jointly,
agrees to purchase from the Company and each Selling Stockholder who has agreed
to sell Additional Shares the number of Additional Shares (subject to such
adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of Additional Shares to be sold by the
Company and each Selling Stockholder who has agreed to sell Additional Shares as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholders.
Certificates in transferable form for the Shares (including any Additional
Shares) which each of the Selling Stockholders agrees to sell pursuant to this
Agreement have been placed in custody with __________________ (the "Custodian")
for delivery under this Agreement pursuant to a Custody Agreement and Power of
Attorney (the "Custody Agreement") executed by each of the Selling Stockholders
appointing [WILLIAM A. BIANCO, JR.] and [DAVID J. SHIMMON] as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees
that (i) the Shares represented by the certificates held in custody pursuant to
the Custody Agreement are subject to the interests of the Underwriters, the
Company and each other Selling Stockholder, (ii) the arrangements made by the
Selling Stockholders for such custody are, except as specifically provided in
the Custody Agreement, irrevocable, and (iii) the obligations of the Selling
Stockholders hereunder and under the Custody Agreement shall not be terminated
by any act of such Selling Stockholder or by operation of law, whether by the
death or incapacity of any Selling Stockholder or the occurrence of any other
event. If any Selling Stockholder shall die or be incapacitated or if any other
event shall occur before the delivery of the Shares hereunder, certificates for
the Shares of such Selling Stockholder shall be delivered to the Underwriters by
the Attorneys-in-Fact in accordance with the terms and conditions of this
Agreement and the Custody Agreement as if such death or incapacity or other
event had not occurred, regardless of whether or not the Attorneys-in-Fact or
any Underwriter shall have received notice of such death, incapacity or other
event. Each Attorney-in-Fact is authorized, on behalf of each of the Selling
Stockholders, to execute this Agreement and any other documents necessary or
desirable in connection with the sale of the Shares to be sold hereunder by such
Selling Stockholder, to make delivery of the certificates for such Shares, to
receive the proceeds of the sale of such Shares, to give receipts for such
proceeds, to pay therefrom any expenses to be borne by such Selling Stockholder
in connection with the sale and public offering of such Shares, to distribute
the balance thereof to such Selling Stockholder, and to take such other action
as may be necessary or desirable in connection with the transactions
contemplated by this Agreement. Each Attorney-in-Fact agrees to perform his
duties under the Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon
4
<PAGE>
after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
-------------------------------------------
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on ______________, 1997 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company and the Attorneys-
in-Fact of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
-------------------------
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement, any Rule 462(b) Registration
Statement, or a post-effective amendment thereto to be declared effective before
the offering of the Shares may commence, the Company will endeavor to cause the
Registration Statement, any Rule 462(b) Registration Statement, or such post-
effective amendment to become effective as soon as possible and will advise you
promptly and, if requested by you, will confirm such advice in writing, when the
Registration Statement, any Rule 462(b) Registration Statement, or such post-
effective amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
5
<PAGE>
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four signed
copies of (i) the registration statement as originally filed with the
Commission, (ii) each amendment thereto, including financial statements and all
exhibits thereto, and (iii) any Rule 462(b) Registration Statement and any
amendments or supplements thereto, and will also furnish to you, without charge,
such number of conformed copies of the registration statement as originally
filed and of each amendment thereto, but without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall object after being
so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a
Prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by
6
<PAGE>
all dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with sales by any Underwriter
or dealer. If during such period of time any event shall occur that in the
judgment of the Company or in the opinion of counsel for the Underwriters is
required to be set forth in the Prospectus (as then amended or supplemented) or
should be set forth therein in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or if it
is necessary to supplement or amend the Prospectus to comply with the Act or any
other law, the Company will forthwith prepare and, subject to the provisions of
paragraph (d) above, file with the Commission an appropriate supplement or
amendment thereto, and will expeditiously furnish to the Underwriters and
dealers a reasonable number of copies thereof. In the event that the Company and
you, as Representatives of the several Underwriters, agree that the Prospectus
should be amended or supplemented, the Company, if requested by you, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will furnish
to you (i) as soon as available, a copy of each report of the Company mailed to
stockholders or filed with the Commission, and (ii) from time to time such other
information concerning the Company as you may request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating this
Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company or the Selling Stockholders to comply with the terms or
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the Representatives for all out-of-pocket expenses (including fees and expenses
of counsel for the Underwriters) incurred by you in connection herewith.
7
<PAGE>
(k) The Company will apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the description set
forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
contract to sell, solicit an offer to buy, pledge or otherwise dispose of any
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or grant any options or warrants to purchase Common Stock, for
a period of 180 days after the date of the Prospectus, without the prior written
consent of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up" letters,
in form and substance satisfactory to you, signed by each of its current
officers and directors and each of its stockholders, warrant holders and option
holders designated by you.
(o) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, the Company has not taken, nor will it take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
(q) The Company will cause the Conversion Transactions to be effected
prior to the Closing Date.
6. Agreements of the Selling Stockholders. Each of the Selling
--------------------------------------
Stockholders agrees with the several Underwriters as follows:
(a) Such Selling Stockholder will cooperate to the extent necessary to
cause the registration statement or any post-effective amendment thereto to
become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal, state, foreign and
other taxes, if any on the transfer or sale of the Shares being sold by the
Selling Stockholder to the Underwriters.
(c) Such Selling Stockholder will do or perform all things required to
be done or performed by the Selling Stockholder prior to the Closing Date or any
Option Closing Date, as the case may be, to satisfy all conditions precedent to
the delivery of the Shares pursuant to this Agreement.
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(d) Such Selling Stockholder has executed or will execute a "lock-up"
letter as provided in Section 5(n) above and will not sell, contract to sell,
solicit an offer to buy, pledge or otherwise dispose of any Common Stock, except
for the sale of Shares to the Underwriters pursuant to this Agreement, prior to
the expiration of 180 days after the date of the Prospectus, without the prior
written consent of Smith Barney Inc.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Stockholder will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of time
referred to in Section 5(f) hereof, of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations or of any change in information relating to such Selling Stockholder
or the Company or any new information relating to the Company or relating to any
matter stated in the Prospectus or any amendment or supplement thereto which
comes to the attention of such Selling Stockholder that suggests that any
statement made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any material
respect or that the Registration Statement or Prospectus (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a material
fact or a fact necessary to be stated therein in order to make the statements
therein not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
7. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, and any Rule 462(b) Registration Statement prospectus and any supplement or
amendment thereto when filed with the Commission, complied or will comply in all
material respects with the provisions of the Act and did not or will not at any
such times contain an 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, except that this representation and warranty does not
apply to statements in or omissions from the registration statement, the Rule
462(b) Registration Statement, or the prospectus made in reliance
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<PAGE>
upon and in conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you expressly
for use therein. The Prospectus delivered to the Underwriters for use in
connection with the offering was identical to the electronically transmitted
copy thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T promulgated by the Commission ("Regulation S-T").
(c) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares to be issued and sold
by the Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and nonassessable and free of any preemptive or
similar rights; and the capital stock of the Company conforms to the description
thereof in the registration statement and the prospectus.
(d) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole.
(e) All the Company's subsidiaries (collectively, the "Subsidiaries")
are listed in an exhibit to the Registration Statement. Each Subsidiary is a
corporation duly organized, validly existing and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, prospects, net worth or results of
operations of such Subsidiary; all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrance.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to
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be filed as an exhibit to the Registration Statement that are not described
or filed as required by the Act.
(g) Neither the Company nor any of the Subsidiaries is in violation of
its certificate or articles of incorporation or by-laws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any of
the Subsidiaries is a party or by which any of them or any of their respective
properties may be bound.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the Conversion Transactions or the transactions contemplated
hereby (A) requires any consent, approval, authorization or other order of or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
for the registration of the Shares under the Act and the Exchange Act and
compliance with the securities or Blue Sky laws of various jurisdictions, all of
which have been or will be effected in accordance with this Agreement) or
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the certificate or articles of incorporation or bylaws, or
other organizational documents, of the Company or any of the Subsidiaries or (B)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any agreement, indenture, lease or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of them or any
of their respective properties may be bound, or violates or will violate any
statute, law, regulation or filing or judgment, injunction, order or decree
applicable to the Company or any of the Subsidiaries or any of their respective
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject.
(i) The accountants, Ernst & Young LLP, who have certified or shall
certify the financial statements included in the Registration Statement and the
Prospectus (or any amendment or supplement thereto) are independent public
accountants as required by the Act.
(j) The financial statements, together with related schedules and
notes, included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and the Subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data included in the
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Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and the
Subsidiaries. The pro forma financial statements and other pro forma financial
information included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) present fairly the information shown therein,
have been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled on the
pro forma bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or circumstances
referred to therein.
(k) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement have been duly and validly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the Subsidiaries
taken as a whole.
(m) Neither the Company nor any of the Subsidiaries owns any items of
real property and each of the Company and the Subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, claims, security interests or other encumbrances except such as are
described in the Registration Statement and the Prospectus or in a document
filed as an exhibit to the Registration Statement and all the property described
in the Prospectus as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases.
(n) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
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<PAGE>
(o) The Company and each of the Subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("permits") as are necessary to own its respective properties and to conduct its
business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the Prospectus.
(r) The Company and each of the Subsidiaries have filed all tax returns
required to be filed, which returns are complete and correct, and neither the
Company nor any Subsidiary is in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto.
(s) No holder of any security of the Company has any right (which has
not been satisfied or waived) to require registration of shares of Common Stock
or any other security of the Company because of the filing of the registration
statement or consummation of the transactions contemplated by this Agreement.
(t) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not aware of
any claim to the contrary or any challenge by any other person to the rights of
the Company and the Subsidiaries with respect to the foregoing.
(u) The Company is not now, and after sale of the Shares to be sold by
it hereunder and application of the net proceeds from such sale as described in
the Prospectus under the caption "Use of Proceeds" will not be, an "investment
company" or an "affiliated person" of,
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<PAGE>
or "promoter" or "principal underwriter" for an "investment company" as such
terms are defined under the Investment Company Act of 1940, as amended.
(v) The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are adequate for the conduct of the businesses in which they are
engaged or propose to engage; neither the Company nor any Subsidiary has been
refused any insurance coverage sought or applied for; and neither the Company
nor any Subsidiary has any 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 other) business, properties, prospects, net worth or results of
operations of the Company and the Subsidiaries taken as a whole.
(w) Neither the Company nor any Subsidiary is involved in any labor
dispute nor, to the knowledge of the Company, is any such dispute threatened,
which dispute would have a material adverse effect on the condition (financial
or other) business, properties, prospects, net worth or results of operations of
the Company and the Subsidiaries taken as a whole.
(x) There are no contracts or other documents that are required to be
described in the Prospectus or filed as exhibits to the Registration Statement
by the Act that have not been described in the Prospectus or filed as exhibits
to the Registration Statement.
(y) No relationship, direct or indirect, exists between or among the
Company on one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus that is not so described.
(z) The Company has complied with all provisions of Florida Statutes,
(S)517.075, relating to issuers doing business with Cuba.
(aa) The Conversion Transactions have been approved by all necessary
corporate action on behalf of the Company and the [Restated Certificate of
Incorporation] has been filed with the Secretary of State of the State of
Delaware in order to permit all of the Conversion Transactions to be
effected no later than 8:00 A.M., New York City time, on the Closing Date.
(bb) (1) Except as described in the Prospectus and except for such
matters that, alone or in the aggregate, will not have a material adverse effect
on the condition (financial or other), business, properties, prospects, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole: (i) the Company and the Subsidiaries have complied with all Environmental
Laws relating to the operation and conduct of their respective businesses; (ii)
no real property owned or occupied by the Company or the Subsidiaries (including
soils, groundwater, surface water, buildings or other structures) is
contaminated with any Hazardous Substance; (iii) no real property formerly owned
or occupied by the Company or the Subsidiaries in connection with the operation
or conduct of their respective businesses was contaminated with Hazardous
Substances during the period of ownership or occupation by the Company or the
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Subsidiaries; (iv) neither the Company nor any of the Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property arising from the operation or conduct of their respective
businesses; (v) neither the Company nor any of the Subsidiaries has been
associated with any release or threat of release of any Hazardous Substance
arising from the operation or conduct of their respective businesses; (vi) none
of the Company or the Subsidiaries has received any notice, demand, letter,
claim or request for information relating to the operation or conduct of its
business or any real property currently or formerly owned or occupied by it
alleging that such entity is or may be in violation of or liable under any
Environmental Law; (vii) neither the Company nor any of the Subsidiaries is
subject to any orders, decrees, injunctions or other arrangements with any
governmental authority or is subject to any indemnity or other agreement with
any third party relating to liability under any Environmental Law; (viii) there
are no circumstances or conditions involving the Company or the Subsidiaries or
that could reasonably be expected to result in any claims, liability,
investigations, costs or restrictions on the ownership, use or transfer of any
property of the Company or the Subsidiaries pursuant to any Environmental Law;
and (ix) no real property owned or occupied by the Company or the Subsidiaries
contains any underground storage tanks, asbestos-containing material, lead-based
products, or polychlorinated biphenyls.
(2) For purposes hereof: (i) the term "Hazardous Substance" shall
mean (A) any substance, chemical or waste that is listed or defined as
hazardous, toxic, or dangerous under any Environmental Law (defined below), (B)
any asbestos containing materials, radioactive materials or petroleum
hydrocarbons, or (C) any other substance which may be the subject of regulatory
action by any governmental authority pursuant to any Environmental Law; and (ii)
the term "Environmental Law" shall mean any federal, state local or foreign
laws, statutes, ordinances, rules, regulations and treaties; all judicial,
administrative and regulatory actions, orders, judgments, decrees, permits,
authorizations, policies and opinions; and common law relating to: (A) the
protection, investigation, remediation or restoration of the environment or
natural resources, or land use, (B) the handling, use, presence, disposal,
release or threatened release of any chemical substance or (C) noise, odor,
pollution or contamination causing any injury or threat of injury to persons or
property; including, but not limited to the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S)(S) 9601
et seq.; the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)(S)
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6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. (S)(S) 1251
-------
et seq.; the Clean Air Act, 42 U.S.C. (S)(S) 7401, et seq.; the Hazardous
- ------- -------
Materials Transportation Act, 49 U.S.C. (S)(S) 1471 et seq.; the Toxic
-------
Substances Control Act, 15 U.S.C. (S)(S) 2601 through 2629; and the Safe
Drinking Water Act, 42 U.S.C. (S)(S) 300f through 300j; any state analogs to the
foregoing; each, as amended from time to time, or any successor laws thereto,
together with any rules and regulations promulgated thereunder.
8. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, valid and marketable title to the Shares to be
sold by such Selling
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Stockholder, free and clear of any lien, mortgage, pledge, charge, equity,
claim, security interest or other encumbrance, including, without limitation,
any restriction on transfer.
(b) Such Selling Stockholder now has, and on the Closing Date and any
Option Closing Date will have, full legal right, power and authorization, and
any approval required by law, to sell, assign transfer and deliver such Shares
in the manner provided in this Agreement, and upon delivery of and payment for
such Shares hereunder, the several Underwriters will acquire good and marketable
title to such Shares free and clear of any lien, mortgage, pledge, charge,
equity, claim, security interest, or other encumbrance of any kind.
(c) This Agreement and the Custody Agreement have been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder and are the
valid and binding agreements of such Selling Stockholder enforceable against
such Selling Stockholder in accordance with their terms.
(d) Neither the execution and delivery of this Agreement or the Custody
Agreement by or on behalf of such Selling Stockholder nor the consummation of
the transactions herein or therein contemplated by or on behalf of such Selling
Stockholder requires any consent, approval, authorization or order of, or filing
or registration with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required under the
Act or such as may be required under state securities or Blue Sky laws governing
the purchase and distribution of the Shares) or conflicts or will conflict with
or constitutes or will constitute a breach of, or default under, or violates or
will violate, any agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is or may be bound
or to which any of such Selling Stockholder's property or assets is subject, or
any statute, law, rule, regulation, ruling, judgment, injunction, order or
decree applicable to such Selling Stockholder or to any property or assets of
such Selling Stockholder.
(e) The Registration Statement and the Prospectus, insofar as they
relate to such Selling Stockholder, do not and will not contain 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.
(f) Such Selling Stockholder does not have any knowledge or any reason
to believe that the Registration Statement or the Prospectus (or any amendment
or supplement thereto) contains 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.
(g) The representations and warranties of such Selling Stockholder in
the Custody Agreement are, and on the Closing Date and any Option Closing Date
will be, true and correct. Certificates for all of the Shares to be sold by the
Selling Stockholders pursuant to this Agreement, in suitable form for transfer
by delivery or accompanied by duly executed instruments of transfer or
assignment in blank with signatures guaranteed, have been placed in custody with
the Custodian with irrevocable unconditional instructions to deliver such Shares
to the Underwriters pursuant to this Agreement.
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(h) Such Selling Stockholder has not taken, and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares, except for the lock-up
arrangements described in the Prospectus.
9. Indemnification and Contribution. (a) The Company and each Indemnifying
--------------------------------
Selling Stockholder, jointly and severally, agree to indemnify and hold harmless
each of you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) the
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, provided that the Company
has delivered the Prospectus to the several Underwriters in requisite quantity
on a timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company or any
Indemnifying Selling Stockholder may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or any Selling Stockholder, such
Underwriter or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the indemnifying parties have agreed in
writing to pay such fees and expenses, (ii) the indemnifying parties have failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the indemnifying parties and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and
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any indemnifying party by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Underwriter or such controlling person). It is understood, however, that the
indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be designated
in writing by Smith Barney Inc., and that all such fees and expenses shall be
reimbursed as they are incurred. The indemnifying parties shall not be liable
for any settlement of any such action, suit or proceeding effected without their
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
(c) Each Other Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, the Company, its directors, its
officers who sign the Registration Statement, and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act to the same extent as the foregoing indemnity from the Company and
the Indemnifying Selling Stockholders to each Underwriter, but only with respect
to the information furnished in writing by or on behalf of such Other Selling
Stockholder expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against any Underwriter, any such
controlling person of any Underwriter, the Company, any of its directors, any
such officer, or any such controlling person of the Company, based on the
Registration Statement, the Prospectus or any Prepricing Prospectus or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Other Selling Stockholder pursuant to this paragraph (c), such Other
Selling Stockholder shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Other Selling Stockholder shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof, but the
fees and expenses of such counsel shall be at such Other Selling Stockholder's
expense), and each Underwriter, each such controlling person of any Underwriter,
the Company, its directors, any such officer, and any such controlling person of
the Company shall have the rights and duties given to the Underwriters by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which any Other Selling Stockholder may otherwise have.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement,
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each Selling Stockholder, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the
same extent as the foregoing indemnity from the Company and the Selling
Stockholders to each Underwriter, but only with respect to information relating
to such Underwriter furnished in writing by or on behalf of such Underwriter
through you expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Company, any of its
directors, any such officer, any Selling Stockholder, or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, the Selling Stockholder, and any such
controlling person shall have the rights and duties given to the Underwriters by
paragraph (b) above. The foregoing indemnity agreement shall be in addition to
any liability which any Underwriter may otherwise have.
(d) If the indemnification provided for in this Section 9 is unavailable
to an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Stockholders on the one hand and the Underwriters on the other hand
from the offering of the Shares and the consummation of the transactions
contemplated thereby, or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Selling Stockholders on the one hand and
the Underwriters on the other in connection with the statements or omissions
that resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Selling Stockholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus; provided that, in the event that the
Underwriters shall have purchased any Additional Shares hereunder, any
determination of the relative benefits received by the Company, the Selling
Stockholders or the Underwriters from the offering of the Shares shall include
the net proceeds (before deducting expenses) received by the Selling
Stockholders, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things,
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whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e) The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by a pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in paragraph (d)
above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (d)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule II hereto (or such numbers of Firm Shares increased as set
forth in Section 12 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Stockholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
9.
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10. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, prospects, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially, adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company or any Selling
Stockholder which makes any statement made in the Prospectus untrue or which, in
the opinion of the Company and its counsel or the Underwriters and their
counsel, requires the making of any addition to or change in the Prospectus in
order to state a material fact required by the Act or any other law to be stated
therein or necessary in order to make the statements therein not misleading, if
amending or supplementing the Prospectus to reflect such event or development
would, in your opinion, as Representatives of the several Underwriters,
materially adversely affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of Gray
Cary Ware & Freidenrich, a professional corporation, counsel for the Company and
the Selling Stockholders, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a material adverse effect on the condition
(financial or other), business, properties, net worth or results of operations
of the Company and the Subsidiaries taken as a whole;
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(ii) Each of the Subsidiaries is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of its
organization, with full corporate power and authority to own, lease, and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto); and all
the outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, are fully paid and nonassessable, and are
owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security interest, or, to the best
knowledge of such counsel after reasonable inquiry, any other security interest,
lien, adverse claim, equity or other encumbrance or pre-emptive right, and, to
the best of such counsel's knowledge, free and clear of any security interest,
claim, unperfected lien, encumbrance or pre-emptive right, and, to the best of
such counsel's knowledge, there are no rights, warrants or options to acquire or
instruments convertible into, or exchangeable for, any shares of capital stock
or other equity interest in the Company or its Subsidiaries, except as may be
described in the Prospectus;
(iii) The authorized and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in the
Prospectus; and the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be issued and sold by the Company
hereunder, have been duly authorized and validly issued, and are fully paid and
nonassessable;
(v) The Shares to be issued and sold to the Underwriters by the
Company hereunder have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any preemptive,
or to the best knowledge of such counsel after reasonable inquiry, similar
rights that entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Company;
(vi) The shares of Common Stock of the Company to be issued in
connection with the consummation of the Conversion Transactions have been duly
authorized by all necessary corporate action on the part of the Company and,
when issued and delivered to the recipients thereof against payment therefor,
will be validly issued, fully paid and non-assessable, free of statutory and, to
such counsel's knowledge, contractual preemptive rights, and, to the best
knowledge of such counsel, the issuance of such shares will not create in any
person the right to obtain or subscribe for any capital stock of the Company
pursuant to the Company's certificate of incorporation, bylaws or otherwise;
(vii) The form of certificates for the Shares conforms to the
requirements of the Delaware General Corporation Law;
(viii) The Registration Statement (including any Rule 462(b)
Registration Statement) and all post-effective amendments, if any, have been
declared effective under the Act and, to the best knowledge of such counsel
after reasonable inquiry, no stop order suspending the
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effectiveness of the Registration Statement has been issued and no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(ix) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Shares to be sold by it
to the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company;
(x) Neither the Company nor any of the Subsidiaries is in
violation of its respective certificate or articles of incorporation or bylaws,
or other organizational documents, or to the best knowledge of such counsel
after reasonable inquiry, is in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture, note or
other evidence of indebtedness, except as may be disclosed in the Prospectus;
(xi) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof, nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or any agreement, indenture, lease or other instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties is bound that is an exhibit to the
Registration Statement, or is known to such counsel after reasonable inquiry, or
will result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries, nor will
any such action result in any violation of any existing law, regulation, ruling
(assuming compliance with all applicable state securities and Blue Sky laws),
judgment, injunction, order or decree known to such counsel after reasonable
inquiry, applicable to the Company, the Subsidiaries or any of their respective
properties;
(xii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Company (except as have been obtained under the Act and the Exchange Act or such
as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) for the valid issuance and sale of the
Shares to the Underwriters as contemplated by this Agreement;
(xiii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act;
(xiv) To the best knowledge of such counsel after reasonable
inquiry, (A) other than as described or contemplated in the Prospectus (or any
supplement thereto), there are no legal or governmental proceedings pending or
threatened against the Company or any of the
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Subsidiaries, or to which the Company or any of the Subsidiaries, or any of
their property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto)
and (B) there are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement that are not described or filed as
required, as the case may be;
(xv) To the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in violation of any
law, ordinance, administrative or governmental rule or regulation applicable to
the Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body having jurisdiction over the Company or any of the
Subsidiaries;
(xvi) The statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, or refer to statements of law or legal conclusions, are accurate and
present fairly the information required to be shown;
(xvii) This Agreement and the Custody Agreement have each been
duly executed and delivered by or on behalf of each of the Selling Stockholders
and are valid and binding agreements of each Selling Stockholder enforceable
against each Selling Stockholder in accordance with their terms;
(xviii) To the knowledge of such counsel, each Selling
Stockholder has full legal right, power and authorization, and any approval
required by law, to sell, assign, transfer and deliver good and marketable title
to the Shares which such Selling Stockholder has agreed to sell pursuant to this
Agreement;
(xix) The execution and delivery of this Agreement and the
Custody Agreement by the Selling Stockholders and the consummation of the
transactions contemplated hereby and thereby will not conflict with, violate,
result in a breach of or constitute a default under the terms or provisions of
any agreement, indenture, mortgage or other instrument known to such counsel to
which any Selling Stockholder is a party or by which any of them or any of their
assets or property is bound, or any court order or decree or any law, rule, or
regulation applicable to any Selling Stockholder or to any of the property or
assets of any Selling Stockholder;
(xx) Upon delivery of the Shares pursuant to this Agreement and
payment therefor as contemplated herein the Underwriters will acquire good and
marketable title to the Shares free and clear of any lien, claim, security
interest, or other encumbrance, restriction on transfer or other defect in
title;
(xxi) The Conversion Transactions have been duly authorized by
all necessary corporate action on the part of the Company and have been
consummated in accordance with applicable law; and
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(xxii) Although counsel has not undertaken, except as
otherwise indicated in their opinion, to determine independently, and does not
assume any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the preparation of
the Registration Statement and the Prospectus, including review and discussion
of the contents thereof, and nothing has come to the attention of such counsel
that has caused it to believe that the Registration Statement at the time the
Registration Statement became effective, or the Prospectus, as of its date and
as of the Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that any amendment or supplement to the Prospectus, as of its
respective date, and as of the Closing Date or the Option Closing Date, as the
case may be, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no opinion with respect to
the financial statements and the notes thereto and the schedules and other
financial and statistical data included in the Registration Statement or the
Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon an opinion or
opinions, each dated the Closing Date, of other counsel retained by them or the
Company as to laws of any jurisdiction other than the United States or the State
of California, provided that (1) each such local counsel is acceptable to the
Representatives, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Representatives
and is, in form and substance satisfactory to them and their counsel, and (3)
counsel shall state in their opinion that they believe that they and the
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date, an opinion of Duf
Sundheim, Esq., corporate counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the effect
that:
(i) The Company and each of the Subsidiaries has full corporate
power and authority, and all necessary governmental authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental regulatory officials and bodies (except where the failure so to
have any such authorizations, approvals, orders, licenses, certificates,
franchises or permits, individually or in the aggregate, would not have a
material adverse effect on the business, properties, operations or financial
condition of the Company and the Subsidiaries taken as a whole), to own their
respective properties and to conduct their respective businesses as now being
conducted, as described in the Prospectus;
(ii) Except as disclosed in the Prospectus, the Company owns of
record, directly or indirectly, all the outstanding shares of capital stock of
each of the Subsidiaries free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance;
(iii) Other than as described or contemplated in the Prospectus
(or any supplement thereto), there are no legal or governmental
proceedings pending or threatened against the Company or any of the
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Subsidiaries, or to which the Company or any of the Subsidiaries, or any of
their property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto);
(iv) There are no agreements, contracts, indentures, leases or
other instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to be
filed as an exhibit to the Registration Statement that are not described or
filed as required, as the case may be;
(v) The Company and the Subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned by them or any of them or necessary for the conduct of
their respective businesses, and Duf Sundheim is not aware of any claim to the
contrary or any challenge by any other person to the rights of the Company and
the Subsidiaries with respect to the foregoing;
(vi) Neither the Company nor any of the Subsidiaries is in
violation of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries;
(vii) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of,
and such counsel does not know of any commitment, plan or arrangement to issue,
any shares of capital stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company; and
(viii) Except as described in the Prospectus, there is no holder
of any security of the Company or any other person who has the right,
contractual or otherwise, to cause the Company to sell or otherwise issue to
them, or to permit them to underwrite the sale of, the Shares or the right to
have any Common Stock or other securities of the Company included in the
registration statement or the right, as a result of the filing of the
registration statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.
(e) You shall have received on the Closing Date an opinion of Gibson,
Dunn & Crutcher LLP, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with respect
to the matters referred to in clauses (v), (vii), (viii), (xii) and (xx) of the
foregoing paragraph (c) and such other related matters as you may request.
(f) You shall have received letters addressed to you, as Representatives
of the several Underwriters, and dated the date hereof and the Closing Date from
Ernst & Young LLP, independent certified public accountants, substantially in
the forms heretofore approved by you.
(g) (i) No stop order suspending the effectiveness of the Registration
Statement (including any Rule 462(b) Registration Statement) shall have
been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be
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contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not
have any liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the date hereof and on and as
of the Closing Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other officers
as are acceptable to you), to the effect set forth in this Section 10(g) and in
Section 10(h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by or on behalf of the Selling Stockholders to the effect set forth in
this Section 10(i) and in Section 10(j) hereof.
(j) The Selling Stockholders shall not have failed at or prior to the
Closing Date to have performed or complied with any of their agreements herein
contained and required to be performed or complied with by them hereunder at or
prior to the Closing Date.
(k) The Shares shall have been listed or approved for listing upon notice of
issuance on the Nasdaq National Market.
(l) The Sellers shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Stockholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty
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by the Company, the Selling Stockholders or the particular Selling Stockholder,
as the case may be, to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (i) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Sellers (in proportion to the number of Shares being
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offered by each of them, including any Additional Shares which the Underwriters
shall have elected to purchase) agree to pay the following costs and expenses
and all other costs and expenses incident to the performance by them of their
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the original issuance and sale of the Shares; (iv) the
printing (or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares; (v)
the registration of the Shares under the Exchange Act and the listing of the
Shares on the Nasdaq National Market; (vi) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the fees and expenses of counsel for the Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Selling Stockholders.
12. Effective Date of Agreement. This Agreement shall become effective:
---------------------------
(i)
upon the execution and delivery hereof by the parties hereto; or (ii) if, at the
time this Agreement is executed and delivered, it is necessary for the
Registration Statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as
28
<PAGE>
Representatives of the several Underwriters, by notifying the Company
and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than one-
tenth of the aggregate number of Shares which the Underwriters are obligated to
purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any such default of any such Underwriter under this Agreement. The term
"Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule II hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Underwriter
is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
------------------------
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Stockholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Additional Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market shall have been suspended or materially
limited, (ii) a general moratorium on commercial banking activities in New York
or California shall have been declared by either federal or state authorities,
or (iii) there shall have occurred any outbreak or escalation of hostilities or
other international or domestic calamity, crisis or change in political,
financial or economic conditions, the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to commence
29
<PAGE>
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the resale
of the Shares by the Underwriters. Notice of such termination may be given to
the Company by telegram, telecopy or telephone and shall be subsequently
confirmed by letter.
14. Information Furnished by the Underwriters. The statements set forth in
-----------------------------------------
the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first and third paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
-------------
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 3080 Raymond Street, Santa Clara, California 95054, Attention:
William A. Bianco, Jr., Chairman and Chief Executive Officer; or (ii) if to the
Selling Stockholders, at __________________, Attention:______________________,
or (iii) if to you, as Representatives of the several Underwriters, care of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, and the other controlling
persons referred to in Section 9 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
30
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
NAME OF COMPANY
By
------------------------------
William A. Bianco Jr.
Chairman of the Board &
Chief Executive Officer
Each of the Selling Stockholders
named in Schedule I hereto
By
------------------------------
Attorney-in-Fact
By
------------------------------
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
BT SECURITIES CORPORATION
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By
--------------------------
Managing Director
31
<PAGE>
SCHEDULE I
NAME OF COMPANY
Part A - Firm Shares
- --------------------------
Number of
Selling Stockholders Firm Shares
- -------------------- -----------
------------
Total............... 650,000
============
- --------------------------
(1) Indemnifying Selling Stockholders (see Sections 9(a) & 9(b))
(2) Other Selling Stockholders (see Sections 9(a) & 9(b))
Part B - Additional Shares
- -----------------------------
Number of
Selling Stockholders Additional Shares
- -------------------- -----------------
------------
Total...............
============
32
<PAGE>
SCHEDULE II
NAME OF COMPANY
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- ----------- ----------- ----------- -----------
Smith Barney Inc. .................
Donaldson, Lufkin &
Jenrette Securities Corporation...
BT Securities Corporation..........
---------
Total............... 3,700,000
=========
33
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE KSI GROUP, INC.
THE KSI GROUP, INC. (the "Corporation"), a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is The KSI Group, Inc.
2. The original name of the Corporation was Kinetic Systems Group,
Inc. The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of Delaware on February 23, 1996.
3. Article One of the Certificate of Incorporation is amended to
read in its entirety as follows:
"The name of the corporation is The Kinetics Group, Inc."
4. This Certificate of Amendment was found advisable and duly
adopted by the Board of Directors of the Corporation, pursuant to Section 242 of
the General Corporation Law of the State of Delaware.
5. This Certificate of Amendment was duly adopted by written consent
of the stockholders of the Corporation in accordance with the applicable
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware, and notice of the taking of such corporate action has been given as
provided in Section 228(d) of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by William A. Bianco, Jr., its Chairman of the Board and Chief Executive
Officer and attested by Marie R. Bianco, its Secretary, this 10th day of
December, 1996.
THE KINETICS GROUP, INC.
By: /s/ William A. Bianco
--------------------------------
William A. Bianco, Jr.
Chairman of the Board and
Chief Executive Officer
ATTEST:
By: /s/ Marie R. Bianco
--------------------------------
Marie R. Bianco
Secretary
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
BEFORE PAYMENT OF CAPITAL
Kinetic Systems Group, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That said corporation has not received any payment for its stock.
SECOND: That the Board of Directors of said corporation, by the unanimous
written consent of its members, filed with the minutes of the Board, adopted a
resolution proposing and declaring advisable the following amendment and
restatement of the Certificate of Incorporation of said corporation:
RESOLVED, the Board of Directors hereby approves the First Amended and
Restated Certificate of Incorporation attached as EXHIBIT A.
---------
THIRD: That the aforesaid amendment was duly adopted in accordance with
the provisions of Sections 241 and 245 of the General Corporation Law of the
Sate of Delaware.
IN WITNESS WHEREOF, said Kinetic Systems Group, Inc. has caused this
certificate to be signed by Marie R. Bianco, its Secretary, this 27th day
of March, 1996.
Kinetic Systems Group, Inc.
By: /s/ Marie R. Bianco
------------------------
Marie R. Bianco, Secretary
<PAGE>
EXHIBIT A
---------
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
ONE: The name of this Corporation is The KSI Group, Inc.
---
TWO: The address of the Corporation's registered office in the State of
---
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THREE: The purpose of this Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOUR: This Corporation is authorized to issue two classes of stock,
----
common stock, par value $.01 per share ("COMMON STOCK"), and preferred stock,
par value $.01 per share ("PREFERRED STOCK"), and the total number of authorized
shares shall be Thirty-Six Million (36,000,000) shares.
A. Common Stock. The Corporation's Common Stock shall consist of Thirty
------------
Million (30,000,000) shares, par value $.01 per share. Twenty Million
(20,000,000) shares of Common Stock are hereby designated as "SERIES A COMMON
STOCK" and Ten Million (10,000,000) shares of Common Stock are hereby designated
as "SERIES B COMMON STOCK". The relative rights, preferences, privileges and
restrictions on the Series A Common Stock and the Series B Common Stock shall be
as set forth below. Except as expressly set forth below, there shall be no
difference between shares of Series A Common Stock and Series B Common Stock.
1. DIVIDENDS AND DISTRIBUTIONS. The holders of shares of Common
---------------------------
Stock shall be entitled to the payment of dividends when and as declared by the
Board of Directors out of funds legally available therefor, after payment of
preferential dividends on the Preferred Stock. When and as dividends or other
distributions are declared by the Board of Directors on shares of either series
of Common Stock, such dividends or other distributions shall be paid in equal
amounts per share on all shares of the Series A Common Stock and the Series B
Common Stock. Dividends may be in the form of cash, property or Common Stock;
provided, however, that dividends in the form of Common Stock shall be payable
- -------- -------
on the Series A Common Stock only in shares of Series A Common Stock and
dividends in the form of Common Stock on the Series B Common Stock shall be
payable only in shares of Series B Common Stock.
2. LIQUIDATION, DISSOLUTION OR WINDING UP. Subject to the rights of
--------------------------------------
holders of the Preferred Stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
shares of Series A Common Stock and Series B Common Stock (without distinction)
shall be entitled, on a pari passu basis, to all remaining assets of the
Corporation available for distribution to its stockholders.
3. CONVERSION.
----------
(a) MANDATORY CONVERSION. Immediately after
--------------------
(i) completion of a transaction in which the Corporation
sells, or otherwise disposes of all or substantially all of its assets; or
(ii) the merger of the Corporation with or into any other
corporation (other than a wholly owned subsidiary of the Corporation) if as a
result of such merger the holders of the Common Stock Equivalents of the
Corporation outstanding immediately prior to such transaction, or series of
transactions, own less than 50% of the securities of the surviving corporation
which have full voting rights;
(iii) upon the closing of the issuance and sale of shares of
Series A Common Stock by the Corporation in a Qualified Public Offering, or
1
<PAGE>
(iv) the ninetieth (90th) day following the date that the
Bianco Entities and the Shimmon Entities in the aggregate fail to own of record
a majority of the outstanding shares of Series A Common Stock.
each share of outstanding Series B Common Stock will be automatically converted
into one share of Series A Common Stock without any notice or authorization by
the holder thereof and without the payment of any additional consideration by
the holder thereof. Once the shares of Series B Common Stock have been
converted to shares of Series A Common Stock as contemplated above, the shares
shall not be reconverted to Series B Common Stock, notwithstanding that at some
subsequent date the Bianco Entities and Shimmon subsequently reacquire a
majority interest of the Corporation's Common Stock Equivalents.
(b) ADJUSTMENT. If the Corporation shall in any manner subdivide or
----------
combine the outstanding shares of either the Series A Common Stock or the Series
B Common Stock, the outstanding shares of the other class will be
proportionately subdivided or combined.
(c) OPTIONAL CONVERSION. Shares of Series B Common Stock shall be
-------------------
convertible into shares of Series A Common Stock at the option of the holder at
any time after a Public Offering has occurred.
(d) SERIES A COMMON STOCK RESERVED. The Corporation shall at all
------------------------------
times reserve and keep available out of its authorized but unissued Series A
Common Stock such number of shares of Series A Common Stock as shall from time
to time be sufficient to effect conversion of all shares of Series B Common
Stock into shares of Series A Common Stock (the "RESERVED SERIES A COMMON
SHARES").
B. PREFERRED STOCK. The Preferred Stock shall consist of Six Million
---------------
(6,000,000) shares. Three Million (3,000,000) shares of Preferred Stock are
hereby designated as "SERIES A PREFERRED STOCK" and One Million (1,000,000)
shares of Preferred Stock are hereby designated as "SERIES B PREFERRED STOCK".
The rights, preferences, privileges and restrictions and other matters related
to the Series A Preferred Stock and the Series B Preferred Stock (which are
collectively referred to herein as the "PREFERRED SHARES" and individually as a
"PREFERRED SHARE") shall be as set forth below. Except as expressly set forth
below, there shall be no difference between Series A Preferred Stock and Series
B Preferred Stock. The Board of Directors shall, subject to the provisions of
Section E.2 hereof have the right to designate one or more additional series of
Preferred Stock and to fix and determine the rights, privileges, preferences,
restrictions and limitations thereof upon filing a certificate of determination
with respect thereto in accordance with applicable law.
1. DIVIDENDS.
---------
(a) DIVIDEND OBLIGATION. The holder of each share of Preferred
-------------------
Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of assets of the Corporation available for the
payment of dividends under the laws of the State of California, but prior in
right of payment to any dividends payable on any Junior Security, dividends at
the times and in the amounts provided for in this Section B.1(a), payable as
follows:
(i) Beginning on the date of issue and continuing each Fiscal
Quarter through and including June 30, 1997, the Corporation shall accrue a
dividend on the Preferred Stock cumulatively on a daily basis (but compounded on
a quarterly basis), and shall pay the dividend on each Dividend Reference Date
on each of the Series A Preferred Stock and the Series B Preferred Stock in
fully paid and non-assessable whole shares of Series B Preferred Stock at a rate
equal to one (1) share of Series B Preferred Stock for each $4.00 of accrued
dividend on the Preferred Stock (a "PIK DIVIDEND"). The Corporation shall issue
to such holders of Preferred Stock a certificate or certificates representing
the number of shares of Series B Preferred Stock to which such holders shall be
entitled on each such Dividend Reference Date and cause the same to be mailed to
each such holder within five (5) business days after such Dividend Reference
Date. Any person or persons entitled to receive such Series B Preferred Stock
shall be treated for all purposes as the record holder or holders of such Series
B Preferred Stock on such Dividend Reference Date. Upon delivery of the
certificate for such Series B Preferred Stock, the amount of dividends so paid
shall be deemed to have been paid in full by the Corporation. If a PIK Dividend
will result in the issuance to any holder of a fractional share of Series B
Preferred Stock, in lieu of issuing such fractional share the Corporation shall
round up or down, as appropriate, to the nearest whole share of Series B
Preferred Stock.
(ii) Beginning July 1, 1997, the Corporation shall pay on each
Dividend Reference Date the dividend on the Preferred Stock in cash from
Available Funds (a "CASH DIVIDEND"). The Cash Dividends shall be paid on the
payment date by wire transfer to each holder of Preferred Stock of record on the
Record Date for such dividend, at such holder's address for receipt of such wire
transfer if and to the extent known to the Secretary of the
2
<PAGE>
Corporation, and if not so known, by deposit in the United States mail of the
Corporation's check for the amount thereof, addressed to the holder of record as
such address as appears on the Corporation's stockholder records, at least five
(5) days prior to the applicable Dividend Reference Date or otherwise
transferring funds to such holder in accordance with that holder's reasonable
written instructions, in either case so as to be received by such holder on the
due date of such dividend.
(b) ACCRUAL OF DIVIDENDS. Dividends on each share of Preferred Stock
--------------------
shall accrue cumulatively on a daily basis at the rate and in the manner
prescribed herein from and including the date of issuance of such Preferred
Stock to and including the date on which the Redemption Price or Liquidation
Value of such Preferred Stock shall have been paid, whether or not such
dividends shall have been declared and whether or not there shall be (at the
time such dividends accrue or become payable or at any other time) profits,
surplus or other funds of the Corporation legally available for the payment of
such dividends. For purposes hereof, the date on which the Corporation shall
initially issue any Preferred Stock shall be deemed to be its "date of issuance"
regardless of the number of times transfer of such Preferred Stock shall be made
on the stock records maintained by or for the Corporation and regardless of the
number of certificates which may be issued to evidence such Preferred Stock
(whether by reason of transfer of such Preferred Stock or for any other reason).
(c) DIVIDEND RATE. Dividends shall accrue cumulatively on a daily
-------------
basis at a rate of eight percent (8%) per annum of the Liquidation Value thereof
until June 30, 2002. From and after July 1, 2002, dividends shall accrue
cumulatively on a daily basis at the rate of eight and eight-tenths percent
(8.8%) per annum of the Liquidation Value thereof, such rate increasing on July
1, 2003, to nine and sixty-eight one hundredths percent (9.68%) per annum, and
similarly shall be ten percent (10%) higher on each July 1 thereafter. If the
Corporation shall fail to make a dividend payment, dividends shall accrue
cumulatively on such basis at the Default Rate continuously thereafter until all
dividends then accrued and unpaid and each default payment on the Preferred
Stock shall have been paid. Dividends payable pursuant hereto shall begin to
accrue on each share of Preferred Stock on its date of issuance and shall be
payable on the Dividend Reference Date.
(d) DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time the
-----------------------------------------
Corporation shall pay less than the total amount of dividends then accrued on
the Preferred Stock, such payment shall be distributed among the holders of the
Preferred Stock in proportion to the respective amounts of unpaid accruals on
their Preferred Stock.
(e) CERTAIN PAYMENTS RESTRICTED. Except as authorized by the Purchase
---------------------------
Agreement or the Shareholders Agreement, so long as shares of Preferred Stock
representing at least 60% of the shares of the number of shares of Preferred
Stock issued on the Closing Date shall remain outstanding (or, after June 30,
2002, so long as shares of Preferred Stock representing at least 25% of the
number of shares of Preferred Stock issued on the Closing Date remain
outstanding): (i) no Junior Security of the Corporation shall be acquired or
redeemed by the Corporation; and (ii) no dividend shall be declared or paid, nor
shall any distribution be made, upon any Junior Security unless all accrued
dividends and required distributions upon or redemptions of the Preferred Stock
have been paid or satisfied, provided, that the Corporation shall not be
prohibited from (x) declaring or paying any dividend or distribution on any
Junior Security if the same is solely paid in Junior Securities, or (y)
repurchasing any Junior Security from any employee of or consultant or adviser
to the Corporation if such repurchase, including all material terms, was
pursuant to agreements entered into by the Corporation in a manner not
prohibited by the Purchase Agreement.
(f) DIVIDENDS PAYABLE FROM CERTAIN FUNDS. Notwithstanding the
------------------------------------
provisions of Sections B.1(a), B.1(b), B.1(c) and B.1(d), the Corporation shall
not declare or pay or set apart any amount for payment of cash dividends or make
any other cash distribution on the Preferred Stock in excess of Available Funds;
provided, however, that the failure to pay dividends caused by lack of
- -------- -------
sufficient Available Funds shall nevertheless be deemed non-performance by the
Corporation for purposes of Section D.1(a)(i) hereof.
(g) TIMELY PAYMENT OF DIVIDENDS. Anything in this Section B.1. to the
---------------------------
contrary notwithstanding, dividends payable in cash shall be timely paid if a
check of the Corporation in the proper amount is mailed to a holder of Preferred
Stock no later than one (1) business day before the Dividend Reference Date and
dividends payable in shares of Preferred Stock shall be timely paid if a
certificate representing such shares is issued as of the Dividend Reference Date
and is mailed to the holder of Preferred Stock within twenty (20) business days
of the Dividend Reference Date.
(h) EFFECT OF CERTAIN ACTION. Notwithstanding the provisions of
------------------------
subdivision (c) and (e) of this Section B.1, or of Section D.2 of this Article
FOUR, no increase in the dividend rate or Liquidation Value, restriction on
certain payments or remedies resulting from an Event of Non-Compliance shall be
applicable or effective, if (x) the Corporation has Available Funds to redeem
the Preferred Stock in full and (y) either (i) such redemption is not approved
---
by the holders of the Preferred Stock (if such approval is required under any
provision hereof), (ii) such redemption is prevented by action taken by the
Designated Director, or (iii) such redemption is prevented by action taken by BT
--
Capital.
3
<PAGE>
2. LIQUIDATION.
-----------
(a) PREFERENCE. Upon any liquidation (complete or partial),
----------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Preferred Stock shall be entitled, before any distribution or
payment is made upon any Junior Security of the Corporation, to be paid out of
the assets of the Corporation available for distribution to its stockholders
(whether from capital, surplus or earnings) an amount in cash equal to the
aggregate Liquidation Value of all Preferred Stock outstanding, and upon payment
thereof the holders of the Preferred Stock shall not be entitled to any further
payment.
(b) PARTIAL PAYMENT. If upon such liquidation, dissolution or
---------------
winding up of the Corporation, whether voluntary or involuntary, the assets of
the Corporation to be distributed among the holders of the Preferred Stock shall
be insufficient to permit payment to the holders of the Preferred Stock of the
amount which they are entitled to be paid as aforesaid, then the entire
remaining assets of the Corporation shall be distributed to the holders of the
Preferred Stock ratably based upon the aggregate Liquidation Value of the
Preferred Stock held by them.
(c) REMAINING ASSETS. Upon any such liquidation, dissolution or
----------------
winding up of the Corporation, after the holders of the Preferred Stock shall
have been paid in full the amounts to which they shall be entitled, the
remaining assets of the Corporation shall be distributed ratably to the holders
of any Junior Security of the Corporation.
(d) NOTICE; REORGANIZATION. Written notice of any liquidation,
----------------------
dissolution or winding up, or Reorganization stating an anticipated payment
date, the amount of the payment, or nature of any consideration to be received
or paid to holders of Preferred Stock, and, to the extent then reasonably
calculable, to holders of Common Stock, shall be given not less than thirty (30)
days prior to the anticipated record date stated therein, to each record holder
of Preferred Stock at the address for such record holder shown on the
Corporation's records. Neither the consolidation or merger of the Corporation
into or with any other corporation or corporations, nor the sale or transfer by
the Corporation of all or any part of its assets, nor the reduction of the
capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation.
3. REDEMPTIONS.
-----------
(a) REDEMPTION PRICE. For each share of Preferred Stock which is
----------------
to be redeemed by the Corporation pursuant to this Section B.3, the Corporation
shall become obligated to the holder of such Preferred Stock on the Redemption
Date, regardless of whether the Corporation shall be able or legally permitted
to make such payment on the Redemption Date, to pay to such holder the
Redemption Price for such share of Preferred Stock; provided, however, that
-------- -------
nothing herein shall be construed to require any actual payment before such
payment can be made without contravening applicable law.
(b) REDEEMED OR OTHERWISE ACQUIRED PREFERRED STOCK NOT TO BE
--------------------------------------------------------
REISSUED. Any shares of Preferred Stock redeemed pursuant to this Section B.3 or
- --------
otherwise acquired by the Corporation in any manner whatsoever shall not under
any circumstances be reissued, sold or transferred by the Corporation.
(c) DETERMINATION OF NUMBER OF EACH HOLDER'S PREFERRED STOCK TO
-----------------------------------------------------------
BE REDEEMED. The number of shares of Preferred Stock to be redeemed from each
- -----------
holder thereof in each redemption under this Section B.3 shall be determined by
multiplying the total number of shares of Preferred Stock to be redeemed times a
fraction, the numerator of which shall be the total number of shares of
Preferred Stock then held by such holder and the denominator of which shall be
the total number of shares of Preferred Stock then outstanding, rounded if the
result is fractional to the largest whole number of shares of Preferred Stock
included in the result.
(d) OPTIONAL REDEMPTION. From and after July 1, 2002, the
-------------------
Corporation may from time to time redeem all or any portion of the Preferred
Stock then outstanding at the Redemption Price of the Preferred Stock to be
redeemed. If such optional redemption is in respect of less than all of
Preferred Stock then outstanding, then such redemption shall be made on a pro
rata basis among all holders of Preferred Stock.
(e) MANDATORY REDEMPTIONS.
---------------------
4
<PAGE>
(i) Unless waived by the Majority Preferred Stockholders,
all shares of Preferred Stock shall be redeemed upon the occurrence of a
Redemption Event. The Redemption Date for shares to be redeemed under this
clause (i) shall be the tenth (10th) Business Day following the occurrence of
the Redemption Event.
(ii) Written notice of (x) any transaction or event which
will constitute a Redemption Event upon the passage of time, which is authorized
by the Corporation, and the substance and intended date of consummation thereof,
shall be given not more than sixty (60) nor less than thirty (30) days prior to
the anticipated date of consummation thereof (and unless waived by the Majority
Preferred Stockholders, the Corporation shall not consummate any such action
which would constitute a Redemption Event, earlier than thirty (30) days
following the giving of such notice), and (y) each event which constitutes a
Redemption Event without action by the Corporation, shall be given by the
Corporation within ten (10) days after the Corporation obtains notice of the
facts giving rise to such Redemption Event, to each record holder of Preferred
Stock at the address for such record holder shown on the Corporation's records.
(f) NOTICE OF REDEMPTION. Notice of any redemption of Preferred
--------------------
Stock under Section B.3(d) or B.3(e), specifying the Redemption Date and place
of redemption, the Redemption Price and the paragraph pursuant to which such
redemption is being made, shall be given to each holder of record of Preferred
Stock to be redeemed, at the address for such holder shown on the Corporation's
records, not more than sixty (60) nor less than thirty (30) days prior to the
Redemption Date. The notice shall also specify the number of shares of Preferred
Stock which are to be redeemed from each holder of Preferred Stock. In case
fewer than all the shares of Preferred Stock represented by any certificate are
redeemed, a new certificate representing the unredeemed shares of Preferred
Stock shall be issued to the holder thereof without cost to such holder.
(g) DEPOSIT OF REDEMPTION PRICE. If on or before the Redemption
---------------------------
Date specified in any notice of redemption of any Preferred Stock the
Corporation shall deposit the amount of the Redemption Price thereof with a bank
or trust company having an office in the City of Los Angeles, California or the
City of New York, New York, designated in such notice of redemption, irrevocably
in trust for the benefit of the holder of such Preferred Stock, (i) such shares
of Preferred Stock shall be deemed to have been redeemed on the Redemption Date
so specified, whether or not the certificate for such Preferred Stock shall be
surrendered for redemption and canceled, and (ii) the right of any holder of
Preferred Stock to be redeemed to convert such shares as provided in Section B.4
shall expire 5:00 P.M. Pacific Time on the business day immediately prior to
such Redemption Date.
(h) DIVIDENDS AFTER REDEMPTION DATE. If moneys sufficient to
-------------------------------
redeem a share of Preferred Stock shall have been irrevocably deposited in trust
for such purpose on the Redemption Date, then dividends with respect to such
share of Preferred Stock shall cease to accrue on the Redemption Date and, on
such Redemption Date, all rights of the holder of such Preferred Stock as a
shareholder of the Corporation by reason of the ownership of such Preferred
Stock shall cease, except the right to receive the Redemption Price of such
Preferred Stock upon presentation and surrender of the certificate representing
such Preferred Stock, and such Preferred Stock shall not after such Redemption
Date be deemed to be outstanding.
(i) OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall
---------------------------------
neither redeem nor otherwise acquire any Preferred Stock except as expressly
authorized herein.
(j) CALCULATED DIVIDENDS MUST BE PAID PRIOR TO ANY REDEMPTION.
---------------------------------------------------------
The Corporation shall not redeem any Preferred Stock unless all dividends
accrued but unpaid on all Preferred Stock outstanding on the Redemption Date
have been paid, whether or not such shares of Preferred Stock are being
redeemed, and the Corporation shall upon any mandatory redemption cause all of
such accrued but unpaid dividends to be paid.
(k) REDEMPTION FROM CERTAIN FUNDS. Notwithstanding the provisions
-----------------------------
of Sections B.3(a) and B.3(d), if at the time of any redemption or redemptions
required pursuant to this Section B.3 the aggregate of the Available Funds of
the Corporation is insufficient to redeem the entire number of shares of
Preferred Stock required under this Section B.3 to be redeemed at such time,
such aggregate funds shall be used to redeem the maximum possible number of
shares of Preferred Stock pro rata (regardless of whether the holders thereof
request to be redeemed), however, that the failure to so redeem caused by lack
-------
of sufficient Available Funds shall nevertheless be deemed nonperformance by the
Corporation for purposes of Section D.1(a). Thereafter, any additional such
funds shall immediately be used by the Corporation to redeem the balance of the
Preferred Stock which the Corporation has become obligated to redeem pursuant to
this Section B.3(k) but which it has not redeemed, or, in the event any Person
other than the Corporation is the surviving or resulting corporation in
5
<PAGE>
any Organic Change, such Person shall, upon consummation of such Organic Change,
redeem such balance of Preferred Stock (and the Corporation shall so provide in
its agreements with such Person relating to such Organic Change).
4. CONVERSION.
----------
The Preferred Stock shall be convertible as follows:
(a) SERIES A CONVERSION RIGHT. Each share of Series A Preferred
-------------------------
Stock shall be convertible at any time, at the option of the holder thereof,
without the payment of any additional consideration by the holder thereof, at
the office of the Corporation or any transfer agent for the Series A Preferred
Stock, into the number of fully paid and nonassessable shares of Series B Common
Stock initially determined by dividing $4.00 by the Conversion Price in effect
at the time of conversion. Upon the occurrence of a Liquidity Event, each share
of Series A Preferred Stock then outstanding shall be automatically converted,
without the payment of any additional consideration by the holder thereof, and
without any further action by the Corporation into the number of fully paid and
nonassessable shares of Class B Common Stock determined by dividing $4.00 by the
Series A Conversion Price in effect at the time of conversion. Effective 12:01
A.M. on the first business day following (i) adoption of a resolution by vote or
written consent of holders of record of 75% or more of the outstanding Series A
Preferred Stock to convert Series A Preferred Stock into shares of Series B
Common Stock, or (ii) conversion of a cumulative number of shares of Series A
Preferred Stock as equals 75% of the cumulative number of shares of Series A
Preferred Stock issued by the Corporation, all then outstanding shares of Series
A Preferred Stock shall be converted into shares of Series B Common Stock. The
"SERIES A CONVERSION PRICE" shall initially be $4.00 per share, and shall be
adjusted and readjusted from time to time as provided in this Section B.4.
Certain capitalized terms used elsewhere in this Section B.4 have the meanings
specified in Section B.4(d) and Section F.5 of this Article FOUR. If any shares
of Series A Preferred Stock are to be redeemed in accordance with Section B.3 of
this Article FOUR, the conversion rights of any holder of such shares to be
redeemed shall expire at 5:00 P.M. Pacific Time on the business day immediately
prior to the apposite Redemption Date if the funds necessary to redeem such
shares are deposited in trust as provided in Section B.3(g).
(b) SERIES B CONVERSION RIGHT. Each share of Series B Preferred
-------------------------
Stock shall be convertible at any time, at the option of the holder thereof,
without the payment of any additional consideration by the holder thereof, at
the office of the Corporation or any transfer agent for the Series B Preferred
Stock, into the number of fully paid and non-assessable shares of Series B
Common Stock initially determined by dividing an amount equal to $4.00 by the
Series B Conversion Price in effect at the time of conversion. Effective 12:01
A.M. on the first business day following (i) adoption of a resolution by vote or
written consent of holders of record of 75% or more of the outstanding Series B
Preferred Stock to convert Series B Preferred Stock into shares of Series B
Common Stock, or (ii) conversion of a cumulative number of shares of Series B
Preferred Stock as equals 75% of the cumulative number of shares of Series B
Preferred Stock issued by the Corporation, all then outstanding shares of Series
B Preferred Stock shall be converted into shares of Series B Common Stock. The
"SERIES B CONVERSION PRICE" shall initially be the 1995 Common Stock Per Share
Value, and shall be adjusted and readjusted from time to time as provided in
this Section B.4. If any shares of Series B Preferred Stock are to be redeemed
in accordance with Section B.3 of this Article FOUR, the conversion rights of
any holder of such shares to be redeemed shall expire at 5:00 P.M. Pacific Time
on the business day immediately prior to the apposite Redemption Date if the
funds necessary to redeem such shares are deposited in trust as provided in
Section B.3(g).
(c) MECHANISMS OF CONVERSION. Before any holder of the Preferred
------------------------
Stock shall be entitled to convert the same into Series B Common Stock, such
holder shall surrender to the Corporation at the office of the Corporation or of
any transfer agent for the Preferred Stock, the certificate or certificates
representing such Preferred Stock, accompanied by written notice to the
Corporation that such holder elects to convert all or a specified number of such
shares and stating therein its name or the name of names of its nominees in
which it wishes the certificate or certificates for Series B Common Stock to be
issued. Provided such holder has properly elected to convert its Preferred
Stock, the holder shall be deemed to have converted such shares of Preferred
Stock (and to have become a holder of the shares of Series B Common Stock
issuable upon conversion thereof) on the date ("CONVERSION DATE") that the
Corporation receives all documents required by this Section B.4(b) to be
delivered in order to convert such shares of Preferred Stock. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of the Preferred Stock, or to its nominee or nominees, a certificate
or certificates representing the number of shares of Series B Common Stock and a
check or cash with respect to any fractional interest in a share of Series B
Common Stock to which it shall be entitled as aforesaid and, if less than the
full number of Preferred Stock evidenced by such surrendered certificate or
certificates are being converted, a new certificate or certificates, of like
tenor, for the number of Preferred Stock evidenced by such surrendered
certificate less the number of such shares being converted. Any conversion made
at the election of a holder of the Preferred Stock shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the Preferred Stock to be converted, and the
6
<PAGE>
person or persons entitled to receive the Series B Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such Series B Common Stock on such date.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
---------------------------------------------------
(i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case
----------------------------------------------
at any time or from time to time after the Closing Date the Corporation shall:
(1) take a record of the holders of its Nonpreferred
Stock (as defined below) for the purpose of entitling them to receive a dividend
payable in, or other distribution of, Nonpreferred Stock, or
(2) subdivide its outstanding shares of Nonpreferred
Stock into a larger number of shares of Nonpreferred Stock, or
(3) combine its outstanding shares of Nonpreferred
Stock into a smaller number of shares of Nonpreferred Stock,
then the Series A Conversion Price and the Series B Conversion Price in effect
- ----
immediately after the happening of any such event shall be proportionately
decreased, in case of the happening of events described in subparagraphs (1) or
(2) above, or proportionately increased, in case of the happening of events
described in subparagraph (3) above. "NONPREFERRED STOCK" shall mean the Common
Stock and shall also include stock of the Corporation of any other class which
is not preferred as to dividends or assets over any other class of stock of the
Corporation.
(ii) CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any
-----------------------------------------
time or from time to time after the Closing Date the Corporation shall take a
record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive any dividend or other distribution of:
(1) cash (other than a cash distribution made as a dividend
and payable out of earnings or earned surplus legally available for the payment
of dividends), or
(2) any evidence of its indebtedness (other than
Convertible Securities, as defined below), any shares of its stock (other than
Additional Shares of Nonpreferred Stock, as defined below) or any other
securities or property of any nature whatsoever (other than cash and other than
Convertible Securities or Additional Shares of Nonpreferred Stock), or
(3) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than Convertible Securities),
any shares of its stock (other than Additional Shares of Nonpreferred Stock) or
any other securities or property of any nature whatsoever (other than cash and
other than Convertible Securities or Additional Shares of Nonpreferred Stock),
then each Conversion Price then in effect shall be adjusted to that number
- ----
determined by multiplying such Conversion Price by a fraction (x) the numerator
of which shall be (I) the Current Market Price (as defined below) per share of
Common Stock immediately prior to the date of taking such record minus (II) the
portion applicable to one share of Common Stock of any such cash so
distributable and of the "fair value" of any and all such evidences of
indebtedness, shares of stock, other securities or property, or warrants or
other subscription or purchase rights, so distributable and (y) the denominator
of which shall be the Current Market Price per share of Common Stock immediately
prior to the date of taking such record. Such "fair value" of evidences of
indebtedness, shares of stock, other securities or property, or warrants other
than subscription or purchase rights shall be determined pursuant to the
Valuation Procedure. The "VALUATION PROCEDURE" is a determination of fair value
of any property made in good faith by the Board of Directors; provided, however,
-------- -------
that if the determination of fair value is not approved by at least 75% of the
authorized number of directors and the Designated Director objects to such
determination, then the fair value of such property shall be determined in good
faith by an appraiser selected by the Board of Directors, which appraiser is not
reasonably objected to by the Designated Director. The fees and expenses of such
appraiser shall be paid by the Corporation. A reclassification of the
Nonpreferred Stock into shares of Nonpreferred Stock and shares of any other
class of stock shall be deemed a distribution by the Corporation to the holders
of its Nonpreferred Stock of such shares of such other class of stock within the
meaning of this Section B.4(d)(ii) and, if the outstanding shares of
Nonpreferred Stock shall be changed into a larger or smaller number of shares of
Nonpreferred Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Nonpreferred Stock within the meaning of Section
7
<PAGE>
B.4(d)(i). "CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares
of stock or other securities which are convertible into or exchangeable for
Additional Shares of Nonpreferred Stock, either immediately or upon the arrival
of a specified date or the happening of a specified event. "CURRENT MARKET
PRICE" per share of Common Stock at a date herein specified, shall be deemed to
be the average of the Closing Prices for ten consecutive Business Days
immediately prior to the day in question. "CLOSING PRICES" for each such
Business Day shall be (i) if the Common Stock is traded on a national securities
exchange, its last sale price on the preceding Business Day on such exchange or,
if there was no sale on that day, the last sale price on the next preceding
Business Day on which there was a sale on such exchange or (ii) if the principal
market for the Common Stock is the over-the-counter market, its last sale price
reported on the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") on the preceding Business Day or, if the Common Stock is an
issue for which last sale prices are not reported on NASDAQ, the closing bid
quotation on such day (the closing bid quotation for a given day shall be the
highest bid quotation as quoted in any of The Wall Street Journal, the National
Quotation Bureau pink sheets, quotation sheets of registered marketmakers and,
if necessary, dealers' telephone quotations), but, in each of the preceding two
cases, if the relevant NASDAQ price or quotation did not exist on such day, then
the price or quotation on the next preceding Business Day in which there was
such a price or quotation. If the Current Market Price per share of Common Stock
cannot be ascertained by any of the foregoing methods, the Current Market Price
per share of Common Stock shall be determined by the Valuation Procedure.
(iii) ISSUANCE OF ADDITIONAL SHARES OF NONPREFERRED STOCK.
---------------------------------------------------
"ADDITIONAL SHARES OF NONPREFERRED STOCK" shall mean all shares of Nonpreferred
Stock issued by the Corporation after the Closing Date other than the shares of
Series B Common Stock issued to a holder of the Preferred Stock upon conversion
of the Preferred Stock or upon exercise of warrants or options to purchase
Common Stock which have been issued prior to the Closing Date; provided,
--------
however, that if the Corporation shall at any time or from time to time, in any
- -------
transaction entered into otherwise than in violation of this Restated
Certificate, acquire after the Closing Date any Common Stock outstanding on the
Closing Date, the issuance of such shares (or a number of shares of Common Stock
equal to such number of shares) shall not be "ADDITIONAL SHARES OF NONPREFERRED
STOCK." In case at any time or from time to time after the Closing Date, the
Corporation shall (except as hereinafter provided) issue, whether in connection
with the merger of a corporation into the Corporation or otherwise, any
Additional Shares of Nonpreferred Stock for a consideration per share less than
the Current Market Price per share of Common Stock on the Computation Date
(determined as set forth in the last sentence of this Section B.4(d)(iii)), then
each Conversion Price then in effect shall be adjusted to be that number
determined by multiplying such Conversion Price as in effect immediately prior
to such adjustment by a fraction (x) the numerator of which shall be the number
of Common Stock Equivalents outstanding immediately prior to such issuance, plus
the number of shares of Common Stock which the aggregate consideration, if any,
for the total number of such Additional Shares of Nonpreferred Stock so issued
would purchase at the Current Market Price per share of Common Stock and (y) the
denominator of which shall be the number of Common Stock Equivalents outstanding
immediately prior to such issuance plus the number of Common Stock Equivalents
so issued as a result of such transaction. For purposes of the adjustment
provided for in this Section B.4(d)(iii), the numerator and the denominator in
(x) and (y) of the immediately preceding sentence shall be computed on the
assumption that immediately before and after the issuance of the Additional
Shares of Nonpreferred Stock all Convertible Securities and options and warrants
to purchase Convertible Securities outstanding on the Closing Date, had been
fully exercised or converted or exchanged, as the case may be. The provisions
of this Section B.4(d)(iii) shall not apply to any issuance of Additional Shares
of Nonpreferred Stock for which an adjustment is provided under Section
B.4(d)(i). No adjustment of a Conversion Price shall be made under this Section
B.4(d)(iii) upon the issuance of any Additional Shares of Nonpreferred Stock
which are issued (or deemed to be issued) pursuant to the exercise (or grant) of
(i) up to 677,650 shares pursuant to options issued under stock option plans in
effect on the Closing Date or adopted thereafter by the Board of Directors (such
number to be equitably adjusted in the case of any event described in Section
B.4(d)(i) hereof), or (ii) warrants, options or other rights to subscribe for or
purchase any Additional Shares of Nonpreferred Stock or pursuant to the exercise
of any conversion or exchange rights in any Convertible Securities, if an
adjustment in the Conversion Price shall previously have been made upon the
issuance of these warrants, options or other rights or upon the issuance of such
Convertible Securities (or upon the issuance of any warrant, option or other
rights therefor) pursuant to Section B.4(d)(iv) or Section B.4(d)(v). For
purposes of this Section B.4(d)(iii), the "COMPUTATION DATE" shall be the date
on which the Corporation shall issue such Additional Shares of Nonpreferred
Stock; provided, that if the Corporation becomes irrevocably obligated pursuant
--------
to an agreement or instrument to issue such Additional Shares of Nonpreferred
Stock upon the occurrence of an event not within the Corporation's control, and
a period of ninety (90) days or more has elapsed from the date the Corporation
first becomes so obligated and such Additional Shares of Nonpreferred Stock have
not yet been issued and the Corporation's obligation to issue such shares has
not been terminated, then the Computation Date shall be deemed to be the 90th
day following the date the Corporation becomes so obligated; however, if no
Additional Shares of Nonpreferred Stock are issued thereafter as contemplated in
such agreement or instrument, or if fewer such shares are issued than was so
contemplated, in each case prior to the Conversion Date, the Conversion Price
adjustment shall be rescinded
8
<PAGE>
automatically and each Conversion Price shall be readjusted to the Conversion
Price that would have been in effect if only the number of Additional Shares of
Nonpreferred Stock actually issued pursuant to such agreement or instrument had
been issued.
(iv) DISTRIBUTION OF WARRANTS, OPTIONS, CONVERTIBLE SECURITIES OR
------------------------------------------------------------
OTHER RIGHTS. In case at any time or from time to time after the Closing Date,
- ------------
the Corporation shall take a record of the holders of its Nonpreferred Stock for
the purpose of entitling them to receive a distribution of, or shall otherwise
issue, any warrants, options or other rights to subscribe for or purchase any
Additional Shares of Nonpreferred Stock or any Convertible Securities and the
consideration per share for which Additional Shares of Nonpreferred Stock may at
any time thereafter be issuable pursuant to such warrants, options or other
rights or pursuant to the terms of such Convertible Securities shall be less
than the Current Market Price per share of Common Stock on the Computation Date
(determined as set forth in the last sentence of this Section B.4(d)(iv)), then
each Conversion Price then in effect shall be adjusted as provided in the second
sentence of Section B.4(d)(iii). Such adjustment shall be made on the basis
that (I) the consideration per share for which such Additional Shares of
Nonpreferred Stock may be issued equals the quotient resulting from dividing (x)
the maximum number of Additional Shares of Nonpreferred Stock issuable pursuant
to all such warrants, options or other rights or necessary to effect the
conversion or exchange of all such Convertible Securities into (y) the minimum
consideration received and receivable by the Corporation for all such Additional
Shares of Nonpreferred Stock pursuant to such warrants, options or other rights
or pursuant to the terms of such Convertible Securities, (II) the maximum number
of Additional Shares of Nonpreferred Stock issuable pursuant to all such
warrants, options or other rights or necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the Computation Date (determined as set forth in the last sentence of this
Section B.4(d)(iv)), and (III) the aggregate consideration for such maximum
number of Additional Shares of Nonpreferred Stock shall be deemed to be the
minimum consideration received and receivable by the Corporation for the
issuance of such Additional Shares of Nonpreferred Stock pursuant to such
warrants, option or other rights or pursuant to the terms of such Convertible
Securities.
For purposes of this Section B.4(d)(iv), the "COMPUTATION DATE" shall
be the earliest of (xx) the date on which the Corporation shall take a record of
the holders of its Nonpreferred Stock for the purpose of entitling them to
receive any such warrants, options or other right, (yy) the date on which the
Corporation shall otherwise become irrevocably bound to issue such warrants,
options or other rights, and (zz) the date of actual issuance of such warrants,
options or other rights; provided, that if the Corporation becomes irrevocably
--------
obligated pursuant to an agreement or instrument to issue such warrants, options
or other rights upon the occurrence of an event not within the Corporation's
control, and a period of ninety (90) days or more has elapsed from the date the
Corporation first becomes so obligated and such warrants, options or other
rights have not yet been issued and the Corporation's obligation to issue such
warrants, options or other rights has not been terminated, then the Computation
Date shall be deemed to be the 90th day following the date the Corporation
becomes so obligated; however, if no warrants, options or other rights are
issued thereafter as contemplated in such agreement or instrument, or if fewer
such warrants, rights or options are issued than was so contemplated, in each
case prior to the Conversion Date, the Conversion Price adjustment shall be
rescinded automatically and the Conversion Price shall be readjusted to the
Conversion Price that would have been in effect if only the number of warrants,
options or other rights actually issued pursuant to such agreement or instrument
had been issued.
(v) ISSUANCE OF WARRANTS, OPTIONS, CONVERTIBLE SECURITIES OR
--------------------------------------------------------
OTHER RIGHTS. In case at any time or from time to time after the Closing Date,
- ------------
the Corporation shall issue, any warrants, options, or other rights to purchase
shares of Non-Preferred Stock, or any Convertible Securities, and the
consideration per share for which Additional Shares of Nonpreferred Stock may at
any time thereafter be issuable pursuant to the exercise of such warrants,
options or other rights or upon conversion of such Convertible Securities shall
be less than the Current Market Price per share of Common Stock on the
Computation Date (determined as set forth in the last sentence of this Section
B.4(d)(v), then each Conversion Price then in effect shall be adjusted as
provided in the second sentence of Section B.4(d)(iii). Such adjustment shall
be made on the basis that (I) the amount of consideration per share for which
such Additional Shares of Nonpreferred Stock may be issued equals the quotient
resulting from dividing (x) the maximum number of Additional Shares of
Nonpreferred Stock necessary to effect the conversion or exchange of all such
warrants, options, rights, or Convertible Securities, into (y) the minimum
consideration received and to be receivable, if any, by the Corporation upon
issuance of such warrants, options or other rights, or Convertible Securities,
and any additional consideration payable upon the exercise, conversion or
exchange of all such Convertible Securities, (II) the maximum number of all
Additional Shares of Nonpreferred Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the Computation Date (determined as set forth in the last sentence of this
Section B.4(d)(v)), and (III) the aggregate consideration for such maximum
number of Additional Shares of Nonpreferred Stock shall be deemed to be the
minimum consideration received and receivable by the Corporation for the
issuance of such warrants, options, rights or Convertible Securities plus the
additional consideration, if any, received or receivable for such Additional
Shares of Nonpreferred Stock pursuant to the terms of such warrants, options,
rights or Convertible Securities.
9
<PAGE>
For purposes of this Section B.4(d)(v), the "COMPUTATION DATE" shall
be the earliest of (yy) the date on which the Corporation shall become
irrevocably bound to issue such warrants, options or other rights to purchase
Non-Preferred Stock or Convertible Securities, and (zz) the date of actual
issuance of such Preferred Stock, warrants rights, options or Convertible
Securities; provided, that if the Corporation becomes irrevocably obligated
--------
pursuant to an agreement or instrument to issue such Securities upon the
occurrence of an event not within the Corporation's control, and a period of
ninety (90) days or more has elapsed from the date the Corporation first becomes
so obligated and such warrants, options, rights or Convertible Securities have
not yet been issued and the Corporation's obligation to issue such warrants,
options, rights or Convertible Securities has not been terminated, then the
Computation Date shall be deemed to be the 90th day following the date the
Corporation becomes so obligated; however, if no warrants, options, rights or
Convertible Securities are issued thereafter as contemplated in such agreement
or instrument, or if fewer such securities are issued than was so contemplated,
in each case prior to the Conversion Date, the Conversion Price adjustment shall
be rescinded automatically and the Conversion Price shall be readjusted to the
Conversion Price that would have been in effect if only the number of warrants,
options, rights or Convertible Securities actually issued pursuant to such
agreement or instrument had been issued. For purposes of this Section
B.4(d)(v), (A) any warrants, options, rights or Convertible Securities
originally issued to Silicon Valley Bank shall be deemed issued on the day
following the Closing Date, (B) the Current Market Price per share of Common
Stock on the date of issuance of such securities shall be $4.00, and (C) the
Computation Date for such issuance shall be the day following the Closing Date.
No adjustment of a Conversion Price shall be made under this Section B.4(d)(v)
upon the issuance of any Convertible Securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any such adjustment shall previously have been made upon the issuance of such
warrants or other rights pursuant to Section B.4(d)(iv).
(vi) SUPERSEDING ADJUSTMENT OF CONVERSION PRICE. If at any time
------------------------------------------
after any adjustment of the Conversion Price shall have been made pursuant to
Section B.4(d)(iv) or Section B.4(d)(v) on the basis of the issuance of warrants
or other rights or the issuance of other Convertible Securities, or after any
new adjustment of the Conversion Price shall have been made pursuant to this
section,
(1) such warrants, options or rights or the right of
conversion or exchange in such other Convertible Securities shall expire, and a
portion of such warrants, options or rights, or the right of conversion or
exchange in respect of a portion of such other Convertible Securities, as the
case may be, shall not have been exercised, or
(2) the consideration per share, for which Additional Shares
of Nonpreferred Stock are issuable pursuant to such warrants or rights or the
terms of such other Convertible Securities, shall be increased solely by virtue
of provisions therein contained for an automatic increase in such consideration
per share upon the arrival of a specified date or the happening of a specified
event,
then such previous adjustment shall be rescinded and annulled and the Additional
- ----
Shares of Nonpreferred Stock which were deemed to have been issued by virtue of
the computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such warrants, rights
or options or other Convertible Securities on the basis of:
(A) treating the number of Additional Shares of Nonpreferred
Stock, if any, theretofore actually issued or issuable pursuant to the previous
exercise of such warrants, options or rights or such right of conversion or
exchange, as having been issued on the date or dates of such issuance was
determined for purposes of such previous adjustment and for the consideration
actually received therefor, and
(B) treating any such warrants, options or rights or any such
other Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share of such Additional Shares of Nonpreferred Stock issuable
under such warrants or rights or other Convertible Securities,
and, if and to the extent called for by the foregoing provisions of this Section
B.4(d) on the basis aforesaid, a new adjustment of the Conversion Price shall be
made, which new adjustment shall supersede the previous adjustment so rescinded
and annulled.
10
<PAGE>
(vii) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
-----------------------------------------------------
SECTION. The following provisions shall be applicable to the making of
- -------
adjustments of the Conversion Price hereinbefore provided for in this Section
B.4(d):
(1) TREASURY STOCK. Subject to the proviso in the first
--------------
sentence of Section B.4(d)(iii), the sale or other disposition of any issued
shares of Nonpreferred Stock owned or held by or for the account of the
Corporation shall be deemed an issuance thereof for purposes of this Section
B.4(d).
(2) COMPUTATION OF CONSIDERATION. To the extent that any
----------------------------
Additional Shares of Nonpreferred Stock or any Convertible Securities or any
warrants, options, or other rights to subscribe for or purchase any Additional
Shares of Nonpreferred Stock or any Convertible Securities shall be issued
solely for cash consideration, the consideration received by the Corporation
therefor shall be deemed to be the amount of cash received by the Corporation
therefor, without reduction for expenses, commissions or discounts paid or
incurred by the Corporation in connection with such transaction, in any such
case excluding any amounts paid or receivable for accrued interest or accrued
dividends. To the extent that such issuance shall be for a consideration other
than solely for cash, then, except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined pursuant to the
Valuation Procedure. The consideration for any Additional Shares of Nonpreferred
Stock issued pursuant to any warrants, options or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by the
Corporation upon the exercise of such warrants, options or other rights, plus
the additional consideration payable to the Corporation for issuing such
warrants, options or other rights. The consideration for any Additional Shares
of Nonpreferred Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by the Corporation
for issuing any warrants or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the
Corporation in respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Corporation upon the exercise of the right of conversion or exchange in such
Convertible Securities.
(3) WHEN ADJUSTMENTS TO BE MADE. The adjustments required
---------------------------
by the preceding subsections of this Section B.4(d) shall be made whenever and
as often as any specified event requiring an adjustment shall occur, except that
no adjustment of the Conversion Price that would otherwise be required shall be
made (except in the case of a subdivision or combination of shares of the
Nonpreferred Stock, as provided for in Section B.4.(d)(i)) unless and until such
adjustment, either by itself or with other adjustments not previously made, adds
or subtracts at least one-tenth of one percent (.001) to the Conversion Price,
as determined in good faith by the Board of Directors of the Corporation. Any
adjustment representing a change of less than such minimum amount shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Section B.4(d) and not previously made, would
result in a minimum adjustment. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the date of
its occurrence. All calculations made under this subsection shall be made to the
nearest one hundredths of one cent.
(4) FRACTIONAL INTERESTS. In computing adjustments under
--------------------
this Section B.4(d), fractional interests in Nonpreferred Stock shall be taken
into account to the nearest one-thousandth of a share.
(5) WHEN ADJUSTMENT NOT REQUIRED. If the Corporation shall
----------------------------
take a record of the holders of its Nonpreferred Stock for the purpose of
entitling them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution thereof to
shareholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then (A) thereafter no adjustment
shall be required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled or (B) in the
event that such adjustments cannot be rescinded or annulled as a result of the
conversion of the Preferred Stock after the taking of such record occurs, in
lieu of such rescission or annulment of the adjustment, the Corporation shall
have the option to purchase the number of shares of Common Stock from each
former holder of Preferred Stock who had converted after such record date equal
to the difference between (x) the number of shares of Common Stock which such
holder had received upon conversion after such record date and (y) the number of
shares of Common Stock which such holder would have received on conversion had
such adjustment been annulled or rescinded prior to conversion. The purchase
price per share of such Common Stock shall be the Fair Market Value per share.
(e) NO IMPAIRMENT. Other than in connection with an amendment of
-------------
this Restated Certificate approved by holders of the requisite number of shares
(including holders of the Preferred Stock), the Corporation will not through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other
11
<PAGE>
voluntary action, 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 B.4 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 Preferred Stock against
impairment; provided, however, that nothing in this Section B.4(e) shall prevent
-------- -------
the Corporation from effecting any Reorganization or taking any action that is
either (i) approved by the holders of Preferred Stock as required by this
Restated Certificate, or (ii) not expressly prohibited by this Restated
Certificate and is approved in good faith by the Board of Directors of the
Corporation provided that other consequences of a Reorganization shall
nonetheless be effective. Without limiting the generality of the foregoing, the
Corporation (x) will not permit the par value of any shares of stock at the time
receivable upon the conversion of the Preferred Stock to exceed the Conversion
Price then in effect, (y) will take all such action as may be necessary or
appropriate in order that the Corporation may validly and legally issue fully
paid nonassessable shares of stock on the conversion of the Preferred Stock, and
(z) will not take any action which results in any adjustment of the Conversion
Price if the total number of shares of Series B Common Stock issuable after the
action upon the conversion of all the Preferred Stock will exceed the total
number of shares of Series B Common Stock then authorized by this Restated
Certificate and available for the purpose of issue upon such conversion.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section B.4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
the Preferred Stock a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (i) the consideration received or to be received
by the Corporation for any Additional Shares of Nonpreferred Stock issued or
sold or deemed to have been issued, (ii) the number of shares of Nonpreferred
Stock then outstanding or deemed to be outstanding, and (iii) the Conversion
Price in effect immediately prior to such issue or sale and as adjusted and
readjusted on account thereof, showing how it was calculated. The Corporation
shall, as promptly as practicable following its receipt of the written request,
but in any event within five Business Days after receipt of such written
request, of any holder of the Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (aa) the Conversion Price at the
time in effect, showing how it was calculated and (bb) the number of shares of
Series B Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Preferred Stock.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to each holder of the Preferred Stock at least ten days prior to the Record
Date (unless a shorter period is consented to by the Designated Director), a
notice specifying the Record Date and the purpose of such Record Date.
(h) SERIES B COMMON STOCK RESERVED. The Corporation shall at all
------------------------------
times reserve and keep available out of its authorized but unissued Series B
Common Stock such number of shares of Series B Common Stock as shall from time
to time be sufficient to effect conversion of all shares of Preferred Stock into
shares of Series B Common Stock (the "RESERVED SERIES B COMMON SHARES").
C. DIRECTORS AND VOTING RIGHTS.
---------------------------
1. NUMBER OF DIRECTORS. The Board of Directors shall consist of
-------------------
five (5) directors. Of the directors, four (4) shall be designated as the
"COMMON DIRECTORS" and one (1) shall be designated as the "DESIGNATED DIRECTOR."
2. ELECTION OF DIRECTORS. Except as may otherwise be provided in
---------------------
Section D.2 hereof or by law, so long as shares of Preferred Stock equal to not
less than 60% of the number of shares of Preferred Stock issued on the Closing
Date are outstanding, directors shall be elected as follows:
(a) COMMON DIRECTORS. The holders of the Series A Common Stock,
----------------
voting as a single class and to the exclusion of the holders of the Series B
Common Stock and Preferred Stock, shall have the right to elect the Common
Directors. Only the holders of shares of Series A Common Stock shall have the
right to elect the Common Directors. Only the holders of shares of Series A
Common Stock shall have the right to remove the Common Directors or to fill a
vacancy caused by resignation, removal or death of a Common Director.
12
<PAGE>
(b) DESIGNATED DIRECTOR. The holders of the Preferred Stock,
-------------------
voting as a single class and to the exclusion of the holders of the Common
Stock, shall have the right to elect the Designated Director. Only the holders
of shares of Preferred Stock shall have the right to remove a Designated
Director or to fill a vacancy caused by the resignation, removal or death of a
Designated Director.
(c) The holders of Series B Common Stock will have no right to
vote for the election of directors.
3. NUMBER OF VOTES. When voting on questions other than the
---------------
election or removal of directors:
(a) SERIES A COMMON STOCK. Each holder of shares of Series A
---------------------
Common Stock shall be entitled to a number of votes equal to the number of
shares of Series A Common Stock held by such holder.
(b) SERIES B COMMON STOCK. The holders of Series B Common Stock
---------------------
shall not, by virtue of ownership of such Series B Common Stock, possess any
voting power, except as otherwise required herein or by the provisions of
applicable law, in which event each holder of shares of Series B Common Stock
shall be entitled to a number of votes equal to the number of shares of Series B
Common Stock held by such holder.
(c) PREFERRED STOCK. The holders of Preferred Stock shall not, by
---------------
virtue of ownership of such Preferred Stock, possess any voting power, except as
otherwise required herein or by the provisions of applicable law. In the event
any vote of holders of Preferred Stock shall be taken for any purpose, each
share of Preferred Stock shall, have one (1) vote per share.
D. EVENTS OF NONCOMPLIANCE.
-----------------------
1. DEFINITION.
----------
(a) An Event of Noncompliance shall be deemed to have occurred if:
(i) the Corporation fails to pay on their respective Dividend
Reference Dates, and there remains unpaid at any one time, two dividend
payments, whether or not consecutive, with respect to the Preferred Stock;
(ii) the Corporation fails for any reason to redeem Preferred
Stock as and when required pursuant to any paragraph of Section B.3; or
(iii) upon written notice given to the Corporation by the
Majority Preferred Stockholders after occurrence of (x) an Event of Default
under the Purchase Agreement, or (y) a violation of Section E of this Article
FOUR.
(b) The existence or continuation of any Event of Noncompliance
shall be irrespective of whether such event or the underlying facts shall have
come about voluntarily or involuntarily or shall be beyond the Corporation's
control or shall have come about or been effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body, or
because of Sections B.1(g) or B.3(e) hereof.
2. CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
---------------------------------------
(a) If and whenever any Event of Noncompliance shall occur, then
and thereafter the holders of the Preferred Stock, until divested of such right
as hereinafter provided, shall be entitled, voting as a single class with each
share entitled to one vote, at a meeting called pursuant to Section D.2(d)
hereof, to elect the smallest number of directors which shall constitute a
majority of the authorized number of directors of the Corporation, and the
holders of Series A Common Stock, voting as a single class, shall be entitled to
elect the remaining members of the Board of Directors. Upon the election by the
holders of Preferred Stock of a majority of the directors, the terms of office
of all persons who were theretofore directors of the Corporation shall forthwith
terminate, whether or not the holders of the Series A Common Stock shall then
have elected the remaining directors of the Corporation.
13
<PAGE>
(b) Any director elected by the holders of the Preferred Stock
voting as a class under this Section D.2 may be removed and any vacancy on the
Board of Directors created by such removal or by the death, resignation or
inability to serve of any such director may be filled by the vote or written
consent of the holders of the Preferred Stock; and any such vacancy created
otherwise than by removal may be filled by a majority of the remaining directors
so elected.
(c) At such time as all Events of Noncompliance are cured or
eliminated and written notice thereof is given to such directors and the holders
of the Preferred Stock, the holders of the Preferred Stock shall be divested of
the voting rights specified in this Section D.2 with respect to such cured or
eliminated Events of Noncompliance. These voting rights shall again accrue to
the holders of Preferred Stock as and when provided in this Section D.2. Upon
the termination of any such voting rights as hereinabove provided, the Board of
Directors shall call a special meeting of the shareholders at which all
directors will be elected, and the terms of office of all persons who are then
directors of the Corporation shall terminate immediately upon the election of
their successors.
(d) At any time when such special voting power shall be vested in
the holders of the Preferred Stock as provided in this Section D.2, a proper
officer of the Corporation shall, upon the written request of the holders of
record of a majority of the outstanding shares of Preferred Stock addressed to
the Secretary of the Corporation, call a special meeting of the shareholders.
Such meeting shall be held at the earliest practicable date at the principal
office of the Corporation, as shall be designated by such officer and specified
in the notice of such meeting. At any such meeting, or at any other meeting held
while the holders of the Preferred Stock have the voting power described in this
Section D.2, unless otherwise provided by law, the holders of a majority of the
Preferred Stock, present in person or by proxy, shall be sufficient to
constitute a quorum for the election of directors as herein provided. At such
meeting or, if no such special meeting shall have been called, then at the next
annual meeting of the shareholders, the holders of Preferred Stock shall be
entitled to elect the smallest number of directors which shall constitute a
majority of the directors of the Corporation, and the holders of the Common
Stock shall be entitled to elect the remaining members of the Board of
Directors. If such meeting shall not be called by a proper officer of the
Corporation within 20 days after personal service of said written request upon
the Secretary of the Corporation or within 20 days after mailing the same within
the United States of America, by certified mail addressed to the Secretary of
the Corporation at its principal office, then the holders of record of a
majority of the outstanding shares of Preferred Stock may designate in writing
one of their number to call such meeting at the expense of the Corporation, and
such meeting may be called by such person so designated upon the notice required
for annual meetings of shareholders and shall be held at the principal office of
the Corporation. Any holder of Preferred Stock so designated shall have access
to the stock books of the Corporation for the purpose of causing a meeting of
shareholders to be called pursuant to these provisions.
E. SPECIAL APPROVAL RIGHTS.
-----------------------
The Corporation covenants and agrees that, so long as a number of
shares of Preferred Stock equal to not less than 60% of the number of shares of
Preferred Stock issued on the Closing Date are outstanding (or, after June 30,
2002, so long as shares of Preferred Stock representing at least 25% of the
number of shares of Preferred Stock issued on the Closing Date remain
outstanding), unless prior thereto, or concurrently therewith, the Corporation
shall have irrevocably exercised its right to redeem all Preferred Stock
pursuant to Section B.3(d) by giving notice pursuant to Section B.3(f), or the
Majority Preferred Stockholders shall otherwise consent in writing, it will not:
1. RESTRICTED PAYMENTS. Declare or pay dividends upon any capital
-------------------
stock now or hereafter outstanding or return any capital to any of its
shareholders or make any other distribution, payment or delivery of property or
cash to such shareholders in their capacities as such, or redeem, retire,
purchase or acquire, directly or indirectly, any shares of its stock now or
hereafter outstanding, except (i) the Corporation may pay PIK Dividends and Cash
Dividends on the Preferred Stock in accordance with this Restated Certificate
and the Shareholders Agreement, and (ii) the Corporation may redeem or
repurchase shares of its capital stock pursuant to this Restated Certificate, or
as permitted by the Shareholders Agreement.
2. ISSUANCE OF CERTAIN STOCK. Enter into any agreement, other than
-------------------------
the Purchase Agreement, the Shareholders Agreement or the Employee Stock Option
Plan, restricting in any manner the sale or transfer of the Corporation's or any
Subsidiary's stock of any class; or authorize or issue any additional shares of
stock of any class, or series which is senior to, or pari passu with, the Series
A Preferred Stock or the Series B Preferred Stock with respect to the right to
receive dividends, to receive liquidation preferences or with respect to the
amount payable upon redemption, except shares of Series B Preferred Stock issued
as PIK Dividends on shares of Series A Preferred Stock or Series B Preferred
Stock.
14
<PAGE>
3. CHANGES IN CHARTER DOCUMENTS. Amend or modify at any time this
----------------------------
Restated Certificate from the form thereof in effect immediately following the
Closing Date if such amendment affects the rights of the holders of the
Preferred Stock of any series.
4. ORGANIC CHANGE; PUBLIC OFFERING. Enter into any contract,
-------------------------------
agreement, partnership, or joint venture or in any other manner commit the
Corporation to engage in any transaction which would constitute an Organic
Change, or effectuate a Public Offering other than a Qualified Public Offering.
F. GENERAL.
-------
1. NON-ASSESSABLE SHARES. The Preferred Stock and the Common Stock
---------------------
shall be non-assessable shares.
2. CLOSING OF BOOKS. The Corporation will not close its books
----------------
against the transfer of any Preferred Stock or Common Stock, except in
connection with a Record Date.
3. REGISTRATION OF TRANSFER. The Corporation shall keep at its
------------------------
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of Preferred Stock and Common Stock. Upon the
surrender of any certificate representing Preferred Stock or Common Stock at
such place, the Corporation shall, at the request of the registered holder of
such certificate, execute and deliver a new certificate or certificates in
exchange therefor representing in the aggregate the number of shares of
Preferred Stock or Common Stock, as the case may be, represented by the
surrendered certificate (and the Corporation forthwith shall cancel such
surrendered certificate), subject to the requirements of applicable securities
laws and receipt by the Corporation of an opinion of counsel for such holder,
which opinion of counsel shall be reasonably satisfactory to the Corporation and
its counsel, addressed to the Corporation stating that any sale, transfer,
assignment or hypothecation to be effected or registered by the issuance of such
new certificate or certificates is exempt from or made in accordance with the
registration and prospectus delivery requirements of the 1933 Act and exempt
from or made in accordance with the qualification or registration requirements
of all applicable state securities laws; such opinion shall state that it may be
relied upon by the Corporation's transfer agent and counsel. Each such new
certificate shall be registered in such name and shall represent such number of
shares of Preferred Stock or Common Stock as shall be requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate; and dividends shall be calculated cumulatively on a
daily basis on the Preferred Stock represented by such new certificate from the
date of issuance or, if later, the date to which dividends have been fully paid
on the Preferred Stock represented by the surrendered certificate at the rate
and in the manner applicable to the shares represented by such surrendered
certificate. The issuance of new certificates shall be made without charge to
the holders of the surrendered certificates for any issuance tax in respect
thereof or other cost incurred by the Corporation in connection with such
issuance; provided, however, that the Corporation shall not be required to pay
-------- -------
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of the
surrendered certificate.
4. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to
-----------
the Corporation (an affidavit of the registered holder, without bond, shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more Preferred Stock or Common Stock and, in
the case of loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the registered holder is a
financial institution, its own agreement of indemnity shall be satisfactory),
or, in the case of mutilation, upon surrender of such certificate, the
Corporation shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the number of shares of
Preferred Stock or Common Stock, as the case may be, represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate, on which dividends shall be
calculated cumulatively on a daily basis from the date to which dividends have
been fully paid on such lost, stolen, destroyed or mutilated certificate at the
rate and in the manner applicable to such certificate.
5. DEFINITIONS. The following terms shall have the following
-----------
meanings, which meanings shall be equally applicable to the singular and plural
forms of such terms:
"ADDITIONAL SHARES OF NON-PREFERRED STOCK" shall have the meaning set
forth in Section B.4(d) herein.
"AFFILIATE" means, with respect to the Corporation, any Person (other
than a Purchaser) which directly or indirectly controls, is controlled by, or is
under common control with the Corporation.
15
<PAGE>
"AUTHORIZED OFFICER" means the President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer or Secretary of the
Corporation.
"AVAILABLE FUNDS" means the amount (i) for the purposes of Section B.1
hereof, permitted to be paid as dividends on the Preferred Stock under the
Delaware General Corporation Law, and (ii) for the purposes of Section B.3
hereof, legally available for the redemption of the Preferred Stock under such
law.
"BIANCO ENTITIES" means William A. Bianco, Jr., Marie R. Bianco, The
Bianco Family 1991 Trust dated February 1, 1991, or any other trust created by
The Bianco Family 1991 Trust dated February 1, 1991 for the benefit of William
A. Bianco Jr. and/or Marie R. Bianco.
"BT CAPITAL" means BT Capital Partners, Inc., a Delaware corporation.
"BUSINESS DAY" means any day which is not a Saturday or a Sunday or a
day on which banks are required or permitted to close under the laws of the
State of California.
"CASH DIVIDEND" means the cash dividend of the Preferred Stock.
"CHANGE IN OWNERSHIP" shall have the meaning set forth in the Purchase
Agreement.
"CLOSING DATE" means March 31, 1996.
"CLOSING PRICES" shall have the meaning set forth in Section B.4(d)
herein.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON DIRECTORS" shall have the meaning set forth in Section C.1
herein.
"COMMON STOCK" means either the Series A Common Stock, or the Series B
Common Stock, of the Corporation.
"COMMON STOCK EQUIVALENTS" shall have the meaning set forth in the
Purchase Agreement.
"COMPUTATION DATE" shall have the meanings set forth in Section B.4(c)
herein.
"CONSOLIDATED" and "CONSOLIDATED," when used in reference to any
amount, means such amount determined on a consolidated or combined basis, as the
case may be, in accordance with GAAP, after the elimination of intercompany
items.
"CONTROL," "CONTROLLED BY" or "UNDER COMMON CONTROL WITH" means direct
or indirect possession of the power to direct or cause the direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise).
"CONVERSION DATE" shall have the meanings set forth in Section B.4(b)
herein.
"CONVERSION PRICE" shall mean, as applicable, the Series A Conversion
Price and/or the Series B Conversion Price.
"CONVERTIBLE SECURITIES" shall have the meaning set forth in Section
B.4(d) herein.
"CORPORATION" means The KSI Group, Inc., a Delaware corporation.
"CURRENT MARKET PRICE" shall have the meaning set forth in Section
B.4(d) herein.
"DEFAULT RATE" means for the period commencing on the date following
the Dividend Reference Date for any missed dividend and until the first
anniversary date of such Dividend Reference Date, one percent (1%) per annum
above
16
<PAGE>
the then applicable Dividend Rate; and thereafter an additional one percent (1%)
per annum commencing on each subsequent anniversary date of such Dividend
Reference Date.
"DESIGNATED DIRECTOR" shall mean the director designated and elected
by the holders of the Preferred Stock.
"DIVIDEND RATE" means the applicable rate of dividends payable on the
Preferred Stock as specified in Section B.1(c).
"DIVIDEND REFERENCE DATES" means June 30, 1996 and the last day of
each September, December, March and June thereafter (or, if any such date is not
a Business Day, then the immediately preceding Business Day) on which dividends
are to be paid on Preferred Stock.
"EMPLOYEE STOCK OPTION PLAN" shall have the meaning set forth in the
Purchase Agreement.
"EVENT OF DEFAULT" shall have the meaning set forth in the Purchase
Agreement.
"EXECUTIVE OFFICER" shall have the meaning set forth in the Purchase
Agreement.
"EVENT OF NONCOMPLIANCE" means any of the events listed in Section D.1
hereof.
"FISCAL QUARTER" means a fiscal quarter of the Corporation ending on
or about the last day of each of March, June, September and December of each
year.
"GAAP" means generally accepted accounting principles in the United
States, as in effect on the date of determination, consistently applied.
"JUNIOR SECURITY" means any equity security of any kind which the
Corporation shall at any time issue or be authorized to issue other than the
Preferred Stock, including, without limitation, the Common Stock.
"LIQUIDATION VALUE" of any share of Preferred Stock as of any
particular date means $4.00 per share, plus, (x) in each case any dividends
----
(calculated pursuant to Section B.1(c)) accrued with respect to such share of
Preferred Stock which have not been paid on or before the date of determination
and, in the event of any liquidation, dissolution or winding up of the
Corporation or the redemption of any share of Preferred Stock, unpaid dividends
on such share of Preferred Stock to the payment date under Section B.2, or to
the Redemption Date, as the case may be, calculated cumulatively on a daily
basis from the next preceding Dividend Reference Date to the close of business
on such payment date or Redemption Date, and plus (y) subject to Section B.1(h)
hereof, from and after July 1, 2002, an amount equal to ten percent (10%) of the
Liquidation Value in effect on June 30 of such year, and plus (z) subject to
Section B.1(h) hereof, on each July 1 thereafter, commencing July 1, 2003, an
additional ten percent (10%) per annum of Liquidation Value in effect on June 30
of such year.
"LIQUIDITY EVENT" means the effectiveness of a registration statement
filed under the 1933 Act covering a Qualified Public Offering.
"MAJORITY PREFERRED STOCKHOLDERS" means holders of more than fifty
percent (50%) of the aggregate number of Preferred Stock then outstanding;
provided, however, that Preferred Stock owned by the Corporation, a Subsidiary,
- -------- -------
or a Person controlled by the Corporation shall be disregarded and deemed not
outstanding for this purpose.
"NASDAQ" shall have the meaning set forth in Section B.4(c) herein.
"NON-PREFERRED STOCK" shall have the meaning set forth in Section
B.4(d) herein.
"ORGANIC CHANGE" shall have the meaning set forth in the Purchase
Agreement.
"PERSON" shall mean an individual, partnership, corporation,
government or agency or political subdivision or any agency, department or
instrumentality thereof.
"PIK DIVIDEND" has the meaning set forth in Section B.1(a)(i) herein.
17
<PAGE>
"PREFERRED STOCK" means, generically, the Series A Preferred Stock and
the Series B Preferred Stock.
"PUBLIC OFFERING" means a completed public offering by the Corporation
of newly issued shares of Common Stock registered under the 1933 Act.
"PURCHASE AGREEMENT" means the Stock Purchase Agreement, dated as of
May 31, 1995 between Kinetic Systems, Inc., a California corporation, and the
Purchaser.
"PURCHASER" means BT Capital.
"QUALIFIED PUBLIC OFFERING" means a Public Offering effected pursuant
to firm underwriting agreement with an underwriter of recognized national or
regional standing approved in writing by the Majority Preferred Stockholders,
such approval not to be unreasonably withheld.
"RECORD DATE" means the date on which a holder of Preferred Stock must
officially own shares (i) to receive a dividend, (ii) to vote on any matter,
(iii) to receive any distribution or to receive the Redemption Price, or (iv) to
receive notice of certain events, which in each case shall be the first Business
Day prior to the date of the event for which a Record Date is determined, unless
otherwise required by applicable law or fixed by the Board of Directors.
"REDEMPTION DATE," as to any share of Preferred Stock, means the date
specified in the notice of redemption in the case of a redemption of such share
of Preferred Stock pursuant to Section B.3(d) or Section B.3(e); provided,
--------
however, that for purposes of Section B.3(d) the Redemption Date shall be the
- -------
date (if later) on which the applicable Redemption Price is actually paid to the
holder of such share of Preferred Stock or deposited in trust for the benefit of
such holder pursuant to Section B.3(g).
"REDEMPTION EVENT" shall mean the closing date for (i) the sale or
other disposition of all or substantially all of the assets of the Corporation,
(ii) any transaction of merger or consolidation which includes the Corporation
or any sale of equity securities by the shareholders whereby immediately
following the consummation of such transactions, the shareholders of the
Corporation before such transactions do not own or control at least a majority
of the outstanding equity securities of the surviving corporation, or (iii) the
occurrence of a Change in Ownership.
"REDEMPTION PRICE" as to any share of Preferred Stock means the
Liquidation Value of such share of Preferred Stock.
"REORGANIZATION" means (1) any consolidation or merger of the
Corporation with or into any other corporation or other entity, as a result of
which the holders of the Common Stock will receive cash, securities of another
corporation, property or any combination thereof, for the shares of Common Stock
of the Corporation; or (1) a sale or other disposition of all or substantially
all of the assets of the Corporation.
"RESERVED SERIES A COMMON SHARES" shall have the meaning set forth in
Section A.3(d) herein.
"RESERVED SERIES B COMMON SHARES" shall have the meaning set forth in
Section B.4(g) herein.
"RESTATED CERTIFICATE" means this First Amended and Restated
Certificate of Incorporation of the Corporation.
"SECURITIES" means the Preferred Stock and the Common Stock issued or
to be issued upon the conversion of the Preferred Stock.
"SERIES A CONVERSION PRICE" shall have the meaning set forth in
Section B.4(a) herein.
"SERIES B CONVERSION PRICE" shall have the meaning set forth in
Section B.4(b) herein.
"SHAREHOLDERS AGREEMENT" means the Shareholders Agreement, dated as of
April 1, 1996 among the Corporation and the holders of the Securities.
"SHIMMON" means David J. Shimmon.
18
<PAGE>
"SHIMMON ENTITIES" means Shimmon and any trust created for the benefit
of Shimmon, his siblings, ancestors, descendants or spouse.
"SUBSIDIARY" means each corporation or other entity of which the
Corporation owns, directly or indirectly, more than 50% of (i) the stock of any
class having power under ordinary circumstance to vote for the election of
directors or (ii) the capital or equity, however, named.
"1933 ACT" means the Securities Act of 1933, as amended and as may be
amended from time to time, including the rules and regulations thereunder.
"1995 COMMON STOCK PER SHARE VALUE" means $8.02.
6. COPIES OF DOCUMENTS. The Corporation shall at all times maintain
-------------------
at its principal executive office copies of the Purchase Agreement and the
Shareholders Agreement referred to herein and shall provide copies thereof to
its stockholders upon request and without charge.
7. AMENDMENT AND MODIFICATION.
--------------------------
(a) No amendment or modification of any provision hereof (or of
the percentage of Preferred Stock required to approve such amendment or
modification) shall be binding or effective without the affirmative vote, or
prior written consent, of the holders of more than 50% of the Preferred Stock,
and 66 2/3% of the Series A Common Stock outstanding at the time such change
shall be made.
(b) No amendment or modification of any provision hereof shall
extend to or affect any obligation not expressly amended or modified or impair
any right consequent thereon. No course of dealing, and no failure to exercise
or delay in exercising any right, remedy, power or privilege hereunder shall
operate as an amendment or modification of any provision of this Restated
Certificate.
FIVE: This Corporation is to have perpetual existence.
----
SIX: Elections of directors need not be by written ballot unless a
---
stockholder demands election by written ballot at the meeting and before voting
begins.
SEVEN: In furtherance and not in limitation of the powers conferred by
-----
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the Corporation.
EIGHT: To the fullest extent permitted by the Delaware General Corporation
-----
Law as the same exists or as it may hereafter be amended, no director of this
Corporation shall be personally liable to this Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article with respect to any matter
occurring or any cause of action, suit, or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision.
NINE: Meetings of stockholders may be held within or without the State of
----
Delaware, as the Bylaws may provide. The books of this Corporation may be kept
(subject to any provision contained in the Delaware General Corporation Law)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of this
Corporation.
TEN: This Corporation reserves the right to amend, alter, change, or
---
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
19
<PAGE>
CERTIFICATE OF INCORPORATION
OF
KINETIC SYSTEMS GROUP, INC.
ONE: The name of this Corporation is Kinetic Systems Group, Inc.
---
TWO: The address of the Corporation's registered office in the State
---
of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County
of New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.
THREE: The purpose of this Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOUR: This Corporation is authorized to issue two classes of stock,
----
common stock, par value $.01 per share ("Common Stock"), and preferred stock,
par value $.01 per share ("Preferred Stock"), and the total number of authorized
shares shall be Thirty-Six Million (36,000,000) shares.
A. Common Stock. The Corporation's Common Stock shall consist of Thirty
------------
Million (30,000,000) shares, par value $.01 per share. Twenty Million
(20,000,000) shares of Common Stock are hereby designated as "Series A Common
Stock" and Ten Million (10,000,000) shares of Common Stock are hereby designated
as "Series B Common Stock". The relative rights, preferences, privileges and
restrictions on the Series A Common Stock and the Series B Common Stock shall be
as set forth below. Except as expressly set forth below, there shall be no
difference between shares of Series A Common Stock and Series B Common Stock.
1. Dividends and Distributions. The holders of shares of Common
---------------------------
Stock shall be entitled to the payment of dividends when and as declared by the
Board of Directors out of funds legally available therefor, after payment of
preferential dividends on the Preferred Stock. When and as dividends or other
distributions are declared by the Board of Directors on shares of either series
of Common Stock, such dividends or other distributions shall be paid in equal
amounts per share on all shares of the Series A Common Stock and the Series B
Common Stock. Dividends may be in the form of cash, property or Common Stock;
provided, however, that dividends in the form of Common Stock shall be payable
- -------- -------
on the Series A Common Stock shall be payable on the Series A Common Stock only
in shares of Series A Common Stock and dividends in the form of Common Stock on
the Series B Common Stock shall be payable only in shares of Series B Common
Stock.
2. Liquidation, Dissolution or Winding Up. Subject to the rights of
--------------------------------------
holders of the Preferred Stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
shares of Series A Common Stock and Series B Common Stock (without distinction)
shall be entitled, on a pari passu basis, to all remaining assets of the
Corporation available for distribution to its stockholders.
3. Conversion.
----------
(a) Mandatory Conversion. Immediately after
--------------------
(i) completion of a transaction in which the Corporation
sells or otherwise disposes of all or substantially all of its assets; or
1
<PAGE>
(ii) the merger of the Corporation with or into any other
corporation (other than a wholly owned subsidiary of the Corporation) if as a
result of such merger the holders of the Common Stock Equivalents of the
Corporation outstanding immediately prior to such transaction, or series of
transactions, own less than 50% of the securities of the surviving corporation
which have full voting rights;
(iii) upon the closing of the issuance and sale of shares of
Series A Common Stock by the Corporation in a Qualified Public Offering, or
(iv) the ninetieth (90th) day following the date that the
Bianco Entities and the Shimmon Entities in the aggregate fail to own of record
a majority of the outstanding shares of Series A Common Stock.
each share of outstanding Series B Common Stock will be automatically converted
into one share of Series A Common Stock without any notice or authorization by
the holder thereof and without the payment of any additional consideration by
the holder thereof. Once the shares of Series B Common Stock have been
converted to shares of Series A Common Stock as contemplated above, the shares
shall not be reconverted to Series B Common Stock, notwithstanding that at some
subsequent date the Bianco Entities and Shimmon subsequently reacquire a
majority interest of the Corporation's Common Stock Equivalents.
(b) Adjustment. If the Corporation shall in any manner subdivide
----------
or combine the outstanding shares of either the Series A Common Stock or the
Series B Common Stock, the outstanding shares of the other class will be
proportionately subdivided or combined.
(c) Optional Conversion. Shares of Series B Common Stock shall
-------------------
be convertible into shares of Series A Common Stock at the option of the holder
at any time after a Public Offering has occurred.
(d) Series A Common Stock Reserved. The Corporation shall at all
------------------------------
times reserve and keep available out of its authorized but unissued Series A
Common Stock such number of shares of Series A Common Stock as shall from time
to time be sufficient to effect conversion of all shares of Series B Common
Stock into shares of Series A Common Stock (the "Reserved Series A Common
Shares").
B. Preferred Stock. The Preferred Stock shall consist of Six Million
---------------
(6,000,000) shares. Three Million (3,000,000) shares of Preferred Stock are
hereby designated as "Series A Preferred Stock" and One Million (1,000,000)
shares of Preferred Stock are hereby designated as "Series B Preferred Stock".
The rights, preferences, privileges and restrictions and other matters related
to the Series A Preferred Stock and the Series B Preferred Stock (which are
collectively referred to herein as the "Preferred Shares" and individually as a
"Preferred Share") shall be as set forth below. Except as expressly set forth
below, there shall be no difference between Series A Preferred Stock and Series
B Preferred Stock. The Board of Directors shall, subject to the provisions of
Section E.2 hereof have the right to designate one or more additional series of
Preferred Stock and to fix and determine the rights, privileges, preferences,
restrictions and limitations thereof upon filing a certificate of determination
with respect thereto in accordance with applicable law.
1. Dividends.
---------
(a) Dividend Obligation. The holder of each share of Preferred
-------------------
Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of assets of the Corporation available for the
payment of dividends under the laws of the State of
2
<PAGE>
California, but prior in right of payment to any dividends payable on any Junior
Security, dividends at the times and in the amounts provided for in this Section
B.1(a), payable as follows:
(i) Beginning on the date of issue and continuing each
Fiscal Quarter through and including June 30, 1997, the Corporation shall accrue
a dividend on the Preferred Stock cumulatively on a daily basis (but compounded
on a quarterly basis), and shall pay the dividend on each Dividend Reference
Date on each of the Series A Preferred Stock and the Series B Preferred Stock in
fully paid and non-assessable whole share, of Series B Preferred Stock at a rate
equal to one (1) share of Series B Preferred Stock for each $4.00 of accrued
dividend on the Preferred Stock (a "PIK Dividend"). The Corporation shall issue
to such holders of Preferred Stock a certificate or certificates representing
the number of shares of Series B Preferred Stock to which such holders shall be
entitled on each such Dividend Reference Date and cause the same to be mailed to
each such holder within five (5) business days after such Dividend Reference
Date. Any person or persons entitled to receive such Series B Preferred Stock
shall be treated for all purposes as the record holder or holders of such Series
B Preferred Stock on such Dividend Reference Date. Upon delivery of the
certificate for such Series B Preferred Stock, the amount of dividends so paid
shall be deemed to have been paid in full by the Corporation. If a PIK Dividend
will result in the issuance to any holder of a fractional share of Series B
Preferred Stock, in lieu of issuing such fractional share the Corporation shall
round up or down, as appropriate, to the nearest whole share of Series B
Preferred Stock.
(ii) Beginning July 1, 1997, the Corporation shall pay on
each Dividend Reference Date the dividend on the Preferred Stock in cash from
Available Funds (a "Cash Dividend"). The Cash Dividends shall be paid on the
payment date by wire transfer to each holder of Preferred Stock of record on the
Record Date for such dividend, at such holder's address for receipt of such wire
transfer if and to the extent known to the Secretary of the Corporation, and if
not so known, by deposit in the United States mail of the Corporation's check
for the amount thereof, addressed to the holder of record as such address as
appears on the Corporation's stockholder records, at least five (5) days prior
to the applicable Dividend Reference Date or otherwise transferring funds to
such holder in accordance with that holder's reasonable written instructions, in
either case so as to be received by such holder on the due date of such
dividend.
(b) Accrual of Dividends. Dividends on each share of Preferred
--------------------
Stock shall accrue cumulatively on a daily basis at the rate and in the manner
prescribed herein from and including the date of issuance of such Preferred
Stock to and including the date on which the Redemption Price or Liquidation
Value of such Preferred Stock shall have been paid, whether or not such
dividends shall have been declared and whether or not there shall be (at the
time such dividends accrue or become payable or at any other time) profits,
surplus or other funds of the Corporation legally available for the payment of
such dividends. For purposes hereof, the date on which the Corporation shall
initially issue any Preferred Stock shall be deemed to be its "date of issuance"
regardless of the number of times transfer of such Preferred Stock shall be
made on the stock records maintained by or for the Corporation and regardless of
the number of certificates which may be issued to evidence such Preferred Stock
(whether by reason of transfer of such Preferred Stock or for any other reason).
(c) Dividend Rate. Dividends shall accrue cumulatively on a
-------------
daily basis at a rate of eight (8%) per annum of the Liquidation Value thereof
until June 30, 2002. From and after July 1, 2002, dividends shall accrue
cumulatively on a daily basis at the rate of eight and eight-tenths percent
(8.8%) per annum of the Liquidation Value thereof, such rate increasing on July
1, 2003, to nine and sixty-eight one hundredths percent (9.68%) per annum, and
similarly shall be ten percent (10%) higher on each July 1 thereafter. If the
Corporation shall fail to make a dividend payment, dividends shall accrue
cumulatively on such basis at the Default Rate continuously thereafter until all
dividends then accrued and unpaid and each default payment
3
<PAGE>
on the Preferred Stock shall have been paid. Dividends payable pursuant hereto
shall begin to accrue on each share of Preferred Stock on its date of issuance
and shall be payable on the Dividend Reference Date.
(d) DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time the
-----------------------------------------
Corporation shall pay less than the total amount of dividends then accrued on
the Preferred Stock, such payment shall be distributed among the holders of the
Preferred Stock in proportion to the respective amounts of unpaid accruals on
their Preferred Stock.
(e) CERTAIN PAYMENTS RESTRICTED. Except as authorized by the Purchase
---------------------------
Agreement or the Stockholders Agreement, so long as shares of Preferred Stock
representing at least 60% of the shares of the number of shares of Preferred
Stock issued on the Closing Date shall remain outstanding (or, after June 30,
2002, so long as shares of Preferred Stock representing at least 25% of the
number of shares of Preferred Stock issued on the Closing Date remain
outstanding): (i) no Junior Security of the Corporation shall be acquired or
redeemed by the Corporation; and (ii) no dividend shall be declared or paid, nor
shall any distribution be made, upon any Junior Security unless all accrued
dividends and required distributions upon or redemptions of the Preferred Stock
have been paid or satisfied, provided, that the Corporation shall not be
prohibited from (x) declaring or paying any dividend or distribution on any
Junior Security if the same is solely paid in Junior Securities, or (y)
repurchasing any from any employee of or consultant or adviser to the
Corporation if such repurchase, including all material terms, was pursuant to
agreements entered into by the Corporation in a manner not prohibited by the
Purchase Agreement.
(f) DIVIDENDS PAYABLE FROM CERTAIN FUNDS. Notwithstanding the provisions
------------------------------------
of Sections B.1(a), B.1(b), B.1(c) and B.1(d), the Corporation shall not declare
or pay or set apart any amount for payment of cash dividends or make any other
cash distribution on the Preferred Stock in excess of Available Funds; provided,
--------
however, that the failure to pay dividends caused by lack of sufficient
- -------
Available Funds shall nevertheless be deemed non-performance by the Corporation
for purposes of Section D.1(a)(i) hereof.
(g) TIMELY PAYMENT OF DIVIDENDS. Anything in this Section B.1. to the
---------------------------
contrary notwithstanding, dividends payable in cash shall be timely paid if a
check of the Corporation in the proper amount is mailed to a holder of Preferred
Stock no later than one (1) business day before the Dividend Reference Date and
dividends payable in shares of Preferred Stock shall be timely paid if a
certificate representing such shares is issued as of the Dividend Reference Date
and is mailed to the holder of Preferred Stock within twenty (20) business days
of the Dividend Reference Date.
(h) EFFECT OF CERTAIN ACTION. Notwithstanding the provisions of
------------------------
subdivision (c) and (e) of this Section B.1. or of Section D.2 of this Article
FOUR, no increase in the dividend rate of Liquidation Value, restriction on
certain payments or remedies resulting from an Event of Non-Compliance shall be
applicable or effective, if (x) the Corporation has Available Funds to redeem
the Preferred Stock in full and (y) either (i) such redemption is not approved
---
by the holders of the Preferred Stock (if such approval is required under any
provision hereof), (ii) such redemption is prevented by action taken by the
Designated Director, or (iii) such redemption is prevented by action taken by BT
--
Capital.
2. LIQUIDATION.
-----------
(a) PREFERENCE. Upon any liquidation (complete or partial), dissolution
-----------
or winding up of the Corporation, whether voluntary or involuntary, the holders
of Preferred Stock shall be entitled before any distribution or payment is made
upon any Junior Security of the
4
<PAGE>
Corporation, to be paid out of the assets of the Corporation available for
distribution to its stockholders (whether from capital, surplus or earnings) an
amount in cash equal to the aggregate Liquidation Value of all Preferred Stock
outstanding, and upon payment thereof the holders of the Preferred Stock shall
not be entitled to any further payment.
(b) Partial Payment. If upon such liquidation, dissolution or
---------------
winding up of the Corporation, whether voluntary or involuntary, the assets of
the Corporation to be distributed among the holders of the Preferred Stock shall
be insufficient to permit payment to the holders of the Preferred Stock of the
amount which they are entitled to be paid as aforesaid, then the entire
remaining assets of the Corporation shall be distributed to the holders of the
Preferred Stock ratably based upon the aggregate Liquidation Value of the
Preferred Stock held by them.
(c) Remaining Assets. Upon any such liquidation, dissolution or
----------------
winding up of the Corporation, after the holders of the Preferred Stock shall
have been paid in full the amounts to which they shall be entitled, the
remaining assets of the Corporation shall be distributed ratably to the holders
of any Junior Security of the Corporation.
(d) Notice; Reorganization. Written notice of any liquidation,
----------------------
dissolution or winding up, or Reorganization stating an anticipated payment
date, the amount of the payment, or nature of any consideration to be received
or paid to holders of Preferred Stock, and, to the extent then reasonably
calculable, to holders of Common Stock, shall be given not less than thirty (30)
days prior to the anticipated record date stated therein, to each record holder
of Preferred Stock at the address for such record holder shown on the
Corporation's records. Neither the consolidation or merger of the Corporation
into or with any other corporation or corporations, nor the sale or transfer
by the Corporation of all or any part of its assets, nor the reduction of the
capital stock of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation.
3. Redemptions.
-----------
(a) Redemption Price. For each share of Preferred Stock which
----------------
is to be redeemed by the Corporation pursuant to this Section B.3, the
Corporation shall become obligated to the holder of such Preferred Stock on the
Redemption Date, regardless of whether the Corporation shall be able or legally
permitted to make such payment on the Redemption Date, to pay to such holder the
Redemption Price for such share of Preferred Stock; provided, however, that
-------- -------
nothing herein shall be construed to require any actual payment before such
payment can be made without contravening applicable law.
(b) Redeemed or Otherwise Acquired Preferred Stock Not to be
--------------------------------------------------------
Reissued. Any shares of Preferred Stock redeemed pursuant to this Section B.3 or
- --------
otherwise acquired by the Corporation in any manner whatsoever shall not under
any circumstances be reissued, sold or transferred by the Corporation.
(c) Determination of Number of Each Holder's Preferred Stock to
-----------------------------------------------------------
be Redeemed. The number of shares of Preferred Stock to be redeemed from each
- -----------
holder thereof in each redemption under this Section B.3 shall be determined by
multiplying the total number of shares of Preferred Stock to be redeemed times a
fraction, the numberator of which shall be the total number of shares of
Preferred Stock then held by such holder and the denominator of which shall be
the total number of shares of Preferred Stock then outstanding, rounded if the
result is fractional to the largest whole number of shares of Preferred Stock
included in the result.
(d) Optional Redemption. From and after July 1, 2002, the
-------------------
Corporation may from time to time redeem all or any portion of the Preferred
Stock then
5
<PAGE>
outstanding at the Redemption Price of the Preferred Stock to be redeemed. If
such optional redemption is in respect of less than all of Preferred Stock then
outstanding, then such redemption shall be made on a pro rata basis among all
holders of Preferred Stock.
(e) MANDATORY REDEMPTIONS.
---------------------
(i) Unless waived by the Majority Preferred Stockholders, all
shares of Preferred Stock shall be redeemed upon the occurrence of a Redemption
Event. The Redemption Date for shares to be redeemed under this clause (i) shall
be the tenth (10th) Business Day following the occurrence of the Redemption
Event.
(ii) Written notice of (x) any transaction or event which will
constitute a Redemption Event upon the passage of time, which is authorized by
the Corporation, and the substance and intended date of consummation thereof,
shall be given not more than sixty (60) nor less than thirty (30) days prior to
the anticipated date of consummation thereof (and unless waived by the Majority
Preferred Stockholders, the Corporation shall not consummate any such action
which would constitute a Redemption Event, earlier than thirty (30) days
following the giving of such notice), and (y) each event which constitutes a
Redemption Event without action by the Corporation, shall be given by the
Corporation within ten (10) days after the Corporation obtains notice of the
facts giving rise to such Redemption Event, to each record holder of Preferred
Stock at the address for such record holder shown on the Corporation's
records.
(f) NOTICE OF REDEMPTION. Notice of any redemption of Preferred Stock
--------------------
under Section B.3(d) or B.3(e), specifying the Redemption Date and place of
redemption, the Redemption Price and the paragraph pursuant to which such
redemption is being made, shall be given to each holder of record of Preferred
Stock to be redeemed, at the address for such holder shown on the Corporation's
records, not more than sixty (60) nor less than thirty (30) days prior to the
Redemption Date. The notice shall also specify the number of shares of Preferred
Stock which are to be redeemed from each holder of Preferred Stock. In case
fewer than all the shares of Preferred Stock represented by any certificate are
redeemed, a new certificate representing the unredeemed shares of Preferred
Stock shall be issued to the holder thereof without cost to such holder.
(g) DEPOSIT OF REDEMPTION PRICE. If on or before the Redemption Date
---------------------------
specified in any notice of redemption of any Preferred Stock the Corporation
shall deposit the amount of the Redemption Price thereof with a bank or trust
company having an office in the City of Los Angeles, California or the City
of New York, New York, designated in such notice of redemption, irrevocably in
trust for the benefit of the holder of such Preferred Stock, (i) such shares of
Preferred Stock shall be deemed to have been redeemed on the Redemption Date so
specified, whether or not the certificate for such Preferred Stock shall be
surrendered for redemption and canceled, and (ii) the right of any holder of
Preferred Stock to be redeemed to convert such shares as provided in Section B.4
shall expire 5:00 P.M. Pacific Time on the business day immediately prior to
such Redemption Date.
(h) DIVIDENDS AFTER REDEMPTION DATE. If moneys sufficient to redeem a
-------------------------------
share of Preferred Stock shall have been irrevocably deposited in trust for such
purpose on the Redemption Date, then dividends with respect to such share of
Preferred Stock shall cease to accrue on the Redemption Date and, on such
Redemption Date, all rights of the holder of such Preferred Stock as a
shareholder of the Corporation by reason of the ownership of such Preferred
Stock shall cease, except the right to receive the Redemption Price of such
Preferred Stock upon presentation and surrender of the certificate representing
such Preferred Stock, and such Preferred Stock shall not after such Redemption
Date be deemed to be outstanding.
6
<PAGE>
(i) Other Redemptions or Acquisitions. The Corporation shall
---------------------------------
neither redeem nor otherwise acquire any Preferred Stock except as expressly
authorized herein.
(j) Calculated Dividends Must Be Paid Prior to Any Redemption.
---------------------------------------------------------
The Corporation shall not redeem any Preferred Stock unless all dividends
accrued but unpaid on all Preferred Stock outstanding on the Redemption Date
have been paid, whether or not such shares of Preferred Stock are being
redeemed, and the Corporation shall upon any mandatory redemption cause all of
such accrued but unpaid dividends to be paid.
(k) Redemption form Certain Funds. Notwithstanding the
-----------------------------
provisions of Sections B.3(a) and B.3(d), if at the time of any redemption or
redemptions required pursuant to this Section B.3 the aggregate of the Available
Funds of the Corporation is insufficient to redeem the entire number of shares
of Preferred Stock required under this Section B.3 to be redeemed at such time,
such aggregate funds shall be used to redeem the maximum possible number of
shares of Preferred Stock pro rata (regardless of whether the holders thereof
request to be redeemed), however, that the failure to so redeem caused by lack
-------
of sufficient Available Funds shall nevertheless be deemed nonperformance by
the Corporation for purposes of Section D.1(a). Thereafter, any additional such
funds shall immediately be used by the Corporation to redeem the balance of the
Preferred Stock which the Corporation has become obligated to redeem pursuant to
this Section B.3(k) but which it has not redeemed, or, in the event any Person
other than the Corporation is the surviving or resulting corporation in any
Organic Change, such Person shall, upon consummation of such Organic Change,
redeem such balance of Preferred Stock (and the Corporation shall so provide in
its agreements with such Person relating to such Organic Change).
4. Conversion.
----------
The Preferred Stock shall be convertible as follows:
(a) Series A Conversion Right. Each share of Series A Preferred
-------------------------
Stock shall be convertible at any time, at the option of the holder thereof,
without the payment of any additional consideration by the holder thereof, at
the office of the Corporation or any transfer agent for the Series A Preferred
Stock, into the number of fully paid and nonassessable shares of Series B Common
Stock initially determined by dividing $4.00 by the Conversion Price in effect
at the time of conversion. Upon the occurrence of a Liquidity Event, each
share of Series A Preferred Stock then outstanding shall be automatically
converted, without the payment of any additional consideration by the holder
thereof, and without any further action by the Corporation into the number of
fully paid and nonassessable shares of Class B Common Stock determined by
dividing $4.00 by the Series A Conversion Price in effect at the time of
conversion. Effective 12:01 A.M. on the first business day following (i)
adoption of a resolution by vote or written consent of holders of record of 75%
or more of the outstanding Series A Preferred Stock to convert Series A
Preferred Stock into shares of Series B Common Stock, or (ii) conversion of a
cumulative number of shares of Series A Preferred Stock as equals 75% of the
cumulative number of shares of Series A Preferred Stock issued by the
Corporation, all then outstanding shares of Series A Preferred Stock shall be
converted into shares of Series B Common Stock. The "Series A Conversion Price"
shall initially be $4.00 per share, and shall be adjusted and readjusted from
time to time as provided in this Section B.4. Certain capitalized terms used
elsewhere in this Section B.4 have the meanings specified in Section B.4(d) and
Section F.5 of this Article FOUR. If any shares of Series A Preferred Stock are
to be redeemed in accordance with Section B.3 of this Article FOUR, the
conversion rights of any holder of such shares to be redeemed shall expire at
5:00 P.M. Pacific Time on the business day immediately prior to the apposite
Redemption Date if the funds necessary to redeem such shares are deposited in
trust as provided in Section B.3(g).
7
<PAGE>
(b) Series B Conversion Right. Each share of Series B Preferred
-------------------------
Stock shall be convertible at any time, at the option of the holder thereof,
without the payment of any additional consideration by the holder thereof, at
the office of the Corporation or any transfer agent for the Series B Preferred
Stock, into the number of fully paid and non-assessable shares of Series B
Common Stock initially determined by dividing an amount equal to $4.00 by the
Series B Conversion Price in effect at the time of conversion. Effective 12:01
A.M. on the first business day following (i) adoption of a resolution by vote
or written consent of holders of record of 75% or more of the outstanding Series
B Preferred Stock to convert Series B Preferred Stock into shares of Series B
Common Stock, or (ii) conversion of a cumulative number of shares of series B
Preferred Stock as equals 75% of the cumulative number of shares of Series B
Preferred Stock issued by the Corporation, all then outstanding shares of Series
B Preferred Stock shall be converted into shares of Series B Common Stock. The
"Series B Conversion Price" shall initially be the 1995 Common Stock Per Share
Value, and shall be adjusted and readjusted from time to time as provided in
this Section B.4. If any shares of Series B Preferred Stock are to be redeemed
in accordance with Section B.3 of this Article FOUR, the conversion rights of
any holder of such shares to be redeemed shall expire at 5:00 P.M. Pacific
Time on the business day immediately prior to the apposite Redemption Date if
the funds necessary to redeem such shares are deposited in trust as
provided in Section B.3(g).
(c) Mechanisms of Conversion. Before any holder of the Preferred
------------------------
Stock shall be entitled to convert the same into Series B Common Stock, such
holder shall surrender to the Corporation at the office of the Corporation or of
any transfer agent for the Preferred Stock, the certificate or certificates
representing such Preferred Stock, accompanied by written notice to the
Corporation that such holder elects to convert all or a specified number of such
shares and stating therein its name or the name or names of its nominees in
which it wishes the certificate or certificates for Series B Common Stock to be
issued. Provided such holder has properly elected to convert its Preferred
Stock, the holder shall be deemed to have converted such shares of Preferred
Stock (and to have become a holder of the shares of Series B Common Stock
issuable upon conversion thereof) on the date ("Conversion Date") that the
Corporation receives all documents required by this Section B.4(b) to be
delivered in order to convert such shares of Preferred Stock. The Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of the Preferred Stock, or to its nominee or nominees, a certificate
or certificates representing the number of shares of Series B Common Stock and a
check or cash with respect to any fractional interest in a share of Series B
Common Stock to which it shall be entitled as aforesaid and, if less than the
full number of Preferred Stock evidenced by such surrendered certificate or
certificates are being converted, a new certificate or certificates, of like
tenor, for the number of Preferred Stock evidenced by such surrendered
certificate less the number of such shares being converted. Any conversion made
at the election of a holder of the Preferred Stock shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the Preferred Stock to be converted, and the person or persons entitled to
receive the Series B Common Stock issuable upon conversion shall be treated for
all purposes as the record holder or holders of such Series B Common Stock on
such date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Stock Dividends, Subdivisions and Combinations. In case
----------------------------------------------
at any time or from time to time after the Closing Date the Corporation shall:
(1) take a record of the holders of its Nonpreferred
Stock (as defined below) for the purpose of entitling them to receive a dividend
payable in, or other distribution of, Nonpreferred Stock, or
8
<PAGE>
(2) subdivide its outstanding shares of Nonpreferred
Stock into a larger number of shares of Nonpreferred Stock, or
(3) combine its outstanding shares of Nonpreferred
Stock into a smaller number of shares of Nonpreferred Stock,
then the Series A Conversion Price and the Series B Conversion Price in effect
- ----
immediately after the happening of any such event shall be proportionately
decreased, in case of the happening of events described in subparagraphs (1) or
(2) above, or proportionately increased, in case of the happening of events
described in subparagraph (3) above. "Nonpreferred Stock" shall mean the Common
Stock and shall also include stock of the Corporation of any other class which
is not preferred as to dividends or assets over any other class of stock of the
Corporation.
(ii) Certain Other Dividends and Distributions. In case at
-----------------------------------------
any time or from time to time after the Closing Date the Corporation shall take
a record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive any dividend or other distribution of:
(1) cash (other than a cash distribution made as a
dividend and payable out of earnings or earned surplus legally available for the
payment of dividends), or
(2) any evidence of its indebtedness (other than
Convertible Securities, as defined below), any shares of its stock (other than
Additional Shares of Nonpreferred Stock, as defined below) or any other
securities or property of any nature whatsoever (other than cash and other than
Convertible Securities or Additional Shares of Nonpreferred Stock), or
(3) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than Convertible Securities),
any shares of its stock (other than Additional Shares of Nonpreferred Stock) or
any other securities or property of any nature whatsoever (other than cash and
other Convertible Securities or Additional Shares of Nonpreferred Stock).
then each Conversion Price then in effect shall be adjusted to that number
- ----
determined by multiplying such Conversion Price by a fraction (x) the numerator
of which shall be (I) the Current Market Price (as defined below) per share of
Common Stock immediately prior to the date of taking such record minus (II) the
portion applicable to one share of Common Stock of any such cash so
distributable and of the "fair value" of any and all such evidences of
indebtedness, shares of stock, other securities or property, or warrants or
other subscription or purchase rights, so distributable and (y) the denominator
of which shall be the Current Market Price per share of Common Stock immediately
prior to the date of taking such record. Such "fair value" of evidences of
indebtedness, shares of stock, other securities or property, or warrants other
than subscription or purchase rights shall be determined pursuant to the
Valuation Procedure. The "Valuation Procedure" is a determination of fair value
of any property made in good faith by the Board of Directors; provided, however,
-------- -------
that if the determination of fair value is not approved by at least 75% of the
authorized number of directors and the Designated Director objects to such
determination, then the fair value of such property shall be determined in good
faith by an appraiser selected by the Board of Directors, which appraiser is not
reasonably objected to by the Designated Director. The fees and expenses of such
appraiser shall be paid by the Corporation. A reclassification of the
Nonpreferred Stock into shares of Nonpreferred Stock and shares of any other
class of stock shall be deemed a distribution by the Corporation to the holders
of its Nonpreferred Stock of such shares of such other class of stock within the
meaning of this Section B.4(d)(ii) and, if the outstanding shares of
Nonpreferred Stock shall be changed into a larger or smaller number of
9
<PAGE>
shares of Nonpreferred Stock as a part of such reclassification, shall be deemed
a subdivision or combination, as the case may be, of the outstanding shares of
Nonpreferred Stock within the meaning of Section B.4(d)(i). "CONVERTIBLE
SECURITIES" shall mean evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for Additional Shares of
Nonpreferred Stock, either immediately or upon the arrival of a specified date
or the happening of a specified event. "CURRENT MARKET PRICE" per share of
Common Stock at a date herein specified shall be deemed to be the average of the
Closing Prices for ten consecutive Business Days immediately prior to the day in
question. "CLOSING PRICES" for each such Business Day shall be (i) if the Common
Stock is traded on a national securities exchange, its last sale price on the
preceding Business Day on such exchange or, if there was no sale on that day,
the last sale price on next preceding Business Day on which there was a sale on
such exchange or (ii) if the principal market for the Common Stock is the over-
the-counter market, its last sale price reported on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ") on the preceding
Business Day or, if the Common Stock is an issue for which last sale prices are
not reported on NASDAQ, the closing bid quotation on such day (the closing bid
quotation for a given day shall be the highest bid quotation as quoted in any of
The Wall Street Journal, the National Quotation Bureau pink sheets, quotation
sheets of registered marketmakers and, if necessary, dealers telephone
quotations), but, in each of the preceding two cases, if the relevant NASDAQ
price or quotation did not exist on such day, then the price or quotation on the
next preceding Business Day in which there was such a price or quotation. If the
Current Market Price per share of Common Stock cannot be ascertained by any of
the foregoing methods, the Current Market Price per share of Common Stock shall
be determined by the Valuation Procedure.
(iii) ISSUANCE OF ADDITIONAL SHARES OF NONPREFERRED STOCK. "ADDITIONAL
---------------------------------------------------
SHARES OF NONPREFERRED STOCK" shall mean all shares of Nonpreferred Stock issued
by the Corporation after the Closing Date other than the shares of Series B
Common Stock issued to a holder of the Preferred Stock upon conversion of the
Preferred Stock or upon exercise of warrants or options to purchase Common Stock
which have been issued prior to the Closing Date; provided, however, that if the
-------- -------
Corporation shall at any time or from time to time, in any transaction entered
into otherwise than in violation of these Restated Articles, acquire after the
Closing Date any Common Stock outstanding on the Closing Date, the issuance of
such shares (or a number of shares of Common Stock equal to such number of
shares) shall not be "ADDITIONAL SHARES OF NONPREFERRED STOCK." In case at any
time or from time to time after the Closing Date, the Corporation shall (except
as hereinafter provided) issue, whether in connection with the merger of a
corporation into the Corporation or otherwise, any Additional Shares of
Nonpreferred Stock for a consideration per share less than the Current Market
Price per share of Common Stock on the Computation Date (determined as set forth
in the last sentence of this Section B.4(d)(iii)), then each Conversion Price
then in effect shall be adjusted to be that number determined by multiplying
such Conversion Price as in effect immediately prior to such adjustment by a
fraction (x) the numerator of which shall be the number of Common Stock
Equivalents outstanding immediately prior to such issuance, plus the number of
shares of Common Stock which the aggregate consideration, if any, for the total
number of such Additional Shares of Nonpreferred Stock so issued would purchase
at the Current Market Price per share of Common Stock and (y) the denominator of
which shall be the number of Common Stock Equivalents outstanding immediately
prior to such issuance plus the number of Common Stock Equivalents so issued as
a result of such transaction. For purposes of the adjustment provided for in
this Section B.4(d)(iii), the numerator and the denominator in (x) and (y) of
the immediately preceding sentence shall be computed on the assumption that
immediately before and after the issuance of the Additional Shares of
Nonpreferred Stock all Convertible Securities and options and warrants to
purchase Convertible Securities outstanding on the Closing Date, had been fully
exercised or converted or exchanged, as the case may be. The provisions of this
Section B.4(d)(iii) shall not apply to any issuance of Additional Shares of
Nonpreferred Stock for which an adjustment is provided under Section B.4(d)(i).
No adjustment of a Conversion Price shall be made under this Section B.4(d)(iii)
upon the issuance of any
10
<PAGE>
Additional Shares of Nonpreferred Stock which are issued (or deemed to be
issued) pursuant to the exercise (or grant) of (i) up to 677,650 shares pursuant
to options issued under stock option plans in effect on the date of these
Restated Articles or adopted hereafter by the Board of Directors (such number to
be equitably adjusted in the case of any event described in Section B.4(d)(i)
hereof), or (ii) warrants, options or other rights to subscribe for or purchase
any Additional Shares of Nonpreferred Stock or pursuant to the exercise of any
conversion or exchange rights in any Convertible Securities. If an adjustment in
the Conversion Price shall previously have been made upon the issuance of these
warrants, options or other rights or upon the issuance of such Convertible
Securities (or upon the issuance of any warrant, option or other rights
therefor) pursuant to Section B.4(d)(iv) or Section B.4(d)(v). For purposes of
this Section B.4(d)(iii), the "Computation Date" shall be the date on which the
Corporation shall issue such Additional Shares of Nonpreferred Stock; provided
--------
that if the Corporation becomes irrevocably obligated pursuant to an agreement
or instrument to issue such Additional Shares of Nonpreferred Stock upon the
occurrence of an event not within the Corporation's control, and a period of
ninety (90) days or more has elapsed from the date the Corporation first becomes
so obligated and such Additional Shares of Nonpreferred Stock have not yet been
issued and the Corporation's obligation to issue such shares has not been
terminated, then the Computation Date shall be deemed to be the 90th day
following the date the Corporation becomes so obligated; however, if no
Additional Shares of Nonpreferred Stock are issued thereafter as contemplated in
such agreement or instrument, or if fewer such shares are issued than was so
contemplated, in each case prior to the Conversion Date, the Conversion Price
adjustment shall be rescinded automatically and each Conversion Price shall be
readjusted to the Conversion Price that would have been in effect if only the
number of Additional Shares of Nonpreferred Stock actually issued pursuant to
such agreement or instrument had been issued.
(iv) Distribution of Warrants, Options, Convertible
----------------------------------------------
Securities or Other Rights. In case at any time or from time to time after the
- --------------------------
Closing Date, the Corporation shall take a record of the holders of its
Nonpreferred Stock for the purpose of entitling them to receive a distribution
of, or shall otherwise issue, any warrants, options or other rights to subscribe
for or purchase any Additional Shares of Nonpreferred Stock or any Convertible
Securities and the consideration per share for which Additional Shares of
Nonpreferred Stock may at any time thereafter be issuable pursuant to such
warrants, options or other rights or pursuant to the terms of such Convertible
Securities shall be less than the Current Market Price per share of Common Stock
on the Computation Date (determined as set forth in the last sentence of this
Section B.4(d)(iv)), then each Conversion Price then in effect shall be adjusted
as provided in the second sentence of Section B.4(d)(iii). Such adjustment shall
be made on the basis that (I) the consideration per share for which such
Additional Shares of Nonpreferred Stock may be issued equals the quotient
resulting from dividing (x) the maximum number of Additional Shares of
Nonpreferred Stock issuable pursuant to all such warrants, options or other
rights or necessary to effect the conversion or exchange of all such Convertible
Securities into (y) the minimum consideration received and receivable by the
Corporation for all such Additional Shares of Nonpreferred Stock pursuant to
such warrants, options or other rights or pursuant to the terms of such
Convertible Securities, (II) the maximum number of Additional Shares of
Nonprefered Stock issuable pursuant to all such warrants, options or other
rights or necessary to effect he conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the Computation Date
(determined as set forth in the last sentence of this Section B.4(d)(iv)), and
(III) the aggregate consideration for such maximum number of Additional Shares
of Nonpreferred Stock shall be deemed to be the minimum consideration received
and receivable by the Corporation for the issuance of such Additional Shares of
Nonpreferred Stock pursuant to such warrants, option or other rights or pursuant
to the terms of such Convertible Securities.
For purposes of this Section B.4(d)(iv), the "Computation Date"
shall be the earliest of (xx) the date on which the Corporation shall take a
record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive any such warrants, options or other
11
<PAGE>
right, (yy) the date on which the Corporation shall otherwise become irrevocably
bound to issue such warrants, options or other rights, and (zz) the date of
actual issuance of such warrants, options or other rights; provided, that if the
--------
Corporation becomes irrevocably obligated pursuant to an agreement or instrument
to issue such warrants, options or other rights upon the occurrence of an event
not within the Corporation's control, and a period of ninety (90) days or more
has elapsed from the date the Corporation first becomes so obligated and such
warrants, options or other rights have not yet been issued and the Corporation's
obligation to issue such warrants, options or other rights has not been
terminated, then the Computation Date shall be deemed to be the 90th day
following the date the Corporation becomes so obligated; however, if no
warrants, options or other rights are issued thereafter as contemplated in such
agreement or instrument, or if fewer such warrants, rights or options are issued
than was so contemplated, in each case prior to the Conversion Date, the
Conversion Price adjustment shall be rescinded automatically and the Conversion
Price shall be readjusted to the Conversion Price that would have been in effect
if only the number of warrants, options or other rights actually issued pursuant
to such agreement or instrument had been issued.
(v) Issuance of Warrants, Options, Convertible Securities or
--------------------------------------------------------
Other Rights. In case at any time or from time to time after the Closing Date,
- ------------
the Corporation shall issue, any warrants, options, or other rights to purchase
shares of Non-Preferred Stock, or any Convertible Securities, and the
consideration per share for which Additional Shares of Nonpreferred Stock may at
any time thereafter be issuable pursuant to the exercise of such warrants,
options or other rights or upon conversion of such Convertible Securities shall
be less than the Current Market Price per share of Common Stock on the
Computation Date (determined as set forth in the last sentence of this Section
B.4(d)(v), then each Conversion Price then in effect shall be adjusted as
provided in the second sentence of Section B.4(d)(iii). Such adjustment shall be
made on the basis that (I) the amount of consideration per share for which such
Additional Shares of Nonpreferred Stock may be issued equals the quotient
resulting from dividing (x) the maximum number of Additional Shares of
Nonpreferred Stock necessary to effect the conversion or exchange of all such
warrants, options, rights, or Convertible Securities, into (y) the minimum
consideration received and to be receivable, if any, by the Corporation upon
issuance of such warrants, options or other rights, or Convertible Securities,
and any additional consideration payable upon the exercise, conversion or
exchange of all such Convertible Securities, (II) the maximum number of all
Additional Shares of Nonpreferred Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the Computation Date (determined as set forth in the last sentence of this
Section B.4(d)(v)), and (III) the aggregate consideration for such maximum
number of Additional Shares of Nonpreferred Stock shall be deemed to be the
minimum consideration received and receivable by the Corporation for the
issuance of such warrants, options, rights or Convertible Securities plus the
additional consideration, if any, received or receivable for such Additional
Shares of Nonpreferred Stock pursuant to the terms of such warrants, options,
rights or Convertible Securities.
For purposes of this Section B.4(d)(v), the "Computation Date" shall be the
earliest of (yy) the date on which the Corporation shall become irrevocably
bound to issue such warrants, options or other rights to purchase Non-Preferred
Stock or Convertible Securities, and (zz) the date of actual issuance of such
Preferred Stock, warrants rights, options or Convertible Securities; provided,
--------
that if the Corporation becomes irrevocably obligated pursuant to an agreement
or instrument to issue such Securities upon the occurrence of an event not
within the Corporation's control, and a period of ninety (90) days or more has
elapsed from the date the Corporation first becomes so obligated and such
warrants, options, rights or Convertible Securities have not yet been issued and
the Corporation's obligation to issue such warrants, options, rights or
Convertible Securities has not been terminated, then the Computation Date shall
be deemed to be the 90th day following the date the Corporation becomes so
obligated; however, if no warrants, options, rights or Convertible Securities
are issued thereafter as contemplated in such agreement or instrument, or if
fewer such securities are issued than was so contemplated, in each case prior to
12
<PAGE>
the Conversion Date, the Conversion Price adjustment shall be rescinded
automatically and the Conversion Price shall be readjusted to the Conversion
Price that would have been in effect if only the number of warrants, options,
rights or Convertible Securities actually issued pursuant to such agreement or
instrument had been issued. For purposes of this Section B.4(d)(v), (A) any
warrants, options, rights or Convertible Securities originally issued to Silicon
Valley Bank shall be deemed issued on the day following the Closing Date, (B)
the Current Market Price per share of Common Stock on the date of issuance of
such securities shall be $4.00, and (C) the Computation Date for such issuance
shall be the day following the Closing Date. No adjustment of a Conversion Price
shall be made under this Section B.4(d)(v) upon the issuance of any Convertible
Securities which are issued pursuant to the exercise of any warrants or other
subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights
pursuant to Section B.4(d)(iv).
(vi) Superseding Adjustment of Conversion Price. If at any time after
------------------------------------------
any adjustment of the Conversion Price shall have been made pursuant to Section
B.4(d)(iv) or Section B.4(d)(v) on the basis of the issuance of warrants or
other rights or the issuance of other Convertible Securities, or after any new
adjustment of the Conversion Price shall have been made pursuant to this
section,
(1) such warrants, options or rights or the right of conversion
or exchange in such other Convertible Securities shall expire, and a portion of
such warrants, options or rights, or the right of conversion or exchange in
respect of a portion of such other Convertible Securities, as the case may be,
shall not have been exercised, or
(2) the consideration per share, for which Additional Shares of
Nonpreferred Stock are issuable pursuant to such warrants or rights or the terms
of such other Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such consideration
per share upon the arrival of a specified date or the happening of a specifed
event.
then such previous adjustment shall be rescinded and annulled and the
- ----
Additional Shares of Nonpreferred Stock which were deemed to have been issued
by virtue of the computation made in connection with the adjustment so rescinded
and annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
warrants, rights or options or other Convertible Securities on the basis of:
(A) treating the number of Additional Shares of Nonpreferred
Stock, if any, theretofore actually issued or issuable pursuant to the previous
exercise of such warrants, options or rights or such right of conversion or
exchange, as having been issued on the date or dates of such issuance was
determined for purposes of such previous adjustment and for the consideration
actually received therefor, and
(B) treating any such warrants, options or rights or any such
other Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share of such Additional Shares of Nonpreferred Stock issuable
under such warrants or rights or other Convertible Securities.
and, if and to the extent called for by the foregoing provisions of this Section
B.4(d) on the basis aforesaid, a new adjustment of the Conversion Price shall be
made, which new adjustment shall supersede the previous adjustment so rescinded
and annulled.
(vii) Other Provisions Applicable to Adustments Under This Section.
------------------------------------------------------------
The following provisions shall be applicable to the making of adjustments of the
Conversion Price hereinbefore provided for in this Section B.4(d):
13
<PAGE>
(1) Treasury Stock. Subject to the proviso in the
--------------
first sentence of Section B.4(d)(iii), the sale or other disposition of any
issued shares of Nonpreferred Stock owned or held by or for the account of the
Corporation shall be deemed an issuance thereof for purposes of this Section
B.4(d).
(2) Computation of Consideration. To the extent that
----------------------------
any Additional Shares of Nonpreferred Stock or any Convertible Securities or any
warrants, options, or other rights to subscribe for or purchase any Additional
Shares of Nonpreferred Stock or any Convertible Securities shall be issued
solely for cash consideration, the consideration received by the Corporation
therefor shall be deemed to be the amount of cash received by the Corporation
therefor, without reduction for expenses, commissions or discounts paid or
incurred by the Corporation in connection with such transaction, in any such
case excluding any amounts paid or receivable for accrued interest or accrued
dividends. To the extent that such issuance shall be for a consideration other
than solely for cash, then, except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined pursuant to the
Valuation Procedure. The consideration for any Additional Shares of Nonpreferred
Stock issued pursuant to any warrants, options or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by the
Corporation upon the exercise of such warrants, options or other rights, plus
the additional consideration payable to the Corporation for issuing such
warrants, options or other rights. The consideration for any Additional Shares
of Nonpreferred Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by the Corporation
for issuing any warrants or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the
Corporation in respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Corporation upon the exercise of the right of conversion or exchange in such
Convertible Securities.
(3) When Adjustments to be made. The adjustments
---------------------------
required by the preceding subsections of this Section B.4(d) shall be made
whenever and as often as any specified event requiring an adjustment shall
occur, except that no adjustment of the Conversion Price that would otherwise be
required shall be made (except in the case of a subdivision or combination of
shares of the Nonpreferred Stock, as provided for in Section B.4.(d)(i)) unless
and until such adjustment, either by itself or with other adjustments not
previously made, adds or subtracts at least one-tenth of one percent (.001) to
the Conversion Price, as determined in good faith by the Board of Directors of
the Corporation. Any adjustment representing a change of less than such minimum
amount shall be carried forward and made as soon as such adjustment, together
with other adjustments required by this Section B.4(d) and not previously made,
would result in a minimum adjustment. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business on the
date of its occurrence. All calculations made under this subsection shall be
made to the nearest one hundredths of one cent.
(4) Fractional Interests. In computing adjustments
--------------------
under this Section B.4(d), fractional interests in Nonpreferred Stock shall be
taken into account to the nearest one-thousandth of a share.
(5) When Adjustment Not Required. If the Corporation
----------------------------
shall take a record of the holders of its Nonpreferred Stock for the purpose of
entitling them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution thereof to
shareholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then (A) thereafter no adjustment
shall be required by reason of the taking of such record and any such adjustment
previously made in
14
<PAGE>
respect thereof shall be rescinded and annulled or (B) in the event that such
adjustments cannot be rescinded or annulled as a result of the conversion of the
Preferred Stock after the taking of such record occurs, in lieu of such
rescission or annulment of the adjustment, the Corporation shall have the option
to purchase the number of shares of Common Stock from each former holder of
Preferred Stock who had converted after such record date equal to the difference
between (x) the number of shares of Common Stock which such holder had received
upon conversion after such record date and (y) the number of shares of Common
Stock which such holder would have received on conversion had such adjustment
been annulled or rescinded prior to conversion. The purchase price per share of
such Common Stock shall be the Fair Market Value per share.
(e) No Impairment. Other than in connection with an amendment of
-------------
the Restated Articles approved by holders of the requisite number of shares
(including holders of the Preferred Stock), the Corporation will not through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, 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 B.4 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 Preferred Stock against impairment; provided, however, that
-------- -------
nothing in this Section B.4(e) shall prevent the Corporation from effecting any
Reorganization or taking any action that is either (i) approved by the holders
of Preferred Stock as required by these Restated Articles, or (ii) not expressly
prohibited by these Restated Articles and is approved in good faith by the Board
of Directors of the Corporation provided that other consequences of a
Reorganization shall nonetheless be effective. Without limiting the generality
of the foregoing, the Corporation (x) will not permit the par value of any
shares of stock at the time receivable upon the conversion of the Preferred
Stock to exceed the Conversion Price then in effect, (y) will take all such
action as may be necessary or appropriate in order that the Corporation may
validly and legally issued fully paid nonassessable shares of stock on the
conversion of the Preferred Stock, and (z) will not take any action which
results in any adjustment of the Conversion Price if the total number of shares
of Series B Common Stock issuable after the action upon the conversion of all
the Preferred Stock will exceed the total number of shares of Series B Common
Stock then authorized by the Restated Articles and available for the purpose of
issue upon such conversion.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section B.4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
the Preferred Stock a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (i) the consideration received or to be received
by the Corporation for any Additional Shares of Nonpreferred Stock issued or
sold or deemed to have been issued, (ii) the number of shares of Nonpreferred
Stock then outstanding or deemed to be outstanding, and (iii) the Conversion
Price in effect immediately prior to such issue or sale and as adjusted and
readjusted on account thereof, showing how it was calculated. The Corporation
shall, as promptly as practicable following its receipt of the written request,
but in any event within five Business Days after receipt of such written
request, of any holder of the Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (aa) the Conversion Price at
the time in effect, showing how it was calculated and (bb) the number of shares
of Series B Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Preferred Stock.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, or any right to subscribe for,
purchase or
15
<PAGE>
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of the Preferred Stock at least ten days prior to the Record Date (unless
a shorter period is consented to by the Designated Director), a notice
specifying the Record Date and the purpose of such Record Date.
(h) Series B Common Stock Reserved. The Corporation shall at
------------------------------
all times reserve and keep available out of its authorized but unissued Series B
Common Stock such number of shares of Series B Common Stock as shall from time
to time be sufficient to effect conversion of all shares of Preferred Stock into
shares of Series B Common Stock (the "Reserved Series B Common Shares").
C. Directors and Voting Rights.
---------------------------
1. Number of Directors. The Board of Directors shall consist of
-------------------
five (5) directors. Of the directors four (4) shall be designated as the
"Common Directors" and one (1) shall be designated as the "Designated Director."
2. Election of Directors. Except as may otherwise be provided in
---------------------
Section D.2 hereof or by law, so long as shares of Preferred Stock equal to not
less than 60% of the number of shares of Preferred Stock issued on the Closing
Date are outstanding, directors shall be elected as follows:
(a) Common Directors. The holders of the Series A Common Stock,
----------------
voting as a single class and to the exclusion of the holders of the Series B
Common Stock and Preferred Stock, shall have the right to elect the common
Directors. Only the holders of shares of Series A Common Stock shall have the
right to elect the Common Directors. Only the holders of shares of Series A
Common Stock shall have the right to remove the Common Directors or to fill a
vacancy caused by resignation, removal or death of a Common Director.
(b) Designated Director. The holders of the Preferred Stock,
-------------------
voting as a single class and to the exclusion of the holders of the Common
Stock, shall have the right to elect the Designated Director. Only the holders
of shares of Preferred Stock shall have the right to remove a Designated
Director or to fill a vacancy caused by the resignation, removal or death of a
Designated Director.
(c) The holders of Series B Common Stock will have no right to
vote for the election of directors.
3. Number of Votes. When voting on questions other than the
---------------
election or removal of directors:
(a) Series A Common Stock. Each holder of shares of Series A
---------------------
Common Stock shall be entitled to a number of votes equal to the number of
shares of Series A Common Stock held by such holder.
(b) Series B Common Stock. The holders of Series B Common Stock
---------------------
shall not, by virtue of ownership of such Series B Common Stock, possess any
voting power, except as otherwise required herein or by the provisions of
applicable law, in which event each holder of shares of Series B Common Stock
shall be entitled to a number of votes equal to the number of shares of Series B
Common Stock held by such holder.
(c) Preferred Stock. The holders of Preferred Stock shall not
---------------
by virtue of ownership of such Preferred Stock possess any voting power, except
as otherwise
16
<PAGE>
required herein or by the provisions of applicable law. In the event any vote of
holders of Preferred Stock shall be taken for any purpose, each share of
Preferred Stock shall, have one (1) vote per share.
D. EVENTS OF NONCOMPLIANCE.
------------------------
1. DEFINITION.
----------
(a) An Event of Noncompliance shall be deemed to have occurred if;
(i) the Corporation fails to pay on their respective Dividend
Reference Dates, and there remains unpaid at any one time, two dividend
payments, whether or not consecutive, with respect to the Preferred Stock:
(ii) the Corporation fails for any reason to redeem Preferred
Stock as and when required pursuant to any paragraph of Section B.3; or
(iii) upon written notice given to the Corporation by the
Majority Preferred Stockholders after occurrence of (x) an Event of Default
under the Purchase Agreement, or (y) a violation of Section E of this Article
FOUR.
(b) The existence or continuation of any Event of Noncompliance
shall be irrespective of whether such event or the underlying facts shall have
come about voluntarily or involuntarily or shall be beyond the Corporation's
control or shall have come about or been effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body, or
because of Sections B.1(g) or B.3(e) hereof.
2. CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
---------------------------------------
(a) If and whenever any Event of Noncompliance shall occur, then
and thereafter the holders of the Preferred Stock, until divested of such right
as hereinafter provided, shall be entitled, voting as a single class with each
share entitled to one vote, at a meeting called pursuant to Section D.2(d)
hereof, to elect the smallest number of directors which shall constitute a
majority of the authorized number of directors of the Corporation, and the
holders of Series A Common Stock, voting as a single class, shall be entitled to
elect the remaining members of the Board of Directors. Upon the election by the
holders of Preferred Stock of a majority of the directors, the terms of office
of all persons who were theretofore directors of the Corporation shall forthwith
terminate, whether or not the holders of the Series A Common Stock shall then
have elected the remaining directors of the Corporation.
(b) Any director elected by the holders of the Preferred Stock
voting as a class under this Section D.2 may be removed and any vacancy on the
Board of Directors created by such removal or by the death, resignation or
inability to serve of any such director may be filled by the vote or written
consent of the holders of the Preferred Stock; and any such vacancy created
otherwise than by removal may be filled by a majority of the remaining directors
so elected.
(c) At such time as all Events of Noncompliance are cured or
eliminated and written notice thereof is given to such directors and the holders
of the Preferred Stock, the holders of the Preferred Stock shall be divested of
the voting rights specified in this Section D.2 with respect to such cured or
eliminated Events of Noncompliance. These voting rights shall again accrue to
the holders of Preferred Stock as and when provided in this Section D.2. Upon
the termination of any such voting rights as hereinabove provided, the Board of
Directors shall call a special meeting of the shareholders at which all
directors will be elected, and the terms of office of
17
<PAGE>
all persons who are then directors of the Corporation shall terminate
immediately upon the election of their successors.
(d) At any time when such special voting power shall be vested in the
holders of the Preferred Stock as provided in this Section D.2, a proper officer
of the Corporation shall, upon the written request of the holders of record of a
majority of the outstanding shares of Preferred Stock addressed to the Secretary
of the Corporation, call a special meeting of the shareholders. Such meeting
shall be held at the earliest practicable date at the principal office of the
Corporation, as shall be designated by such officer and specified in the notice
of such meeting. At any such meeting, or at any other meeting held while the
holders of the Preferred Stock have the voting power described in this Section
D.2, unless otherwise provided by law, the holders of a majority of the
Preferred Stock, present in person or by proxy, shall be sufficient to
constitute a quorum for the election of directors as herein provided. At such
meeting, or, if no such special meeting shall have been called, then at the next
annual meeting of the shareholders, the holders of Preferred Stock shall be
entitled to elect the smallest number of directors which shall constitute a
majority of the directors of the Corporation, and the holders of the Common
Stock shall be entitled to elect the remaining members of the Board of
Directors. If such meeting shall not be called by a proper officer of the
Corporation within 20 days after personal service of said written request upon
the Secretary of the Corporation or within 20 days after mailing the same within
the United States of America, by certified mail addressed to the Secretary of
the Corporation at its principal office, then the holders of record of a
majority of the outstanding shares of Preferred Stock may designate in writing
one of their number to call such meeting at the expense of the Corporation, and
such meeting may be called by such person so designated upon the notice required
for annual meetings of shareholders and shall be held at the principal office of
the Corporation. Any holder of Preferred Stock so designated shall have access
to the stock books of the Corporation for the purpose of causing a meeting of
shareholders to be called pursuant to these provisions.
E. Special Approval Rights.
-----------------------
The Corporation covenants and agrees that, so long as a number of shares of
Preferred Stock equal to not less than 60% of the number of shares of Preferred
Stock issued on the Closing Date are outstanding (or, after June 30, 2002, so
long as shares of Preferred Stock representing at least 25% of the number of
shares of Preferred Stock issued on the Closing Date remain outstanding), unless
prior thereto, or concurrently therewith, the Corporation shall have irrevocably
exercised its right to redeem all Preferred Stock pursuant to Section B.3(d) by
giving notice pursuant to Section B.3(f), or the Majority Preferred Stockholders
shall otherwise consent in writing, it will not:
1. Restricted Payments. Declare or pay dividends upon any capital stock
-------------------
now or hereafter outstanding or return any capital to any of its shareholders or
make any other distribution, payment or delivery of property or cash to such
shareholders in their capacities as such, or redeem, retire, purchase or
acquire, directly or indirectly, any shares of its stock now or hereafter
outstanding, except (i) the Corporation may pay PIK Dividends and Cash Dividends
on the Preferred Stock in accordance with the Restated Articles and the
Stockholders Agreement, and (ii) the Corporation may redeem or repurchase shares
of its capital stock pursuant to this Restated Certificate, or as permitted by
the Stockholders Agreement.
2. Issuance of Certain Stock. Enter into any agreement, other than the
-------------------------
Purchase Agreement, the Shareholders Agreement or the Employee Stock Option
Plan, restricting in any manner the sale or transfer of the Corporation's or any
Subsidiary's stock of any class; or authorize or issue any additional shares of
stock of any class, or series which is senior to, or pari passu with, the Series
A Preferred Stock or the Series B Preferred Stock with respect to the right to
receive dividends, to receive liquidation preferences or with respect to the
amount payable upon
18
<PAGE>
redemption, except shares of Series B Preferred Stock issued as PIK Dividends on
shares of Series A Preferred Stock or Series B Preferred Stock.
3. Changes in Charter Documents. Amend or modify at any time this
----------------------------
Restated Articles from the form thereof in effect immediately following the
Closing Date if such amendment affects the rights of the holders of the
Preferred Stock of any series.
4. Organic Change; Public Offering. Enter into any contract, agreement,
-------------------------------
partnership, or joint venture or in any other manner commit the Corporation to
engage in any transaction which would constitute an Organic Change, or
effectuate a Public Offering other than a Qualified Public Offering.
F. General.
-------
1. Non-Assessable Shares. The Preferred Stock and the Common Stock shall
---------------------
be non-assessable shares.
2. Closing of Books. The Corporation will not close its books against the
----------------
transfer of any Preferred Stock or Common Stock, except in connection with a
Record Date.
3. Registration of Transfer. The Corporation shall keep at its principal
------------------------
office (or such other place as the Corporation reasonably designates) a register
for the registration of Preferred Stock and Common Stock. Upon the surrender of
any certificate representing Preferred Stock or Common Stock at such place, the
Corporation shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares of Preferred Stock or Common
Stock, as the case may be, represented by the surrendered certificate (and the
Corporation forthwith shall cancel such surrendered certificate), subject to the
requirements of applicable securities laws and receipt by the Corporation of an
opinion of counsel for such holder, which opinion of counsel shall be reasonably
satisfactory to the Corporation and its counsel, addressed to the Corporation
stating that any sale, transfer, assignment or hypothecation to be effected or
registered by the issuance of such new certificate or certificates is exempt
from or made in accordance with the registration and prospectus delivery
requirements of the 1933 Act and exempt from or made in accordance with the
qualification or registration requirements of all applicable state securities
laws; such opinion shall state that it may be relied upon by the Corporation's
transfer agent and counsel. Each such new certificate shall be registered in
such name and shall represent such number of shares of Preferred Stock or Common
Stock as shall be requested by the holder of the surrendered certificate and
shall be substantially identical in form to the surrendered certificate; and
dividends shall be calculated cumulatively on a daily basis on the Preferred
Stock represented by such new certificate from the date of issuance or, if
later, the date to which dividends have been fully paid on the Preferred Stock
represented by such surrendered certificate. The issuance of new certificates
shall be made without charge to the holders of the surrendered certificates for
any issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such issuance; provided, however, that the Corporation shall not
-------- -------
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the holder of the surrendered certificate.
4. Replacement. Upon receipt of evidence reasonably satisfactory to the
-----------
Corporation (an affidavit of the registered holder, without bond, shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more Preferred Stock or Common Stock and, in
the case of loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the registered holder is a
19
<PAGE>
financial institution, its own agreement of indemnity shall be satisfactory),
or, in the case of mutilation, upon surrender of such certificate, the
Corporation shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the number of shares of
Preferred Stock or Common Stock, as the case may be, represented by such
lost, stolen, destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate, on which dividends shall be
calculated cumulatively on a daily basis from the date to which dividends have
been fully paid on such lost, stolen, destroyed or mutilated certificate at the
rate and in the manner applicable to such certificate.
5. Definitions. The following terms shall have the following
-----------
meanings, which meanings shall be equally applicable to the singular and plural
forms of such terms:
"Additional Shares of Non-Preferred Stock" shall have the meaning set
forth in Section B.4(d) herein.
"Affiliate" means, with respect to the Corporation, any Person (other
than a Purchaser) which directly or indirectly controls, is controlled by, or is
under common control with the Corporation.
"Authorized Officer" means the President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer or Secretary of the
Corporation.
"Available Funds" means the amount (i) for the purposes of Section B.1
hereof, permitted to be paid as dividends on the Preferred Stock under the
California Corporations Code, and (ii) for the purposes of Section B.3 hereof,
legally available for the redemption of the Preferred Stock under such law.
"Bianco Entities" means William A. Bianco, Jr., Marie R. Bianco, The
Bianco Family 1991 Trust dated February 1, 1991, or any other trust created by
The Bianco Family 1991 Trust dated February 1, 1991 for the benefit of William
A. Bianco Jr. and/or Marie R. Bianco.
"BT Capital" means BT Capital Partners, Inc., a Delaware corporation.
"Business Day" means any day which is not on Saturday or Sunday or a
day on which banks are required or permitted to close under the laws of the
State of California.
"Cash Dividend" means the cash dividend of the Preferred Stock.
"Change in Ownership" shall have the meaning set forth in the Purchase
Agreement.
"Closing Date" means the date of the closing under the Purchase
Agreement, which is expected to take place in June, 1995.
"Closing Prices" shall have the meaning set forth in Section B.4(d)
herein.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Directors" shall have the meaning set forth in Section C.1
herein.
"Common Stock" means either the Series A Common Stock, or the Series
B Common Stock, of the Corporation.
20
<PAGE>
"Common Stock Equivalents" shall have the meaning set forth in the
Purchase Agreement.
"Computation Date" shall have the meanings set forth in Section B.4(c)
herein.
"Consolidated" and "consolidated," when used in reference to any
amount, means such amount determined on a consolidated or combined basis, as the
case may be, in accordance with GAAP, after the elimination of intercompany
items.
"Control," "controlled by" or "under common control with" means direct
or indirect possession of the power to direct or cause the direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise).
"Conversion Date" shall have the meanings set forth in Section B.4(b)
herein.
"Conversion Price" shall mean, as applicable, the Series A Conversion
Price and/or the Series B Conversion Price.
"Convertible Securities" shall have the meaning set forth in Section
B.4(d) herein.
"Corporation" means Kinetic Systems Group, Inc., a California
corporation.
"Current Market Price" shall have the meaning set forth in Section
B.4(d) herein.
"Default Rate" means for the period commencing on the date following
the Dividend Reference Date for any missed dividend and until the first
anniversary date of such Dividend Reference Date, one percent (1%) per annum
above the then applicable Dividend Rate; and thereafter an additional one
percent (1%) per annum commencing on each subsequent anniversary date of such
Dividend Reference Date.
"Designated Director" shall mean the director designated and elected
by the holders of the Preferred Stock.
"Dividend Rate" means the applicable rate of dividends payable on the
Preferred Stock as specified in Section B.1(c).
"Dividend Reference Dates" means June 30, 1995 and each September 30,
December 31, March 31 and June 30 thereafter (or, if any such date is not a
Business Day, then the immediately preceding Business Day) on which dividends
are to be paid on Preferred Stock.
"Employee Stock Option Plan" shall have the meaning set forth in the
Purchase Agreement.
"Event of Default" shall have the meaning set forth in the Purchase
Agreement.
"Executive Officer" shall have the meaning set forth in the Purchase
Agreement.
"Event of Noncompliance" means any of the events listed in Section D.1
hereof.
"Fiscal Quarter" means a fiscal quarter of the Corporation ending on
or about the last day of each of March 31, June 30, September 30 and December 31
of each year.
21
<PAGE>
"GAAP" means generally accepted accounting principles in the United States,
as in effect on the date of determination consistently applied.
"Junior Security" means any equity security of any kind which the
Corporation shall at any time issue or be authorized to issue other than the
Preferred Stock, including, without limitation, the Common Stock.
"Liquidation Value" of any share of Preferred Stock as of any particular
date means $4.00 per share, plus, (x) in each case any dividends (calculated
----
pursuant to Section B.1(c)) accrued with respect to such share of Preferred
Stock which have not been paid on or before the date of determination and, in
the event of any liquidation, dissolution or winding up of the Corporation or
the redemption of any share of Preferred Stock, unpaid dividends on such share
of Preferred Stock to the payment date under Section B.2, or to the Redemption
Date, as the case may be, calculated cumulatively on a daily basis from the next
preceding Dividend Reference Date to the close of business on such payment date
or Redemption Date, and plus (y) subject to Section B.1(h) hereof, from and
after July 1, 2002, an amount equal to ten percent (10%) of the Liquidation
Value in effect on June 30 of such year, and plus (z) subject to Section B.1(h)
hereof, on each July 1 thereafter, commencing July 1, 2003, an additional ten
percent (10%) per annum of Liquidation Value in effect on June 30 of such year.
"Liquidity Event" means the effectiveness of a registration statement filed
under the 1933 Act covering a Qualified Public Offering.
"Majority Preferred Stockholders" means holders of more than fifty percent
(50%) of the aggregate number of Preferred Stock then outstanding; provided,
--------
however, that Preferred Stock owned by the Corporation, a Subsidiary, or a
- -------
Person controlled by the Corporation shall be disregarded and deemed not
outstanding for this purpose.
"NASDAQ" shall have the meaning set forth in Section B.4(c) herein.
"Non-Preferred Stock" shall have the meaning set forth in Section B.4(d)
herein.
"Organic Change" shall have the meaning set forth in the Purchase
Agreement.
"Person" shall mean an individual, partnership, corporation, government or
agency or political subdivision or any agency, department or instrumentality
thereof.
"PIK Dividend" has the meaning set forth in Section B.1(a)(i) herein.
"Preferred Stock" means, generically, the Series A Preferred Stock and the
Series B Preferred Stock.
"Public Offering" means a completed public offering by the Corporation of
newly issued shares of Common Stock registered under the 1933 Act.
"Purchase Agreement" means the Stock Purchase Agreement, dated as of May
31, 1994 between the Corporation and the Purchaser.
"Purchaser" means BT Capital.
"Qualified Public Offering" means a Public Offering effected pursuant to
firm underwriting agreement with an underwriter of recognized national or
regional standing approved in writing by the Majority Preferred Stockholders,
such approval not to be unreasonably withheld.
22
<PAGE>
"Record Date" means the date on which a holder of Preferred Stock must
officially own shares (i) to receive a dividend, (ii) to vote on any matter,
(iii) to receive any distribution or to receive the Redemption Price, or (iv) to
receive notice of certain events, which in each case shall be the first Business
Day prior to the date of the event for which a Record Date is determined, unless
otherwise required by applicable law or fixed by the Board of Directors.
"Redemption Date," as to any share of Preferred Stock, means the date
specified in the notice of redemption in the case of a redemption of such share
of Preferred Stock pursuant to Section B.3(d) or Section B.3(e); provided,
--------
however, that for purposes of Section B.3(d) the Redemption Date shall be the
- -------
date (if later) on which the applicable Redemption Price is actually paid to the
holder of such share of Preferred Stock or deposited in trust for the benefit of
such holder pursuant to Section B.3(g).
"Redemption Event" shall mean the closing date for (i) the sale or
other disposition of all or substantially all of the assets of the Corporation,
(ii) any transaction of merger or consolidation which includes the Corporation
or any sale of equity securities by the shareholders whereby immediately
following the consummation of such transactions, the shareholders of the
Corporation before such transactions do not own or control at least a majority
of the outstanding equity securities of the surviving corporation, or (iii) the
occurrence of a Change in Ownership.
"Redemption Price" as to any share of Preferred Stock means the
Liquidation Value of such share of Preferred Stock.
"Reorganization" means (1) any consolidation or merger of the
Corporation with or into any other corporation or other entity, as a result of
which the holders of the Common Stock will receive cash, securities of another
corporation, property or any combination thereof, for the shares of Common Stock
of the Corporation; or (1) a sale or other disposition of all or substantially
all of the assets of the Corporation.
"Reserved Series A Common Shares" shall have the meaning set forth in
Section A.3(d) herein.
"Reserved Series B Common Shares" shall have the meaning set forth in
Section B.4(g) herein.
"Restated Articles" means these Amended and Restated Articles of
Incorporation of the Corporation.
"Securities" means the Preferred Stock and the Common Stock issued or
to be issued upon the conversion of the Preferred Stock.
"Series A Conversion Price" shall have the meaning set forth in
Section B.4(a) herein.
"Section B Conversion Price" shall have the meaning set forth in
Section B.4(b) herein.
"Shareholders Agreement" means the Shareholders Agreement, dated as of
May 31, 1995 among the Corporation and the holders of the Securities.
"Shimmon" means David J. Shimmon.
23
<PAGE>
"Shimmon Entities" means Shimmon and any trust created for the benefit
of Shimmon, his siblings, ancestors, descendants or spouse.
"Subsidiary" means each corporation or other entity of which the
Corporation owns, directly or indirectly, more than 50% of (i) the stock of any
class having power under ordinary circumstance to vote for the election of
directors or (ii) the capital or equity, however named.
"1933 Act" means the Securities Act of 1933, as amended and as may be
amended from time to time, including the rules and regulations thereunder.
"1995 Common Stock Per Share Value" means the sum, expressed in
dollars, derived by dividing (a) the Enterprise Value (determined as set forth
below) of the Corporation as of September 30, 1995, by (b) the number of Common
Stock Equivalents determined as of March 31, 1995 (adjusted to give effect to
the 100:1 stock split effected by these Restated Articles). The Corporation's
Enterprise Value shall be a sum equal to the difference between (i) 6.6 times
the Corporation's earnings before interest and income taxes during its year
ended September 30, 1995 and (ii) the excess of (x) the Corporation's average
outstanding consolidated and combined indebtedness for borrowed money or for
the deferred purchase price of fixed or other assets, including all capitalized
lease obligations, during the 12 months ending September 30, 1995 over (y)
$3,000,000.
6. Copies of Documents. The Corporation shall at all times
-------------------
maintain at its principal executive office copies of the Purchase Agreement and
the Stockholders Agreement referred to herein and shall provide copies thereof
to its stockholders upon request and without charge.
7. Amendment and Modification.
--------------------------
(a) No amendment or modification of any provision hereof (or of
the percentage of Preferred Stock required to approve such amendment or
modification) shall be binding or effective without the affirmative vote, or
prior written consent, of the holders of more than 50% of the Preferred Stock,
and 80% of the Series A Common Stock outstanding at the time such change shall
be made.
(b) No amendment or modification of any provision hereof shall
extend to or affect any obligation not expressly amended or modified or impair
any right consequent thereon. No course of dealing and no failure to exercise
or delay in exercising any right, remedy, power or privilege hereunder shall
operate as an amendment or modification of any provision of this Restated
Certificate.
FIVE: The name and mailing address of the incorporator is William A.
----
Bianco, Jr. Kinetic System Group, Inc., 3080 Raymond Street, California 95054.
SIX: This Corporation is to have perpetual existence.
---
SEVEN: Elections of directors need not be by written ballot unless a
-----
stockholder demands election by written ballot at the meeting and before voting
begins.
EIGHT: In furtherance and not in limitation of the powers conferred by
-----
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the Corporation.
24
<PAGE>
NINE: To the fullest extent permitted by the Delaware General
----
Corporation Law as the same exists or as it may hereafter be amended, no
director of this Corporation shall be personally liable to this Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article with respect to any matter
occurring or any cause of action, suit, or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision.
TEN: Meetings of stockholders may be held within or without the State of
---
Delaware, as the Bylaws may provide. The books of this Corporation may be kept
(subject to any provision contained in the Delaware General Corporation Law)
outside of the State of Delaware as such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of this
Corporation.
ELEVEN: This Corporation reserves the right to amend, alter, change, or
------
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
I, the undersigned, being the incorporator hereinbefore named, for the
purposes of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this certificate, hereby declaring and
certifying, under penalties of perjury, that this is my act and deed and the
facts therein stated are true, and accordingly have hereunto set my hand this
20th day of February, 1996.
/s/ William A. Bianco, Jr.
------------------------------------
William A. Bianco, Jr., Incorporator
25
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
THE KSI GROUP, INC.
ARTICLE I
---------
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
---------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
---------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
---------
Directors shall be held in the City of Santa Clara, State of California, at such
place as may be fixed from time to time by the Board of Directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
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1997, shall be held at such date and time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
they shall elect by a plurality vote a Board of Directors, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
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date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
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corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
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stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 5. Special meetings of the stockholders, for any purpose or
---------
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place,
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date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
---------
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued and
---------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
---------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
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Section 10. Unless otherwise provided in the certificate of
----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
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incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
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DIRECTORS
Section 1. The number of Directors which shall constitute the whole
---------
Board shall be four (4). The number may be changed by resolution of the Board of
Directors or by the stockholders at the annual meeting of the stockholders,
except as provided in Section 2 of this Article, and each Director elected shall
hold office until his successor is elected and qualified. Directors need not be
stockholders.
Section 2. Vacancies and new created Directorships resulting from any
---------
increase in the authorized number of Directors may be filled by a majority of
the Directors then in office, though less than a quorum, or by a sole remaining
Director, and the Directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no Directors in office, then an election of
Directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created Directorship, the Directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such Directors, summarily order an election to be held to fill any such
vacancies or newly created Directorships, or to replace the Directors chosen by
the Directors then in office.
Section 3. The business of the corporation shall be managed by or
---------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and
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do all such lawful acts and things as are not by statute or by the certificate
of incorporation or by these bylaws directed or required to be exercised or done
by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
---------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
---------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected Directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the Directors.
Section 6. Regular meetings of the Board of Directors may be held
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without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 7. Special meetings of the Board may be called by the
---------
President on two (2) days' notice to each Director by mail or forty-eight (48)
hours' notice to each Director either personally or by telegram; special
meetings shall be called by the President or Secretary in like manner and on
like notice on the written request of two Directors unless the Board consists of
only one Director, in which case special meetings shall be called by the
President or Secretary in like manner and on like notice on the written request
of the sole Director.
Section 8. At all meetings of the Board a majority of the Directors
---------
shall constitute a quorum for the transaction of business and the act of a
majority of the Directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
---------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 10. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board
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of Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
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majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the Directors of the corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation 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
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therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, any Director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of shares
entitled to vote at an election of Directors.
ARTICLE IV
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NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
---------
certificate of incorporation or of these bylaws, notice is required to be given
to any Director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
Director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to Directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
---------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
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OFFICERS
Section 1. The officers of the corporation shall be chosen by the
---------
Board of Directors and shall be a President, Treasurer and a Secretary. The
Board of Directors may elect from among its members a Chairman of the Board and
a Vice Chairman of the Board. The Board of Directors may also choose one or
more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any
number of offices may be held by the same person, unless the certificate of
incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
---------
annual meeting of stockholders shall choose a President, a Treasurer, and a
Secretary and may choose Vice Presidents.
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Section 3. The Board of Directors may appoint such other officers and
---------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4. The salaries of all officers and agents of the corporation
---------
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
---------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
---------
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
---------
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The President shall be the chief executive officer of the
---------
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors;
he shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts
---------
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the President or in the event of his
----------
inability or refusal to act, the Vice-President, if any, (or in the event there
be more than one Vice-President, the Vice-Presidents in the order designated by
the Directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
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President. The Vice-Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The Secretary shall attend all meetings of the Board of
----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The Assistant Secretary, or if there be more than one,
----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporate
----------
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
----------
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give the
----------
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
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Section 16. The Assistant Treasurer, or if there shall be more than
----------
one, the Assistant Treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI
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CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
---------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman or Vice- Chairman of the Board of Directors, or the President or a
Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the Certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
---------
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
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Section 3. The Board of Directors may direct a new certificate or
---------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
---------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
---------
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
---------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
-----------
GENERAL PROVISIONS
DIVIDENDS
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Section 1. Dividends upon the capital stock of the corporation,
---------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
---------
of any funds of the corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the Directors shall think conducive to the interest of the
corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
---------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
---------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
---------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
---------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any Director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a Director of the
corporation or a predecessor corporation or, at the corporation's request, a
Director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in
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this Section 6 shall: (i) not be deemed exclusive of any other rights to which
those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested Directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding such
office, (ii) continue as to a person who has ceased to be a Director, and (iii)
inure to the benefit of the heirs, executors and administrators of such a
person. The corporation's obligation to provide indemnification under this
Section 6 shall be offset to the extent of any other source of indemnification
or any otherwise applicable insurance coverage under a policy maintained by the
corporation or any other person.
Expenses incurred by a Director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a Director of the corporation (or was serving at the corporation's request
as a Director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each Director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a Director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all Directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a
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person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
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ARTICLE VIII
------------
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
---------
bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal bylaws.
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CERTIFICATE OF THE SECRETARY
OF
THE KSI GROUP, INC.
I, the undersigned, certify that:
1. I am the duly elected and acting secretary of The KSI Group, Inc., a
Delaware corporation (the "CORPORATION").
2. The above bylaws, consisting of 11 pages (not including this page),
are the bylaws of this corporation as adopted by the incorporator of the
CORPORATION on February 25, 1996.
IN WITNESS WHEREOF, I have subscribed my name on March 29, 1996.
/s/ Marie R. Bianco
-----------------------------
Marie R. Bianco, Secretary
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EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE KINETICS GROUP, INC.
THE KINETICS GROUP, INC. (the "Corporation"), a corporation organized
and existing under the laws of the State of Delaware, hereby certifies as
follows:
1. The name of the Corporation is The Kinetics Group, Inc.
2. The original name of the Corporation was Kinetic Systems Group,
Inc. The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of Delaware on February 23, 1996.
3. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the Certificate of Incorporation of
the Corporation.
4. The text of the Amended and Restated Certificate of
Incorporation, as heretofore amended, is hereby restated and further amended to
read in its entirety as set forth in Exhibit A attached hereto.
---------
5. This Amended and Restated Certificate of Incorporation was duly
adopted by written consent of the stockholders of the Corporation in accordance
with the applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware, and notice of the taking of such
corporate action has been given as provided in Section 228(d) of the General
Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by William A. Bianco, Jr., its Chairman of the Board and Chief Executive
Officer and attested by Marie R. Bianco, its Secretary, this _____ day of
____________________________, 1997.
THE KINETICS GROUP, INC.
By:
-----------------------------------
William A. Bianco, Jr.
Chairman of the Board and
Chief Executive Officer
ATTEST:
By:
---------------------------------
Marie R. Bianco
Secretary
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<PAGE>
Exhibit A
---------
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE KINETICS GROUP, INC.
ARTICLE I
NAME
----
The name of the corporation is The Kinetics Group, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE
-----------------
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
-------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
-------------
(A) The Corporation is authorized to issue two classes of shares,
designated "Common Stock" and "Preferred Stock," respectively. The number of
shares of Common Stock authorized to be issued is forty million (40,000,000)
shares, $0.001 par value per share, and the number of shares of Preferred Stock
authorized to be issued is two million (2,000,000) shares, $0.001 par value per
share.
(B) Each four (4) shares of the Corporation's Series A Common Stock
and Series B Common Stock shall, without any action on the part of the holder
thereof, be reclassified as and changed into three (3) shares of Common Stock.
1
<PAGE>
ARTICLE VI
BOARD OF DIRECTORS
------------------
(C) The Preferred Stock authorized by this Certificate of
Incorporation may be issued from time to time in one or more series. The Board
of Directors is authorized to determine, alter or eliminate any or all of the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock, and to fix, increase or decrease the
number of shares comprising any such series and the designation thereof, or any
of them, and to provide for the rights and terms of redemption or conversion of
the shares of any such series.
ARTICLE V
MANAGEMENT
----------
The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(A) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Certificate of
Incorporation or the Bylaws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
(B) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
(C) On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten registered public
offering (the "IPO"), any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Prior to such sale, unless
otherwise provided by law, any action which may otherwise by taken at any
meeting of the stockholders may be taken without a meeting and without prior
notice, if a written consent describing such actions is signed by the holders of
outstanding shares having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
(D) Special meetings of stockholders of the Corporation may be called
only (1) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) or (2) by the holders of not
less than ten percent (10%) of all of the shares entitled to cast votes at the
meeting.
2
<PAGE>
(A) The number of directors shall initially be set at five (5) and,
thereafter, shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). Subject to the rights of the holders of any series of
Preferred Stock then outstanding, a vacancy resulting from the removal of a
director by the stockholders as provided in Article VI, Section (C) below may be
filled at a special meeting of the stockholders held for that purpose.
(B) Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors resulting from any increase in authorized
number of directors or any vacancies in the Board of Directors resulting from
death, resignation or other cause (other than removal from office by a vote of
the stockholders) may be filled only by a majority vote of the directors then in
office, though less than a quorum, and directors so chosen shall hold office for
a term expiring at the next annual meeting of stockholders at which the term of
office to which they have been elected expires, and until their respective
successors are elected, except in the case of the death, resignation, or removal
of any director. No decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.
(C) Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class. Vacancies in the Board of Directors resulting from such removal may be
filled by a majority of the directors then in office, though less than a quorum,
or by the stockholders as provided in Article VI, Section (A) above. Directors
so chosen shall hold office for a term expiring at the next annual meeting of
stockholders at which the term of office to which they have been elected
expires, and until their respective successors are elected, except in the case
of the death, resignation, or removal of any director.
ARTICLE VII
BYLAWS
------
The Board of Directors is expressly empowered to adopt, amend or
repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws
of the
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<PAGE>
Corporation by the Board of Directors shall require the approval of a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal Bylaws of the
Corporation by the stockholders shall require, in addition to any vote of the
holders of any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a single class.
ARTICLE VIII
LIABILITY OF DIRECTORS
----------------------
The director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination of limitation of the liability of a director,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended.
Any repeal or modification of the foregoing provisions of this Article
VIII by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner prescribed by the
laws of the State of Delaware and all rights conferred upon stockholders are
granted subject to this reservation; provided, however, that, notwithstanding
-------- -------
any other provision of this Certificate of Incorporation or any provision of law
which might otherwise permit a lesser vote or no vote, but in addition to any
vote of the holders of any class or series of the stock of this Corporation
required by law or by this Certificate of Incorporation, the affirmative vote of
the holders of at least 66-2/3% of the voting power of all of the then
outstanding shares of the capital stock of the Corporation
4
<PAGE>
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal this Article IX, Article V,
Article VI, Article VII or Article VIII.
5
<PAGE>
EXHIBIT 10.1
THE KINETICS GROUP, INC.
1997 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Kinetics Group, Inc. 1997 Stock Option Plan
(the "PLAN") is hereby established effective as of __________, 1997 the date of
closing of the initial public offering of securities of the Company under the
Securities Act of 1933 as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of the Participating Company Group and its stockholders by providing an
incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Incentive
Stock Options shall be granted, if at all, within ten (10) years from the
earlier of the date the Plan is adopted by the Board or the date the Plan is
duly approved by the stockholders of the Company. Notwithstanding the foregoing,
if the maximum number of shares of Stock issuable pursuant to the Plan as
provided in Section 4.1 has been increased at any time, all Incentive Stock
Options shall be granted, if at all, no later than the last day preceding the
tenth (10th) anniversary of the earlier of (a) the date on which the latest such
increase in the maximum number of shares of Stock issuable under the Plan was
approved by the stockholders of the Company or (b) the date such amendment was
adopted by the Board.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
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<PAGE>
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means The Kinetics Group, Inc., a Delaware
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board
2
<PAGE>
without regard to any restriction other than a restriction which, by its terms,
will never lapse.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be
(as set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended
to be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(n) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(o) "OPTIONEE" means a person who has been granted one or more
Options.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(t) "SECTION 162(M)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(u) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
3
<PAGE>
(v) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(w) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.3 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
4
<PAGE>
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option
in substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.4 COMMITTEE COMPLYING WITH SECTION 162(M). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
5
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4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Three Hundred Fifty Thousand (350,000) and
shall consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If any outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject to
the Option. The adjustments determined by the Board pursuant to this Section 4.2
shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees", "Consultants" and "Directors" shall include prospective Employees,
prospective Consultants and prospective Directors to whom Options are granted in
connection with written offers of employment or other service relationship with
the Participating Company Group. Eligible persons may be granted more than one
(1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee
on the effective date of the grant of an Option to such person may be granted
only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed
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<PAGE>
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option
first. Separate certificates representing each such portion shall be issued upon
the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Option shall be not less than the Fair Market
Value of a share of Stock on the effective date of grant of the Option, and (b)
no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the
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Option Agreement evidencing such Option; provided, however, that (a) no
Incentive Stock Option shall be exercisable after the expiration of ten (10)
years after the effective date of grant of such Option, (b) no Incentive Stock
Option granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee, prospective Consultant or
prospective Director may become exercisable prior to the date on which such
person commences service with a Participating Company.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
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<PAGE>
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Incentive Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
9
<PAGE>
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any of the standard forms of Option
Agreement described in this Section 7 either in connection with the grant or
amendment of an individual Option or in connection with the authorization of a
new standard form or forms; provided, however, that the terms and conditions of
any such new, revised or amended standard form or forms of Option Agreement are
not inconsistent with the terms of the Plan. Such authority shall include, but
not by way of limitation, the authority to grant Options which are not
immediately exercisable.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or
10
<PAGE>
exchanges of the voting stock of the Company or multiple Ownership Change Events
are related, and its determination shall be final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of this
Section 8.2, an Option shall be deemed assumed if, following the Transfer of
Control, the Option confers the right to purchase, for each share of Stock
subject to the Option immediately prior to the Transfer of Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Transfer of Control was
entitled. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Transfer of Control nor exercised
as of the date of the Transfer of Control shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Transfer
of Control and any consideration received pursuant to the Transfer of Control
with respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
------------------------
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
10. NONTRANSFERABILITY OF INCENTIVE STOCK OPTIONS. During the lifetime of
---------------------------------------------
the Optionee, an Option shall be exercisable only by the Optionee or the
Optionee's guardian or legal representative. No Option shall be assignable or
transferable by the Optionee, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, a Nonstatutory Stock Option shall
be assignable or transferable to the extent permitted by the Board and set forth
in the Option Agreement evidencing such Option.
11. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the
11
<PAGE>
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
--------------------------------
the Plan at any time. However, subject to changes in applicable law, regulations
or rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify
as an Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
The Kinetics Group, Inc. 1997 Stock Option Plan was duly adopted by the Board on
December 6, 1996.
/s/ Marie R. Bianco
-----------------------------------
Secretary
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<PAGE>
THE KINETICS GROUP, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION
AGREEMENT") is made and entered into as of ___________, 199__, by and between
The Kinetics Group, Inc. and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee pursuant to The Kinetics Group,
Inc. 1997 Stock Option Plan an option to purchase certain shares of Stock, upon
the terms and conditions set forth in this Option Agreement (the "OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the
following terms shall have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ________________________ ,
199_.
(b) "NUMBER OF OPTION SHARES" means ___________________ shares
of Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock,
as adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date occurring one (1)
year after (check one):
__ the Date of Option Grant.
__ __________________ , 199__, the date the Optionee's
Service commenced.
1
<PAGE>
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/4
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Vesting Date
Plus
----
For each full three months of the 1/16
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted in the Plan, including, without limitation, the power to amend
or terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(k) "COMPANY" means The Kinetics Group, Inc., a Delaware
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
2
<PAGE>
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of
the optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for this purpose.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
3
<PAGE>
(u) "PLAN" means The Kinetics Group, Inc. 1997 Stock Option
Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination. (NOTE: If the Option
is exercised more than three (3) months after the date on which the Optionee
ceased to be an Employee (other than by reason of death or a permanent and total
disability as defined in Section 22(e)(3) of the Code), the Option will be
treated as a nonstatutory stock option and not as an incentive stock option to
the extent required by Section 422 of the Code.)
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be an
incentive stock option within the meaning of Section 422(b) of the Code (an
"INCENTIVE STOCK OPTION"), but the Company does not represent or warrant that
this Option qualifies as such. The Optionee should consult with the Optionee's
own tax advisor regarding the tax effects of this Option and the requirements
necessary to obtain favorable income tax treatment under Section 422 of the
Code, including, but not limited to, holding period requirements. (NOTE: If the
aggregate Exercise Price of the Option (that is, the Exercise Price multiplied
by the Number of Option Shares) plus the aggregate exercise price of any other
Incentive Stock Options held by the Optionee
4
<PAGE>
(whether granted pursuant to the Plan or any other stock option plan of the
Participating Company Group) is greater than One Hundred Thousand Dollars
($100,000), the Optionee should contact the Chief Financial Officer of the
Company to ascertain whether the entire Option qualifies as an Incentive Stock
Option.)
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, or (b) the Optionee is subject to a
restriction on transfer to comply with "Pooling-of-Interests Accounting" rules.
Failure to file an election under Section 83(b), if appropriate, may result in
adverse tax consequences to the Optionee. The Optionee acknowledges that the
Optionee has been advised to consult with a tax advisor prior to the exercise of
the Option regarding the tax consequences to the Optionee of the exercise of the
Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE
DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE
EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b)
ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase rights set forth in Section 11.
Notwithstanding
5
<PAGE>
the foregoing, except as provided in Section 4.1(b), the aggregate Fair Market
Value of the shares of Stock with respect to which the Optionee may exercise the
Option for the first time during any calendar year, when added to the aggregate
Fair Market Value of the shares subject to any other options designated as
Incentive Stock Options granted to the Optionee under all stock option plans of
the Participating Company Group prior to the Date of Option Grant with respect
to which such options are exercisable for the first time during the same
calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For
purposes of the preceding sentence, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of shares of stock shall be determined as of the time the
option with respect to such shares is granted. Such limitation on exercise
shall be referred to in this Option Agreement as the "ISO EXERCISE LIMITATION."
If Section 422 of the Code is amended to provide for a different limitation from
that set forth in this Section 4.1(a), the ISO Exercise Limitation shall be
deemed amended effective as of the date required or permitted by such amendment
to the Code. The ISO Exercise Limitation shall terminate upon the earlier of
(i) the Optionee's termination of Service, (ii) the day immediately prior to the
effective date of a Transfer of Control in which the Option is not assumed or
substituted for by the Acquiring Corporation as provided in Section 8, or (iii)
the day ten (10) days prior to the Option Expiration Date. Upon such
termination of the ISO Exercise Limitation, the Option shall be deemed a
nonstatutory stock option to the extent of the number of shares subject to the
Option which would otherwise exceed the ISO Exercise Limitation.
(b) Notwithstanding any other provision of this Option Agreement,
if compliance with the ISO Exercise Limitation as set forth in Section 4.1(a)
will result in the exercisability of any Vested Shares (as defined in Section
11.2) being delayed more than thirty (30) days beyond the date such shares
become Vested Shares (the "VESTING DATE"), the Option shall be deemed to be two
(2) options. The first option shall be for the maximum portion of the Number of
Option Shares that can comply with the ISO Exercise Limitation without causing
the Option to be unexercisable in the aggregate as to Vested Shares on the
Vesting Date for such shares. The second option, which shall not be treated as
an Incentive Stock Option as described in section 422(b) of the Code, shall be
for the balance of the Number of Option Shares; that is, those such shares
which, on the respective Vesting Date for such shares, would be unexercisable if
included in the first option and thereby made subject to the ISO Exercise
Limitation. Shares treated as subject to the second option shall be exercisable
on the same terms and at the same time as set forth in this Option Agreement;
provided, however, that (i) the second sentence of Section 4.1(a) shall not
apply to the second option and (ii) each such share shall become a Vested Share
on the Vesting Date on which such share must first be allocated to the second
option pursuant to the preceding sentence. Unless the Optionee specifically
elects to the contrary in the Optionee's written notice of exercise, the first
option shall be deemed to be exercised first to the maximum possible extent and
then the second option shall be deemed to be exercised.
6
<PAGE>
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current form of escrow
agreement referenced below. The Option shall be deemed to be exercised upon
receipt by the Company of such written notice, the aggregate Exercise Price,
and, if required by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. The Option may not be exercised by tender to the Company of shares of
Stock unless such shares either have been owned by the Optionee for more than
six (6) months or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
7
<PAGE>
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares as
to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.
The grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should
be directed to the Chief Financial Officer of the Company. The inability of the
Company to obtain from any regulatory body having jurisdiction the authority, if
any, deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any shares subject to the Option 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. As a condition to
the exercise of the Option, the Company may require the Optionee
8
<PAGE>
to satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason except Disability
or death, the Option, to the extent unexercised and exercisable by the Optionee
on the
9
<PAGE>
date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 ADDITIONAL LIMITATION ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as
to the tax consequences of any such delayed exercise. The Optionee should
consult with the Optionee's own tax advisor as to the tax consequences to the
Optionee of any such delayed exercise.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7.1 of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to return to Service with the Participating Company Group
remains guaranteed by statute or contract. Notwithstanding the foregoing,
unless otherwise designated by the Company (or required by law), a leave of
absence shall not be treated as Service for purposes of determining the
Optionee's Vested Ratio.
10
<PAGE>
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. For purposes of this Section 8.2, the Option
shall be deemed assumed if, following the Transfer of Control, the Option
confers the right to purchase, for each share of Stock subject to the Option
immediately prior to the Transfer of Control, the consideration (whether stock,
cash or other securities or property) to which a holder of a share of Stock on
the effective date of the Transfer of Control was entitled. The Option shall
11
<PAGE>
terminate and cease to be outstanding effective as of the date of the Transfer
of Control to the extent that the Option is neither assumed or substituted for
by the Acquiring Corporation in connection with the Transfer of Control nor
exercised as of the date of the Transfer of Control. Notwithstanding the
foregoing, shares acquired upon exercise of the Option prior to the Transfer of
Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions
of this Option Agreement except as otherwise provided herein. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is subject
to the Option immediately prior to an Ownership Change Event described in
Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a stockholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
12
<PAGE>
11. UNVESTED SHARE REPURCHASE OPTION.
--------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if
at all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to
the Company by the Optionee at the same time as the delivery of the Repurchase
Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
13
<PAGE>
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "Stock" and "Unvested Shares" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option will be available for repurchase, the Company
may require the Optionee to deposit the certificate evidencing the shares which
the Optionee purchases upon exercise of the Option with an escrow agent
designated by the Company under the terms and conditions of an escrow agreement
approved by the Company. If the Company does not require such deposit as a
condition of exercise of the Option, the Company reserves the right at any time
to require the Optionee to so deposit the certificate in escrow. Upon the
occurrence of an Ownership Change Event or a change, as described in Section 9,
in the character or amount of any of the outstanding stock of the corporation
the stock of which is subject to the provisions of this Option Agreement, any
and all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of shares of Stock
acquired upon exercise of the Option that remain, following such Ownership
Change Event or change described in Section 9, subject to the Unvested Share
Repurchase Option shall be immediately subject to the escrow to the same extent
as such shares of Stock immediately before such event. The Company shall bear
the expenses of the escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option, but not more frequently
than once each calendar year, the escrow agent shall deliver to the Optionee the
shares and any other property no longer subject to such restriction.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share
14
<PAGE>
Repurchase Option, the notices required to be given to the Optionee shall be
given to the escrow agent, and any payment required to be given to the Optionee
shall be given to the escrow agent. Within thirty (30) days after payment by
the Company, the escrow agent shall deliver the shares and any other property
which the Company has purchased to the Company and shall deliver the payment
received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and with the same
force and effect as the shares subject to the Unvested Share Repurchase Option
immediately before such event.
14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
----------------------------------------------
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year after the date the Optionee exercises all or part of the Option or within
two (2) years after the Date of Option Grant. Until such time as the Optionee
disposes of such shares in a manner consistent with the provisions of this
Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the Optionee's
name (and not in the name of any nominee) for the one-year period immediately
after the exercise of the Option and the two-year period immediately after Date
of Option Grant. At any time during the one-year or two-year periods set forth
above, the Company may place a legend on any certificate representing shares
acquired pursuant to the Option requesting the transfer agent for the Company's
stock to notify the Company of any such transfers. The obligation of the
Optionee to notify the Company of any such transfer shall continue
notwithstanding that a legend has been placed on the certificate pursuant to the
preceding sentence.
15. LEGENDS. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option and any applicable federal, state or foreign
securities law restrictions on all certificates representing shares of stock
subject to the provisions of this Option Agreement. The Optionee shall, at the
request of the Company, promptly present to the Company any and all certificates
representing shares acquired pursuant to the Option in the possession of the
Optionee in order to carry out the provisions of this Section.
16. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise
----------------------------------
of the Option may be sold, exchanged, transferred (including, without
limitation, any
15
<PAGE>
transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated
or otherwise disposed of, including by operation of law, in any manner which
violates any of the provisions of this Option Agreement and, except pursuant to
an Ownership Change, until the date on which such shares become Vested Shares,
and any such attempted disposition shall be void. The Company shall not be
required (a) to transfer on its books any shares which will have been
transferred in violation of any of the provisions set forth in this Option
Agreement or (b) to treat as owner of such shares or to accord the right to vote
as such owner or to pay dividends to any transferee to whom such shares will
have been so transferred.
17. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
18. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation or is required to enable
the Option to qualify as an Incentive Stock Option. No amendment or addition to
this Option Agreement shall be effective unless in writing.
19. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
20. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
THE KINETICS GROUP, INC.
By:_____________________________________
Title:__________________________________
16
<PAGE>
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:_____________________________ ___________________________________
17
<PAGE>
THE KINETICS GROUP, INC.
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the
"OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and
between The Kinetics Group, Inc. and ___________________________ (the
"OPTIONEE").
The Company has granted to the Optionee pursuant to The Kinetics Group,
Inc. 1997 Stock Option Plan an option to purchase certain shares of Stock, upon
the terms and conditions set forth in this Option Agreement (the "OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ___________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means ______________ shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ __________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(e) "INITIAL VESTING DATE" means the date occurring one (1)
year after (check one):
__ the Date of Option Grant.
__ _______________, 199_, the date the Optionee's
Service commenced.
1
<PAGE>
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/4
provided the Optionee's Service
is continuous from the later of
the Date of Option Grant or the
Optionee's Service
commencement date until the
Initial Vesting Date
Plus
----
For each full three months of the 1/16
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted in the Plan, including, without limitation, the power to amend
or terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(k) "COMPANY" means The Kinetics Group, Inc., a Delaware
corporation, or any successor corporation thereto.
2
<PAGE>
(l) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of
the optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for this purpose.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
3
<PAGE>
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(u) "PLAN" means The Kinetics Group, Inc. 1997 Stock Option
Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination.
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in a ccordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be a
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the
4
<PAGE>
Option. Shares acquired upon exercise of the Option are nontransferable and
subject to a substantial risk of forfeiture if, for example, (a) they are
unvested and are subject to a right of the Company to repurchase such shares at
the Optionee's original purchase price if the Optionee's Service terminates, or
(b) the Optionee is subject to a restriction on transfer to comply with
"Pooling-of-Interests Accounting" rules. Failure to file an election under
Section 83(b), if appropriate, may result in adverse tax consequences to the
Optionee. The Optionee acknowledges that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax
consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER
SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE
PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES
THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE
RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase rights set forth
in Section 11.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed
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<PAGE>
copy, if required herein, of the then current form of escrow agreement
referenced below. The Option shall be deemed to be exercised upon receipt by the
Company of such written notice, the aggregate Exercise Price, and, if required
by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. The Option may not be exercised by tender to the Company of shares of
Stock unless such shares either have been owned by the Optionee for more than
six (6) months or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares
6
<PAGE>
acquired upon exercise of the Option. The Optionee is cautioned that the Option
is not exercisable unless the tax withholding obligations of the Participating
Company Group are satisfied. Accordingly, the Optionee may not be able to
exercise the Option when desired even though the Option is vested, and the
Company shall have no obligation to issue a certificate for such shares or
release such shares from any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares as
to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should
be directed to the Chief Financial Officer of the Company. The inability of the
Company to obtain from any regulatory body having jurisdiction the authority, if
any, deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any shares subject to the Option 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. As a condition to
the exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the
7
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Option, to the extent provided in Section 7, may be exercised by the Optionee's
legal representative or by any person empowered to do so under the deceased
Optionee's will or under the then applicable laws of descent and distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason except Disability
or death, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 ADDITIONAL LIMITATION ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
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7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7.1 of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7.5 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to return to Service with the Participating Company Group
remains guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
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(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. For purposes of this Section 8.2, the Option
shall be deemed assumed if, following the Transfer of Control, the Option
confers the right to purchase, for each share of Stock subject to the Option
immediately prior to the Transfer of Control, the consideration (whether stock,
cash or other securities or property) to which a holder of a share of Stock on
the effective date of the Transfer of Control was entitled. The Option shall
terminate and cease to be outstanding effective as of the date of the Transfer
of Control to the extent that the Option is neither assumed or substituted for
by the Acquiring Corporation in connection with the Transfer of Control nor
exercised as of the date of the Transfer of Control. Notwithstanding the
foregoing, shares acquired upon exercise of the Option prior to the Transfer of
Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions
of this Option Agreement except as otherwise provided herein. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is subject
to the Option immediately prior to an Ownership Change Event described in
Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification,
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<PAGE>
or similar change in the capital structure of the Company, appropriate
adjustments shall be made in the number, Exercise Price and class of shares of
stock subject to the Option. If a majority of the shares which are of the same
class as the shares that are subject to the Option are exchanged for, converted
into, or otherwise become (whether or not pursuant to an Ownership Change Event)
shares of another corporation (the "NEW SHARES"), the Board may unilaterally
amend the Option to provide that the Option is exercisable for New Shares. In
the event of any such amendment, the Number of Option Shares and the Exercise
Price shall be adjusted in a fair and equitable manner, as determined by the
Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 9 shall be rounded
up or down to the nearest whole number, as determined by the Board, and in no
event may the Exercise Price be decreased to an amount less than the par value,
if any, of the stock subject to the Option. The adjustments determined by the
Board pursuant to this Section 9 shall be final, binding and conclusive.
10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a stockholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
11. UNVESTED SHARE REPURCHASE OPTION.
--------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
11
<PAGE>
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if at
all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The shares being repurchased shall be delivered to
the Company by the Optionee at the same time as the delivery of the Repurchase
Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "Stock" and "Unvested Shares" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
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12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option will be available for repurchase, the Company
may require the Optionee to deposit the certificate evidencing the shares which
the Optionee purchases upon exercise of the Option with an escrow agent
designated by the Company under the terms and conditions of an escrow agreement
approved by the Company. If the Company does not require such deposit as a
condition of exercise of the Option, the Company reserves the right at any time
to require the Optionee to so deposit the certificate in escrow. Upon the
occurrence of an Ownership Change Event or a change, as described in Section 9,
in the character or amount of any of the outstanding stock of the corporation
the stock of which is subject to the provisions of this Option Agreement, any
and all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of shares of Stock
acquired upon exercise of the Option that remain, following such Ownership
Change Event or change described in Section 9, subject to the Unvested Share
Repurchase Option shall be immediately subject to the escrow to the same extent
as such shares of Stock immediately before such event. The Company shall bear
the expenses of the escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option, but not more frequently
than once each calendar year, the escrow agent shall deliver to the Optionee the
shares and any other property no longer subject to such restriction.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option, the notices required to be given to the Optionee shall
be given to the escrow agent, and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares and any other
property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and with the same
force and effect as the shares subject to the Unvested Share Repurchase Option
immediately before such event.
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14. LEGENDS. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option and any applicable federal, state or foreign
securities law restrictions on all certificates representing shares of stock
subject to the provisions of this Option Agreement. The Optionee shall, at the
request of the Company, promptly present to the Company any and all certificates
representing shares acquired pursuant to the Option in the possession of the
Optionee in order to carry out the provisions of this Section.
15. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise
----------------------------------
of the Option may be sold, exchanged, transferred (including, without
limitation, any transfer to a nominee or agent of the Optionee), assigned,
pledged, hypothecated or otherwise disposed of, including by operation of law,
in any manner which violates any of the provisions of this Option Agreement and,
except pursuant to an Ownership Change, until the date on which such shares
become Vested Shares, and any such attempted disposition shall be void. The
Company shall not be required (a) to transfer on its books any shares which will
have been transferred in violation of any of the provisions set forth in this
Option Agreement or (b) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
will have been so transferred.
16. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
17. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation. No amendment or
addition to this Option Agreement shall be effective unless in writing.
18. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
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19. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
THE KINETICS GROUP, INC.
By:________________________________
Title:_____________________________
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:________________________ ___________________________________
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EXHIBIT 10.2
THE KINETICS GROUP, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Kinetics Group, Inc. 1997 Employee Stock
Purchase Plan (the "PLAN") is hereby established effective as of the effective
date of the initial registration by the Company of its Stock under Section 12
of the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to provide Eligible
Employees of the Participating Company Group with an opportunity to acquire a
proprietary interest in the Company through the purchase of Stock. The Company
intends that the Plan shall qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited, the
Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by
law.
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(d) "COMPANY" means The Kinetics Group, Inc., a Delaware
corporation, or any successor corporation thereto.
(e) "COMPENSATION" means, with respect to an Offering Period
under the Plan, all amounts paid in cash in the forms of base salary,
commissions, overtime, bonuses, annual awards, other incentive payments, shift
premiums, and all other compensation paid in cash during such Offering Period
before deduction for any contributions to any plan maintained by a
Participating Company and described in Section 401(k) or Section 125 of the
Code. Compensation shall not include reimbursements of expenses, allowances,
long-term disability, workers' compensation or any amount deemed received
without the actual transfer of cash or any amounts directly or indirectly paid
pursuant to the Plan or any other stock purchase or stock option plan.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the
Plan.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a director who is also treated as an employee) in the
records of a Participating Company and for purposes of Section 423 of the
Code; provided, however, that neither service as a director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of
the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices of a share of Stock if the Stock is
so reported instead) as reported on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System, the NASDAQ National Market
System or such other national or regional securities exchange or market system
constituting the primary market for the Stock. If the relevant date does not
fall on a day on which the Stock is trading on NASDAQ, the NASDAQ National
Market System or other national or regional securities exchange or market
system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded prior to the relevant date, or
such other appropriate day as shall be determined by the Board, in its sole
discretion. If there is then no public market for the Stock, the Fair Market
Value on any relevant date shall be as determined by the Board without regard
to any restriction other than a restriction which, by its terms, will never
lapse. Notwithstanding the foregoing, the Fair Market Value per share of Stock
on the Effective Date shall be deemed to be the public offering price set
forth in the final prospectus filed with the Securities and Exchange
Commission in connection with the initial public offering of the Stock.
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(j) "OFFERING" means an offering of Stock as provided in
Section 6.
(k) "OFFERING DATE" means, for any Offering Period, the first
day of such Offering Period.
(l) "OFFERING PERIOD" means a period determined in accordance
with Section 6.1.
(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee participating in
the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation which the Board determines should be
included in the Plan. The Board shall have the sole and absolute discretion to
determine from time to time what Parent Corporations or Subsidiary Corporations
shall be Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then
Participating Companies.
(q) "PURCHASE DATE" means, for any Purchase Period, the last
day of such Purchase Period.
(r) "PURCHASE PERIOD" means a period determined in accordance
with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased pursuant to the Plan, as determined in accordance with
Section 9.
(t) "PURCHASE RIGHT" means an option pursuant to the Plan to
purchase such shares of Stock as provided in Section 8 which may or may not be
exercised at the end of an Offering Period. Such option arises from the right
of a Participant to withdraw such Participant's accumulated payroll deductions
(if any) and terminate participation in the Plan or any Offering therein at
any time during a Purchase Period.
(u) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
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(v) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. The Plan shall be administered by the Board, including
--------------
any duly appointed Committee of the Board. All questions of interpretation of
the Plan or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or such
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Two Hundred Fifty Thousand (250,000) and
shall consist of authorized but unissued or reacquired shares of the Stock, or
any combination thereof. If an outstanding Purchase Right for any reason
expires or is terminated or canceled, the shares of Stock allocable to the
unexercised portion of such Purchase Right shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of
the Company, or in the event of any merger (including a merger effected for
the purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall
be made in the number and class of shares subject to the Plan, to the Per
Offering Share Limit set forth in Section 8.1 and to each Purchase Right and
in the Purchase Price.
5. ELIGIBILITY.
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5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Any Employee of a
Participating Company is eligible to participate in the Plan except the
following:
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(a) Employees who are customarily employed by the Participating
Company Group for twenty (20) hours or less per week;
(b) Employees who are customarily employed by the Participating
Company Group for not more than five (5) months in any calendar year; and
(c) Employees who own or hold options to purchase or who, as a
result of participation in the Plan, would own or hold options to purchase,
stock of the Company or of any Parent Corporation or Subsidiary Corporation
possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of such corporation within the meaning of
Section 423(b)(3) of the Code.
5.2 LEASED EMPLOYEES EXCLUDED. Notwithstanding anything herein to
the contrary, any individual performing services for a Participating Company
solely through a leasing agency or employment agency shall not be deemed an
"Employee" of such Participating Company.
6. OFFERINGS.
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6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however that the first
Offering Period shall commence on the Effective Date and end on April 30, 1999
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first day of May and November of each year and end on the last day of the
second April and October, respectively, occurring thereafter. Notwithstanding
the foregoing, the Board may establish a different term for one or more
Offerings or different commencing or ending dates for such Offerings;
provided, however, that no Offering may exceed a term of twenty-seven (27)
months. An Employee who becomes an Eligible Employee after an Offering Period
has commenced shall not be eligible to participate in such Offering but may
participate in any subsequent Offering provided such Employee is still an
Eligible Employee as of the commencement of any such subsequent Offering.
Eligible Employees may not participate in more than one Offering at a time. In
the event the first or last day of an Offering Period is not a business day,
the Company shall specify the business day that will be deemed the first or
last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four
(4) consecutive purchase periods of approximately six (6) months duration
(individually, a "PURCHASE PERIOD"). The Purchase Period commencing on the
Offering Date of the Initial Offering Period shall end on October 31, 1997. A
Purchase Period commencing on May 1 shall end on the last day of the next
following October. A
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Purchase Period commencing on November 1 shall end on the last day of the next
following April. Notwithstanding the foregoing, the Board may establish a
different term for one or more Purchase Periods or different commencing or
ending dates for such Purchase Periods. In the event the first or last day of
a Purchase Period is not a business day, the Company shall specify the
business day that will be deemed the first or last day, as the case may be, of
the Purchase Period.
6.3 GOVERNMENTAL APPROVAL; STOCKHOLDER APPROVAL. Notwithstanding
any other provision of the Plan to the contrary, any Purchase Right granted
pursuant to the Plan shall be subject to (a) obtaining all necessary
governmental approvals or qualifications of the sale or issuance of the
Purchase Rights or the shares of Stock and (b) obtaining stockholder approval
of the Plan. Notwithstanding the foregoing, stockholder approval shall not be
necessary in order to grant any Purchase Right granted in the Plan's Initial
Offering Period; provided, however, that the exercise of any such Purchase
Right shall be subject to obtaining stockholder approval of the Plan.
7. PARTICIPATION IN THE PLAN.
-------------------------
7.1 INITIAL PARTICIPATION. An Eligible Employee shall become a
Participant on the first Offering Date after satisfying the eligibility
requirements of Section 5 and delivering to the Company's payroll office or
other office designated by the Company not later than the close of business
for such office on the last business day before such Offering Date (the
"SUBSCRIPTION DATE") a subscription agreement indicating the Employee's
election to participate in the Plan and authorizing payroll deductions. An
Eligible Employee who does not deliver a subscription agreement to the
Company's payroll or other designated office on or before the Subscription
Date shall not participate in the Plan for that Offering Period or for any
subsequent Offering Period unless such Employee subsequently enrolls in the
Plan by filing a subscription agreement with the Company by the Subscription
Date for such subsequent Offering Period. The Company may, from time to time,
change the Subscription Date as deemed advisable by the Company in its sole
discretion for proper administration of the Plan.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
until such time as such Participant (a) ceases to be an Eligible Employee, (b)
withdraws from the Plan pursuant to Section 13.2 or (c) terminates employment
as provided in Section 14. If a Participant automatically may participate in a
subsequent Offering Period pursuant to this Section 7.2, then the Participant
is not required to file any additional subscription agreement for such
subsequent Offering Period in order to continue participation in the Plan.
However, a Participant may file a subscription agreement with respect to a
subsequent Offering Period if the Participant desires to
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change any of the Participant's elections contained in the Participant's then
effective subscription agreement.
8. RIGHT TO PURCHASE SHARES.
------------------------
8.1 PURCHASE RIGHT. Except as set forth below, during an Offering
Period each Participant in such Offering Period shall have a Purchase Right
consisting of the right to purchase that number of whole shares of Stock
arrived at by dividing Fifty Thousand Dollars ($50,000) by the Fair Market
Value of a share of Stock on the Offering Date of such Offering Period;
provided, however, that such number shall not exceed five thousand (5,000)
shares (the "PER OFFERING SHARE LIMIT"). Shares of Stock may only be purchased
through a Participant's payroll deductions pursuant to Section 10.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
foregoing, if the Board shall establish an Offering Period of less than twenty-
three and one-half (23 1/2) months or more than twenty-four and one-half (24
1/2) months in duration, (a) the dollar amount in Section 8.1 shall be
determined by multiplying $2,083.33 by the number of months in the Offering
Period and rounding to the nearest whole dollar, and (b) the Per Offering
Share Limit shall be determined by multiplying 208.33 shares by the number of
months in the Offering Period and rounding to the nearest whole share. For
purposes of the preceding sentence, fractional months shall be rounded to the
nearest whole month.
9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be
--------------
acquired in a given Offering Period pursuant to the exercise of all or any
portion of a Purchase Right granted under the Plan shall be set by the Board;
provided, however, that the Purchase Price shall not be less than eighty-five
percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on
the Offering Date of the Offering Period, or (b) the Fair Market Value of a
share of Stock on the Purchase Date of the Offering Period. Unless otherwise
provided by the Board prior to the commencement of an Offering Period, the
Purchase Price for that Offering Period shall be eighty-five percent (85%) of
the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date
of the Offering Period, or (b) the Fair Market Value of a share of Stock on the
Purchase Date of the Offering Period.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of
--------------------------------------------------------
Stock which are acquired pursuant to the exercise of all or any portion of a
Purchase Right for an Offering Period may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period. Except as set forth below, the amount of Compensation to be deducted
from a Participant's Compensation during each pay period shall be determined by
the Participant's subscription agreement.
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10.1 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.
10.2 LIMITATIONS ON PAYROLL DEDUCTIONS. The amount of payroll
deductions with respect to the Plan for any Participant during any pay period
shall be in one percent (1%) increments not to exceed ten percent (10%) of the
Participant's Compensation for such pay period. Notwithstanding the foregoing,
the Board may change the limits on payroll deductions effective as of a future
Offering Date, as determined by the Board. Amounts deducted from Compensation
shall be reduced by any amounts contributed by the Participant and applied to
the purchase of Company stock pursuant to any other employee stock purchase
plan qualifying under Section 423 of the Code.
10.3 ELECTION TO INCREASE, DECREASE OR STOP PAYROLL DEDUCTIONS.
During an Offering Period, a Participant may elect to increase or decrease the
amount deducted or stop deductions from his or her Compensation by filing an
amended subscription agreement with the Company on or before the "Change
Notice Date." The "CHANGE NOTICE DATE" shall initially be the seventh (7th)
day prior to the end of the first pay period for which such election is to be
effective; however, the Company may change such Change Notice Date from time
to time.
10.4 PARTICIPANT ACCOUNTS. Individual Plan accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such account and shall be deposited with the
general funds of the Company. All payroll deductions received or held by the
Company may be used by the Company for any corporate purpose.
10.5 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.6 COMPANY ESTABLISHED PROCEDURES. The Company may, from time to
time, establish or change (a) a minimum required payroll deduction amount for
participation in an Offering, (b) limitations on the frequency or number of
changes in the rate of payroll deduction during an Offering, (c) an exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars,
(d) payroll deduction in excess of or less than the amount designated by a
Participant in order to adjust for delays or mistakes in the Company's
processing of subscription agreements, (e) the date(s) and manner by which the
Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan, or (f) such other limitations or procedures as
deemed advisable by the Company in the Company's sole discretion which are
consistent with the Plan and in accordance with the requirements of Section
423 of the Code.
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11. PURCHASE OF SHARES.
------------------
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Offering or
whose participation in the Offering has not terminated on or before such
Purchase Date shall automatically acquire pursuant to the exercise of the
Participant's Purchase Right the number of whole shares of Stock arrived at by
dividing the total amount of the Participant's accumulated payroll deductions
for the Purchase Period by the Purchase Price; provided, however, in no event
shall the number of shares purchased by the Participant during an Offering
Period exceed the number of shares subject to the Participant's Purchase
Right. No shares of Stock shall be purchased on a Purchase Date on behalf of a
Participant whose participation in the Offering or the Plan has terminated on
or before such Purchase Date.
11.2 RETURN OF CASH BALANCE. Any cash balance remaining in the
Participant's Plan account shall be refunded to the Participant as soon as
practicable after the Purchase Date. In the event the cash to be returned to a
Participant pursuant to the preceding sentence is an amount less than the
amount necessary to purchase a whole share of Stock, the Company may establish
procedures whereby such cash is maintained in the Participant's Plan account
and applied toward the purchase of shares of Stock in the subsequent Purchase
Period or Offering Period.
11.3 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares of Stock he or she acquires under the Plan, the
Participant shall make adequate provision for the foreign, federal, state and
local tax withholding obligations of the Participating Company Group, if any,
which arise upon exercise of the Purchase Right or upon such disposition of
shares, respectively. The Participating Company Group may, but shall not be
obligated to, withhold from the Participant's compensation the amount
necessary to meet such withholding obligations.
11.4 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of
such Offering Period.
12. LIMITATIONS ON PURCHASE OF SHARES; RIGHTS AS A STOCKHOLDER.
----------------------------------------------------------
12.1 FAIR MARKET VALUE LIMITATION. Notwithstanding any other
provision of the Plan, no Participant shall be entitled to purchase shares of
Stock under the Plan (or any other employee stock purchase plan which is
intended to meet the requirements of Section 423 of the Code sponsored by the
Company or a Parent Corporation or Subsidiary Corporation at a rate which
exceeds $25,000 in
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Fair Market Value, which Fair Market Value is determined for shares purchased
during a given Offering Period as of the Offering Date for such Offering
Period (or such other limit as may be imposed by the Code), for each calendar
year in which the Participant participates in the Plan (or any other employee
stock purchase plan described in this sentence).
12.2 PRO RATA ALLOCATION. In the event the number of shares of Stock
which might be purchased by all Participants in the Plan exceeds the number of
shares of Stock available in the Plan, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable.
12.3 RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have
no rights as a stockholder by virtue of the Participant's participation in the
Plan until the date of the issuance of a stock certificate for the shares of
Stock being purchased pursuant to the exercise of the Participant's Purchase
Right. No adjustment shall be made for cash dividends or distributions or other
rights for which the record date is prior to the date such stock certificate is
issued. Nothing herein shall confer upon a Participant any right to continue in
the employ of the Participating Company Group or interfere in any way with any
right of the Participating Company Group to terminate the Participant's
employment at any time.
13. WITHDRAWAL.
----------
13.1 WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an
Offering by signing and delivering to the Company's payroll or other designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, if a Participant withdraws after the
Purchase Date for a Purchase Period of an Offering, the withdrawal shall not
affect shares of Stock acquired by the Participant in such Purchase Period.
Unless otherwise indicated, withdrawal from an Offering shall not result in a
withdrawal from the Plan or any succeeding Offering therein. By withdrawing
from an Offering effective as of the close of a given Purchase Date, a
Participant may have shares of Stock purchased on such Purchase Date and
immediately commence participation in the new Offering commencing immediately
after such Purchase Date. A Participant is prohibited from again participating
in an Offering at any time following withdrawal from such Offering. The Company
may impose, from time to time, a requirement that the notice of withdrawal be on
file with the Company's payroll office or other designated office for a
reasonable period prior to the effectiveness of the Participant's withdrawal
from an Offering.
13.2 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the
Plan by signing and delivering to the Company's payroll office or other
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designated office a written notice of withdrawal on a form provided by the
Company for such purpose. Withdrawals made after a Purchase Date shall not
affect shares of Stock acquired by the Participant on such Purchase Date. In
the event a Participant voluntarily elects to withdraw from the Plan, the
Participant may not resume participation in the Plan during the same Offering
Period, but may participate in any subsequent Offering under the Plan by again
satisfying the requirements of Sections 5 and 7.1. The Company may impose,
from time to time, a requirement that the notice of withdrawal be on file with
the Company's payroll office or other designated office for a reasonable
period prior to the effectiveness of the Participant's withdrawal from the
Plan.
13.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's withdrawal
from an Offering or the Plan pursuant to Sections 13.1 or 13.2, respectively,
the Participant's accumulated payroll deductions which have not been applied
toward the purchase of shares of Stock shall be returned as soon as practicable
after the withdrawal, without the payment of any interest, to the Participant,
and the Participant's interest in the Offering or the Plan, as applicable, shall
terminate. Such accumulated payroll deductions may not be applied to any other
Offering under the Plan.
13.4 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date of an Offering (other than the final
Purchase Date of such Offering) is less than the Fair Market Value of a share of
Stock on the Offering Date for such Offering, then every Participant shall
automatically (a) be withdrawn from such Offering at the close of such Purchase
Date and after the acquisition of shares of Stock for such Purchase Period and
(b) be enrolled in the Offering commencing on the first business day subsequent
to such Purchase Period. A Participant may elect not to be automatically
withdrawn from an Offering Period pursuant to this Section 13.4 by delivering to
the Company not later than the close of business on the last day before the
Purchase Date a written notice indicating such election.
14. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Termination of a
----------------------------------------
Participant's employment with a Participating Company for any reason, including
retirement, disability or death or the failure of a Participant to remain an
Eligible Employee, shall terminate the Participant's participation in the Plan
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned to a Participant pursuant to this Section 14. A Participant whose
participation has been so terminated may again become eligible to participate in
the Plan by again satisfying the requirements of Sections 5 and 7.1.
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15. TRANSFER OF CONTROL.
-------------------
15.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting
stock immediately before the Transaction, direct or indirect beneficial
ownership of more than fifty percent (50%) of the total combined voting power
of the outstanding voting stock of the Company or the corporation or
corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or
the Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to
determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its determination
shall be final, binding and conclusive.
15.2 EFFECT OF TRANSFER OF CONTROL ON PURCHASE RIGHTS. In the event
of a Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan or
substitute substantially equivalent Purchase Rights for stock of the Acquiring
Corporation. If the Acquiring Corporation elects not to assume or substitute
for the outstanding Purchase Rights, the Board may, in its sole discretion and
notwithstanding any other provision herein to the contrary, adjust the Purchase
Date of the then current Purchase Period to a date on or before the date of the
Transfer of Control, but shall not adjust the number of shares of Stock subject
to any Purchase Right. All Purchase Rights which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding
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Purchase Rights immediately prior to an Ownership Change Event described in
Section 15.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting
stock is held by another corporation or by other corporations that are members
of an affiliated group within the meaning of section 1504(a) of the Code
without regard to the provisions of section 1504(b) of the Code, the
outstanding Purchase Rights shall not terminate unless the Board otherwise
provides in its sole discretion.
16. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be
-------------------------------------
transferred in any manner otherwise than by will or the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. The Company, in its absolute discretion, may impose
such restrictions on the transferability of the shares purchasable upon the
exercise of a Purchase Right as it deems appropriate and any such restriction
shall be set forth in the respective subscription agreement and may be referred
to on the certificates evidencing such shares.
17. REPORTS. Each Participant who exercised all or part of his or her
-------
Purchase Right for a Purchase Period shall receive, as soon as practicable after
the Purchase Date of such Purchase Period, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the remaining cash balance to be refunded or retained in the
Participant's Plan account pursuant to Section 11.2, if any. Each Participant
shall be provided information concerning the Company equivalent to that
information generally made available to the Company's common stockholders.
18. RESTRICTION ON ISSUANCE OF SHARES. The issuance of shares under the
---------------------------------
Plan shall be subject to compliance with all applicable requirements of foreign,
federal or state law with respect to such securities. A Purchase Right may not
be exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable foreign, federal or state securities laws or other
law or regulations. In addition, no Purchase Right may be exercised unless (a)
a registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan 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. As a condition to the exercise of a
Purchase Right, the
13
<PAGE>
Company may require the Participant to satisfy any qualifications that may be
necessary or appropriate, to evidence compliance with any applicable law or
regulation, and to make any representation or warranty with respect thereto as
may be requested by the Company.
19. LEGENDS. The Company may at any time place legends or other
-------
identifying symbols referencing any applicable foreign, federal or state
securities law restrictions or any provision convenient in the administration of
the Plan on some or all of the certificates representing shares of Stock issued
under the Plan. The Participant shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to a Purchase Right in the possession of the Participant in order to
carry out the provisions of this Section. Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF MADE ON OR BEFORE ______________, 19__. THE REGISTERED
HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S
NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE."
20. NOTIFICATION OF SALE OF SHARES. The Company may require the
------------------------------
Participant to give the Company prompt notice of any disposition of shares
acquired by exercise of a Purchase Right within two years from the date of
granting such Purchase Right or one year from the date of exercise of such
Purchase Right. The Company may require that until such time as a Participant
disposes of shares acquired upon exercise of a Purchase Right, the Participant
shall hold all such shares in the Participant's name (and not in the name of any
nominee) until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding sentence. The Company may direct that the
certificates evidencing shares acquired by exercise of a Purchase Right refer to
such requirement to give prompt notice of disposition.
21. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend
------------------------------------
or terminate the Plan, except that (a) such termination shall not affect
Purchase Rights previously granted under the Plan, except as permitted under the
Plan, and (b) no amendment may adversely affect a Purchase Right previously
granted under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of
14
<PAGE>
Stock under applicable foreign, federal or state securities laws). In
addition, an amendment to the Plan must be approved by the stockholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations
that may be designated by the Board as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
The Kinetics Group, Inc. 1997 Employee Stock Purchase Plan was duly adopted by
the Board of Directors of the Company on December 6, 1996.
/s/ Marie R. Bianco
-------------------------------------
Secretary
15
<PAGE>
THE KINETICS GROUP, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
Original Application
Change in Percentage of Payroll Deductions
I hereby elect to participate in the 1997 Employee Stock Purchase Plan (the
"PLAN") of The Kinetics Group, Inc. (the "COMPANY") and subscribe to purchase
shares of the Company's common stock as determined in accordance with the terms
of the Plan.
I hereby authorize payroll deductions in the amount of ______________
percent (in 1% increments not to exceed 10%) of my "COMPENSATION" (as defined in
the Plan) from each paycheck throughout the "OFFERING PERIOD" (as defined in the
Plan) in accordance with the terms of the Plan. I understand that these payroll
deductions will be accumulated for the purchase of shares of common stock of the
Company at the applicable purchase price determined in accordance with the Plan.
I further understand that, except as otherwise set forth in the Plan, shares
will be purchased for me automatically on the last day of each Purchase Period
unless I withdraw from the Plan or from the Offering by giving written notice to
the Company or unless I terminate employment.
I further understand that I will automatically participate in each
subsequent Offering which commences immediately after the last day of an
Offering in which I am participating under the Plan until such time as I file
with the Company a notice of withdrawal from the Plan on such form as may be
established from time to time by the Company or I terminate employment.
Shares purchased for me under the Plan should be issued in the name set
forth below. (I understand that shares may be issued either in my name alone or
together with my spouse as community property or in joint tenancy.)
NAME:
_________________________________________________________________
ADDRESS:
______________________________________________________________
______________________________________________________________
MY SOCIAL SECURITY NUMBER: ___________________________________________
I hereby authorize withholding from my compensation in order to satisfy the
foreign, federal, state and local tax withholding obligations, if any, which may
arise upon my purchase of shares under the Plan and/or upon my disposition of
shares I acquired under the Plan. I hereby agree that until I dispose of the
shares, unless otherwise permitted by the Company, I will hold all shares I
acquire under the Plan in the name entered above (and not in the name of any
nominee) for at least two (2) years from the first day of the Offering Period in
which, and at least one (1) year from the Purchase Date on which, I acquired
such shares. I further agree that I will promptly notify the Chief Financial
Officer of the Company in writing of any transfer of such shares prior to the
end of the periods referred to in the preceding sentence.
I am familiar with the provisions of the Plan and hereby agree to
participate in the Plan subject to all of the provisions thereof. I understand
that the Board of Directors of the Company reserves the right to amend the Plan
and my right to purchase stock under the Plan as may be necessary to qualify the
Plan as an employee stock purchase plan as defined in section 423 of the
Internal Revenue Code of 1986, as amended, or to obtain qualification or
registration of the Company's common stock to be issued out of the Plan under
applicable foreign, federal and state securities laws. I understand that the
effectiveness of this subscription agreement is dependent upon my eligibility to
participate in the Plan.
Date: ________________________ Signature:_______________________________
Name Printed:_____________________________
16
<PAGE>
THE KINETICS GROUP, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I hereby elect to withdraw from the current offering (the "CURRENT
OFFERING") of the common stock of The Kinetics Group, Inc. (the "COMPANY") under
the Company's 1997 Employee Stock Purchase Plan (the "PLAN").
MAKE ONE ELECTION UNDER SECTION A AND ONE ELECTION UNDER SECTION B:
A. Current Offering. As to my participation in the current purchase period
----------------
(the "Current Purchase Period") of the Current Offering under the Plan, I
elect as follows (check one):
____ 1. I elect to terminate my participation in the Current Purchase Period
immediately.
I hereby request that all payroll deductions credited to my account
under the Plan (if any) not previously used to purchase shares under
the Plan shall not be used to purchase shares on the last day of the
---
Current Purchase Period. Instead, I request that all such amounts be
paid to me as soon as practicable. I understand that this election
immediately terminates my interest in the Current Offering.
____ 2. I elect to terminate my participation in the Current Offering
following my purchase of shares on the last day of the Current
Purchase Period.
I hereby request that all payroll deductions credited to my account
under the Plan (if any) not previously used to purchase shares under
the Plan shall be used to purchase shares on the last day of the
Current Purchase Period. I understand that this election will
terminate my interest in the Current Offering immediately following
such purchase. I request that any cash balance remaining in my
account under the Plan after my purchase of shares be returned to me
as soon as practicable.
I understand that if no election is made as to participation in the Current
Offering under the Plan, I will be deemed to have elected to participate in the
Current Offering.
B. Future Offerings. As to my participation in future offerings of common
----------------
stock under the Plan, I elect as follows (check one):
____ 1. I elect to participate in future offerings under the Plan.
I understand that by making this election I will participate in the
next offering under the Plan commencing subsequent to the Current
Offering, and in each subsequent offering commencing immediately
after the last day of an offering in which I participate, until such
time as I elect to withdraw from the Plan or from any such subsequent
offering.
____ 2. I elect not to participate in future offerings under the Plan.
---
I understand that by making this election I terminate my interest in
the Plan and that no further payroll deductions will be made unless I
elect in accordance with the Plan to become a participant in another
offering under the Plan.
I understand that if no election is made as to participation in future
offerings under the Plan, I will be deemed to have elected to participate in
such future offerings.
Date:______________________ Signature:________________________________
Name Printed:_____________________________
17
<PAGE>
EXHIBIT 10.3
THE KSI GROUP, INC.
1996 KEY EMPLOYEES STOCK OPTION PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1996 Key Employees Stock Option
--------
Plan (this "Plan") of The KSI Group, Inc. (the "Company") are (i) to align the
---- -------
interests of the Company's stockholders and the recipients of options under this
Plan by increasing the proprietary interest of such recipients in the Company's
growth and success, (ii) to advance the interests of the Company by attracting
and retaining officers and other key employees, and (iii) to motivate such
persons to act in the long-term best interests of the Company's stockholders.
1.2 ADMINISTRATION. This Plan shall be administered either by the
--------------
Board of Directors of the Company (the "Board")or by a committee (the
-----
"Committee") designated by the Board consisting of two or more members of the
---------
Board. As used herein, the term "Committee" shall mean the Board if no such
committee is designated, and shall mean such committee during such times as it
is so designated. In the event such a committee is designated by the Board,
each member of such committee shall be a "Non-Employee Director" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
------------
The Committee shall, subject to the terms of this Plan, select
eligible persons for participation in this Plan and shall determine the number
of shares of Common Stock subject to each option granted hereunder, the exercise
price of such option, the time and conditions of exercise of such option and all
other terms and conditions of such option, including, without limitation, the
form of the written option agreement between the Company and the optionee that
evidences each option and sets forth the terms and conditions of such option
(the "Agreement"). The Committee shall, subject to the terms of this Plan,
---------
interpret this Plan and the application thereof, establish such rules and
regulations it deems necessary or desirable for the administration of this Plan
and may impose, incidental to the grant of an option, conditions with respect to
the grant, such as limiting competitive employment or other activities. All
such interpretations, rules, regulations and conditions shall be final, binding
and conclusive. Each option shall be evidenced by an Agreement.
The Committee may delegate some or all of its power and authority
hereunder to the Chief Executive Officer or other executive officer of the
Company as the Committee deems appropriate; provided, however, that the
Committee may not delegate its power and authority with regard to the selection
for participation in this Plan of an officer or other person subject to Section
16 of the Exchange Act or decisions concerning the timing, pricing or amount of
an option grant to such an officer or other person.
No member of the Board of Directors or Committee, and neither the
Chief Executive Officer nor other executive officer to whom the Committee
delegates any of its power and authority hereunder, shall be liable for any act,
omission, interpretation, construction or determination made in connection with
this Plan in good faith, and the members of the Board of Directors and the
Committee and the Chief Executive Officer or other executive officer shall be
entitled to indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including attorneys'
<PAGE>
fees) arising therefrom to the full extent permitted by law and under any
directors' and officers' liability insurance that may be in effect from time to
time.
A majority of the Committee shall constitute a quorum. The acts of
the Committee shall be either (i) acts of a majority of the members of the
Committee present at any meeting at which a quorum is present or (ii) acts
approved in writing by all of the members of the Committee without a meeting.
1.3 ELIGIBILITY. Participants in this Plan shall consist of such
-----------
officers and other key employees of the Company, its subsidiaries from time to
time and any other entity designated by the Board or the Committee (individually
a "Subsidiary" and collectively the "Subsidiaries") as the Committee in its sole
---------- ------------
discretion may select from time to time. For purposes of this Plan, references
to employment shall also mean employment by a Subsidiary. The Committee's
selection of a person to participate in this Plan at any time shall not require
the Committee to select such person to participate in this Plan at any other
time.
1.4 SHARES AVAILABLE. Subject to adjustment as provided in Section
----------------
3.7, 450,000 shares of the Class B Common Stock, $.01 par value per share, of
the Company ("Common Stock"), shall be available for grants of options under
------------
this Plan, reduced by the sum of the aggregate number of shares of Common Stock
which become subject to outstanding options. To the extent that shares of
Common Stock subject to an outstanding option are not issued or delivered by
reason of the expiration, termination, cancellation or forfeiture of such option
or by reason of the delivery or withholding of shares of Common Stock to pay all
or a portion of the exercise price of such option, or to satisfy all or a
portion of the tax withholding obligations relating to such option, then such
shares of Common Stock shall again be available under this Plan.
Shares of Common Stock shall be made available from authorized and
unissued shares of Common Stock, or authorized and issued shares of Common Stock
reacquired and held as treasury shares or otherwise or a combination thereof.
II. STOCK OPTIONS
2.1 GRANTS OF STOCK OPTIONS. The Committee may, in its discretion,
-----------------------
grant options to purchase shares of Common Stock to such eligible persons as may
be selected by the Committee. Each option shall be a non-qualified stock option
not intended to satisfy the requirements of Section 422 of the Internal Revenue
Code of 1986.
2.2 TERMS OF STOCK OPTIONS. Options shall be subject to the
----------------------
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee shall
deem advisable:
(a) Number of Shares and Purchase Price. The number of shares of
-----------------------------------
Common Stock subject to an option and the purchase price per share of Common
Stock purchasable upon exercise of the option shall be determined by the
Committee; provided, however, that such purchase price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date of grant of
such option. "Fair Market Value" shall be determined by the Committee by
whatever means or method as the Committee, in the good faith exercise of its
discretion, shall at such time deem appropriate.
(b) Option Period and Exercisability. The period during which an
--------------------------------
option may be exercised shall be determined by the Committee. The Committee
may, in its discretion, establish
2
<PAGE>
performance measures or other criteria which shall be satisfied or met as a
condition to the grant of an option or to the exercisability of all or a portion
of an option. The Committee shall determine whether an option shall become
exercisable in cumulative or non-cumulative installments and in part or in full
at any time. An exercisable option, or portion thereof, may be exercised only
with respect to whole shares of Common Stock. Notwithstanding Section 2.3 hereof
or the provisions of any Agreement, the Committee may in its sole and absolute
discretion extend the time for the exercise of any option.
(c) Method of Exercise. An option may be exercised (i) by giving
------------------
written notice to the Company specifying the number of whole shares of Common
Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery of previously owned whole shares of Common Stock (which
the optionee has held for at least six months prior to the delivery of such
shares or which the optionee purchased on the open market and in each case for
which the optionee has good title, free and clear of all liens and encumbrances)
having an aggregate Fair Market Value, determined as of the date of exercise,
equal to the aggregate purchase price payable by reason of such exercise, (C) by
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered upon exercise of the option having an aggregate Fair
Market Value, determined as of the date of exercise, equal to the aggregate
purchase price payable by reason of such exercise, (D) in cash by a broker-
dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise, or (E) a combination of (A), (B) and (C), in
each case to the extent not prohibited by the Agreement relating to the option
and (ii) by executing such documents as the Company may reasonably request;
provided, however, that notwithstanding the foregoing or anything in the
Agreement relating to such option to the contrary, the Company shall have sole
discretion to disapprove of an election pursuant to clause (C). Any fraction of
a share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until the
full purchase price therefor has been paid (or arrangement made for such payment
to the Company's satisfaction).
(d) Additional Options. The Committee shall have the authority to
------------------
include in any Agreement relating to an option a provision entitling the
optionee to an additional option in the event such optionee exercises the option
represented by such option agreement, in whole or in part, by delivering
previously owned whole shares of Common Stock in payment of the purchase price
in accordance with this Plan and such Agreement. Any such additional option
shall be for a number of shares of Common Stock equal to the number of delivered
shares, shall have a purchase price determined by the Committee in accordance
with this Plan, shall be exercisable on the terms and subject to the conditions
established by the Committee at the time of grant of such additional option, and
shall be subject to such other terms and conditions as the Committee shall
determine in accordance with this Plan.
2.3 TERMINATION OF EMPLOYMENT.
-------------------------
(a) Total Disability. Unless otherwise specified in the Agreement
----------------
relating to an option, if an optionee's employment with the Company terminates
by reason of Total Disability, each option held by such optionee shall be
exercisable only to the extent that such option is exercisable on the effective
date of such optionee's termination of employment and may thereafter be
exercised by such optionee (or such optionee's legal representative or similar
person) until and including the earliest to occur of (i) the date which is one
year (or such other period as set forth in the Agreement relating to such
option) after the effective date of such optionee's termination of employment,
and (ii) the expiration date of the term of such option. For purposes of this
Plan, "Total Disability" shall, with respect to any optionee who at such time
----------------
has a written employment agreement with the Company, mean the permanent and
total disability of such optionee as described in such agreement; and otherwise
shall mean the inability
3
<PAGE>
of such optionee substantially to perform such optionee's duties and
responsibilities for a continuous period of six months.
(b) Death. Unless otherwise specified in the Agreement relating to an
-----
option, if an optionee's employment with the Company terminates by reason of
death, each option held by such optionee shall be exercisable only to the extent
that such option is exercisable on the date of such optionee's death and may
thereafter be exercised by such optionee's executor, administrator, legal
representative, beneficiary or similar person until and including the earliest
to occur of (i) the date which is one year (or such other period as set forth in
the Agreement relating to such option) after the date of death and (ii) the
expiration date of the term of such option.
(c) Termination for Cause. Unless otherwise specified in the
---------------------
Agreement relating to an option, if the employment of the holder of such option
is terminated by the Company for Cause, such option shall terminate
automatically on the date of such termination. For purposes of this Plan,
"Cause" shall, with respect to any optionee who at such time has a written
-----
employment agreement with the Company, have the meaning ascribed thereto in such
agreement and (i) shall also include an optionee's termination of his employment
for any reason, but (ii) shall not include termination by reason of an
optionee's disability notwithstanding any language to the contrary in such
employment agreement; and otherwise shall mean the willful and continued failure
to substantially perform the duties with the Company (other than a failure
resulting from the optionee's Total Disability), the willful engaging in conduct
which is demonstrably injurious to the Company or any Subsidiary, monetarily or
otherwise, including conduct that, in the reasonable judgment of the Company, no
longer conforms to the standard of the Company' executives, any act of
dishonesty, commission of a felony, a significant violation of any statutory or
common law duty of loyalty to the Company, or such optionee's termination of his
employment for any reason.
(d) Other Termination. Unless otherwise specified in the Agreement
-----------------
relating to an option, if an optionee's employment with the Company terminates
for any reason other than Total Disability, death or for Cause, each option held
by such optionee shall be exercisable only to the extent that such option is
exercisable on the effective date of such optionee's termination of employment
and may thereafter be exercised by such optionee (or such optionee's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months (or such other period as set forth in the
Agreement relating to such option) after the effective date of such optionee's
termination of employment, and (ii) the expiration date of the term of such
option.
III. GENERAL
3.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to
-------------------------------
the holders of the Class A Common Stock of the Company for approval and, if
approved by the requisite vote or action of the holders of such shares shall
become effective as of the date of approval by the Board. No option may be
exercised prior to the date of such stockholder approval. This Plan shall
terminate ten years after its effective date, unless terminated earlier by the
Board. Termination of this Plan shall not affect the terms or conditions of any
option granted prior to termination.
3.2 AMENDMENTS. The Board may amend this Plan as it shall deem
----------
advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation, including Rule 16b-3 under the Exchange Act;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) increase the maximum number of shares of Common
Stock available under this Plan (subject to Section 3.7), or (b) extend the term
of this Plan; and, provided,
4
<PAGE>
further, that his Plan shall not be amended in a manner which fails to comply
with Rule 16b-3(c)(2)(ii)(B) under Section 16 of the Exchange Act. No amendment
may impair the rights of a holder of an outstanding option without the consent
of such holder.
3.3 AGREEMENT. No option shall be valid until an Agreement is
---------
executed by the Company and the optionee and, upon execution by the Company and
the optionee and delivery of the Agreement to the Company, such option shall be
effective as of the effective date set forth in the Agreement.
3.4 NON-TRANSFERABILITY. No option hereunder shall be transferable
-------------------
other than (i) by will or the laws of descent and distribution or pursuant to
beneficiary designation procedures approved by the Company or (ii) as otherwise
permitted under Rule 16b-3 under the Exchange Act as set forth in the Agreement
relating to such option. Except to the extent permitted by the foregoing
sentence, each option may be exercised during the optionee's lifetime only by
the optionee or the optionee's legal representative or similar person. Except
as permitted by the second preceding sentence, no option hereunder shall be
sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise
disposed of (whether by operation of law or otherwise) or be subject to
execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any
option hereunder, such option and all rights thereunder shall immediately become
null and void.
3.5 TAX WITHHOLDING. The Company shall have the right to require,
---------------
prior to the issuance or delivery of any shares of Common Stock, payment by the
optionee of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with an option hereunder. Unless otherwise
provided in an Agreement relating to an option, the optionee may elect that (i)
the Company shall withhold whole shares of Common Stock which would otherwise be
delivered upon exercise of the option having an aggregate Fair Market Value
determined as of the date the obligation to withhold or pay taxes arises in
connection with the option (the "Tax Date") in the amount necessary to satisfy
--------
any such obligation or (ii) the optionee satisfy any such obligation by any of
the following means: (A) a cash payment to the Company, (B) delivery to the
Company of previously owned whole shares of Common Stock (which the optionee has
held for at least six months prior to the delivery of such shares or which the
optionee purchased on the open market and in each case for which the optionee
has good title, free and clear of all liens and encumbrances) having an
aggregate Fair Market Value determined as of the Tax Date, equal to the amount
necessary to satisfy any such obligation, (C) authorizing the Company to
withhold whole shares of Common Stock which would otherwise be delivered upon
exercise of the option having an aggregate Fair Market Value, determined as of
the Tax Date, equal to the amount necessary to satisfy any such obligation, (D)
a cash payment by a broker-dealer acceptable to the Company to whom the optionee
has submitted an irrevocable notice of exercise, or (E) any combination of (A),
(B) and (C), in each case to the extent not prohibited by the Agreement relating
to the option. Any fraction of a share of Common Stock which would be required
to satisfy such an obligation shall be disregarded and the remaining amount due
shall be paid in cash by the optionee.
3.6 RESTRICTIONS ON SHARES. Each option hereunder shall be subject
----------------------
to the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any option hereunder bear a
5
<PAGE>
legend indicating that the sale, transfer or other disposition thereof by the
holder is prohibited except in compliance with the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
3.7 ADJUSTMENT. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding option and the
purchase price per security shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding options without an
increase in the aggregate purchase price. The decision of the Committee
regarding any such adjustment shall be final and binding. If any adjustment
would result in a fractional security being (a) available under this Plan, such
fractional security shall be disregarded, or (b) subject to an option under this
Plan, the Company shall pay the optionee, in connection with the first exercise
of the option in whole or in part occurring after such adjustment, an amount in
cash determined by multiplying (A) the fraction of such security (rounded to the
nearest hundredth) by (B) the excess, if any, of (x) the Fair Market Value on
the exercise date over (y) the exercise price of the option.
3.8 EFFECT OF CERTAIN TRANSACTIONS.
------------------------------
(a) In the event that the Company enters into an agreement (a) to
dispose of all or substantially all of its assets, in contemplation of the
distribution of the net proceeds of such sale to the Company's shareholders, or
(b) to consummate a merger or consolidation in which the Company is not the
surviving or resulting corporation, or in the event the persons who, as of the
date of the adoption of this Plan by the Board of Directors, hold 100% of the
outstanding capital stock of the Company enter into an agreement to sell all of
such stock (such distribution, merger, consolidation or sale being hereinafter
referred to as a "Transaction"), then (unless otherwise specified in the
-----------
Agreement relating to an option), the Committee shall provide, at its election
made in its sole and absolute discretion, for one or more of the following: (i)
for each outstanding option, whether or not then exercisable, to be replaced
with a comparable option to purchase shares of capital stock of a successor or
purchasing corporation or parent thereof, or (ii) for each outstanding option,
whether or not then exercisable, to be assumed by a successor or purchasing
corporation or parent thereof (and, in the event of such assumption, each
outstanding option shall continue to be exercisable, on the terms and subject to
the conditions set forth in, and in cumulative amounts at the times provided in,
the Agreement relating to such option but shall, from and after the consummation
of such Transaction, be exercisable for the capital stock, cash and/or other
property received by the common stockholders of the Company in such Transaction
in an amount equal to what the holder of such option would have received had he
exercised such option immediately prior to the consummation of such
Transaction), or (iii) for each outstanding option, whether or not then
exercisable, to become exercisable during such period prior to the scheduled
consummation of such Transaction as may be specified by the Committee; provided,
however, that such elections of the Committee shall apply identically, by their
terms, to all holders of options granted under this Plan (unless otherwise
required by an Agreement). In the event the Committee elects to cause the
options not then otherwise exercisable to become exercisable prior to such
Transaction (an "Accelerated Option"), any exercise of an Accelerated Option
------------------
shall be conditioned upon, and shall be effective only concurrently with, the
consummation of such Transaction; and if such Transaction is not consummated,
the exercise of such Accelerated Options shall be of no further force or effect
(and an optionee may elect, with respect to the exercise during such period of
an option that was otherwise exercisable, to so condition such exercise upon the
consummation of the Transaction). All options not exercised prior to the
consummation of such Transaction (and which are not being assumed by a successor
or purchasing corporation or parent thereof) shall terminate and be of no
further force or effect as of the consummation of such Transaction.
6
<PAGE>
(b) With respect to any optionee who is subject to Section 16 of the
Exchange Act, (i) notwithstanding the exercise periods set forth in Section 2.3,
or as set forth pursuant to such Section in any Agreement to which such optionee
is a party, and (ii) notwithstanding the expiration date of the term of such
option, in the event the Company is involved in a business combination that is
intended to be treated as a pooling of interests for financial accounting
purposes (a "Pooling Transaction") or pursuant to which such optionee
-------------------
receives a substitute option to purchase securities of any entity, including an
entity directly or indirectly acquiring the Company, then each option (or option
in substitution thereof) held by such optionee shall be exercisable to the
extent set forth in the Agreement evidencing such option until and including the
latest of (x) the date set forth pursuant to the then applicable paragraph of
Section 2.3 or the expiration date of the term of the option, as the case may
be, (y) the date which is six months and one day after the consummation of such
business combination and (z) the date which is ten business days after the date
of expiration of any period during which such optionee may not dispose of a
security issued in the Pooling Transaction in order for the Pooling Transaction
to be accounted for as a pooling of interests.
3.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have
---------------------------------------
any right to participate in this Plan. Neither this Plan nor any option granted
hereunder shall confer upon any person any right to continued employment by the
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment of any person at any time without liability hereunder.
3.10 RIGHTS AS STOCKHOLDER. No person shall have any rights as a
---------------------
stockholder of the Company with respect to any shares of Common Stock which are
subject to an option hereunder until such person becomes a stockholder of record
with respect to such shares of Common Stock.
3.11 DESIGNATION OF BENEFICIARY. If permitted by the Company, an
--------------------------
optionee may file with the Committee a written designation of one or more
persons as such optionee's beneficiary or beneficiaries (both primary and
contingent) in the event of the optionee's death. To the extent an outstanding
option granted hereunder is exercisable, such beneficiary or beneficiaries shall
be entitled to exercise such option.
Each beneficiary designation shall become effective only when filed in
writing with the Committee during the optionee's lifetime on a form prescribed
by the Committee. The spouse of a married optionee domiciled in a community
property jurisdiction shall join in any designation of a beneficiary other than
such spouse. The filing with the Committee of a new beneficiary designation
shall cancel all previously filed beneficiary designations.
If an optionee fails to designate a beneficiary, or if all designated
beneficiaries of an optionee predecease the optionee, then each outstanding
option hereunder held by such optionee, to the extent exercisable, may be
exercised by such optionee's executor, administrator, legal representative or
similar person.
3.12 GOVERNING LAW. This Plan, each option hereunder and the related
-------------
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the laws of the United States, shall be
governed by the laws of the State of Delaware and construed in accordance
therewith without giving effect to principles of conflicts of laws.
3.13 FOREIGN EMPLOYEES. Without amending this Plan, the Committee
-----------------
may grant options to eligible persons who are foreign nationals on such terms
and conditions different from those specified in this Plan as may in the
judgment of the Committee be necessary or desirable to foster and promote
achievement of the purposes of this Plan and, in furtherance of such purposes
the Committee may
7
<PAGE>
make such modifications, amendments, procedures, subplans and the like as may be
necessary or advisable to comply with provisions of laws in other countries or
jurisdictions in which the Company or its Subsidiaries operates or has
employees.
8
<PAGE>
EXHIBIT 10.4
FIRST AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This First Amended and Restated Registration Rights Agreement (this
"Agreement") dated as of April 1, 1996 between THE KSI GROUP, INC., a Delaware
corporation (the "Company"), and BT CAPITAL PARTNERS, INC., a Delaware
corporation ("Purchaser").
RECITALS
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of May
31, 1995, by and among Kinetic Systems, Inc., a California corporation ("KSI
CA") and Purchaser ("Purchase Agreement"), Purchaser has purchased shares of
Preferred Stock from KSI CA which shares are convertible into shares of KSI CA's
Series B Common Stock which in turn are exchangeable for shares of KSI CA's
Series A Common Stock and KSI CA agreed to provide certain rights to Purchaser
to cause the shares of Series A Common Stock which Purchaser may from time to
time hold to be registered pursuant to the Securities Act.
WHEREAS, KSI CA and Purchaser entered into a Registration Rights Agreement
on May 31, 1995 (the "Original Agreement") pursuant to which KSI CA granted
Purchaser certain registration rights.
WHEREAS, on March 31, 1996, all of the shareholders of KSI CA, including
Purchaser, exchanged all of their shares of KSI CA for shares of the Company.
WHEREAS, the parties wish to amend and restate the Original Agreement in
its entirety as follows to make Purchaser's rights applicable to shares of the
Company instead of shares of KSI CA.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions and Usage.
---------------------
As used in this Agreement:
1.1 Definitions.
-----------
Agent. "Agent" shall mean the principal placement agent on an
-----
agented placement of Registrable Securities.
Commission. "Commission" shall mean the Securities and Exchange
----------
Commission.
<PAGE>
Common Stock. "Common Stock" shall mean (i) the Series A Common
------------
Stock, par value $.01 per share, of the Company, (ii) shares of capital stock of
the Company or any legal successor issued by the Company or any other person in
respect of or in exchange for shares of such Series A Common Stock in connection
with any stock dividend or distribution, stock split-up, recapitalization,
recombination, exchange, merger or reorganization, and (iii) shares of capital
stock of the Company or any legal successor issued by the Company or any other
person which is convertible into, or exchangeable from such shares of Series A
Common Stock.
Continuously Effective. "Continuously Effective", with respect to
----------------------
a specified registration statement, shall mean that it shall not cease to be
effective and available for Transfers of Registrable Securities thereunder for
longer than either (i) any ten (10) consecutive business days, or (ii) an
aggregate of fifteen (15) business days during the period specified in the
relevant provision of this Agreement.
Demand Registration. "Demand Registration" shall have the meaning
-------------------
set forth in Section 2.1(i).
--------------
Demanding Holders. "Demanding Holders" shall have the meaning set
-----------------
forth in Section 2.1(i).
--------------
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
------------
of 1934.
Founding Shareholders. "Founding Shareholders" shall mean
---------------------
individually, or collectively, William A. Bianco, Jr., Marie R. Bianco, The
Bianco Family 1991 Trust, and David J. Shimmon.
Holder. "Holder" shall mean Purchaser and Transferees of
------
Purchaser's Registrable Securities with respect to the rights that such
Transferees shall have acquired in accordance with Section 8, at such times as
---------
such Persons shall own Registrable Securities.
Initial Public Offering. "Initial Public Offering" shall mean the
-----------------------
first offering of shares of Common Stock registered pursuant to Section 5 of the
Securities Act.
Majority Selling Holders. "Majority Selling Holders" shall mean
------------------------
those Selling Holders whose Registrable Securities included in such registration
represent a majority of the Registrable Securities of all Selling Holders
included therein.
Person. "Person" shall mean any individual, corporation,
------
partnership, joint venture, association, joint-stock company, limited liability
company, trust, unincorporated organization or government or other agency or
political subdivision thereof.
Preferred Stock. "Preferred Stock" shall mean the preferred stock,
---------------
par value $.01 per share, of the Company.
<PAGE>
Piggyback Registration. "Piggyback Registration" shall have the
----------------------
meaning set forth in Section 3.
---------
Purchase Agreement. "Purchase Agreement" shall have the meaning set
------------------
forth in the Recitals.
--------
Register, Registered and Registration. "Register", "registered", and
-------------------------------------
"registration" shall refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Securities
Act, and the declaration or ordering by the Commission of effectiveness of such
registration statement or document.
Registrable Securities. "Registrable Securities" shall mean, subject
----------------------
to Section 8 and Section 10.3: (i) shares of Common Stock originally issued to a
--------- ------------
Holder and owned by a Holder on the date of determination, (ii) any shares of
Common Stock or other securities issued as a dividend or other distribution with
respect to, or in exchange by the Company generally for, or in replacement by
the Company generally of, shares of Common Stock then issuable upon the
conversion and/or exchange of the Shares; and (iii) any voting security issued
in exchange for Shares in any reorganization of the Company; provided, however,
-------- -------
that Registrable Securities shall not include any Securities which have
theretofore been registered and sold pursuant to the Securities Act or which
have been sold to the public pursuant to Rule 144 or any similar rule
promulgated by the Commission pursuant to the Securities Act, and, provided
--------
further, the Company shall have no obligation under Sections 2 and 3 to register
- ------- ----------------
any Registrable Securities of a Holder if the Company shall deliver to the
Holders requesting such registration an opinion of counsel reasonably
satisfactory to such Holders and its counsel to the effect that the proposed
sale or disposition of all of the Registrable Securities for which registration
was requested does not require registration under the Securities Act for a sale
or disposition in a single public sale, and offers to remove any and all legends
restricting transfer from the certificates evidencing such Registrable
Securities. For purposes of this Agreement, a Person will be deemed to be a
holder of Registrable Securities whenever such Person has the then-existing
right to acquire such Registrable Securities (by conversion, purchase or
otherwise), whether or not such acquisition has actually been effected.
Registrable Securities then outstanding. "Registrable Securities then
---------------------------------------
outstanding" shall mean, with respect to a specified determination date, the
Registrable Securities owned by all Holders on such date.
Registration Expenses. "Registration Expenses" shall have the meaning
---------------------
set forth in Section 6.1.
-----------
S-3 Registration. "S-3 Registration" shall mean a registration of
----------------
shares being sold for the account of Selling Holders which is then eligible for
inclusion by the Company in a Form S-3 or Form S-2 Registration Statement (or
any successor form which is substantially similar to Form S-2 or S-3 as in
effect on the Closing Date).
Securities Act. "Securities Act" shall mean the Securities Act of
--------------
1933.
<PAGE>
Selling Holders. "Selling Holders" shall mean, with respect to a
---------------
specified registration pursuant to this Agreement, Holders whose Registrable
Securities are included in such registration.
Shares. "Shares" shall mean the shares of Preferred Stock sold
------
pursuant to the Purchase Agreement and all shares of Preferred Stock issued as
dividends thereon.
Substantial Holder. "Substantial Holder" shall mean any Holder or
------------------
affiliated group of Holders that owns on the date of determination 50% or more
of the Registrable Securities then outstanding.
Transfer. "Transfer" shall mean and include the act of selling,
--------
giving, transferring, creating a trust (voting or otherwise), assigning or
otherwise disposing of (other than pledging, hypothecating or otherwise
transferring as security) (and correlative words shall have correlative
meanings); provided however, that any transfer or other disposition upon
-------- -------
foreclosure or other exercise of remedies of a secured creditor after an event
of default under or with respect to a pledge, hypothecation or other transfer as
security shall constitute a "Transfer".
Underwriters' Representative. "Underwriters' Representative" shall
----------------------------
mean the managing underwriter, or, in the case of a co-managed underwriting, the
managing underwriter designated as the Underwriters' Representative by the co-
managers.
Violation. "Violation" shall have the meaning set forth in Section
--------- -------
7.1.
- ---
1.2 Usage.
-----
(i) References to a Person are also references to its assigns and
successors in interest (by means of merger, consolidation or sale of all or
substantially all the assets of such Person or otherwise, as the case may be).
(ii) References to Registrable Securities "owned" by a Holder shall
include Registrable Securities beneficially owned by such Person but which are
held of record in the name of a nominee, trustee, custodian, or other agent, but
shall exclude shares of Common Stock held by a Holder in a fiduciary capacity
for customers of such Person.
(iii) References to a document are to it as amended, waived and
otherwise modified from time to time and references to a statute or other
governmental rule are to it as amended and otherwise modified from time to time
(and references to any provision thereof shall include references to any
successor provision).
(iv) References to Sections or to Schedules or Exhibits are to
sections hereof or schedules or exhibits hereto, unless the context otherwise
requires.
<PAGE>
(v) The definitions set forth herein are equally applicable both to
the singular and plural forms and the feminine, masculine and neuter forms of
the terms defined.
(vi) The term "including" and correlative terms shall be deemed to be
followed by "without limitation" whether or not followed by such words or words
of like import.
(vii) The term "hereof" and similar terms refer to this Agreement as
a whole.
(viii) The "date of" any notice or request given pursuant to this
Agreement shall be determined in accordance with Section 13.
----------
Section 2. Demand Registration.
-------------------
2.1
(i) At any time on or after six (6) months after the Initial Public
Offering if one or more Holders who collectively own an aggregate of 51% or more
of the Registrable Securities then outstanding shall make a written request to
the Company (the "Demanding Holders"), the Company shall cause there to be filed
with the Commission a registration statement meeting the requirements of the
Securities Act (a "Demand Registration"), and each Demanding Holder shall be
entitled to have included therein (subject to Section 2.7) all or such number of
-----------
such Demanding Holder's Registered Shares, as the Demanding Holder shall request
in writing. Any request made pursuant to this Section 2.1 shall be addressed to
-----------
the attention of the Secretary of the Company, and shall specify the number of
Registrable Securities to be registered, the intended methods of disposition
thereof and that the request is for a Demand Registration pursuant to this
Section 2.1(i).
- --------------
(ii) The Company shall be entitled to postpone for up to sixty (60)
days the filing of any Demand Registration statement otherwise required to be
prepared and filed pursuant to this Section 2.1, if the Board determines, in its
-----------
good faith reasonable judgment (with the concurrence of the managing
underwriter, if any), that such registration and the Transfer or Registrable
Securities contemplated thereby would materially interfere with, or require
premature disclosure of, any financing, acquisition or reorganization involving
the Company or any of its wholly owned subsidiaries and the Company promptly
gives the Demanding Holders notice of such determination; provided, however,
-------- -------
that the Company shall not have postponed pursuant to this Section 2.1(ii) the
---------------
filing of any other Demand Registration statement otherwise required to be
prepared and filed pursuant to this Section 2.1 during the twelve (12) month
-----------
period ended on the date of the relevant request pursuant to Section 2.1(i).
--------------
(iii) Whenever the Company shall have received a demand pursuant to
Section 2.1(i) to effect the registration of any Registrable Shares, the Company
- --------------
shall promptly give written notice of such proposed registration to all Holders.
Any such Holder may, within twenty (20) days after receipt of such notice,
request in writing that all of such Holder's Registrable Securities, or any
portion thereof designated by such Holder, be included in the registration.
<PAGE>
2.2 At any time, or from time to time, when the Company is eligible
to use Form S-2 or Form S-3 (or any similar successor form) in connection with a
S-3 Registration, Holders of Registrable Securities amounting to not less than
1% of the shares of Common Stock then outstanding, may request that the Company
file a S-3 Registration Statement covering the sale of the number of Registrable
Securities specified in the request. Any request made pursuant to this Section
-------
2.2 shall be addressed to the attention of the Secretary of the Company, and
- ---
shall specify the number of Registrable Securities to be registered, the
intended methods of disposition thereof and that the request is for a Shelf
Registration pursuant to this Section 2.2.
-----------
2.3 Following receipt of a request for a Demand Registration or an S-
3 Registration, the Company shall:
(i) File the registration statement with the Commission as promptly as
practicable, and shall use the Company's best efforts to have the registration
declared effective under the Securities Act as soon as reasonably practicable,
in each instance giving due regard to the need to prepare current financial
statements, conduct due diligence and complete other actions that are reasonably
necessary to effect a registered public offering.
(ii) Use the Company's best efforts to keep the relevant registration
statement Continuously Effective (x) if a Demand Registration, for up to two
hundred and seventy (270) days or until such earlier date as of which all the
Registrable Securities under the Demand Registration statement shall have been
disposed of in the manner described in the Registration Statement, and (y) if a
S-3 Registration, for so long as Company remains eligible to use a S-3
Registration, but not in excess of three (3) years. Notwithstanding the
foregoing, if for any reason the effectiveness of a registration pursuant to
this Section 2 is suspended or, in the case of a Demand Registration, postponed
---------
as permitted by Section 2.1(ii), the foregoing period shall be extended by the
---------------
aggregate number of days of such suspension or postponement.
2.4 The Company shall be obligated to effect no more than one (1)
Demand Registration, except that if following completion of a Demand
Registration and the expiration of at least twelve (12) months from completion
of the Initial Public Offering the Demanding Holders request a S-3 Registration
and the Company is then ineligible to file a Form S-3 Registration Statement,
the Holders will be entitled to require the Company to effect a second Demand
Registration at Company's expense. For purposes of the preceding sentence,
registration shall not be deemed to have been effected (i) unless a registration
statement with respect thereto has become effective, (ii) if after such
registration statement has become effective, such registration or the related
offer, sale or distribution of Registrable Securities thereunder is interfered
with by any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court for any reason not attributable
to the Selling Holders and such interference is not thereafter eliminated, or
(iii) if the conditions to closing specified in the underwriting agreement, if
any, entered into in connection with such registration are not satisfied or
waived. If the Company shall have complied with its obligations under this
Agreement, a right to demand a registration pursuant to this Section 2 shall be
---------
deemed to have been satisfied (i) if a Demand Registration, upon the date as of
which
<PAGE>
all of the Registrable Securities included therein shall have been disposed of
pursuant to the Registration Statement, and (ii) if a S-3 Registration, upon the
effective date of a S-3 Registration, provided no stop order or similar order,
or proceedings for such an order, is thereafter entered or initiated or, upon
request of the Initiating Substantial Holder, such S-3 Registration is
subsequently withdrawn.
2.5 A registration pursuant to this Section 2.1 shall be on such
-----------
appropriate registration form of the Commission as shall (i) be selected by the
Company and be reasonably acceptable to the Majority Selling Holders, or by the
Initiating Substantial Holder, as the case may be, and (ii) permit the
disposition of the Registrable Securities in accordance with the intended method
or methods of disposition specified in the request pursuant to Section 2.1(i).
--------------
2.6 If any registration pursuant to Section 2 involves an
---------
underwritten offering (whether on a "firm", "best efforts" or "all reasonable
efforts" basis or otherwise), or an agented offering, the Majority Selling
Holders, shall have the right to select the underwriter or underwriters and
manager or managers to administer such underwritten offering or the placement
agent or agents for such agented offering, the choice of such underwriter to be
subject to the Company's consent, not to be unreasonably withheld. No consent
of Company shall be required to retain as underwriter any firm which acted as a
managing underwriter of the Initial Public Offering.
2.7 Whenever the Company shall effect a registration pursuant to this
Section 2 in connection with an underwritten offering by one or more Selling
- ---------
Holders of Registrable Securities if the Underwriters' Representative or Agent
advises each such Selling Holder in writing that, in its opinion, the amount of
securities requested to be included in such offering (whether by Selling Holders
or others) exceeds the amount which can be sold in such offering within a price
range acceptable to the Majority Selling Holders, the securities which may be
included in such offering and the related registration, shall be reduced to such
amount which can be sold within such price range, and shall be on a pro rata
basis among all Selling Holders in accordance with the number of shares
requested to be included in such registration pursuant to this Section 2. In
---------
the event and to the extent the Underwriters' Representative or Agent advises
the Company in writing that, in its opinion, shares in addition to the
Registrable Securities may be included on such offering without adversely
affecting the price which the Majority Selling Holders are likely to receive for
their securities, the Company may permit the inclusion in such offering and such
registration of shares of Common Stock owned by any one or more Founding
Shareholders who request such registration (pro rata among them based on their
proportionate ownership of shares of Common Stock). This provision is for the
express benefit of the Founding Shareholders, may not be amended or modified
without their consent, and may be enforced directly by them.
3. Piggyback Registration.
----------------------
3.1 If at any time the Company proposes to register (including for
this purpose a registration effected by the Company for itself as well as for
shareholders of the Company other than the Holders) securities under the
Securities Act in connection with the public offering solely for cash on Form S-
1, S-2 or S-3 (or any replacement or successor
<PAGE>
forms), including the Initial Public Offering, the Company shall promptly give
each Holder of Registrable Securities written notice of such registration (a
"Piggyback Registration"). Upon the written request of each Holder given within
twenty (20) days following the date of such notice, the Company shall cause to
be included in such registration statement and use its best efforts to be
registered under the Securities Act all the Registrable Securities that each
such Holder shall have requested to be registered. The Company shall have the
absolute right to withdraw or cease to prepare or file any registration
statement for any offering referred to in this Section 3 without any obligation
---------
or liability to any Holder.
3.2 If the Underwriters' Representative or Agent shall advise the
Company in writing (with a copy to each Selling Holder) that, in its opinion,
the amount of Registrable Securities requested to be included in such
registration would materially adversely affect such offering, or the timing
thereof, then the Company will include in such registration, to the extent of
the amount and class which the Company is so advised can be sold without such
material adverse effect in such offering: First, securities proposed to be sold
by the Company for its own account; second, the number of Registrable Securities
requested to be included in such registration by Holders pursuant to this
Section 3 equalling one-half of the total number of securities proposed to be
- ---------
sold by all Persons other than the Company; third, all other securities being
registered pursuant to the exercise of contractual rights comparable to the
rights granted in this Section 3, pro rata based on the estimated gross proceeds
---------
from the sale thereof; and fourth, all other securities requested to be included
in such registration, including shares of Common Stock owned by one or more
Founding Shareholders (pro rata among them based on their proportionate
ownership of shares of Common Stock). This provision is for the express benefit
of the Founding Shareholders, may not be amended or modified without their
consent, and may be enforced directly by them.
3.3 Each Holder shall be entitled to have its Registrable Securities
included in an unlimited number of Piggyback Registrations pursuant to this
Section 3.
- ---------
4. Registration Procedures. Whenever required under Section 2 or Section
----------------------- --------- -------
3 to effect the registration of any Registrable Securities, the Company shall,
- -
as expeditiously as practicable:
4.1 Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use the Company's best efforts
to cause such registration statement to become effective; provided, however,
-------- -------
that before filing a registration statement or prospectus or any amendments or
supplements thereto, including documents incorporated by reference after the
initial filing of the registration statement and prior to effectiveness thereof,
the Company shall furnish to one firm of counsel for the Selling Holders
(selected by Majority Selling Holders or the Initiating Substantial Holder, as
the case may be) copies of all such documents in the form substantially as
proposed to be filed with the Commission at least four (4) business days prior
to filing for review and comment by such counsel, which opportunity to comment
shall include an absolute right to control or contest disclosure if the
applicable Selling Holder reasonably believes that it may be subject to
controlling person liability under applicable securities laws with respect
thereto.
<PAGE>
4.2 Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and rules thereunder with respect to the
disposition of all securities covered by such registration statement. If the
registration is for an underwritten offering, the Company shall amend the
registration statement or supplement the prospectus whenever required by the
terms of the underwriting agreement entered into pursuant to Section 5.2.
-----------
Subject to Rule 415 under the Securities Act, if the registration statement is a
Shelf Registration, the Company shall amend the registration statement or
supplement the prospectus so that it will remain current and in compliance with
the requirements of the Securities Act for three (3) years after its effective
date, and if during such period any event or development occurs as a result of
which the registration statement or prospectus contains a misstatement 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, the Company shall
promptly notify each Selling Holder, amend the registration statement or
supplement the prospectus so that each will thereafter comply with the
Securities Act and furnish to each Selling Holder of Registerable Shares such
amended or supplemented prospectus, which each such Holder shall thereafter use
in the Transfer of Registerable Shares covered by such registration statement.
Pending such amendment or supplement each such Holder shall cease making offers
or Transfers of Registerable Shares pursuant to the prior prospectus. In the
event that any Registrable Securities included in a registration statement
subject to, or required by, this Agreement remain unsold at the end of the
period during which the Company is obligated to use its best efforts to maintain
the effectiveness of such registration statement, the Company may file a post-
effective amendment to the registration statement for the purpose of removing
such Securities from registered status.
4.3 Furnish to each Selling Holder of Registrable Securities, without
charge, such numbers of copies of the registration statement, any pre-effective
or post-effective amendment thereto, the prospectus, including each preliminary
prospectus and any amendments or supplements thereto, in each case in conformity
with the requirements of the Securities Act and the rules thereunder, and such
other related documents as any such Selling Holder may reasonably request in
order to facilitate the disposition of Registrable Securities owned by such
Selling Holder.
4.4 Use the Company's best efforts (i) to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such states or jurisdictions as shall be reasonably requested
by the Underwriters' Representative or Agent (as applicable, or if inapplicable,
the Majority Selling Holders), and (ii) to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification (or exemption from qualification) of the offer
and transfer of any of the Registrable Securities in any jurisdiction, at the
earliest possible moment; provided, however, that the Company shall not be
-------- -------
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
<PAGE>
4.5 In the event of any underwritten or agented offering, enter into
and perform the Company's obligations under an underwriting or agency agreement
(including indemnification and contribution obligations of underwriters or
agents), in usual and customary form, with the managing underwriter or
underwriters of or agents for such offering. The Company shall also cooperate
with the Majority Selling Holders and the Underwriters' Representative or Agent
for such offering in the marketing of the Registerable Shares, including making
available the Company's officers, accountants, counsel, premises, books and
records for such purpose, but the Company shall not be required to incur any
material out-of-pocket expense pursuant to this sentence.
4.6 Promptly notify each Selling Holder of any stop order issued or
threatened to be issued by the Commission in connection therewith (and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered).
4.7 Make generally available to the Company's security holders copies
of all periodic reports, proxy statements, and other information referred to in
Section 10.1 and an earnings statement satisfying the provisions of 11(a) of
- ------------
the Securities Act no later than ninety (90) days following the end of the
twelve (12)-month period beginning with the first month of the Company's first
fiscal quarter commencing after the effective date of each registration
statement filed pursuant to this Agreement.
4.8 Make available for inspection by any Selling Holder, any
underwriter participating in such offering and the representatives of such
Selling Holder and Underwriter (but not more than one (1) firm of counsel to
such Selling Holders), all financial and other information as shall be
reasonably requested by them, and provide the Selling Holder, any underwriter
participating in such offering and the representatives of such Selling Holder
and Underwriter the opportunity to discuss the business affairs of the Company
with its principal executives and independent public accountants who have
certified the audited financial statements included in such registration
statement, in each case all as necessary to enable them to exercise their due
diligence responsibility under the Securities Act; provided, however, that
-------- -------
information that the Company determines, in good faith, to be confidential and
which the Company advises such Person in writing, is confidential shall not be
disclosed unless such Person signs a confidentiality agreement reasonably
satisfactory to the Company or the related Selling Holder of Registrable
Securities agrees to be responsible for such Person's breach of confidentiality
on terms reasonably satisfactory to the Company.
4.9 Use the Company's best efforts to obtain a so-called "comfort
letter" from its independent public accountants, and legal opinions of counsel
to the Company, addressed to the Underwriter, in customary form and covering
such matters of the type customarily covered by such letters, and in a form that
shall be reasonably satisfactory to the Underwriter's Representative. The
Company shall furnish to each Selling Holder a copy of each such comfort letter
or legal opinion.
<PAGE>
4.10 Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration statement
from and after a date not later than the effective date of such registration
statement.
4.11 Use all reasonable efforts to cause the Registrable Securities
covered by such registration statement (i) if the Common Stock is then listed on
a securities exchange or included for quotation in a recognized trading market,
to continue to be so listed or included for a reasonable period of time after
the offering, and (ii) to be registered with or approved by such other United
States or state governmental agencies or authorities as may be necessary by
virtue of the business and operations of the Company to enable the Selling
Holders of Registrable Securities to consummate the disposition of such
Registrable Securities.
4.12 Use the Company's reasonable efforts to provide a CUSIP number
for the Registrable Securities prior to the effective date of the first
registration statement including Registrable Securities.
4.13 Take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
each such registration.
5. Holders' Obligations. It shall be a condition precedent to the
--------------------
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Securities of any Selling Holder of Registrable
Securities that such Selling Holder shall:
5.1 Furnish to the Company such information regarding such Selling
Holder, the number of the Registrable Securities owned by it, and the intended
method of disposition of such securities as shall be required to effect the
registration of such Selling Holder's Registrable Securities, and to cooperate
with the Company in preparing such registration;
5.2 Agree to sell their Registrable Securities to the underwriters at
the same price and on substantially the same terms and conditions as the Company
or the other Persons on whose behalf the registration statement was being filed
have agreed to sell their securities, and to execute the underwriting agreement
agreed to by the Majority Selling Holders (in the case of a registration under
Section 2) or the Company and the Majority Selling Holders (in the case of a
- ---------
registration under Section 3).
---------
6. Expenses of Registration. Expenses in connection with registrations
------------------------
pursuant to this Agreement shall be allocated and paid as follows:
6.1 With respect to each Demand Registration or S-3 Registration, the
Company shall bear and pay all expenses incurred in connection with any
registration, filing, or qualification of Registrable Securities with respect to
such Demand Registration or S-3 Registration for each Selling Holder (which
right may be assigned to any Person to whom Registrable Securities are
Transferred as permitted by Section 9), including all registration, filing and
---------
National Association of Securities Dealers, Inc. fees, all fees and expenses of
complying with securities or blue sky laws, all word processing, duplicating and
printing
<PAGE>
expenses, messenger and delivery expenses, the reasonable fees and disbursements
of counsel for the Company, and of the Company's independent public accountants,
including the expenses of "cold comfort" letters required by or incident to such
performance and compliance, and the reasonable fees and disbursements of one (1)
firm of counsel for all the Selling Holders of Registrable Securities (selected
by Demanding Holders owning a majority of the Registrable Securities owned by
Demanding Holders to be included in a Demand Registration) (the "Registration
Expenses"), but excluding underwriting discounts and commissions relating to
Registrable Securities (which shall be paid on a pro rata basis by the Selling
Holders).
6.2 The Company shall bear and pay all Registration Expenses incurred
in connection with any Piggyback Registrations pursuant to Section 3 for each
---------
Selling Holder (which right may be Transferred to any Person to whom Registrable
Securities are Transferred as permitted by Section 9), but excluding
---------
underwriting discounts and commissions relating to Registrable Securities (which
shall be paid on a pro rata basis by the Selling Holders of Registrable
Securities).
6.3 Any failure of the Company to pay any Registration Expenses as
required by this Section 6 shall not relieve the Company of its obligations
---------
under this Agreement.
7. Indemnification; Contribution. If any Registrable Securities are
-----------------------------
included in a registration statement under this Agreement:
7.1 To the extent permitted by applicable law, the Company shall
indemnify and hold harmless each Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including attorneys' fees and disbursements and
expenses of investigation, incurred by such party pursuant to any actual or
threatened action, suit, proceeding or investigation, or to which any of the
foregoing Persons may become subject under the Securities Act, the Exchange Act
or other federal or state laws, insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"):
(i) Any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein, or any amendments or
supplements thereto;
(ii) 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; or
(iii) Any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any applicable state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
applicable state securities law;
<PAGE>
provided, however, that the indemnification required by this Section 7.1 shall
- -------- ------- -----------
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or expense to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished to the Company by the indemnified party expressly for use in
connection with such registration; provided, further, that the indemnity
-------- -------
agreement contained in this Section 7 shall not apply to any underwriter to the
---------
extent that any such loss is based on or arises out of an untrue statement or
alleged untrue statement of a material fact, or an omission or alleged omission
to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such person at or prior to
the confirmation of sale to such person if such underwriter was under an
obligation to deliver such final prospectus and failed to do so.
7.2 To the extent permitted by applicable law, each Selling Holder
shall indemnify and hold harmless the Company, each of its directors, each of
its officers who shall have signed the registration statement, each Person, if
any, who controls the Company within the meaning of the Securities Act, any
other Selling Holder, any controlling Person of any such other Selling Holder
and each officer, director, partner, and employee of such other Selling Holder
and such controlling Person, against any and all losses, claims, damages,
liabilities and expenses (joint and several), including attorneys' fees and
disbursements and expenses of investigation, incurred by such party pursuant to
any actual or threatened action, suit, proceeding or investigation, or to which
any of the foregoing Persons may otherwise become subject under the Securities
Act, the Exchange Act or other federal or state laws, insofar as such losses,
claims, damages, liabilities and expenses arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration; provided, however, that (x) the indemnification required by this
-------- -------
Section 7.2 shall not apply to amounts paid in settlement of any such loss,
- -----------
claim, damage, liability or expense if settlement is effected without the
consent of the relevant Selling Holder of Registrable Securities, which consent
shall not be unreasonably withheld, and (y) in no event shall the amount of any
indemnity under this Section 7.2 exceed the gross proceeds from the applicable
-----------
offering received by such Selling Holder.
7.3 Promptly after receipt by an indemnified party under this Section
-------
7 of notice of the commencement of any action, suit, proceeding, investigation
- -
or threat thereof made in writing for which such indemnified party may make a
claim under this Section 7, such indemnified party shall deliver to the
---------
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
-------- -------
have the right to retain its own
<PAGE>
counsel, with the fees and disbursements and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time following the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 7 but shall not relieve the indemnifying
---------
party of any liability that it may have to any indemnified party otherwise than
pursuant to this Section 7. Any fees and expenses incurred by the indemnified
---------
party (including any fees and expenses incurred in connection with investigating
or preparing to defend such action or proceeding) shall be paid to the
indemnified party, as incurred, within thirty (30) days of written notice
thereof to the indemnifying party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). Any such indemnified party shall have the right to employ separate
counsel in any such action, claim or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be the expenses
of such indemnified party unless (i) the indemnifying party has agreed to pay
such fees and expenses or (ii) the indemnifying party shall have failed to
promptly assume the defense of such action, claim or proceeding or (iii) the
named parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or in addition
to those available to the indemnifying party and that the assertion of such
defenses would create a conflict of interest such that counsel employed by the
indemnifying party could not faithfully represent the indemnified party (in
which case, if such indemnified party notifies the indemnifying party in writing
that it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one (1) separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties, unless
in the reasonable judgment of such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such action, claim or proceeding, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels). No indemnifying party shall be liable to an
indemnified party for any settlement of any action, proceeding or claim without
the written consent of the indemnifying party, which consent shall not be
unreasonably withheld.
7.4 If the indemnification required by this Section 7 from the
---------
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 7:
- ---------
<PAGE>
(i) The indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any Violation has been committed by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such Violation. 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 Section 7.1 and
-----------
Section 7.2, any legal or other fees or expenses reasonably incurred by such
- -----------
party in connection with any investigation or proceeding.
(ii) The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 7.4 were determined by pro rata
-----------
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in Section 7.4(i). No Person guilty of
--------------
fraudulent misrepresentation (within the meaning of 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty of
such fraudulent misrepresentation.
7.5 If indemnification is available under this Section 7, the
---------
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 8 without regard to the relative fault of such
---------
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 7.4.
-----------
7.6 The obligations of the Company and the Selling Holders of
Registrable Securities under this Section 7 shall survive the completion of any
---------
offering of Registrable Securities pursuant to a registration statement under
this Agreement, and otherwise.
8. Transfer of Registration Rights. Rights with respect to Registrable
-------------------------------
Securities may be Transferred as follows: all rights of a Holder with respect
to Registrable Securities pursuant to this Agreement may be Transferred by such
Holder to any of its Person in connection with the Transfer of Registrable
Securities to such Person, in all cases, if (x) any such Transferee that is not
a party to this Agreement shall have executed and delivered to the Secretary of
the Company a properly completed agreement substantially in the form of Exhibit
-------
A, and (y) the Transferor shall have delivered to the Secretary of the Company,
- -
no later than fifteen (15) days following the date of the Transfer, written
notification of such Transfer setting forth the name of the Transferor, name and
address of the Transferee, and the number of Registrable Securities which shall
have been so Transferred.
9. Holdback. Each Holder entitled pursuant to this Agreement to have
--------
Registrable Securities included in a registration statement prepared pursuant to
this Agreement, if so requested by the Underwriters' Representative or Agent in
connection with an offering of any
<PAGE>
Registrable Securities, and if similar agreements are executed by each Person
including securities for sale in such Registration, shall not effect any public
sale or distribution of shares of Common Stock or any securities convertible
into or exchangeable or exercisable for shares of Common Stock, including a sale
pursuant to Rule 144 under the Securities Act (except as part of such
underwritten or agented registration), during the fifteen (15)-day period prior
to, and during the one hundred and eighty (180)-day period beginning on, the
date such registration statement is declared effective under the Securities Act
by the Commission, provided that such Holder is timely notified of such
--------
effective date in writing by the Company or such Underwriters' Representative or
Agent. In order to enforce the foregoing covenant, the Company shall be entitled
to impose stop-transfer instructions with respect to the Registrable Securities
of each Holder until the end of such period.
10. Covenants of the Company. The Company hereby agrees and covenants as
------------------------
follows:
10.1 The Company shall file as and when applicable, on a timely
basis, all reports required to be filed by it under the Exchange Act. If the
Company is not required to file reports pursuant to the Exchange Act, upon the
request of any Holder of Registrable Securities, the Company shall make publicly
available the information specified in subparagraph (c)(2) of Rule 144 of the
Securities Act, and take such further action as may be reasonably required from
time to time and as may be within the reasonable control of the Company, to
enable the Holders to Transfer Registrable Securities without registration under
the Securities Act within the limitation of the exemptions provided by Rule 144
under the Securities Act or any similar rule or regulation hereafter adopted by
the Commission.
10.2 (i) The Company shall not, and shall permit its majority owned
subsidiaries to, effect any public sale or distribution of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
shares of Common Stock, during the five (5) business days prior to, and during
the ninety (90)-day period beginning on, the commencement of a public
distribution of the Registrable Securities pursuant to any registration
statement prepared pursuant to this Agreement (other than by the Company
pursuant to such registration if the registration is pursuant to Section 3).
---------
The Company shall not effect any registration of its securities (other than on
Form S-4, Form S-8, or any successor forms to such forms or pursuant to such
other registration rights agreements as may be approved in writing by the
Majority Selling Holders or the Initiating Substantial Holder, as the case may
be), or effect any public or private sale or distribution of any of its
securities, including a sale pursuant to Regulation D under the Securities Act,
whether on its own behalf or at the request of any holder or holders of such
securities from the date of a request for a Demand Registration pursuant to
Section 2.1 until the earlier of (x) ninety (90) days following the date as of
- -----------
which all securities covered by such Demand Registration statement shall have
been Transferred, and (y) one hundred and eighty (180) days following the
effective date of such Demand Registration statement, unless the Company shall
have previously notified in writing all Selling Holders of the Company's desire
to do so, and Selling Holders owning a majority of the Registrable Securities or
the Underwriters' Representative, if any, shall have consented thereto in
writing.
<PAGE>
(ii) Any agreement entered into after the date of this Agreement
pursuant to which the Company or any of its majority owned subsidiaries issues
or agrees to issue any privately placed securities similar to any issue of the
Registrable Securities (other than (x) shares of Common Stock pursuant to a
stock incentive, stock option, stock bonus, stock purchase or other employee
benefit plan of the Company approved by its Board of Directors, and (y)
securities issued to Persons in exchange for ownership interests in any Person
in connection with a business combination in which the Company or any of its
majority owned subsidiaries is a party) shall contain a provision whereby
holders of such securities agree not to effect any public sale or distribution
of any such securities during the periods described in the first sentence of
Section 10.2(i), in each case including a sale pursuant to Rule 144 under the
- ---------------
Securities Act (unless such Person is prevented by applicable statute or
regulation from entering into such an agreement).
10.3 The Company shall not grant to any Person (other than a Holder
of Registrable Securities) any registration rights with respect to securities of
the Company, or enter into any agreement, that would entitle the holder thereof
to have securities owned by it included in a Demand Registration or, without
consent of Purchaser, which gives such Person the right to participate in any
Piggyback Registration or terms more favorable to such person than are provided
to Purchaser under the Agreement.
11. Amendment, Modification and Waivers; Further Assurances.
-------------------------------------------------------
(i) This Agreement may be amended with the consent of the Company and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent of Holders owning Registrable Securities possessing a
majority in number of the Registrable Securities then outstanding to such
amendment, action or omission to act.
(ii) No waiver of any terms or conditions of this Agreement shall
operate as a waiver of any other breach of such terms and conditions or any
other term or condition, nor shall any failure to enforce any provision hereof
operate as a waiver of such provision or of any other provision hereof. No
written waiver hereunder, unless it by its own terms explicitly provides to the
contrary, shall be construed to effect a continuing waiver of the provisions
being waived and no such waiver in any instance shall constitute a waiver in any
other instance or for any other purpose or impair the right of the party against
whom such waiver is claimed in all other instances or for all other purposes to
require full compliance with such provision.
(iii) Each of the parties hereto shall execute all such further
instruments and documents and take all such further action as any other party
hereto may reasonably require in order to effectuate the terms and purposes of
this Agreement.
12. Assignment; Benefit. This Agreement and all of the provisions hereof
-------------------
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, assigns, executors, administrators or successors;
provided, however, that except as specifically provided herein with respect to
- -------- -------
certain matters, neither this Agreement nor any of the rights,
<PAGE>
interests or obligations hereunder shall be assigned or delegated by the Company
without the prior written consent of Holders owning Registrable Securities
possessing a majority in number of the Registrable Securities outstanding on the
date as of which such delegation or assignment is to become effective. A Holder
may Transfer its rights hereunder to a successor in interest to the Registrable
Securities owned by such assignor only as permitted by Section 8.
---------
13. Miscellaneous.
-------------
13.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
13.2 Notices. All notices and requests given pursuant to this
-------
Agreement shall be in writing and shall be made by hand-delivery, first-class
mail (registered or certified, return receipt requested), confirmed facsimile or
overnight air courier guaranteeing next business day delivery to the relevant
address specified on Schedule 1 to this Agreement or in the relevant agreement
----------
in the form of Exhibit A whereby such party became bound by the provisions of
---------
this Agreement. Except as otherwise provided in this Agreement, the date of
each such notice and request shall be deemed to be, and the date on which each
such notice and request shall be deemed given shall be: at the time delivered,
if personally delivered or mailed; when receipt is acknowledged, if sent by
facsimile; and the next business day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next business day delivery. This
Agreement shall terminate as to any Holder when all of the Registrable
Securities held by such Holder could be sold by such Holder pursuant to Rule
144(k) or pursuant to Rule 144(e)(1)(i).
13.3 Entire Agreement; Integration. This Agreement supersedes all
-----------------------------
prior agreements between or among any of the parties hereto with respect to the
subject matter contained herein and therein, and such agreements embody the
entire understanding among the parties relating to such subject matter.
13.4 Injunctive Relief. Each of the parties hereto acknowledges
-----------------
that in the event of a breach by any of them of any material provision of this
Agreement, the aggrieved party may be without an adequate remedy at law. Each
of the parties therefore agrees that in the event of such a breach hereof the
aggrieved party may elect to institute and prosecute proceedings in any court of
competent jurisdiction to enforce specific performance or to enjoin the
continuing breach hereof. By seeking or obtaining any such relief, the aggrieved
party shall not be precluded from seeking or obtaining any other relief to which
it may be entitled.
13.5 Section Headings. Section headings are for convenience of
----------------
reference only and shall not affect the meaning of any provision of this
Agreement.
13.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, and all of which shall
together constitute one and the same instrument. All signatures need not be on
the same counterpart.
<PAGE>
13.7 Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
the validity and enforceability of the remaining provisions of this Agreement,
unless the result thereof would be unreasonable, in which case the parties
hereto shall negotiate in good faith as to appropriate amendments hereto.
13.8 Filing. A copy of this Agreement and of all amendments thereto
------
shall be filed at the principal executive office of the Company with the
corporate recorder of the Company.
13.9 Termination. This Agreement may be terminated at any time by a
-----------
written instrument signed by the parties hereto. Unless sooner terminated in
accordance with the preceding sentence, this Agreement (other than Section 7
---------
hereof) shall terminate in its entirety on such date as there shall be no
Registrable Securities outstanding, provided that any shares of Common Stock
--------
previously subject to this Agreement shall not be Registrable Securities
following the sale of any such shares in an offering registered pursuant to this
Agreement.
13.10 Attorneys' Fees. In any action or proceeding brought to
---------------
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees (including any fees incurred in any appeal) in
addition to its costs and expenses and any other available remedy.
13.11 No Third Party Beneficiaries. Except as provided in Sections
----------------------------
2.7 and 3.3, nothing herein expressed or implied is intended to confer upon any
person, other than the parties hereto or their respective permitted assigns,
successors, heirs and legal representatives, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first written above.
KINETIC SYSTEMS, INC.,
a California corporation
By: /s/ David J. Shimmon
--------------------------
Name: David J. Shimmon
Title: COO
BT CAPITAL PARTNERS, INC.,
a Delaware corporation
<PAGE>
By: /s/ Martin M. Jelenko
--------------------------
Name: Martin M. Jelenko
Title: Managing Director
THE KSI GROUP, INC.,
a Delaware corporation
By: /s/ David J. Shimmon
--------------------------
Name: David J. Shimmon
Title: COO
<PAGE>
EXHIBIT A
to Registration
Rights Agreement
AGREEMENT TO BE BOUND
BY THE REGISTRATION RIGHTS AGREEMENT
The undersigned, being the transferee of ______ shares of the Preferred
Stock, $.01 par value per share, of The KSI Group, Inc., a Delaware corporation
(the "Company"), as a condition to the transfer of such securities, acknowledges
that matters pertaining to the registration of Registrable Securities is
governed by the Registration Rights Agreement dated as of April 1, 1996 between
the Company and the Purchaser referred to therein (the "Agreement"), and the
undersigned hereby (1) acknowledges receipt of a copy of the Agreement, and (2)
agrees to be bound as a Holder by the terms of the Agreement, as the same has
been or may be amended from time to time.
Agreed to this __ day of _____, 199_.
_________________________________
_________________________________*
_________________________________*
*Include address for notices.
A-1
<PAGE>
SCHEDULE 1
Addresses
---------
BT Capital Partners,Inc.
1 BT Plaza
130 Liberty Street, 30th Floor
New York, New York 10006
Attn: Corporate Secretary
Telecopy: 212/250-4819
With copies to:
BT Capital Partners, Inc.
300 South Grand Avenue
41st Floor
Los Angeles, California 90071
Attn: Martin M. Jelenko
Telecopy: 213/620-8244
and:
Sidley & Austin
555 West Fifth Street
Suite 4000
Los Angeles, California 90013
Attn: Moshe J. Kupietzky
Telecopy: 213/896-6600
A-2
<PAGE>
EXHIBIT 10.5
SECOND AMENDED AND RESTATED
VOTING TRUST AGREEMENT
REGARDING SHARES ISSUED TO THE BIANCO
FAMILY 1991 TRUST
This SECOND AMENDED AND RESTATED VOTING TRUST AGREEMENT ("AGREEMENT") is entered
into effective as of December 1, 1996 (the "EXECUTION DATE") by and among David
J. Shimmon (the "SHIMMON"), the Bianco Family 1991 Trust dated February 1, 1991
or any other trust created by the Bianco Family 1991 Trust dated February 1,
1991, for the benefit of William A. Bianco, Jr. and/or Marie R. Bianco,
including, but not limited to, the survivor trust, the non-exempt marital trust
or the marital trust (collectively referred to as the "BIANCO TRUST") and
William A. Bianco, Jr. ("BIANCO").
RECITALS
A. BIANCO, the BIANCO TRUST, SHIMMON and others entered into a
Contingent Voting Trust Agreement on June 30, 1994 and a First Amended and
Restated Contingent Voting Trust Agreement Regarding Shares Issued To The Bianco
Family 1991 Trust effective as of April 1, 1996 (collectively, the "ORIGINAL
AGREEMENT").
B. The KSI Group, Inc., a Delaware corporation (the "COMPANY") is
contemplating the effectuation of a "QUALIFIED PUBLIC OFFERING" as defined in
the Certificate of Incorporation of the CORPORATION effective as of the
EXECUTION DATE.
C. Section 8.7 of the ORIGINAL AGREEMENT grants "VOTING TRUSTEE" and
the "BENEFICIAL OWNER" the right to amend the ORIGINAL AGREEMENT.
D. Currently, SHIMMON is the "VOTING TRUSTEE" and the BIANCO TRUST is
the "BENEFICIAL OWNER" as defined in the ORIGINAL AGREEMENT.
E. Effective as of the closing of the QUALIFIED PUBLIC OFFERING (the
"CLOSING"), SHIMMON and The BIANCO TRUST desire to amend the ORIGINAL AGREEMENT
as set forth below.
THE PARTIES AGREE AS FOLLOWS:
1. Effectiveness of the AGREEMENT. This AGREEMENT shall become
------------------------------
effective on the earlier of (the "EFFECTIVE DATE"): (a) the CLOSING, or (b)
the date BIANCO ceases to be employed by the COMPANY or an affiliate thereof
for any reason ("BIANCO TERMINATION").
2. VOTING TRUSTEES. Subject to Section 7.7 below and the division of
---------------
responsibilities set forth in this AGREEMENT, initially BIANCO and SHIMMON shall
be the voting trustees (the "VOTING TRUSTEES"). Upon the occurrence of a BIANCO
TERMINATION, BIANCO shall cease to be a TRUSTEE. (See Section 7.2 regarding
termination of employment of SHIMMON and termination of the VOTING TRUST.)
3. DEPOSIT AND TRANSFER OF SHARES--ISSUANCE AND TRANSFER OF VOTING TRUST
---------------------------------------------------------------------
CERTIFICATES.
- ------------
3.1 Deposit of Shares. On the EFFECTIVE DATE, the BIANCO TRUST shall
-----------------
deposit with the Doty & Sundheim, A Professional Corporation ("ESCROW HOLDER")
the certificates for all shares of the COMPANY which it owns and are not being
sold pursuant to the QUALIFIED PUBLIC OFFERING (the "BIANCO TRUST
CERTIFICATES"). In addition, the BIANCO TRUST shall deposit with the ESCROW
HOLDER an executed assignment separate from certificate in the form attached as
Exhibit 3.1 and such additional documents as may be necessary to enable the
- -----------
COMPANY to cause the BIANCO TRUST CERTIFICATES to be transferred to the name of
the VOTING TRUSTEES. In the event the BIANCO TRUST is issued any additional
shares by the COMPANY prior to or during the term of this AGREEMENT and at such
time SHIMMON is (a) employed by the COMPANY and (b) a shareholder of the
COMPANY, such additional shares shall be deposited as set forth above and shall
be included in the definition of the"BIANCO TRUST CERTIFICATES".
3.2 Transfer of VOTING TRUST CERTIFICATES.
-------------------------------------
a. On the EFFECTIVE DATE all the BIANCO TRUST CERTIFICATES
delivered to the ESCROW HOLDER shall be surrendered by the ESCROW HOLDER to
the COMPANY and canceled. New share
1
<PAGE>
certificates shall be issued in the name of the VOTING TRUSTEES. The new share
certificates shall state that they are issued pursuant to this AGREEMENT. This
fact shall also be noted in the entry of ownership of the shares by the VOTING
TRUSTEES in the stock transfer records of the COMPANY. (The certificates
issued to the VOTING TRUSTEES under this Section hereafter shall be referred
to as the "VOTING TRUST CERTIFICATES".)
b. At all times during the term of this AGREEMENT, a proposed
transfer of any of the VOTING TRUST CERTIFICATES shall require the consent of
the BIANCO TRUST and SHIMMON.
3.3 Rights of BENEFICIAL OWNER. Notwithstanding the provisions of
--------------------------
Section 4.1 below, the BIANCO TRUST or the beneficial successor in interest
(collectively hereafter referred to as the "BENEFICIAL OWNER") shall have the
exclusive right to make the decisions required of the VOTING TRUST under (a) the
Hoover Rights Agreement dated April 1, 1996, (b) the Registration Rights
Agreement dated April 1, 1996 and (c) amendments to the above agreements.
3.4 BENEFICIAL CERTIFICATES. The VOTING TRUSTEES shall hold the
-----------------------
VOTING TRUST CERTIFICATES subject to the terms of this AGREEMENT. The COMPANY
shall thereupon issue and deliver to the BIANCO TRUST certificates representing
the BIANCO TRUST's beneficial interest in the COMPANY. The voting trust
beneficial certificates shall be in substantially the form of Exhibit 3.4
-----------
attached hereto (the "BENEFICIAL CERTIFICATES").
3.5 Fractional BENEFICIAL CERTIFICATES. In the event the interest in
----------------------------------
this VOTING TRUST which is owned by any holder cannot be fully represented by
whole BENEFICIAL CERTIFICATES, the VOTING TRUSTEES may issue fractional share
certificates, scrip, or other evidence of ownership of the fractional part of
one BENEFICIAL CERTIFICATE which in their discretion properly indicates
ownership of the fractional interest represented thereby. In the event of such
issue, the fractional interest shall, under no circumstances, have any greater
rights nor lesser liabilities than any other BENEFICIAL CERTIFICATE provided for
herein.
3.6 Transfer of BENEFICIAL CERTIFICATES. The BENEFICIAL CERTIFICATES
-----------------------------------
shall be transferable only as provided in (a) the BENEFICIAL CERTIFICATES and
(b) this AGREEMENT and upon payment of any charges in effect at the time of
transfer. All transfers shall be recorded in accordance with Section 6.2 below.
Any transfer made of any BENEFICIAL CERTIFICATE shall vest in the transferee all
rights of the transferor and shall subject the transferee to the same
limitations as those imposed on the transferor by the terms of the BENEFICIAL
CERTIFICATE so transferred and this AGREEMENT. Upon such transfer the VOTING
TRUSTEES shall deliver a BENEFICIAL CERTIFICATE or CERTIFICATES to the
transferee for the number of shares represented by the BENEFICIAL CERTIFICATE so
transferred.
3.7 Proof of Ownership. The VOTING TRUSTEES shall not be required to
------------------
recognize any transfer of a BENEFICIAL CERTIFICATE not made in accordance with
the provisions hereof unless the person or persons claiming such ownership shall
have produced indicia of title satisfactory to the VOTING TRUSTEES, and shall
have deposited with the VOTING TRUSTEES indemnity satisfactory to him.
3.8 Holder of BENEFICIAL CERTIFICATE as Owner. The VOTING TRUSTEES
-----------------------------------------
may treat the registered holder, for the time being, of each BENEFICIAL
CERTIFICATE (or when presented duly endorsed in blank for transfer, the bearer
thereof) as the absolute owner and holder thereof and of all the rights and
interests represented thereby for all purposes whatsoever. The VOTING TRUSTEES
shall not be bound or affected by any notice to the contrary.
3.9 Replacement of BENEFICIAL CERTIFICATE. If a BENEFICIAL
-------------------------------------
CERTIFICATE is lost, stolen, mutilated, or destroyed, the VOTING TRUSTEES, in
their discretion, may issue a duplicate of the BENEFICIAL CERTIFICATE upon
receipt of (a) evidence of such fact and (b) indemnification satisfactory to
him.
4. VOTING AND ACTION BY VOTING TRUSTEES.
------------------------------------
4.1 Voting of VOTING TRUST CERTIFICATES.
-----------------------------------
a. General Rule. Subject to Sections 3.2.b, 3.3 and 4.1.b, so
long as the VOTING TRUSTEES shall hold VOTING TRUST CERTIFICATES deposited
pursuant to the provisions of this AGREEMENT, they shall possess and in their
unrestricted discretion shall be entitled to exercise in person or by their
attorneys-in-fact or proxies, all rights and powers of absolute owners and
holders of the VOTING TRUST CERTIFICATES, including the full and unqualified
right to vote, assent or consent with respect thereto and to take part in and
consent to any corporate or shareholders' action of any kind whatsoever. No
other person shall have any voting rights in respect to the VOTING TRUST
CERTIFICATES so long as this AGREEMENT is in effect and such shares are
registered in the name of the VOTING TRUSTEES. The right of the VOTING
TRUSTEES to vote, assent, or consent shall include the right to vote at any
election of directors and in favor of or
2
<PAGE>
in opposition to any resolution or the issuance or creation of additional
securities of the COMPANY, or any action of any character whatsoever which may
be presented at any meeting or require the consent of shareholders of the
COMPANY.
b. Special Rules. Prior to a BIANCO TERMINATION and except as
-------------
provided in Section 3.2.b above or required by law, BIANCO, acting as TRUSTEE,
shall have the exclusive right to act on behalf of the VOTING TRUST on all
matters identified in Section 4.1.a above. (After a BIANCO TERMINATION,
SHIMMON shall be the sole VOTING TRUSTEE. See Section 2 above.)
4.2 Voting in Interest of COMPANY. In voting the VOTING TRUST
-----------------------------
CERTIFICATES or in doing any act in respect of the control or management of the
COMPANY or its affairs, as holder of stock deposited hereunder, the VOTING
TRUSTEES shall exercise their best judgment in the interest of the COMPANY to
the end that its affairs shall be properly managed.
4.3 VOTING TRUSTEES's Relationship With COMPANY. The VOTING TRUSTEES
-------------------------------------------
or any firm or corporation of which they may be a member, agent, or employee, or
any corporation, trust, or association of which they may be a trustee,
stockholder, director, officer, agent, or employee, may contract with or be or
become pecuniarily interested, directly or indirectly, in any matter or
transaction to which the COMPANY or any subsidiary or controlled or affiliated
corporation may be a party or in which it may be concerned, as fully and freely
as though such VOTING TRUSTEES were not a VOTING TRUSTEES hereunder. The VOTING
TRUSTEES may act as a director or officer of the COMPANY or of any such
subsidiary or controlled or affiliated corporation.
4.4 Expenses. The VOTING TRUSTEES are expressly authorized to incur
--------
and pay such reasonable expenses and charges, to employ and pay such agents,
attorneys, and counsel, and to incur and pay such other charges and expenses as
they may deem necessary and proper for administering this AGREEMENT. The
BENEFICIAL OWNER agrees to reimburse and indemnify the VOTING TRUSTEES for and
against any and all such claims, expenses, and liabilities incurred by them, or
asserted against them, in connection with or growing out of this AGREEMENT or
the discharge of their duties hereunder. Any such claims, expenses, or
liabilities not so paid by the BENEFICIAL OWNER may be deducted from dividends
or other distributions to him, or may be made a charge payable as a condition to
the delivery of shares in exchange for BENEFICIAL CERTIFICATES as provided
herein. The VOTING TRUSTEES shall be entitled to a lien therefor upon the
shares, funds, or other property in his possession or in the possession of the
ESCROW HOLDER. Notwithstanding the above, the VOTING TRUSTEES shall not receive
a salary in connection with their services as VOTING TRUSTEES.
4.5 VOTING TRUSTEES' Liability. The VOTING TRUSTEES shall always be
--------------------------
protected and free from liability in acting upon any document or signature
believed by them to be genuine and to have been signed by the proper party or
parties or by the party or parties purporting to have signed the same. The
VOTING TRUSTEES shall not be liable for any error of judgement nor for any act
done or omitted, nor for any mistake of fact or law, nor for anything which they
may do or refrain from doing in good faith, nor generally shall the VOTING
TRUSTEES have any accountability hereunder, except the VOTING TRUSTEES shall be
liable for their own willful default or gross negligence. The VOTING TRUSTEES
may advise with legal counsel, and any action under this AGREEMENT taken or
suffered in good faith by them in accordance with the opinion of such counsel
shall be conclusive upon the parties hereto and the VOTING TRUSTEES shall be
fully protected and be subject to no liability in respect thereof.
5. DIVIDEND, DISTRIBUTION, AND SUBSCRIPTION RIGHTS OF BENEFICIAL OWNER.
-------------------------------------------------------------------
5.1 Cash Dividends. The BENEFICIAL OWNER shall be entitled, until
--------------
the termination of this AGREEMENT as hereinafter provided, to receive from time
to time payments equal to the amount of cash dividends, if any, collected or
received by the VOTING TRUSTEES or their successor upon the number of shares in
respect of which such BENEFICIAL CERTIFICATE was issued, less the deductions
provided for in Section 4.4. Such payments shall be made as soon as practicable
after the receipt of such dividends, to the BENEFICIAL OWNER. In lieu of
receiving cash dividends and paying such dividends to the BENEFICIAL OWNER, the
VOTING TRUSTEES may instruct the COMPANY in writing to pay such dividends
directly to the BENEFICIAL OWNER. Upon giving such instructions to the COMPANY,
all liability of the VOTING TRUSTEES with respect to such dividends shall cease,
until the instructions are revoked. The VOTING TRUSTEES may at any time revoke
such instructions and by written notice to the COMPANY direct it to make
dividend payments to the VOTING TRUSTEES.
5.2 Share Dividends. In case the VOTING TRUSTEES shall receive, as a
---------------
dividend or other distribution upon any VOTING TRUST CERTIFICATES held by them
under this AGREEMENT any additional shares of the COMPANY, the VOTING TRUSTEES
shall hold the same subject to this AGREEMENT for the benefit of the BENEFICIAL
OWNER and said shares shall be and become subject to all of the terms and
conditions hereof to the same extent as if originally deposited
3
<PAGE>
hereunder. The VOTING TRUSTEES may, in their discretion, issue BENEFICIAL
CERTIFICATES in respect of such shares to the BENEFICIAL OWNER of record at
the close of business on the record date determined pursuant to the provisions
of Section 5.6.
5.3 Distribution of Liquidation. In the event of the dissolution or
---------------------------
total or partial liquidation of the COMPANY, whether voluntary or involuntary,
the VOTING TRUSTEES shall receive the moneys, securities, rights or property to
which the BENEFICIAL OWNER as shareholder of the COMPANY is entitled and shall
distribute the same to the BENEFICIAL OWNER.
5.4 Other Distributions to Shareholders. If at any time during the
-----------------------------------
continuation of this AGREEMENT the VOTING TRUSTEES shall receive or collect any
moneys through a distribution by the COMPANY to its shareholders, other than in
payment of cash dividends, or shall receive any property (other than shares of
stock of the COMPANY) through a distribution by the COMPANY to its shareholders,
the VOTING TRUSTEES shall distribute the same to the BENEFICIAL OWNER registered
as such at the close of business on the record date determined pursuant to the
provisions of Section 5.6; provided that the VOTING TRUSTEES may withhold
therefrom the deductions provided for in Section 4.4.
5.5 Deductions from Distributions. There shall be deducted and
-----------------------------
withheld from every distribution of every kind under this AGREEMENT any taxes,
assessments, or other charges that may be required by any present or future law
to be deducted or withheld, as well as expenses and charges incurred pursuant to
Section 4.4 hereof, to the extent that such expenses and charges remain unpaid
or unreimbursed.
5.6 Record Date for Distributions. The VOTING TRUSTEES may, if they
-----------------------------
deem it advisable, fix a date not exceeding 20 days preceding any date for the
payment or distribution of dividends or for the distribution of assets or rights
as a record date for the determination of the BENEFICIAL OWNER entitled to
receive such payment or distribution, and the BENEFICIAL OWNER of record on such
date shall be exclusively entitled to participate in such payments or
distributions. In any case in which the VOTING TRUSTEES shall fail to fix such
a record date, the date 3 days prior to the date of payment or distribution of
dividends or the distribution of assets or rights, shall constitute the record
date for the determination of the BENEFICIAL OWNER entitled to receive such
payment or distribution.
6. BOOKS AND RECORDS.
-----------------
6.1 Record of Shares. It shall be the duty of the ESCROW HOLDER to
----------------
maintain a record of all VOTING TRUST CERTIFICATES which are transferred to the
VOTING TRUSTEES and all BENEFICIAL CERTIFICATES indicating the name in which the
stock was held, the date of issuance of the stock, the class and series of the
stock, the number of shares, and the number of the certificate or certificates
representing those shares. The ESCROW HOLDER also shall maintain a record of
the date on which any such share certificates were received by them. The ESCROW
HOLDER shall receive and hold the new share certificates issued by the COMPANY
in the name of the VOTING TRUSTEES and shall maintain a record indicating the
date of issuance of such certificates, the date of receipt of such certificates
and the place in which such certificates are held by them.
6.2 Record of Trust Certificates. The Secretary of the Company shall
----------------------------
maintain a record showing the name and address of the BENEFICIAL OWNER. The
record shall show the dates on which the BENEFICIAL CERTIFICATES were issued,
canceled, transferred, or replaced. The record shall be known as the Beneficial
Owner Certificate Record Book and shall be open to inspection by any of the
parties to this AGREEMENT or their successors at any reasonable time. The first
BENEFICIAL OWNER to appear in the Beneficial Owner Certificate Record Book shall
be the party to this AGREEMENT to whom BENEFICIAL CERTIFICATES are to be issued.
The record shall show any subsequent transfer, assignment, pledge, attachment,
execution, and any other matter affecting the title to the BENEFICIAL
CERTIFICATES which come to the attention of the ESCROW HOLDER or VOTING
TRUSTEES. Any documents, including BENEFICIAL CERTIFICATES which are canceled,
purporting to affect the title of the BENEFICIAL CERTIFICATES shall also be kept
in the Beneficial Owner Record Book, together with a sample copy of the
BENEFICIAL CERTIFICATE.
6.3 Inspection of Records. The books and records of this voting
---------------------
trust shall be open to inspection by any of the parties to this AGREEMENT or
their successors at any reasonable time. The inspection shall be made at the
office of the COMPANY and shall include the right to make copies of the books
and records; provided, however, that any such activity must be conducted with
reasonable notice first given to the Secretary of the COMPANY. In the event of
a dispute, the matter shall be referred to the VOTING TRUSTEES for their
decision as to the reasonableness of the request for inspection and copying.
7. TERM OF VOTING TRUST.
--------------------
4
<PAGE>
7.1 Irrevocability of VOTING TRUST. Except as otherwise provided in
------------------------------
this AGREEMENT, effective as of the EFFECTIVE DATE, the VOTING TRUST created by
this AGREEMENT is hereby expressly declared to be irrevocable.
7.2 Termination. This AGREEMENT shall terminate on the first to
-----------
occur: (a) the date SHIMMON is no longer employed by the COMPANY for any reason
or no reason, (b) upon the occurrence of a transaction or series of related
transactions where the holders of all of the voting securities of the COMPANY
before such transaction hold less than 50% the voting securities of the COMPANY
after such transaction, (c) 10 years from the EXECUTION DATE or (d) the mutual
consent of the parties.
7.3 Extension of Term. The prescribed term of this AGREEMENT may be
-----------------
extended, provided, within the two (2) year period prior to the expiration date
hereof, the BENEFICIAL OWNER by written AGREEMENT, with the written consent of
the VOTING TRUSTEES, extends the duration hereof, as to such BENEFICIAL OWNER'S
shares only, for an additional period not exceeding ten (10) years from the
expiration date then in effect. In the event of such extension, the VOTING
TRUSTEES, prior to the expiration as hereinabove provided, as originally fixed,
or as theretofore extended, as the case may be, file in the principal executive
office of the COMPANY a copy of an agreement extending the expiration date of
this AGREEMENT and thereupon the duration of this AGREEMENT shall be extended
for the period fixed by such extension agreement; provided, however, that no
such extension agreement shall affect the rights or obligations of persons not
parties thereto.
7.4 Return of VOTING TRUST CERTIFICATES After Termination. Within 60
-----------------------------------------------------
days after the termination of this AGREEMENT, the VOTING TRUSTEES shall deliver
to the BENEFICIAL HOLDERS, certificates representing the number of shares in
respect of which such BENEFICIAL CERTIFICATES were issued upon the surrender of
such BENEFICIAL CERTIFICATES properly endorsed and upon payment by the persons
entitled to receive such share certificates of a sum sufficient to cover any
governmental charge on the transfer or delivery of such certificates.
7.5 Final Accounting. Within 90 days after termination of this
----------------
VOTING TRUST, the VOTING TRUSTEES shall render a final accounting to the
BENEFICIAL OWNER and to the COMPANY and shall distribute any funds or other
assets held by him to the parties entitled thereto.
7.6 Deposit of Other Shares. Except as specifically provided for in
-----------------------
this AGREEMENT as set forth above, no additional shares may be deposited into
the VOTING TRUST.
7.7 Death of SHIMMON. Pursuant to Section 7.2, the death of the
----------------
SHIMMON shall cause this AGREEMENT to terminate. In such event the BENEFICIAL
OWNER shall appoint a "termination trustee" to perform those services necessary
to effectuate the termination of this AGREEMENT.
8. GENERAL.
-------
8.1 Place of Performance. This AGREEMENT is made, executed, and
--------------------
entered into at Santa Clara, California, and it is mutually agreed that the
performance of all parts of this contract shall be made at Santa Clara,
California.
8.2 Governing Law. This AGREEMENT is intended by the parties to be
-------------
governed and construed in accordance with the laws of the State of California.
8.3 Severability of Provisions. This AGREEMENT shall not be
--------------------------
severable or divisible in any way but it is specifically agreed that should any
provision herein be, or become invalid that such invalidity shall not affect the
validity of the remainder of the AGREEMENT.
8.4 Construction by VOTING TRUSTEES. The VOTING TRUSTEES are
-------------------------------
authorized and empowered to construe this AGREEMENT and its reasonable
construction made in good faith shall be conclusive and binding upon the
BENEFICIAL OWNER and upon all parties hereto.
8.5 Merger of Consolidation. Subject to the termination provisions
-----------------------
set forth in Section 7.2, in the event that the COMPANY shall merge into or
consolidate with another corporation or corporations, or in the event that all
or substantially all of the assets of the COMPANY are transferred to another
corporation the shares of which are issued to shareholders of the COMPANY in
connection with such transfer, then the term "COMPANY" shall be construed to
include such successor corporation and the VOTING TRUSTEES shall receive and
hold under this AGREEMENT any shares of such successor corporation received by
them on account of their ownership as VOTING TRUSTEES of shares held by them
hereunder prior to such merger, consolidation, of transfer. BENEFICIAL
CERTIFICATES issued and outstanding under this
5
<PAGE>
AGREEMENT at the time of such merger, consolidation, or transfer may remain
outstanding, but the VOTING TRUSTEES may, in their discretion, substitute
therefor new BENEFICIAL CERTIFICATES in appropriate form.
8.6 Notice to BENEFICIAL OWNER. Any notice to be given to the
--------------------------
CERTIFICATE HOLDER shall be sufficiently given if mailed, postage prepaid, to
the registered BENEFICIAL OWNER of such BENEFICIAL CERTIFICATE at the address of
such registered BENEFICIAL HOLDER appearing on the certificate book to be
maintained by the VOTING TRUSTEES. Every notice so given shall be effective
whether or not received, and such notice shall for all purposes be deemed to
have been given on the date of mailing thereof.
8.7 Amendment of AGREEMENT. If at any time the VOTING TRUSTEES deem
----------------------
it advisable to amend this AGREEMENT, they shall submit such amendment to the
BENEFICIAL OWNER for its approval at a special meeting which shall be called for
that purpose. If, at such meeting or any adjournment thereof, the proposed
amendment shall be approved by the affirmative vote of the VOTING TRUSTEES and
the BENEFICIAL OWNER, the proposed amendment so approved shall become a part of
this AGREEMENT as if originally incorporated herein.
8.8 Attorneys' Fees. In the event of any dispute between or among
---------------
the parties, the prevailing party or parties in such action shall be entitled to
receive from the party or parties held to be liable, in addition to any damages
or other remedies provided by law or in equity, an amount equal to the
attorneys' fees and costs expended by such prevailing party or parties in such
action.
8.9 Post Judgment. In addition to any such amount, the prevailing
-------------
party or parties also shall be entitled to receive from the party or parties
held to be liable, an amount equal to the attorneys' fees and costs incurred in
enforcing any judgment against such party or parties. This Section 8.9 is
severable from the other provisions of this AGREEMENT and survives any judgment
and is not deemed merged into any judgment.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT effective as of the
date first set forth above.
SHIMMON:
/s/ David J. Shimmon
------------------------------
David J. Shimmon
BIANCO:
/s/ William A. Bianco
------------------------------
William A. Bianco, Jr.
BENEFICIAL OWNER:
The Bianco Family 1991 Trust dated
February 1, 1991
/s/ William A. Bianco
------------------------------
William A. Bianco, Jr., Trustee
/s/ Marie R. Bianco
------------------------------
Marie R. Bianco, Trustee
6
<PAGE>
EXHIBIT 3.1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the Bianco Family 1991 Trust dated February 1, 1991 (the
"TRUST") hereby sells, assigns and transfers to David J. Shimmon as TRUSTEES of
the First Amended and Restated Contingent Voting Trust Agreement dated April 1,
1996 7,773,333 shares of the common stock of The KSI Group, Inc. (the
"COMPANY") represented by Certificate(s) No. CSA-1 and CSB-1 issued to the TRUST
and does hereby irrevocably constitute and appoint Doty & Sundheim, as attorney
in fact, to transfer the above shares on the books of the COMPANY.
Dated: December 1, 1996 The Bianco Family 1991 Trust dated
February 1, 1991
/s/ William A. Bianco
-------------------------------------
William A. Bianco, Jr., TRUSTEES
/s/ Marie R. Bianco
-------------------------------------
Marie R. Bianco, TRUSTEES
7
<PAGE>
EXHIBIT 3.5
-----------
BENEFICIAL CERTIFICATE
This Beneficial Certificate hereby certifies that The Bianco Family 1991 Trust
dated February 1, 1991 hereby owns a beneficial interest in 3,100,000 shares of
The KSI Group, Inc. Series A Common Stock and 4,900,000 shares of Series B
Common Stock. The beneficiary interest is subject to the First Amended and
Restated Contingent Voting Trust Agreement dated April 1, 1996 (the "CONTINGENT
VOTING TRUST AGREEMENT") and the rights granted the "voting TRUSTEES", as that
term is defined in the CONTINGENT VOTING TRUST AGREEMENT.
Dated: December 1, 1996
/s/ David J. Shimmon /s/ Marie R. Bianco
- ----------------------------- -----------------------------
David J. Shimmon, President Marie R. Bianco, Secretary
i
<PAGE>
THE KSI GROUP, INC.
BENEFICIAL SHARES
HELD BY VOTING TRUSTEES
Beneficial Number of Certificate Issuance Date Received
Owner Shares Number Date By Escrow
- ----- ------ ------ ---- ---------
The Bianco
Family 1991 Trust
dated February 1,
1991 7,773,333
[All BENEFICIAL SHARES are held at Doty & Sundheim,
420 Florence Street, Palo Alto, CA 94301]
ii
<PAGE>
THE KSI GROUP, INC.
VOTING TRUST CERTIFICATES
HELD BY VOTING TRUSTEES
Number of Certificate Issuance Date of
Series Shares Number Date Receipt
- ------ ------ ------ ---- --------
Common A 3,012,167
Common B 4,761,166
[All VOTING TRUST CERTIFICATES are held at Doty & Sundheim,
420 Florence Street, Palo Alto,CA 94301]
iii
<PAGE>
THE KSI GROUP, INC.
BENEFICIAL OWNER
CERTIFICATE RECORD BOOK
Number of Voting Date Date Canceled
Name & Address Trust Certificates Issued or Transferred Notes
- -------------- ------------------ ------- -------------- -----
The Bianco Family
1991 Trust dated
February 1, 1991
[All BENEFICIAL SHARES are held at Doty & Sundheim,
420 Florence Street, Palo Alto, CA 94301]
iv
<PAGE>
EXHIBIT 10.6
FIRST AMENDMENT TO THE
FIRST AMENDED AND RESTATED
VOTING TRUST AGREEMENT
REGARDING SHARES ISSUED TO DAVID J. SHIMMON
This FIRST AMENDMENT to the FIRST AMENDED AND RESTATED VOTING TRUST
AGREEMENT ("AMENDMENT") is entered into as of December 1, 1996 ("EXECUTION
DATE") by and among William A. Bianco, Jr. (the "VOTING TRUSTEE") and David J.
Shimmon, an individual ("SHIMMON").
RECITALS
A. VOTING TRUSTEE, SHIMMON and others entered into a Voting Trust
Agreement on June 30, 1994, an Extension Agreement on June 12, 1995 and a First
Amended and Restated Voting Trust Agreement Regarding Shares Issued to David J.
Shimmon effective as of April 1, 1996 (collectively, the "ORIGINAL AGREEMENT").
B. The KSI Group, Inc., a Delaware corporation (the "COMPANY") is
contemplating the effectuation of a "QUALIFIED PUBLIC OFFERING" as defined in
the Articles of Incorporation of the CORPORATION effective as of the EXECUTION
DATE.
C. Section 7.7 of the ORIGINAL AGREEMENT grants VOTING TRUSTEE and the
"BENEFICIAL OWNER" the right to amend the ORIGINAL AGREEMENT.
D. SHIMMON currently is the "BENEFICIAL OWNER" as defined in the ORIGINAL
AGREEMENT.
E. The VOTING TRUSTEE and SHIMMON desire to amend the ORIGINAL AGREEMENT
as set forth below effective as of the closing of the QUALIFIED PUBLIC OFFERING
(the "CLOSING").
NOW, THEREFORE, THE ORIGINAL AGREEMENT is amended as set forth below:
1. Conditioned Upon Effectuation of the CLOSING. Effective as of the
--------------------------------------------
CLOSING, and only upon the CLOSING, the ORIGINAL AGREEMENT is amended as set
forth below.
2. Amendments. Sections 2.5 and 3.2 of the ORIGINAL AGREEMENT shall be
----------
amended in their entirety as set forth below:
2.5 Transfer of BENEFICIAL CERTIFICATES. The BENEFICIAL CERTIFICATES
-----------------------------------
shall be transferable only as provided in (a) the BENEFICIAL CERTIFICATES
and (b) this AGREEMENT and upon payment of any charges in effect at the
time of transfer. All transfers shall be recorded in accordance with
Section 5.2 below. Any transfer made of any BENEFICIAL CERTIFICATE shall
vest in the transferee all rights of the transferor and shall subject the
transferee to the same
<PAGE>
limitations as those imposed on the transferor by the terms of the
BENEFICIAL CERTIFICATE so transferred and this AGREEMENT. Upon such
transfer the VOTING TRUSTEE shall deliver a BENEFICIAL CERTIFICATE or
CERTIFICATES to the transferee for the number of shares represented by the
BENEFICIAL CERTIFICATE so transferred.
3.2 Rights of BENEFICIAL OWNER. Notwithstanding the provisions of
--------------------------
Section 3.1 above:
a. the BENEFICIAL OWNER shall have the exclusive right to make
the decisions required under (a) the First Amended and Restated Hoover/The
KSI Group, Inc. Rights Agreement dated April 1, 1996 and (b) the First
Amended and Restated Registration Rights Agreement dated April 1, 1996.
b. The decision whether to (i) sell the VOTING TRUST
CERTIFICATES or (ii) vote in favor of the proposed dissolution and
liquidation, merger or consolidation of the COMPANY or a sale of all or
substantially all of its assets shall require the consent of both the
VOTING TRUSTEE and the BENEFICIAL OWNER.
3. Full Effect. Except as modified above, the ORIGINAL AGREEMENT shall
-----------
remain in full force and effect.
VOTING TRUSTEE:
/s/ William A. Bianco, Jr.
------------------------------
William A. Bianco, Jr.
SHIMMON:
/s/ David J. Shimmon
------------------------------
David J. Shimmon
<PAGE>
FIRST AMENDED AND RESTATED
VOTING TRUST AGREEMENT
REGARDING SHARES ISSUED TO DAVID J. SHIMMON
This FIRST AMENDED AND RESTATED VOTING TRUST AGREEMENT ("AGREEMENT") is entered
into effective as of April 1, 1996 ("EXECUTION DATE") by and among William A.
Bianco, Jr. (the "VOTING TRUSTEE"), David J. Shimmon, an individual ("SHIMMON"),
Kinetic Systems, Inc., a California corporation ("KSI CA"), The KSI Group, Inc.,
a Delaware corporation (the "COMPANY"), and Doty & Sundheim, a Professional
Corporation (the "ESCROW HOLDER").
RECITALS
A. The parties entered into a Voting Trust Agreement on June 30, 1994
and an Extension Agreement on June 12, 1995 (collectively, the "ORIGINAL
AGREEMENT"). The parties wish to amend and restate the ORIGINAL AGREEMENT in
its entirety.
B. The parties have entered into this AGREEMENT to provide the VOTING
TRUSTEE, the President of the COMPANY and, through The Bianco Family 1991 Trust
(the "BIANCO FAMILY TRUST"), the controlling shareholder of the COMPANY, certain
voting rights with respect to certain shares held by SHIMMON, as such shares are
defined below.
THE PARTIES AGREE AS FOLLOWS:
1. VOTING TRUSTEE. There shall be one voting trustee of this voting
--------------
trust (the "VOTING TRUST"). Except as set forth in Section 6.7 below, the first
and only voting trustee shall be William A. Bianco, Jr.
2. DEPOSIT AND TRANSFER OF SHARES--ISSUANCE AND TRANSFER OF VOTING
---------------------------------------------------------------
TRUST CERTIFICATES.
- ------------------
2.1 Deposit of Shares. Upon execution of this AGREEMENT, SHIMMON
-----------------
shall deposit with the ESCROW HOLDER the certificates for all shares of the
COMPANY which he owns (the "SHIMMON CERTIFICATES"). In the event SHIMMON is
issued any additional shares by the COMPANY during the term of this AGREEMENT,
such additional shares shall be deposited as set forth above and shall be
included in the definition of "SHIMMON CERTIFICATES". The SHIMMON CERTIFICATES
shall be endorsed in blank or to the VOTING TRUSTEE, and be accompanied by such
instruments of transfer as to enable the COMPANY to cause such certificates to
be transferred to the name of the VOTING TRUSTEE.
2.2 Transfer of VOTING TRUST CERTIFICATES to VOTING TRUSTEE. All
-------------------------------------------------------
SHIMMON CERTIFICATES delivered to the ESCROW HOLDER shall be surrendered by the
ESCROW HOLDER to the COMPANY and canceled. New share certificates shall be
issued in the name of the VOTING TRUSTEE. The new share certificates shall
state that they
1
<PAGE>
are issued pursuant to this AGREEMENT. This fact shall also be noted in the
entry of ownership of the shares by the VOTING TRUSTEE in the stock transfer
records of the COMPANY. (The certificates issued to the VOTING TRUSTEE under
this Section hereafter shall be referred to as the "VOTING TRUST CERTIFICATES".)
2.3 BENEFICIAL CERTIFICATES. The VOTING TRUSTEE shall hold the VOTING
-----------------------
TRUST CERTIFICATES subject to the terms of this AGREEMENT. The COMPANY shall
thereupon issue and deliver to SHIMMON certificates representing SHIMMON'S
beneficial interest in the COMPANY. The voting trust beneficial certificates
shall be in substantially the form of Exhibit 2.3 attached hereto (the
"BENEFICIAL CERTIFICATES"). (SHIMMON and any subsequent beneficial owner
hereafter shall be referred to as the "BENEFICIAL OWNER".)
2.4 Fractional BENEFICIAL CERTIFICATES. In the event the interest in
----------------------------------
this VOTING TRUST which is owned by any holder cannot be fully represented by
whole BENEFICIAL CERTIFICATES, the VOTING TRUSTEE may issue fractional share
certificates, scrip, or other evidence of ownership of the fractional part of
one BENEFICIAL CERTIFICATE which in their discretion properly indicates
ownership of the fractional interest represented thereby. In the event of such
issue, the fractional interest shall, under no circumstances, have any greater
rights nor lesser liabilities than any other BENEFICIAL CERTIFICATE provided for
herein.
2.5 Transfer of BENEFICIAL CERTIFICATES. The BENEFICIAL CERTIFICATES
-----------------------------------
shall be transferable only as provided in (a) the BENEFICIAL CERTIFICATES, (b)
this AGREEMENT, (c) the Kinetic Systems, Inc. 1996 Shareholder Agreement dated
April 1, 1996 and any successor agreement or amendment thereto (the "SHAREHOLDER
AGREEMENT") and upon payment of any charges in effect at the time of transfer.
All transfers shall be recorded in accordance with Section 5. 2 below. Any
transfer made of any BENEFICIAL CERTIFICATE shall vest in the transferee all
rights of the transferor and shall subject the transferee to the same
limitations as those imposed on the transferor by the terms of the BENEFICIAL
CERTIFICATE so transferred, this AGREEMENT and the SHAREHOLDER AGREEMENT. Upon
such transfer the VOTING TRUSTEE shall deliver a BENEFICIAL CERTIFICATE or
CERTIFICATES to the transferee for the number of shares represented by the
BENEFICIAL CERTIFICATE so transferred.
2.6 Proof of Ownership. The VOTING TRUSTEE shall not be required to
------------------
recognize any transfer of a BENEFICIAL CERTIFICATE not made in accordance with
the provisions hereof unless the person or persons claiming such ownership shall
have produced indicia of title satisfactory to the VOTING TRUSTEE, and shall
have deposited with the VOTING TRUSTEE indemnity satisfactory to him.
2.7 Holder of BENEFICIAL CERTIFICATE as Owner. The VOTING TRUSTEE may
-----------------------------------------
treat the registered holder, for the time being, of each BENEFICIAL CERTIFICATE
(or when presented duly endorsed in blank for transfer, the bearer thereof) as
the absolute owner and holder thereof and of all the rights and interests
represented thereby for all purposes
2
<PAGE>
whatsoever. The VOTING TRUSTEE shall not be bound or affected by any notice to
the contrary.
2.8 Replacement of BENEFICIAL CERTIFICATE. If a BENEFICIAL
-------------------------------------
CERTIFICATE is lost, stolen, mutilated, or destroyed, the VOTING TRUSTEE, in his
discretion, may issue a duplicate of the BENEFICIAL CERTIFICATE upon receipt of
(a) evidence of such fact and (b) indemnification satisfactory to him.
3. VOTING AND ACTION BY VOTING TRUSTEE.
-----------------------------------
3.1 Voting of VOTING TRUST CERTIFICATES. Subject to the provisions
-----------------------------------
of Section 3.2 below, so long as the VOTING TRUSTEE shall hold VOTING TRUST
CERTIFICATES deposited pursuant to the provisions of this AGREEMENT, he shall
possess and in his unrestricted discretion shall be entitled to exercise in
person or by his attorneys-in-fact or proxies, all rights and powers of absolute
owners and holders of the VOTING TRUST CERTIFICATES, including the full and
unqualified right to vote, assent or consent with respect thereto and to take
part in and consent to any corporate or shareholders' action of any kind
whatsoever. No other person shall have any voting rights in respect to the
VOTING TRUST CERTIFICATES so long as this AGREEMENT is in effect and such shares
are registered in the name of the VOTING TRUSTEE. The right of the VOTING
TRUSTEE to vote, assent, or consent shall include the right to vote at any
election of directors and in favor of or in opposition to any resolution or the
issuance or creation of additional securities of the COMPANY, or any action of
any character whatsoever which may be presented at any meeting or require the
consent of shareholders of the COMPANY.
3.2 Rights of BENEFICIAL OWNER. Notwithstanding the provisions of
--------------------------
Section 3.1 above, the BENEFICIAL OWNER shall have the exclusive right to make
the decisions required under (a) the SHAREHOLDER AGREEMENT (b) the First Amended
and Restated Hoover/The KSI Group, Inc. Rights Agreement dated April 1, 1996 and
(c) the First Amended and Restated Registration Rights Agreement dated April 1,
1996. As between the BENEFICIAL OWNER and the VOTING TRUSTEE, the BENEFICIAL
OWNER shall have the exclusive right to decide whether to sell the VOTING TRUST
CERTIFICATES. Finally, unless the VOTING TRUSTEE first obtains the written
consent of the BENEFICIAL OWNER, the VOTING TRUSTEE shall have no right to vote
in favor of the proposed dissolution and liquidation, merger or consolidation of
the COMPANY or a sale of all or substantially all of its assets.
3.3 Voting in Interest of COMPANY. In voting the VOTING TRUST
-----------------------------
CERTIFICATES or in doing any act in respect of the control or management of the
COMPANY or its affairs, as holder of stock deposited hereunder, the VOTING
TRUSTEE shall exercise its best judgment in the interest of the COMPANY to the
end that its affairs shall be properly managed.
3
<PAGE>
3.4 VOTING TRUSTEE's Relationship With COMPANY. The VOTING TRUSTEE or
------------------------------------------
any firm or corporation of which it may be a member, agent, or employee, or any
corporation, trust, or association of which it may be a trustee, stockholder,
director, officer, agent, or employee, may contract with or be or become
pecuniarily interested, directly or indirectly, in any matter or transaction to
which the COMPANY or any subsidiary or controlled or affiliated corporation may
be a party or in which it may be concerned, as fully and freely as though such
VOTING TRUSTEE were not a VOTING TRUSTEE hereunder. The VOTING TRUSTEE may act
as a director or officer of the COMPANY or of any such subsidiary or controlled
or affiliated corporation.
3.5 Expenses. The VOTING TRUSTEE is expressly authorized to incur and
--------
pay such reasonable expenses and charges, to employ and pay such agents,
attorneys, and counsel, and to incur and pay such other charges and expenses as
he may deem necessary and proper for administering this AGREEMENT. The
BENEFICIAL OWNER agrees to reimburse and indemnify the VOTING TRUSTEE for and
against any and all such claims, expenses, and liabilities incurred by him, or
asserted against him, in connection with or growing out of this AGREEMENT or the
discharge of his duties hereunder. Any such claims, expenses or liabilities not
so paid by the BENEFICIAL OWNER may be deducted from dividends or other
distributions to him or may be made a charge payable as a condition to the
delivery of shares in exchange for BENEFICIAL CERTIFICATES as provided herein.
The VOTING TRUSTEE shall be entitled to a lien therefor upon the shares, funds
or other property in his possession or in the possession of the ESCROW HOLDER.
Notwithstanding the above, the VOTING TRUSTEE shall not receive a salary in
connection with his services as VOTING TRUSTEE.
3.6 VOTING TRUSTEE's Liability. The VOTING TRUSTEE shall always be
--------------------------
protected and free from liability in acting upon any document or signature
believed by him to be genuine and to have been signed by the proper party or
parties or by the party or parties purporting to have signed the same. The
VOTING TRUSTEE shall not be liable for any error of judgement nor for any act
done or omitted nor for any mistake of fact or law nor for anything which he may
do or refrain from doing in good faith nor generally shall the VOTING TRUSTEE
have any accountability hereunder, except the VOTING TRUSTEE shall be liable for
his own willful default or gross negligence. The VOTING TRUSTEE may advise with
legal counsel and any action under this AGREEMENT taken or suffered in good
faith by him in accordance with the opinion of such counsel shall be conclusive
upon the parties hereto and the VOTING TRUSTEE shall be fully protected and be
subject to no liability in respect thereof.
4. DIVIDEND, DISTRIBUTION, AND SUBSCRIPTION RIGHTS OF BENEFICIAL OWNER.
-------------------------------------------------- ----------------
4
<PAGE>
4.1 Cash Dividends. The BENEFICIAL OWNER shall be entitled, until the
--------------
termination of this AGREEMENT as hereinafter provided, to receive from time to
time payments equal to the amount of cash dividends, if any, collected or
received by the VOTING TRUSTEE or his successor upon the number of shares in
respect of which such BENEFICIAL CERTIFICATE was issued, less the deductions
provided for in Section 3.5. Such payments shall be made as soon as practicable
after the receipt of such dividends, to the BENEFICIAL OWNER. In lieu of
receiving cash dividends and paying such dividends to the BENEFICIAL OWNER, the
VOTING TRUSTEE may instruct the COMPANY in writing to pay such dividends
directly to the BENEFICIAL OWNER. Upon giving such instructions to the COMPANY,
all liability of the VOTING TRUSTEE with respect to such dividends shall cease,
until the instructions are revoked. The VOTING TRUSTEE may at any time revoke
such instructions and by written notice to the COMPANY direct it to make
dividend payments to the VOTING TRUSTEE.
4.2 Share Dividends. In case the VOTING TRUSTEE shall receive, as a
---------------
dividend or other distribution upon any VOTING TRUST CERTIFICATES held by him
under this AGREEMENT any additional shares of the COMPANY, the VOTING TRUSTEE
shall hold the same subject to this AGREEMENT for the benefit of the BENEFICIAL
OWNER and said shares shall be and become subject to all of the terms and
conditions hereof to the same extent as if originally deposited hereunder. The
VOTING TRUSTEE may, in its discretion, issue BENEFICIAL CERTIFICATES in respect
of such shares to the BENEFICIAL OWNER of record at the close of business on the
record date determined pursuant to the provisions of Section 4.6.
4.3 Distribution of Liquidation. In the event of the dissolution or
---------------------------
total or partial liquidation of the COMPANY, whether voluntary or involuntary,
the VOTING TRUSTEE shall receive the moneys, securities, rights, or property to
which the BENEFICIAL OWNER as shareholder of the COMPANY is entitled and shall
distribute the same to the BENEFICIAL OWNER.
4.4 Other Distributions to Shareholders. If at any time during the
-----------------------------------
continuation of this AGREEMENT the VOTING TRUSTEE shall receive or collect any
moneys through a distribution by the COMPANY to its shareholders, other than in
payment of cash dividends, or shall receive any property (other than shares of
stock of the COMPANY) through a distribution by the COMPANY to its shareholders,
the VOTING TRUSTEE shall distribute the same to the BENEFICIAL OWNER registered
as such at the close of business on the record date determined pursuant to the
provisions of Section 4.6; provided that the VOTING TRUSTEE may withhold
therefrom the deductions provided for in Section 3.5.
4.5 Deductions from Distributions. There shall be deducted and
-----------------------------
withheld from every distribution of every kind under this AGREEMENT any taxes,
assessments, or other charges that may be required by any present or future law
to be deducted or withheld, as well as
5
<PAGE>
expenses and charges incurred pursuant to Section 3.5 hereof, to the extent that
such expenses and charges remain unpaid or unreimbursed.
4.6 Record Date for Distributions. The VOTING TRUSTEE may, if he
-----------------------------
deems it advisable, fix a date not exceeding 20 days preceding any date for the
payment or distribution of dividends or for the distribution of assets or rights
as a record date for the determination of the BENEFICIAL OWNER entitled to
receive such payment or distribution, and the BENEFICIAL OWNER of record on such
date shall be exclusively entitled to participate in such payments or
distributions. In any case in which the VOTING TRUSTEE shall fail to fix such a
record date, the date 3 days prior to the date of payment or distribution of
dividends or the distribution of assets or rights, shall constitute the record
date for the determination of the BENEFICIAL OWNER entitled to receive such
payment or distribution.
5. BOOKS AND RECORDS.
-----------------
5.1 Record of Shares. It shall be the duty of the ESCROW HOLDER to
----------------
maintain a record of all VOTING TRUST CERTIFICATES which are transferred to the
VOTING TRUSTEE and all BENEFICIAL CERTIFICATES indicating the name in which the
stock was held, the date of issuance of the stock, the class and series of the
stock, the number of shares, and the number of the certificate or certificates
representing those shares. The ESCROW HOLDER also shall maintain a record of
the date on which any such share certificates were received by them. The ESCROW
HOLDER shall receive and hold the new share certificates issued by the COMPANY
in the name of the VOTING TRUSTEE and shall maintain a record indicating the
date of issuance of such certificates, the date of receipt of such certificates
and the place in which such certificates are held by them.
5.2 Record of Trust Certificates. The Secretary of the Company shall
----------------------------
maintain a record showing the name and address of the BENEFICIAL OWNER. The
record shall show the dates on which the BENEFICIAL CERTIFICATES were issued,
canceled, transferred, or replaced. The record shall be known as the Beneficial
Owner Certificate Record Book and shall be open to inspection by any of the
parties to this AGREEMENT or their successors at any reasonable time. The first
BENEFICIAL OWNER to appear in the Beneficial Owner Certificate Record Book shall
be the party to this AGREEMENT to whom BENEFICIAL CERTIFICATES are to be issued.
The record shall show any subsequent transfer, assignment, pledge, attachment,
execution, and any other matter affecting the title to the BENEFICIAL
CERTIFICATES which come to the attention of the ESCROW HOLDER or VOTING TRUSTEE.
Any documents, including BENEFICIAL CERTIFICATES which are canceled, purporting
to affect the title of the BENEFICIAL CERTIFICATES shall also be kept in the
Beneficial Owner Record Book, together with a sample copy of the BENEFICIAL
CERTIFICATE.
6
<PAGE>
5.3 Inspection of Records. The books and records of this VOTING TRUST
---------------------
shall be open to inspection by any of the parties to this AGREEMENT or their
successors at any reasonable time. The inspection shall be made at the office
of the COMPANY and shall include the right to make copies of the books and
records; provided, however, that any such activity must be conducted with
reasonable notice first given to the Secretary of the COMPANY. In the event of
a dispute, the matter shall be referred to the VOTING TRUSTEE for his decision
as to the reasonableness of the request for inspection and copying.
6. TERM OF VOTING TRUST.
--------------------
6.1 Irrevocability of VOTING TRUST. Except as otherwise provided in
------------------------------
this AGREEMENT, the VOTING TRUST created by this AGREEMENT is hereby expressly
declared to be irrevocable.
6.2 Termination. This AGREEMENT shall terminate: (a) the date William
-----------
A. Bianco, Jr. ceases to be employed by the COMPANY, for any reason or no
reason whether during the original term of this AGREEMENT or any extension
thereof; (b) the date 50% or more of the voting securities of the COMPANY are
transferred to a third party or parties pursuant to one transaction or a series
of related transactions or (c) June 30, 1999. Provided William A. Bianco, Jr.
is still employed by the COMPANY, this AGREEMENT may be extended as provided in
Section 6.3 below.
6.3 Extension of Term. The prescribed term of this AGREEMENT may be
-----------------
extended, provided, within the three month period prior to the expiration date
hereof, the BENEFICIAL OWNER by written AGREEMENT, with the written consent of
the VOTING TRUSTEE, extends the duration hereof, as to such BENEFICIAL OWNER'S
shares only, for an additional period not exceeding five (5) years from the
expiration date then in effect. In the event of such extension, the VOTING
TRUSTEE, prior to the expiration as hereinabove provided, as originally fixed,
or as theretofore extended, as the case may be, files in the principal executive
office of the COMPANY a copy of an agreement extending the expiration date of
this AGREEMENT and thereupon the duration of this AGREEMENT shall be extended
for the period fixed by such extension agreement; provided, however, that no
such extension agreement shall affect the rights or obligations of persons not
parties thereto.
6.4 Return of VOTING TRUST CERTIFICATES After Termination. Within 60
-----------------------------------------------------
days after the termination of this AGREEMENT, the VOTING TRUSTEE shall deliver
to the BENEFICIAL HOLDERS, certificates representing the number of shares in
respect of which such BENEFICIAL CERTIFICATES were issued upon the surrender of
such BENEFICIAL CERTIFICATES properly endorsed and upon payment by the persons
entitled to receive such
7
<PAGE>
share certificates of a sum sufficient to cover any governmental charge on the
transfer or delivery of such certificates.
6.5 Final Accounting. Within 90 days after termination of this VOTING
----------------
TRUST, the VOTING TRUSTEE shall render a final accounting to the BENEFICIAL
OWNER and to the COMPANY and shall distribute any funds or other assets held by
him to the parties entitled thereto.
6.6 Deposit of Other Shares. Except as specifically provided for in
-----------------------
this AGREEMENT as set forth above, no additional shares may be deposited into
the VOTING TRUST.
6.7 Death of VOTING TRUSTEE. Pursuant to Section 6.2, the death of
-----------------------
the VOTING TRUSTEE shall cause this AGREEMENT to terminate. In such event the
BENEFICIAL OWNER shall appoint a "termination trustee" to perform those services
necessary to effectuate the termination of this AGREEMENT.
7. GENERAL.
-------
7.1 Place of Performance. This AGREEMENT is made, executed, and
--------------------
entered into at Santa Clara, California, and it is mutually agreed that the
performance of all parts of this contract shall be made at Santa Clara,
California.
7.2 Governing Law. This AGREEMENT is intended by the parties to be
-------------
governed and construed in accordance with the laws of the State of California.
7.3 Severability of Provisions. This AGREEMENT shall not be severable
--------------------------
or divisible in any way but it is specifically agreed that should any provision
herein be, or become invalid that such invalidity shall not affect the validity
of the remainder of the AGREEMENT.
7.4 Construction by VOTING TRUSTEE. The VOTING TRUSTEE is authorized
------------------------------
and empowered to construe this AGREEMENT and his reasonable construction made in
good faith shall be conclusive and binding upon the BENEFICIAL OWNER and upon
all parties hereto.
7.5 Merger or Consolidation. In the event that the COMPANY shall
-----------------------
merge into or consolidate with another corporation or corporations, or in the
event that all or substantially all of the assets of the COMPANY are transferred
to another corporation the shares of which are
8
<PAGE>
issued to shareholders of the COMPANY in connection with such transfer, then the
term "COMPANY" shall be construed to include such successor corporation and the
VOTING TRUSTEE shall receive and hold under this AGREEMENT any shares of such
successor corporation received by him on account of his ownership as VOTING
TRUSTEE of shares held by him hereunder prior to such merger, consolidation, of
transfer. BENEFICIAL CERTIFICATES issued and outstanding under this AGREEMENT at
the time of such merger, consolidation, or transfer may remain outstanding, but
the VOTING TRUSTEE may, in his discretion, substitute therefor new BENEFICIAL
CERTIFICATES in appropriate form.
7.6 Notice to BENEFICIAL OWNER. Any notice to be given to the
--------------------------
BENEFICIAL OWNER shall be sufficiently given if mailed, postage prepaid, to the
registered BENEFICIAL OWNER of such BENEFICIAL CERTIFICATE at the address of
such registered BENEFICIAL HOLDER appearing on the certificate book to be
maintained by the VOTING TRUSTEE. Every notice so given shall be effective
whether or not received, and such notice shall for all purposes be deemed to
have been given on the date of mailing thereof.
7.7 Amendment of AGREEMENT. If at any time the VOTING TRUSTEE deems
----------------------
it advisable to amend this AGREEMENT, he shall submit such amendment to the
BENEFICIAL OWNER for his approval at a special meeting which shall be called for
that purpose. If, at such meeting or any adjournment thereof, the proposed
amendment shall be approved by the affirmative vote of the VOTING TRUSTEE and
the BENEFICIAL OWNER, the proposed amendment so approved shall become a part of
this AGREEMENT as if originally incorporated herein.
7.8 Attorneys' Fees. In the event of any dispute between or among the
---------------
parties, the prevailing party or parties in such action shall be entitled to
receive from the party or parties held to be liable, in addition to any damages
or other remedies provided by law or in equity, an amount equal to the
attorneys' fees and costs expended by such prevailing party or parties in such
action.
7.9 Post Judgment. In addition to any such amount, the prevailing
-------------
party or parties also shall be entitled to receive from the party or parties
held to be liable, an amount equal to the attorneys' fees and costs incurred in
enforcing any judgment against such party or parties. This Section 7.9 is
severable from the other provisions of this AGREEMENT and survives any judgment
and is not deemed merged into any judgment.
(SIGNATURE PAGE FOLLOWS)
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this AGREEMENT effective as
of the date first set forth above.
VOTING TRUSTEE:
/s/ William A. Bianco, Jr.
-------------------------------------
William A. Bianco, Jr.
BENEFICIAL OWNER:
/s/ David J. Shimmon
-------------------------------------
David J. Shimmon
COMPANY:
The KSI Group, Inc.,
a Delaware corporation
By: /s/ William A. Bianco, Jr.
---------------------------------
William A. Bianco, Jr., President
KSI CA:
Kinetic Systems, Inc.,
a California corporation
By: /s/ William A. Bianco, Jr.
---------------------------------
William A. Bianco, Jr., President
10
<PAGE>
ESCROW HOLDER:
Doty & Sundheim,
a Professional Corporation
By: /s/ George Sundheim
--------------------------
George Sundheim, President
11
<PAGE>
EXHIBIT 2.3
-----------
BENEFICIAL CERTIFICATE
This Beneficial Certificate hereby certifies that David J. Shimmon hereby
owns a beneficial interest in 2,000, 000 shares of The KSI Group, Inc. Series A
Common Stock. The beneficiary interest is subject to the FIRST AMENDED AND
RESTATED VOTING TRUST AGREEMENT dated April 1, 1996 (the "VOTING TRUST
AGREEMENT") and the rights granted the VOTING TRUSTEE, as that term is defined
in the VOTING TRUST AGREEMENT.
Dated: April 1, 1996
--------------------
/s/ William A. Bianco /s/ Marie R. Bianco
---------------------------------- --------------------------
William A. Bianco, Jr., President Marie R. Bianco, Secretary
12
<PAGE>
THE KSI GROUP, INC.
BENEFICIAL SHARES
HELD BY VOTING TRUSTEE
<TABLE>
<CAPTION>
Beneficial Number of Certificate Issuance Date Received
Owner Shares Number Date By Escrow
- ---------- --------- ----------- -------- -------------
<S> <C> <C> <C> <C>
David J. Shimmon 2,000,000
</TABLE>
[All BENEFICIAL SHARES are held at Doty & Sundheim,
420 Florence Street, Palo Alto, CA 94301]
13
<PAGE>
THE KSI GROUP, INC.
VOTING TRUST CERTIFICATES
HELD BY VOTING TRUSTEE
<TABLE>
<CAPTION>
Number of Certificate Issuance Date of
Series Shares Number Date Receipt
- ------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C>
Series A Common 2,000,000 CSA-2 03/31/96
</TABLE>
[All VOTING TRUST CERTIFICATES are held at Doty & Sundheim,
420 Florence Street, Palo Alto, CA 94301]
14
<PAGE>
THE KSI GROUP, INC.
BENEFICIAL OWNER
CERTIFICATE RECORD BOOK
<TABLE>
<CAPTION>
Number of Voting Date Date Canceled
Name & Address Trust Certificates Issued or Transferred
------------------- ------------------ ------- --------------
Notes
-----
<S> <C> <C> <C>
David J. Shimmon CSA-2 03/31/96
13463 Mandoli Drive
Los Altos, CA 94022
</TABLE>
[All BENEFICIAL SHARES are held at Doty & Sundheim,
420 Florence Street, Palo Alto, CA 94301]
15
<PAGE>
EXHIBIT 10.7
[NEWPARK LEASING COMPANY LETTERHEAD]
February 26, 1993
Mr. David Shimmon
Kinetic Systems
3080 Raymond Street
Santa Clara, California 95054
RE: Lease 3080 Raymond Street
Dear Mr. Shimmon:
This letter will amend the lease for the premises at 3080 Raymond Street dated
8/2/89, between NEWPARK LEASING COMPANY, LESSOR, and KINETIC SYSTEMS, INC.,
LESSEE as follows:
1. The lease shall be extended six years commencing 9/1/93 and expiring
8/31/99.
2. Lessor shall construct approximately 4,000 sq. ft. of second floor
offices in the building, increasing the total leased premises to
approximately 34,000 sq. ft. See attached plan and addendum which
describes all improvements to be provided by Lessor. It is understood
that upon execution of this document, Lessor shall proceed immediately
with the design and construction of additional improvements and that
they shall be completed as noted on addendum. Lessee shall have the
right to occupy new space as soon as it is ready.
3. Starting 9/1/93 rental will be $16,320.00 per month and will remain so
until, 9/1/96, when it will become $17,680.00 and remain so for the
balance of the lease term.
4. Lessee will have the option to extend the lease for an additional five
years. This option must be executed in writing at least nine months
prior to the expiration of the lease. Rental shall be adjusted every
three years at the rate of 2% increase per annum, if option is
executed.
5. Paragraph 15 of the original lease will be deleted entirely.
6. Lessor agrees to provide if and as required by law, any additional
building modifications and structural improvements "readily
achievable" and "easily accomplished" as required by the Americans
with Disabilities Act of 1990 and Title XXIV.
7. All other terms and conditions of the original lease will remain in
effect.
Dated: 2/26/93
----------------------
LESSOR:/s/ James C. Jacobsen LESSEE:/s/ David J. Shimmon
--------------------------- -------------------------------
NEWPARK LEASING CO. KINETIC SYSTEMS, INC.
<PAGE>
STANDARD INDUSTRIAL LEASE - NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
<logo>
1. Parties. This lease dated, for reference purposes only, July 31, 1989, is
------- --
made by and between Newpark Leasing Company, A California Partnership (herein
-------------------------------------------------
called "Lessor") and Kinetic Systems Inc., a California Corporation (herein
----------------------------------------------
called "Lessee").
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Santa Clara State of California,
----------- ----------
commonly known as entire premises at 3080 Raymond Street, Santa Clara and
--------------- --------------------------------
described as Approximately 30,000 square feet of manufacturing/light industrial
------------------------------------------------------------------
building being a freestanding, further describe as APN 224-08-130. Said real
- -----------------------------------------------------------------
property including the land and all improvements therein, is herein called "the
Premises".
3. Term.
3.1 Term. The term of this Lease shall be for four (4) years commencing
--------------
on September 1, 1989 and ending on August 31, 1993 unless sooner terminated
----------------- ---------------
pursuant to any provision hereof.
3.2 Delay in Possession. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case, Lessee shall not be obligated to
pay rent until possession of the Premises is tendered to Lessee: provided,
however, that if Lessor shall not have delivered possession of the Premises
within sixty (60) days from said commencement date, Lessee may, at Lessee's
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee is
not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect.
3.3 Early Possession. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rates set forth below.
4. Rent. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $12,600.00, in advance, on the 1st day of each month of the term
--------- ---
hereof. Lessee shall pay Lessor upon the execution hereof, $12,600.00 as rent
----------
for the period of time from September 1, 1989 through September 30, 1989. Rent
--------------------------------------------------------------------
for any period during the term hereof which is for less than one month shall be
a pro rata portion of the monthly installment. Rent shall be payable in lawful
money of the United States to Lessor at the address stated herein or to such
other persons or at such other places as Lessor may designate in writing.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
$14,100.00 as security for Lessee's faithful performance of Lessee's obligations
- ----------
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default or for the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or
applies all or any portion of said deposit, Lessee shall within ten (10) days
after written demand therefor deposit cash with Lessor in an amount sufficient
to restore said deposit to the full amount herein above stated and Lessee's
failure to do so shall be a material breach of this Lease. If the monthly rent
shall, from time to time, increase during the term of this Lease, Lessee shall
thereupon deposit with Lessor additional security deposit so that the amount of
security deposit held by Lessor shall at all times bear the same proportion to
current rent as the original security deposit bears to the original monthly rent
set forth in paragraph 4 hereof. Lessor shall not be required to keep said
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for mechanical and
--------------
process piping construction and all related legal uses, or any other use which
- ------------------------------------------------------
is reasonably comparable and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the Premises, does not violate any convenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to
Lessor written notice of the violation of this warranty within six months from
the date that the Lease term commences, the correction of same shall be the
obligation of the Lessee at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if there
shall be more than one tenant in the building containing the Premises, shall
tend to disturb such other tenants.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date and Lessor further warrants to Lessee that the
plumbing, lighting, air conditioning, heating, and loading doors in the Premises
shall be in good operating condition on the Lease commencement date in the event
that it is determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting forth
with specificity the nature of the violation, to promptly, at Lessor's sole
cost, rectify such violation. Lessee's failure to give such written notice to
Lessor within thirty (30) days after the Lease commencement date shall cause the
conclusive presumption that Lessor has complied with all of Lessor's obligations
hereunder.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the Lease commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises, and
any covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto, Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. Maintenance, Repairs and Alterations.
7.1 Lessee's Obligations. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and non structural,
(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises) including, without
limiting the generality of the foregoing, all plumbing, heating, air
conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior),
ceilings, roofs (interior), floors, windows, doors, plate glass and skylights
located within the Premises, and all landscaping driveways, parking lots, fences
and signs located on the Premises and sidewalks and parkways adjacent to the
Premises. See Attached Addendum Paragraphs #55 & #56.
7.2 Surrender. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occupied.
Initials: /s/ RS
----------
<PAGE>
by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, space heaters, air conditioning, plumbing and
fencing on the premises in good operating condition.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations under
this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its
option (but shall not be required to) enter upon the Premises after ten (10)
day's prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf and put the same in good order, condition and repair, and the cost
thereof together with interest thereon at the maximum rate then allowable by law
shall become due and payable as additional rental to Lessor together
with Lessee's next rental installment.
7.4 Lessor's Obligations. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, all of
which obligations are intended to be that of the Lessee under Paragraph 7.1
hereof. Lessee expressly waives the benefit of any statute now or hereinafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
premises in good order, condition and repair. See attached addendum paragraphs
#55 & #56.
7.5 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility installations in, on or about
the Premises, except for nonstructural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $2,500 in cumulative cost, Lessee shall make no change or alteration
to the exterior of the Premises nor the exterior of the building(s) on
the Premises without Lessor's prior written consent. As used in this Paragraph
7.5 the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee
remove any or all of said alterations, improvements, additions or Utility
Installations at the expiration of the term, and restore the Premises to their
prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, Lessor may require that
Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of non-
responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorney's fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions of this Paragraph 7.5(d), Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2.
8. Insurance Indemnity.
8.1 Insuring Party. As used in this Paragraph 8, the term "insuring party"
shall mean the party who has the obligation to obtain the Property Insurance
required hereunder. The insuring party shall be designated in Paragraph 46
hereof. In the event Lessor is the insuring party, Lessor shall also maintain
the liability insurance described in paragraph 8.2 hereof, in addition to, and
not in lieu of, the insurance required to be maintained by Lessee under said
paragraph 8.2, but Lessor shall not be required to name Lessee as an additional
insured on such policy. Whether the insuring party is the Lessor or the Lessee,
Lessee shall, as additional rent for the Premises, pay the cost of all insurance
required hereunder, except for that portion of the cost attributable to Lessor's
liability insurance coverage in excess of $1,000,000 per occurrence. If Lessor
is the insuring party Lessee shall, within ten (10) days following demand by
Lessor, reimburse Lessor for the cost of the insurance so obtained.
8.2 Liability Insurance. Lessee shall, at Lessee's expense obtain and keep
in force during the term of this Lease a policy of Combined Single Limit, Bodily
Injury and Property Damage insurance insuring Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,000 per occurrence. The
policy shall insure performance by Lessee of the indemnity provisions of this
Paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.3 Property Insurance.
(a) The insuring party shall obtain and keep in force during the term
of this Lease a policy or policies of insurance covering loss or damage to the
Premises, in the amount of the full replacement value thereof, as the same may
exist from time to time, which replacement value is now $1,100,000.00, but in no
event less than the total amount required by lenders having liens on the
Premises, against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended perils
("all risk" as such term is used in the insurance industry). Said insurance
shall provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises. The insuring party shall, in
addition, obtain and keep in force during the term of this Lease a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period. A stipulated value or agreed amount endorsement deleting
the coinsurance provision of the policy shall be procured with said insurance as
well as an automatic increase in insurance endorsement causing the increase in
annual property insurance coverage by 2% per quarter. If the insuring party
shall fail to procure and maintain said insurance the other party may, but shall
not be required to, procure and maintain the same, but at the expense of Lessee.
If such insurance coverage has a deductible clause, the deductible amount shall
not exceed $1,00 per occurrence, and Lessee shall be liable for such deductible
amount.
(b) If the Premises are part of a larger building, or if the Premises
are part of a group of buildings owned by Lessor which are adjacent to the
Premises, then Lessee shall pay for any increase in the property insurance of
such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof. But
if Lessee is the insuring party the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 Insurance Policies. Insurance required hereunder shall be in companies
holding a "General Policyholders Rating" of at least B plus, or such other
rating as may be required by a lender having a lien on the Premises, as set
forth in the most current issue of "Best's Insurance Guide". The insuring party
shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses as required by this paragraph 8. No such policy shall be
cancellable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee upon demand. Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in Paragraph
8.3. If Lessee does or permits to be done anything which shall increase the cost
of the insurance policies referred to in Paragraph 8.3, then Lessee shall
forthwith upon Lessor's demand reimburse Lessor for any additional premiums
attributable to any act or omission or operation of Lessee causing such increase
in the cost of insurance. If Lessor is the insuring party, and if the insurance
policies maintained hereunder cover other improvements in addition to the
Premises, Lessor shall deliver to Lessee a written statement setting forth the
amount of any such insurance cost increase and showing in reasonable detail the
manner in which it has been computed.
8.5 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises arising from any
cause and Lessee hereby waives all claims in respect thereof against Lessor,
unless caused by or due to the sole negligence or willful acts of Lessor.
8.7 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee unless caused by or due to the sole negligence or willful acts of
Lessor. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the building in which the Premises are
located.
Initials /s/ R.S.
--------
<PAGE>
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
then replacement cost of the Premises. "Premises Building Partial Damage" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more of
the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 Partial Damage -- Insured Loss. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the Lessee is
the insuring party, and if the insurance proceeds to effect such repair. Lessee
shall contribute the required amount to Lessor within ten days after Lessee has
received notice from Lessor of the shortage in the insurance. When Lessee shall
contribute such amount to Lessor, Lessor shall make such repairs as soon as
reasonably possible and this Lease shall continue in full force and effect.
Lessee shall in no event have any right to reimbursement for any such amounts so
contributed.
9.3 Partial Damage -- Uninsured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 Total Destruction. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss, (including destruction required by
any authorized public authority), which falls into the classification of
Premises Total Destruction of Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 Damage Near End of Term.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than 20 days after the occurrence of an Insured
Loss falling within the classification of Premises Partial Damage during the
last six months of the term of this Lease. If Lessee duly exercises such option
during said 20 day period, Lessor shall, at Lessor's expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said 20 day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 20 day period by giving written notice to Lessee of Lessor's
election to do so within 10 days after the expiration of said 20 day period,
notwithstanding any term or provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9, and shall not commence such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 Termination -- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the real property tax, as defined
in paragraph 10.2, applicable to the Premises during the term of this Lease.
All such payments shall be made at least ten (10) days prior to the delinquency
date of such payment. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes paid by Lessee shall
cover any period of time prior to or after the expiration of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year during which this Lease shall be in
effect, and Lessor shall reimburse Lessee to the extent required. If Lessee
shall fail to pay any such taxes, Lessor shall have the right to pay the same,
in which case Lessee shall repay such amount to Lessor with Lessee's next rent
installment together with interest at the maximum rate then allowable by law.
10.2 Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. Assignment and Subletting. *
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee or Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any
other person shall not be deemed to be a waiver by Lessor of any provision
hereof. Consent to one assignment or subletting shall not be deemed consent to
any subsequent assignment or subletting. In the event of default by any assignee
of Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees.
*Any profit, will be split 50/50 between Lessor and Lessee. Initials: /s/ RS
-------
<PAGE>
of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 Attorney's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Lessor to Lessee;
provided, however, that if the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Lessee commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. /S/ 101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within 60 days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 30 days.
Provided, however, in the event that any provision of this paragraph 13.1(d) is
contrary to any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
13.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach;
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by Lessor
by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises; expenses of reletting, including
necessary renovation and alternation of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the unpaid
rent for the balance of the term after the time of such award exceeds the amount
of such rental loss for the same period that Lessee proves could be reasonably
avoided; that portion of the leasing commission paid by Lessor pursuant to
Paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder, in the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any
other provision of this Lease to the contrary.
13.5 Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the rent shall be reduced in the proportion
that the floor area of the building taken bears to the total floor area of the
building situated on the Premises. No reduction of rent shall occur if the only
area taken is that which does not have a building located thereon. Any award for
the taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any award
for loss of or damage to Lessee's trade fixtures and removable personal
property. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of severance damages received by Lessor
in connection with such condemnation, repair any damage to the Premises caused
by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
15. Broker's Fee.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
50/50 to Cornish & Carney and Blickman Turkus Licensed real estate broker(s), a
- ---------------------------------------------
fee as set forth in a separate agreement between Lessor and said broker(s), or
in the event there is no separate agreement between Lessor and said broker(s),
the sum of $ As Per Agreement, for brokerage services rendered by said broker(s)
-----------------
to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or if Lessee remains in possession of the Premises after
the expiration of the term of this Lease after having failed to exercise an
Option, or if said broker(s) are the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph 15.
16. Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any are
claimed. Any such statement may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
/s/ RS
<PAGE>
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in Paragraph
15, in the event of any transfer of such title or interest. Lessor herein named
(and in case of any subsequent transfers then the grantor) shall be relieved
from and after the date of such transfer of all liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
18. Severability. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified mail, and if
given personally or by mail, shall be deemed sufficiently given if addressed to
Lessee or to Lessor at the address noted below the signature of the respective
parties, as the case may be. Either party may by notice to the other specify a
different address for notice purposes except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address for
notice purposes. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties at
such addresses as Lessor may from time to time hereafter designate by notice to
Lessee.
24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required by effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be, Lessee's failure to
execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. Attorney's Fees. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the court.
The provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent shall
not be unreasonably withheld.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other property of Lessor or the right of first offer to lease
other property of Lessor; (3) the right or option to purchase the Premises, or
the right of first refusal to purchase the Premises, or the right of first offer
to purchase the Premises or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
<PAGE>
39.2 Options Personal. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 Multiple Options. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary. (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(b) or 13.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) continuing until the obligation is
paid, or (iii) at any time after an event of default described in paragraphs
13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of
such default to Lessee), or (iv) in the event that Lessor has given to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
has become payable under paragraph 13.4 for each of such defaults, or paragraph
13.1(c), whether or not the defaults are cured, during the 12 month period prior
to the time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay Lessor a monetary obligation of Lessee for a
period of 30 days after such obligation becomes due (without any necessity of
Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1(a), 13.1(d) or 13.1(c) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or not the defaults are cured.
40. Multiple Tenant Building. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violations of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of material breach of this Lease.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the
right on the part of said party to institute suit for recovery of such sum. If
it shall be adjudged that there was no legal obligation on the part of said
party to pay such sum or any part thereof, said party shall be entitled to
recover such sum or so much thereof as it was not legally required to pay under
the provisions of this Lease.
44. Authority. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Insuring Party. The insuring party under this Lease shall be the Lessor.
------
47. Addendum. Attached hereto is an addendum or addenda containing paragraphs 47
--
through 56 which constitutes a part of this Lease.
--
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO: THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING
THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
Executed at NEW PARK LEASING COMPANY, a California
------------------------ --------------------------------------
Partnership
on By /s/ James C. Jacobsen
--------------------------------- ------------------------------------
James C. Jacobsen
Address 1350 Duane Ave. By
--------------------------- ------------------------------------
Santa Clara, CA 95050 "LESSOR" (Corporate seal)
---------------------------
Executed at KINETIC SYSTEMS, INC. a California Corp.
------------------------ ---------------------------------------
on 8/2/89 By /s/ Richard Skwarzynski
--------------------------------- -------------------------------------
Address 430 Aldo Ave. Richard Skwarzynski
---------------------------
Santa Clara, CA 95054 By
--------------------------- -------------------------------------
"LESSEE" (Corporate seal)
<PAGE>
THIS IS AN ADDENDUM TO THE STANDARD INDUSTRIAL LEASE NET DATED JULY 31, 1989 IN
WHICH NEWPARK LEASING COMPANY AS "LESSOR" AND KINETIC SYSTEMS, INC., A
CALIFORNIA CORPORATION AS "LESSEE".
47. RENT SCHEDULE:
-------------
Months 01-12: $12,600.00 NNN per month
Months 13-24: $12,900.00 NNN per month
Months 25-48: $14,100.00 NNN per month
48. IMPROVEMENTS: Lessor shall, at Lessor's sole cost and expense, provide the
------------
following improvement to said premises on or before August 31, 1989:
a. Fence a yard area where outlined in red on Exhibit "A".
49. OCCUPANCY: Lessee shall be granted possession and occupancy of the subject
---------
premises upon execution of the lease. Said possession and occupancy shall
be subject to all of the terms, covenants, and conditions of this lease,
saving and excepting that the Lessee shall not be called upon to pay rental
for any period of possession and occupancy prior to August 31, 1989.
50. OPTION TO EXTEND: Lessee has the option to extend this agreement for an
----------------
additional four (4) years. Terms, conditions and rental rate to be
agreeable to both Lessor and Lessee. This option must be exercised on or
before September 1, 1992.
51. TOXICS: Lessor acknowledges that Lessee has no intent of using any
------
toxic material during the term of this lease. In the event that a soil test
is done during the term of the lease, it is understood that it shall be the
sole responsibility of the Lessor to prove that Lessee has caused the
contamination.
52. Lessor to grant Lessee for the four (4) year lease term at least thirty
(30) parking stalls located on the premises outside of fenced yard area.
53. Lessor will bill Lessee for taxes, insurance and maintenance. Lessor shall
furnish Lessee a statement of actual expenses for taxes, insurance, and
maintenance. Taxes, insurance, and maintenance are currently $10,154.00 per
year for the premises or approximately $.028 per square foot per month for
the building.
54. If said property is sold during Lessee's lease term, Lessee will not be
responsible for any increase in taxes due to the sale of said property.
55. Lessor, at its sole cost and expense, will replace HVAC units if HVAC units
fail during said four (4) year lease term. Lessee to maintain HVAC service
contract as to Lease agreement.
56. Lessor, at its sole cost and expense, will maintain roof, foundation, and
exterior walls as long as damage was not caused by Lessee.
<PAGE>
EXHIBIT 10.8
Page 1 of 5
---
STANDARD SUBLEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
1. Parties. This Sublease, dated, for reference purposes only, July 11, 1996 is
------- --
made by and between Potpourri Shopper Inc.
------------------------------------------------------------
(herein called "Sublessor") and
- ----------------------- -------------------------
Kinetic Systems, Inc. (herein called "Sublessee").
- ---------------------------------------------------
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Santa Clara
-----------------------------------------------------------------------------
State of California, commonly known as 3090 Raymond Street Santa Clara
-----------------------------------------
and described as The entire referenced premises consisting of 28,500 square
---------------------------------------------------------------
feet of rentable, along with all furnished parking spaces.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Said real property, including the land and all improvements thereon, is
hereinafter called the "Premises".
3. Term.
3.1 Term. The term of this Sublease shall be for 16.5 months
--------------------------
commencing on August 15th, 1996 and ending on December 31, 1997
----------------- ----------------------------------
unless sooner terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee on
said date, Sublessor shall not be subject to any liability therefore, nor shall
such failure affect the validity of this Lease or the Premises is tendered to
Sublessee; provided, however, that if Sublessor shall not have delivered
possession of the Premises within sixty (60) days from said commencement date,
Sublessee may, at Sublessee's option, by notice in writing to Sublessor within
ten (10) days thereafter, cancel this Sublease, in which event the parties shall
be discharged from all obligations thereunder. If Sublessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to all
provisions hereof, such occupancy shall not advance the termination date and
Sublessee shall pay rent for such period at the initial monthly rates set forth
below. See addendum.
4. Rent. Sublessee shall pay to Sublessor as rent for the Premises equal monthly
payments of $28,500 in advance, on the 10th day of each month of the term
-------
hereof.
Sublessee shall pay Sublessor upon the execution hereof $28,500 as rent for
-------
first month's rent - see addendum.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Rent for any period during the term hereof which is for less than one month
shall be a prorata portion of the monthly installment. Rent shall be payable in
lawful money of the United States to Sublessor at the address stated herein or
to such other persons or at such other places as Sublessor may designate in
writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon execution
hereof $ 0 as security for Sublessee's faithful performance of Sublessee's
---
obligations hereunder, if Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Sublessor may become obligated by reason of Sublessee's default,
or to compensate Sublessor for any loss or damage which Sublessor may suffer
thereby. If Sublessor so uses or applies all or any portion of said deposit,
Sublessee shall within ten (10) days after written demand therefore deposit
cash with Sublessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Sublessee's failure to do so shall be a material
breach of this Subleasee. Sublessor shall not be required to keep said deposit
separate from its general accounts. If Sublessee performs all of Sublessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Sublessor, shall be returned, without payment of interest or
other increment for its use to Sublessee (or at Sublessor's option, to the last
assignee. If any, of Sublessee's interest hereunder) at the expiration of the
term hereof, and after Sublessee has vacated the Premises. No trust relationship
is created herein between Sublessor and Sublessee with respect to said Security
Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for. Sales
----------------
administration or other lawful use consistent with the operation of a first
- --------------------------------------------------------------------------------
class office building and for no other purpose.
- ---------------------
6.2 Compliance with Law.
(b) Except as provided in paragraph 6.2(a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Sublessee
of the Premises. Sublessee shall not use or permit the use of the Premises in
any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant of the building containing the Premises, which shall tend
to disturb such other tenants.
6.3 Condition of Premises. Except as provided in paragraph 6.2(a) Sublessee
hereby accepts the Premises in their condition existing as of the date of the
execution hereof, subject to all applicable zoning, municipal, county and state
laws, ordinances, and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters
disclosed thereby and by any exhibits attached hereto Sublesee acknowledges
that neither Sublessor nor Sublessor's agents have made any representation or
warranty as to the suitability of the Premises for the conduct of Sublessee's
business. See addendum
7. Master Lease
7.1 The Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated Feb 10th, 1992 wherein Newpark Leasing Company, A
-------- -- --------------------------
California Partnership
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
is the lessor, hereinafter referred to as the "Master Lessor"
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions
of the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease.
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom. None
<PAGE>
Page 2 of 5
-
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term
of this Sublease, subject, however, to any earlier termination of the Master
Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and
from all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8.2 hereof
8.2 Master Lessor, by executing this document, agrees that until a default
shall occur in the performance of Sublessor's Obligations under the Master
Lease, that Sublessor may receive, collect and enjoy the rents accruing under
this Sublease. However, if Sublessor shall default in the performance of its
obligations to Master Lessor then Master Lessor may, at its option, receive and
collect, directly from Sublessee, all rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the rents from the Sublessee, be deemed
liable to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee for
any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor .
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then this Sublease shall
not be effective unless, within 10 days of the date hereof, Master Lessor signs
this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease, nor the Master
Lessor's consent, shall not be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving guarantors consent to
this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any one
else liable under the Master Lease shall not be deemed a waiver by Master Lessor
of any provisions of the Mas ter Lease.
(c) The consent to this Sublease shall not constitute a consent to
any subsequent subletting or assignment.
(f) In the event that Sublessor shall default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid rents nor any
security deposit paid by Sublessee, nor shall Master Lessor be liable for any
other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay to None a
----
licensed real estate broker, (herein called "Broker") a fee as set forth in a
separate agreement between Sublessor and Broker, or in the event there is no
separate agreement between Sublessor and Broker, the sum of $ None for brokerage
-----
services rendered by Broker to Sublessor in this transaction.
11. Attorney's fees. If any party or the Broker named herein brings an action
to enforce the terms hereof or to declare rights hereunder, the prevailing party
in any such action, on trial and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court. The
provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
<PAGE>
12. Additional Provisions. (If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.)
See Addendum
---------------------------------------------------------------
- --------------------------------------------------------------------------------
If this Sublease has been filled in it has been prepared for submission to your
attorney for his approval. No representation or recommendation is made by the
real estate broker or its agents or employees as to the legal sufficiency, legal
effect, or tax consequences of this Sublease or the transaction relating
thereto.
Executed at Potpourri Potpourri Inc.
--------------------- --------------------------------
on By /s/ Loren Dalton
------------------------------- ------------------------------
address 1350 Duane Street By Loren Dalton, President
-------------------------- ------------------------------
Santa Clara, CA 95045 "Sublessor"
-------------------------------
Executed at Kinetic Systems, Inc. Kinetic Systems, Inc.
---------------------- --------------------------------
on By /s/ Marie R. Bianco
------------------------------- ------------------------------
address 3080 Raymond Street By Marie Bianco
-------------------------- ------------------------------
Santa Clara, CA 95045 "Sublessee"
- ---------------------------------
Executed at New Park Leasing Co.
---------------------- --------------------------------
on By /s/ James C. Jacobsen
------------------------------- ------------------------------
address By James C. Jacobsen
-------------------------- ------------------------------
- --------------------------------- "Master Lessor"
Executed at
---------------------- --------------------------------
on
------------------------------- --------------------------------
address
-------------------------- --------------------------------
- ---------------------------------
Form 401 77?
NOTE: These forms are often modified to meet changing requirements of law and
needs of the Industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071, (213) 687-
8777.
<PAGE>
[LETTERHEAD OF POTPOURRI]
Page 4 of 5
ADDENDUM
--------
This is an addendum to the standard sublease dated July 11, 1996, between
Potpourri Shoppers Inc., Sublessor; Kinetics Systems, Inc., Sublessee; and New
Park Leasing Company, Master Lessor.
3.2 Delay In Commencement
- -------------------------
The current sublease between KSI Services, Inc. and Potpourri Shoppers Inc.
dated April 28, 1996 will terminate in its entirety upon the effective date of a
new fully executed sublease dated July 11, 1996.
This sublease is contingent upon Sublessor obtaining Corporate approval to
exercise the option to extend clause of the Master Lease.
4.0 Rent Rental payment shall consist of base rent, property taxes, building
- --------
insurance, landscaping. Janitorial services, alarm services, utilities, building
maintenance and telephone expenses are not included in payment. Utilities will
---
be transferred into the accounts of the Sublessee (Kinetic Systems, Inc.) on the
effective date of the sublease.
Sublessor will have the exclusive use of approximately 8200 rentable square feet
of warehouse area from effective date through December 31, 1996. Effective
January 1, 1997 through December 31, 1997 the Sublessor will have the exclusive
use of a reduced area of approximately 5800 square feet. (See Exhibit "A")
Sublessor may vacate any portion of the warehouse space at any time within the
term of this sublease. Sublessor will provide sublessee minimum 30 day advance
notice of such reduction in warehouse space.
A rent credit of $1.00 per square foot per month reflecting the actual square
footage used by the sublessor in the above referenced warehouse space will be in
the form of a reduced rent payment on a monthly basis from the total monthly
payment due.
6.3 Condition of Premises
- -------------------------
Sublessor shall have unrestricted access to the second floor telephone system
and room on a 24 hour a day, seven (7) days a week, 365 days a year basis.
The parking lots located on the eastern and southern side of the premises shall
be exclusively for the use of Kinetic Systems, Inc. An additional 17 parking
spaces will be provided for the exclusive use of Kinetic Systems, Inc. in the
south parking lot of the Duane Street Building (see Exhibit "B").
<PAGE>
Sublessor will allow all fixed cabinets to remain. Sublessee is responsible for
damage, normal wear and tear excepted.
Exterior signage subject to Master Lessor approval.
Sublessee will be responsible for any security requirements pertaining to the
subleased space.
All exterior doors to the subleased space will be re-keyed at the Sublessee's
sole cost. One master key will be retained by Sublessor and Master Lessor for
emergency access.
A copy of an EMF study dated 1/93 was forwarded to Sublessee for review.
Acceptance of this sublease shall indemnify, defend, and hold harmless Sublessor
and Master Lessor from any and all claims, causes of action of Sublessee's
employees and invitees arising out of or related to EMF.
Sublessee shall bear all costs related to any telephone and data communications
changes from current configuration. Work on Sublessor's telephone and data
systems will not commence without Sublessors prior written consent.
Any changes to current building layout requiring any construction activities of
any kind shall have written approval of sublessor and where necessary, Master
Lessor.
Executed at Potpourri Inc. Potpourri Inc.
-------------- --------------
on By /s/ Loren G. Dalton
------------------------------ ----------------------------
address 1350 Duane Street By Loren G. Dalton, President
------------------------- ----------------------------
Santa Clara, CA 95045 "Sublessor"
- ---------------------------------
Executed at Kinetic Systems, Inc. Kinetic Systems, Inc.
--------------------- -------------------------------
on By /s/ Marie R. Bianco
------------------------------ ----------------------------
address 3080 Raymond Street By Marie Bianco
------------------------- ----------------------------
Santa Clara, CA 95045 "Sublessee"
- ---------------------------------
Executed at New Park Leasing Co.
--------------------- -------------------------------
on By /s/ James C. Jacobsen
------------------------------ ----------------------------
address By James C. Jacobsen
------------------------- ----------------------------
- --------------------------------- "Master Lessor"
<PAGE>
[DRAFTS OF 1ST FLR-WAREHOUSE AREA - FOR REFERENCE ONLY - NOT TO SCALE]
3090 Raymond St. - Santa Clara, California
<PAGE>
EXHIBIT 10.9
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of ___________________, 1997, is made by
and between The Kinetics Group, Inc., a Delaware corporation (the "Company"),
and ________________________________________ (the "Indemnitee").
RECITALS
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A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the
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directors, officers and agents of its subsidiaries, and to assume for itself
maximum liability for expenses and damages in connection with claims against
such directors, officers and agents in connection with their service to the
Company and its subsidiaries, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which the
Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
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NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
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(a) Agent. For the purposes of this Agreement, "agent" of the Company
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means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
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out-of-pocket costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however, that "expenses" shall not include any judgments, fines, ERISA
excise taxes or penalties, or amounts paid in settlement of a proceeding.
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(c) Proceeding. For the purposes of this Agreement, "proceeding"
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means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
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any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
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serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
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(a) Maintenance of D&O Insurance. The Company hereby covenants and
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agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
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Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
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Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
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shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
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successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an
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Agent of the Company at any time, against all expenses of any type whatsoever
actually and reasonably incurred by him in connection with the investigation,
defense or appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
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a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is a
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party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
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person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
or on behalf of Indemnitee under a valid and collectible insurance policy of D&O
Insurance, or under a valid and enforceable indemnity clause, by-law or
agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
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provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of
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any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes and penalties, and amounts paid in settlement) incurred by him in
the investigation, defense, settlement or appeal of a proceeding, but not
entitled, however, to indemnification for all of the total amount hereof, the
Company shall nevertheless indemnify the Indemnitee for such total amount
except as to the portion hereof to which the Indemnitee is not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
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Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company. In the event that the Company fails to pay expenses as incurred by the
Indemnitee as required by this paragraph, Indemnitee may seek mandatory
injunctive relief from any court having jurisdiction to require the Company to
pay expenses as set forth in this paragraph. If Indemnitee seeks mandatory
injunctive relief pursuant to this paragraph, it shall not be a defense to
enforcement of the Company's obligations set forth in this paragraph that
indemnitee has an adequate remedy at law for damages.
7. Notice and Other Indemnification Procedures.
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(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses of
any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense, or (C) the Company shall not, in fact, have employed counsel
to
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assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
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notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
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to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
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incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
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Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
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of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both
as to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by
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this Agreement to Indemnitee shall be enforceable by or on behalf of
Indemnitee in any court of competent jurisdiction if (i) the claim for
indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
Indemnitee, in such enforcement action, if successful in whole or in part,
shall be entitled to be paid also the expense of prosecuting his claim. It
shall be a defense to any action for which a claim for indemnification is made
under this Agreement (other than an action brought to enforce a claim for
expenses pursuant to Section 6 hereof, provided that the required undertaking
has been tendered to the Company) that Indemnitee is not entitled to
indemnification because of the limitations set forth in Sections 4 and 8
hereof. Neither the failure of the Corporation (including its Board of
Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Indemnitee is
proper in the circumstances, nor an actual determination by the Company
(including its Board of Directors or its stockholders) that such
indemnification is improper, shall be a defense to the
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action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
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Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
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(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
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intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
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be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
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this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications under
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this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third
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business day after the mailing date. Addresses for notice to either party are
as shown on the signature page of this Agreement, or as subsequently modified
by written notice.
17. Governing Law. This Agreement shall be governed exclusively by and
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construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
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The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
THE COMPANY:
The Kinetics Group
By ______________________________________
Title ___________________________________
Address:
_________________________________________
_________________________________________
INDEMNITEE:
_________________________________________
Address:
_________________________________________
_________________________________________
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EXHIBIT 10.10
BUSINESS LOAN AGREEMENT
This Agreement dated as of April 12, 1996, is among Bank of America
National Trust and Savings Association (the "Bank"), Kinetic Systems, Inc.
("KSI"), KSI Mfg. & Services, Inc. ("Mfg. & Services"), and Kinetic Systems
International, Inc. ("International") (KSI, Mfg. & Services, and International
are sometimes referred to collectively as the "Borrowers" and individually as a
"Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
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(a) During the availability period described below, the Bank
will provide a line of credit to the Borrowers. The amount of the line of
credit (the "Commitment") is Twenty-Two Million Five Hundred Thousand
Dollars ($22,500,000).
(b) This is a revolving line of credit with within-line
facilities for letters of credit and for Local Currency (as defined below)
advances to any Borrower and to subsidiaries of any Borrower acceptable to
the Bank and located outside of the United States. During the availability
period, the Borrowers may repay principal amounts and reborrow them.
(c) Each advance must be for at least One Hundred Thousand
Dollars ($100,000), or for the amount of the remaining available line of
credit, if less.
(d) The Borrowers agree not to permit the outstanding principal
balance of the line of credit plus the outstanding amounts of any letters
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of credit, including amounts drawn on letters of credit and not yet
reimbursed, plus the Equivalent Amount (as defined below) of all Local
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Currency advances to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the
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date of this Agreement and April 15, l998 (the "Expiration Date") unless any
Borrower is in default.
1.3 Interest Rate.
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(a) Unless the Borrowers elect an optional lnterest rate as
described below, the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly
announced from time to time by the Bank in San Francisco, California, as
its Reference Rate. The Reference Rate is set by the Bank based on various
factors, including
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the Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Bank's Reference Rate.
1.4 Repayment Terms.
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(a) The Borrowers will pay interest on May 1, 1996, and then
monthly thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrowers will repay in full all principal and any
unpaid interest or other charges outstanding under this line of credit no
later than the Expiration Date. Any interest period for an optional
interest rate (as described below) shall expire no later than the
Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on
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the Bank's Reference Rate, the Borrowers may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrowers.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement. Any principal amount bearing interest at an
optional rate under this Agreement is referred to as a "Portion." The following
optional interest rates are available:
(a) Fixed Rates.
(b) the LIBOR Rate plus 1.75 percentage points.
1.6 Letters of Credit. This line of credit may be used for financing:
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(i) standby letters of credit with a maximum maturity of 364
days but not to extend more than 90 days beyond the Expiration Date.
(ii) The amount of the letters of credit outstanding at any one
time (including amounts drawn on letters of credit and not yet reimbursed)
may not exceed Five Million Dollars ($5,000,000).
Each Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of
the Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described elsewhere
in this Agreement.
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(b) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstandinq letters of credit.
(c) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and must be in
form and content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Aqreement for
Standby Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies
the Borrowers will be charged for issuing and processing letters of credit
for the Borrowers.
(f) to allow the Bank to automatically charge its checking
account for applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to 1% per annum
of the outstanding undrawn amount of each standby letter of credit, payable
quarterly in arrears, calculated on the basis of the face amount
outstanding on the day the fee is calculated. If there is a default under
this Agreement, at the Bank's option, the amount of the fee shall be
increased to 2% per annum, effective starting on the day the Bank provides
notice of the increase to the Borrowers.
1.7 The Local Currency Facility.
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(a) From time to time during the availability period, the Bank
will make Local Currency advances to any one or more of the Borrowers and
to subsidiaries of any one of the Borrowers acceptable to the Bank and
located outside the United States ("Subsidiaries"). The Equivalent Amount
of all Local Currency advances outstanding at any one time under this
Agreement may not exceed Two Million Dollars ($2,000,000). It is provided,
however, that the Equivalent Amount of Local Currency advances which may be
outstanding from time to time may not exceed the unused amount of credit
available under the Commitment and shall be added to the principal amount
of advances outstanding under this Agreement for purposes of determining
the maximum amount of credit available hereunder.
(b) The Bank shall have no obligation to make any Local Currency
advance unless the Bank and the Borrowers or the borrowing Subsidiary
agree, at the time of Borrowers' or such Subsidiary's request for a Local
Currency advance, on the currency, the amount, the principal payment date,
the interest rate and payment dates, the prepayment and overdue
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payment terms, and the reserve and tax provisions for such advance.
(c) The Borrowers or the borrowing Subsidiary shall execute such
additional documentation as the Bank may require relating to each Local
Currency advance.
(d) Each Local Currency advance to a Subsidiary shall be
guaranteed by the Borrowers pursuant to a guaranty in form and substance
satisfactory to Bank.
(e) For purposes of this Agreement:
(1) "Equivalent Amount" means the equivalent in U. S.
Dollars of another currency calculated at the spot rate for the
purchase of such other currency with U. S. Dollars quoted by the
Bank's Foreign Exchange Trading Center in San Francisco, California,
at approximately 8:00 a.m. San Francisco time two (2) Banking Days (as
determined by the Bank with respect to such currency) prior to the
relevant date.
(2) "Local Currency" means a lawful currency other than
U. S. Dollars which is available at a branch of the Bank located in a
country other than the United States and is the legal tender of that
country where the branch is located.
1.8 Foreign Exchange Facility.
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(a) During the availability period, the bank at its discretion
may enter into spot and forward foreign exchange contracts with any one or
more of the Borrowers. The foreign exchange contract limit will be Four
Million U.S. Dollars (U.S. $4,000,000), and the settlement limit will be
Two Million U.S. Dollars (U.S. $2,000,000). The "foreign exchange contract
limit" is the maximum limit on the net difference between the total foreign
exchange contracts outstanding less the total foreign exchange contracts
for which the Borrowers have already compensated the Bank. The "settlement
limit" is the maximum limit on the gross total amount of all sale and
purchase contracts on which delivery is to be effected and settlement
allowed on any one banking day.
(b) The Bank shall not be required to pay the Borrowers or
deliver any foreign currency to the Borrowers under any foreign exchange
contract until the Bank receives evidence satisactory to it that the
Borrowers have paid the Bank the required U. S. Dollars in immediately
available funds or delivered the required foreign currency to the Bank
under such foreign exchange contract. The Bank shall not be liable for
interest or other damages caused by any such
4
<PAGE>
failure to pay or deliver or any such delay in payment or delivery.
(c) The Borrowers will pay the Bank on demand the Bank's then
standard foreign exchange contract fees for each contract.
(d) Foreign exchange contracts will be in form and substance
satisfactory to the Bank.
(e) No foreign exchange contracts will mature later than 90 days
after the last day of the availability period, and in addition no foreign
exchange contract shall have a tenor longer than 365 days.
(f) The Borrowers understand the risks of, and are financially
able to bear any losses resulting from, entering into foreign exchange
contracts. The Bank shall not be liable for any loss suffered by the
Borrowers as a result of the Borrowers' foreign exchange trading. The
Borrowers will enter into each foreign exchange contract in reliance only
upon the Borrowers' own judgment. The Borrowers acknowledge that in
entering into foreign exchange contracts with the Borrowers, the Bank is
not acting as a fiduciary. The Borrowers understand that neither the Bank
nor the Borrowers have any obligation to enter into any particular foreign
exchange contract with the other.
(g) The Borrowers hereby request the Bank to rely upon and
execute the Borrowers' telephonic instructions regarding foreign exchange
contracts, and the Borrowers agree that the Bank shall incur no liability
for its acts or omissions which result from interruption of communications,
misunderstood communications or instructions from unauthorized persons,
unless caused by the gross negligence or wilful misconduct of the Bank or
its officers or employees. The Borrowers agree to protect the Bank and hold
it harmless from any and all loss, damage, claim, expense (including the
reasonable fees of outside counsel and the allocated costs of staff
counsel) or inconvenience, however arising, which the Bank suffers or
incurs or might suffer or incur, based on or arising out of said acts or
omissions, except to the extent any such loss, damage, claim, expense, or
inconvenience is caused by the gross negligence or wilful misconduct of the
Bank or its officers or employees.
(h) The Borrowers agree to promptly review all confirmations
sent to the Borrowers by the Bank. The Borrowers understand that these
confirmations are not legal contracts but only evidence of the valid and
binding oral contract which the Borrowers have already entered into with
the Bank. The Borrowers agree to promptly execute and return to the Bank
confirmations which accurately reflect the terms of a foreign exchange
contract, and immediately
5
<PAGE>
contact the Bank if the Borrowers believe a confirmation is not accurate.
In the event of a conflict, inconsistency or ambiguity between the
provisions of this Agreement and the provisions of a confirmation, the
provisions of this Agreement will prevail.
(i) The Borrowers agree that the Bank may electronically record
all telephonic conversations with the Borrowers relating to foreign
exchange contracts and that such tape recordings may be submitted in
evidence to any court or in any other proceedings relating to such
contracts. The Borrowers agree that in the event of a conflict,
inconsistency or ambiguity between the terms of a foreign exchange contract
as reflected in a tape recording and the terms stated on a confirmation,
the terms reflected in the tape recording shall control.
(j) Any sum owed to the Bank under a foreign exchange contract
may, at the option of the Bank, be added to the principal amount
outstanding under this Agreement. The amount will bear interest and be due
as described elsewhere in this Agreement. The Borrowers hereby authorize
the Bank to debit the Borrowers' accounts with the Bank for payments due
from the Borrowers to the Bank with respect to any foreign exchange
contract. The Borrowers acknowledge that collateral pledged to secure the
Borrowers' performance of their obligations under this Agreement secures
not only the Borrowers' obligation to repay advances hereunder but also
secures the Borrowers' performance of each and every obligation hereunder,
including but not limited to the Borrowers' performance of their
obligations under foreign exchange contracts with the Bank.
(k) In addition to any other rights or remedies which the Bank
may have under this Agreement or otherwise, upon the occurrence of an event
of default under this Agreement, or if the Borrowers' aggregate realized or
unrealized mark-to-market losses on foreign exchange contracts exceed Five
Hundred Thousand Dollars ($500,000) (the "Revaluation Limit"), the Bank
may:
(1) Suspend performance of its obligations to the Borrowers
under any foreign exchange contract;
(2) Declare all foreign exchange contracts, interest and any
other amounts which are payable by the Borrowers to the Bank
immediately due and payable; and
(3) Without notice to the Borrowers, close out any or all
foreign exchange contracts or positions of the Borrowers with the
Bank.
The Bank shall not be under any obligation to exercise any such rights or
remedies or to exercise them at a time or in
6
<PAGE>
a manner beneficial to the Borrowers. The Borrowers shall be liable for any
amounts owing to the Bank after exercise of any such rights and remedies.
2. OPTIONAL, INTEREST RATES
2.1 Optional Rates. Each optional interest rate is a rate per year.
--------------
Interest will be paid on the last day of each interest period, and, if the
interest period is longer than one month, then on the first day of each month
during the interest period. At the end of any interest period, the interest rate
will revert to the rate based on the Reference Rate, unless the Borrowers have
designated another optional interest rate for the Portion. No Portion will be
converted to a different interest rate during the applicable interest period.
Upon the occurrence of an event of default under this Agreement, the Bank may
terminate the availability of optional interest rates for interest periods
commencing after the default occurs.
2.2 Fixed Rate. The election of Fixed Rates shall be subject to the
----------
following terms and requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and
the Borrowers agree will apply during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in
effect will be no shorter than 30 days and no longer than one year.
(c) Each Fixed Rate Portion will be for an amount not less than
One Million Dollars ($1,000,000).
(d) Each prepayment of a Fixed Rate Portion, whether voluntary,
by reason of acceleration or otherwise, will be accompanied by the amount
of accrued interest on the amount prepaid, and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date earlier
than the scheduled payment date for such amount as required by this
Agreement. The prepayment fee shall be equal to the amount (if any) by
which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the certificate of
deposit market for a period starting on the date on which it was
prepaid and ending on the last day of the interest period for such
Portion (or the scheduled payment date for the amount prepaid, or
earlier).
7
<PAGE>
2.3 LIBOR Rate. The election of LIBOR Rates shall be subject to the
----------
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in
effect will be one, two, three, four, five, six, seven, eight, nine, ten,
eleven, or twelve months. The first day of the interest period must be a
day other than a Saturday or a Sunday on which the Bank is open for
business in California, New York and London and dealing in offshore dollars
(a "LIBOR Banking Day"). The last day of the interest period and the actual
number of days during the interest period will be determined by the Bank
using the practices of the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less than
One Million Dollars ($1,000,000).
(c) The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the first
day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate
(rounded upward to the nearest 1/16th of one percent) at which the
Bank's London Branch, London, Great Britain, would offer U.S. dollar
deposits for the applicable interest period to other major banks in
the London inter-bank market at approximately 11:00 a.m. London time
two (2) London Banking Days before the commencement of the interest
period. A "London Banking Day" is a day on which the Bank's London
Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D, rounded
upward to the nearest 1/100 of one percent. The percentage will be
expressed as a decimal, and will include, but not be limited to,
marginal, emergency, supplemental, special, and other reserve
percentages.
(d) The Borrowers shall irrevocably request a LIBOR Rate Portion
no later than 11:00 a.m. San Francisco time on the LIBOR Banking Day
preceding the day on which the London Rate will be set, as specified above.
8
<PAGE>
(e) The Borrowers may not elect a LIBOR Rate with respect to any
principal amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Each prepayment of a LIBOR Rate Portion, whether voluntary,
by reason of acceleration or otherwise, will be accompanied by the amount
of accrued interest on the amount prepaid and a prepayment fee as described
below. A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement. The
prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or other
appropriate money market selected by the Bank, for a period starting
on the date on which it was prepaid and ending on the last day of the
interest period for such portion (or the scheduled payment date for
the amount prepaid, if earlier).
(g) The Bank will have no obligation to accept an election for a
LIBOR Rate Portion if any of the following described events has occurred
and is continuing:
(i) Dollar deposits in the principal amount, and for periods
equal to the interest period, of a LIBOR Rate Portion are not
available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of
a LIBOR Rate Portion.
3. FEES AND EXPENSES
3.1 Loan Fee. The Borrowers agree to pay a Twenty-Five Thousand
--------
Do1lar ($25,000) fee due by no later than the date of this Agreement.
3.2 Expenses. The Borrowers agree to immediately repay the Bank for
--------
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees, and documentation fees.
3.3 Reimbursement Costs.
-------------------
9
<PAGE>
(a) The Borrowers agree to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house counsel.
(b) The Borrowers agree to reimberse the Bank for the cost of
periodic audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require. The audits and
appraisals may be performed by employees of the Bank by independent appraisers.
4. COLLATERAL
4.1 Personal Property. The Borrowers' obligations to the Bank under
-----------------
this Agreement will be secured by personal property the Borrowers now own or
will own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrowers. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrowers or any one of them to the Bank
(excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrowers have otherwise agreed in writing). All personal property
collateral securing any other present or future obligations of the Borrowers or
any one of them to the Bank shall also secure this Agreement.
(a) Machinery, equipment, and fixtures.
(b) Inventory.
(c) Receivables.
4.2 Personal Property Supporting Guaranties. The obligations of
---------------------------------------
Quality Assurance Management, Inc. ("QAM"), KSI Services, Inc. ("Services"), Hi-
Tech Tool Rental, Inc. ("Hi-Tech"), and Submicron Products, Inc. ("Submicron")
to the Bank will be secured by personal property QAM, Services, Hi-Tech, and
Submicron now own or will own in the future as listed below. The collateral is
further defined in security agreements executed by QAM, Services, Hi-Tech, and
Submicron.
(a) Machinery, equipment, and fixtures.
(b) Inventory.
(c) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
10
<PAGE>
5.1 Requests for Credit. Each request for an extension of credit will
-------------------
be made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
5.2 Disbursements and Payments. Each disbursement by the Bank and each
------------------------
payment by the Borrowers will be:
(a) made at the Bank's branch (or other location) selected by the
Bank from time to time;
(b) made for the account of the Bank's branch selected by the
Bank from time to time;
(c) made in immediately available funds, or such other type of
funds selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank
may, at its discretion, require the Borrowers to sign one or more
promissory notes.
5.3 Telephone and Telefax Authorization.
-----------------------------------
(a) The Bank may honor telephone or telefax instructions for
advances or repayments or for the designation of optional interest rates
and telefax instructions for the issuance of letters of credit given by any
one of the individual signer(s) of this Agreement or a person or persons
authorized by any one of the signer(s) of this Agreement.
(b) Advances will be deposited in and repayments will be
withdrawn from KSI's account number 14873-03172, or such other accounts
with the Bank as designated in writing by the Borrowers.
(c) The Borrowers indemnify and excuse the Bank (including its
officers, employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax instructions it
reasonably believes are made by any individual authorized by the Borrowers
to give such instructions. This indemnity and excuse will survive this
Agreement's termination.
5.4 Direct Debit.
------------
(a) The Borrowers agree that interest and principal payments and
any fees will be deducted automatically on the due date from KSI's account
number 14873-03172, or such other of the Borrowers' accounts with the Bank
as designated in writing by the Borrowers.
(b) The Bank will debit the account on the dates the payments
become due. If a due date does not fall on a
11
<PAGE>
banking day, the Bank will debit the account on the first bankinq day
following the due date.
(c) The Borrowers will maintain sufficient funds in the account
on the dates the Bank enters debits authorized by this Agreement. If there
are insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
5.5 Banking Days. Unless otherwise provided in this Agreement, a
------------
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California. All payments and disbursements which would be due on
a day which is not a banking day will be due on the next banking day. All
payments received on a day which is not a banking day will be applied to the
credit on the next banking day.
5.6 Taxes. If any payments to the Bank under this Agreement are made
-----
from outside the United States, the Borrowers will not deduct any foreign taxes
from any payment they make to the Bank. If any such taxes are imposed on any
payments made by the Borrowers (including payments under this paragraph), the
Borrowers will pay the taxes and will also pay to the Bank, at the time interest
is paid, any additional amount which the Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such taxes had not been
imposed. The Borrowers will confirm that they have paid the taxes by giving the
Bank official tax receipts (or notarized copies) within 30 days after the due
date.
5.7 Additional Costs. The Borrowers will pay the Bank, on demand, for
----------------
the Bank's costs or losses arising from any statute or regulation, or any
request or requirement of a regulatory agency which is applicable to all
national banks or a class of all national banks. The costs and losses will be
allocated to the loan in a manner determined by the Bank, using any reasonable
method. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and
commitments for credit.
5.8 Interest Calculation. Except as otherwise stated in this
--------------------
Agreement, all interest and fees, if any, will be computed on the basis of a
360-day year and the actual number of days elapsed. This results in more
interest or a higher fee than if a 365-day year is used.
5.9 Interest on Late Payments. At the Bank's sole option in each
-------------------------
instance, any amount not paid when due under this Agreement (including interest)
shall bear interest from the due date at the Bank's Reference Rate plus two
(2.0) percentage points. This may result in compounding of interest.
12
<PAGE>
5.10 Default Rate. Upon the occurrence and during the continuation
------------
of any default under this Agreement, advances under this Agreement will at the
option of the Bank bear interest at a rate which is two (2.0) percentage points
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
6. CONDITIONS
The Bank must receive the following items, in form and content
acceptable to the Bank, before it is required to extend any credit to the
Borrowers under this Agreement:
6.1 Authorizations. Evidence that the execution, delivery and
--------------
performance by each Borrower (and each Guarantor) of this Agreement and any
instrument or agreement required under this Agreement have been duly authorized.
6.2 Governing Documents. A copy of each Borrower's articles of
-------------------
incorporation.
6.3 Security Agreements. Signed original security agreements,
-------------------
assignments, financing statements and fixture filings (together with collateral
in which the Bank requires a possessory security interest), which the Bank
requires.
6.4 Evidence of Priority. Evidence that security interests and liens
--------------------
in favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.5 Insurance. Evidence of insurance coverage, as required in the
---------
"Covenants" section of this Agreement.
6.6 Guaranties. Guaranties signed by QAM, Services, Hi-Tech,
----------
Submicron, and The KSI Group, Inc. ("Group"), each in the amount of Twenty-Two
Million Five Hundred Thousand Dollars ($22,500,000). (QAM, Services, Hi-Tech,
Submicron, and Group are hereinafter sometimes referred to collectively as the
"Guarantors" and individually as a "Guarantor").
6.7 Payment of Fees. Payment of all accrued and unpaid expenses
---------------
incurred by the Bank as required by the paragraph entitled "Reimbursement
Costs".
6.8 Other Items. Any other items that the Bank reasonably requires.
-----------
The Bank must receive the following items, in form and content
acceptable to the Bank, by no later than 90 days after the date of this
Agreement:
13
<PAGE>
6.9 Consent to Removal. For any personal property collateral located
------------------
on real property which is located in the United States and which is subject to a
mortgage or deed of trust or which is not owned by the grantor of the security
interest, a Consent to Removal from the owner of the real property and the
holder of any mortgage or deed of trust.
7. REPRESENTATIONS AND WARRANTIES
When the Borrowers sign this Agreement, and until the Bank is repaid
in full, each Borrower makes the following representations and warranties. Each
request for an extension of credit constitutes a renewed representation:
7.1 Organization of Borrowers. Each Borrower is a corporation duly
-------------------------
formed and existing under the laws of the state where organized.
7.2 Authorization. This Agreement, and any instrument or agreement
-------------
required hereunder, are within each Borrower's powers, have been duly
authorized, and do not conflict with any of its organizational papers.
7.3 Enforceable Agreement. This Agreement is a legal, valid and
---------------------
binding agreement of each Borrower, enforceable against each Borrower in
accordance with its terms, and any instrument or agreement required hereunder,
when executed and delivered, will be similarly legal, valid, binding and
enforceable.
7.4 Good Standing. In each state in which each Borrower does
-------------
business, it is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
7.5 No Conflicts. This Agreement does not conflict with any law,
------------
agreement, or obligation by which any Borrower is bound.
7.6 Financial Information. All financial and other information that
---------------------
has been or will be supplied to the Bank, including KSI's consolidated financial
statement dated as of December 31, l995, is:
(a) sufficiently complete to give the Bank accurate knowledge of
the Borrowers' (and any Guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
14
<PAGE>
Since the date of the financial statement(s) specified above, there has been no
material adverse change in the assets or the financial condition of any Borrower
(or any Guarantor).
7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending
--------
or threatened against any Borrower which, if lost, would impair the Borrowers'
or any Borrower's financial condition or ability to repay the loan, except as
have been disclosed in writing to the Bank.
7.8 Collateral. All collateral required in this Agreement is owned by
----------
the grantor of the security interest free of any title defects or any liens or
interests of others, except as have been approved by and disclosed in writing to
the Bank.
7.9 Permits, Franchises. Each Borrower possesses all permits,
-------------------
memberships, franchises, contracts and licenses reguired and all trademark
rights, trade name rights, patent rights and fictitious name rights necessary to
enable it to conduct the business in which it is now engaged.
7.10 Other Obligations. No Borrower is in default on any obligation
-----------------
for borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation, except as have been disclosed in
writing to the Bank.
7.11 Income Tax Returns. No Borrower has any knowledge of any pending
------------------
assessments or adjustments of its income tax for any year, except as have been
disclosed in writing to the Bank.
7.12 No Event of Default. There is no event which is, or with notice
-------------------
or lapse of time or both would be, a default under this Agreement.
7.13 ERISA Plans.
-----------
(a) Each Borrower has fulfilled its obligations, if any, under
the minimum funding standards of ERISA and the Code with respect to each
Plan and is in compliance in all material respects with the presently
applicable provisions of ERISA and the Code, and has not incurred any
liability with respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of
ERISA for which the PBGC requires 30 day notice.
(c) No action by any Borrower to terminate or withdraw from any
Plan has been taken and no notice of intent to terminate a Plan has been
filed under Section 4041 of ERISA.
15
<PAGE>
(d) No proceeding has been commenced with respect to a Plan
under Section 4042 of ERISA, and no event has occurred or condition exists
which might constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes
of this Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(ii) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan
maintained or contributed to by any Borrower and insured by the
Pension Benefit Guaranty Corporation under Title IV of ERISA.
7.14 Location of Borrowers. Each Borrower's place of business (or, if
---------------------
any Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrowers' signature on this Agreement.
8. COVENANTS
The Borrowers agree, so long as credit is available under this
Agreement and until the Bank is repaid in full:
8.1 Use of Proceeds. To use the proceeds of the credit only to
---------------
finance the Borrowers' general working capital needs and work-in-process.
8.2 Financial Information. To provide the following financial
---------------------
information and statements and such additional information as requested by the
Bank from time to time:
(a) Within 120 days after Group's fiscal year end, Group's
annual financial statements. These financial statements must be audited
(with an unqualified opinion) by a Certified Public Accountant ("CPA")
acceptable to the Bank. The statements shall be prepared on a consolidated
basis and must be accompanied by the CPA's management letter (if any).
(b) Within 90 days after Group's fiscal year end, Group's annual
financial statements. These financial statements may be prepared by Group
and the Borrowers. The
16
<PAGE>
statements shall be prepared on a consolidated (with intercompany
eliminations) and consolidating basis.
(c) Within 45 days after the period's end, Group's quarterly
financial statements. These financial statements may be prepared by Group
and the Borrowers. The statements shall be prepared on a consolidated
basis. Further, these financial statements must compare Group's actual
results for the quarter to Group's plan for the quarter and to Group's (or,
for quarters prior to the formation and incorporation of Group, KSI's)
actual results for the same quarter of the immediately preceding fiscal
year.
(d) Within 120 days after Group's fiscal year end, Group's
annual business plan for the then current fiscal year. Such business plan
must include a projected balance sheet, a projected income statement, a
projected cash flow statement, and a projected capital expenditure budget
for each quarter during the then current fiscal year, and those projected
financial statements shall be prepared on a consolidated basis.
(e) Within 120 days after Group's fiscal year end, an equipment
listing. The listing must include a description of the equipment owned or
leased by each Borrower, its location and cost, and such other information
as the Bank may require.
(f) Statements showing an aging of each Borrower's receivables
within 45 days after the end of each fiscal quarter.
(g) Statements showing an aging of each Borrower's accounts
payable within 45 days after the end of each fiscal quarter.
(h) Statements showing an aging of each Borrower's retentions
within 45 days after the end of each fiscal quarter.
(i) A work-in-progress schedule of the Borrowers prepared on a
consolidated basis at the Group level within 45 days after the end of each
month.
(j) Promptly upon the Bank's request, such other statements,
lists of property and accounts, budgets, forecasts or reports as to the
Borrowers and as to each Guarantor as the Bank may request.
(k) Within the periods provided in (a) and (c) above, a
compliance certificate signed by an authorized financial officer of the
Borrowers setting forth (i) the information and computations (in sufficient
detail) to
17
<PAGE>
establish that the Borrowers are in compliance with all financial
covenants at the end of the period covered by the financial statements
then being furnished and (ii) whether there existed as of the date of such
financial statements and whether there exists as of the date of the
certificate, any default under this Agreement and, if any such default
exists, specifying the nature thereof and the action the Borrowers are
taking and propose to take with respect thereto.
8.3 Trading Ratio. To maintain on a consolidated basis at the Group
-------------
level a trading ratio equal to at least 1.0:1.0.
"Trading ratio" means the ratio of (i) cash plus net accounts receivable plus
---- ----
retentions plus the total value of inventory plus prepaid expenses plus costs in
---- ---- ----
excess of billings to (ii) the outstanding principal balance under this
--
Agreement plus accounts payable plus accrued expenses plus cash taxes payable
---- ----
plus billings in excess of costs.
- ----
"Retentions" means, as of any given time, the amounts (i) owed to the Borrowers
under their respective outstanding contracts for work performed and/or labor and
materials furnished as of such time and (ii) which the obligated parties are not
---
required to pay to the Borrowers until certain conditions specified in such
contracts, such as completion of the work which the Borrowers have contracted to
perform, have been satisfied.
"Billings in excess of costs" and "costs in excess of billings" mean all
"billings in excess of costs" and all "costs in excess of billings" as such
terms are interpreted in accordance with generally accepted accounting
principles consistently applied for the construction industry.
"The total value of inventory" shall be determined by using Group's financial
statements for the fiscal quarter just ended as provided to the Bank under
Paragraph 8.2 above.
"The outstanding principal balance under this Agreement" means the outstanding
principal balance of advances under this Agreement and includes the Equivalent
Amount of the principal balance of any Local Currency advances but excludes the
undrawn amounts of outstanding letters of credit.
This ratio will be calculated at the end of each fiscal quarter, using fiscal
year-to-date results on an annualized basis.
8.4 Total Liabilities to Tangible Net Worth. To maintain on a
---------------------------------------
consolidated basis at the Group level a ratio of total liabilities minus costs
in excess of billings to tangible net worth not exceeding 2.5:1.0.
18
<PAGE>
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrowers' assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles, and
monies due from affiliates, officers, directors or shareholders of the
Borrowers) less total liabilities, including but not limited to accrued and
deferred income taxes, and any reserves against assets.
8.5 Cash Flow Coverage Ratio. To maintain on a consolidated basis at
------------------------
the Group level a cash flow coverage ratio of at least 2.0:1.0.
"Cash flow coverage ratio" means the ratio of (i) net income from operations and
investments, after taxes, plus depreciation plus amortization expense plus
---- ---- ----
interest expense minus unfinanced capital expenditures minus cash dividends
----- -----
paid to (ii) interest expense plus the current portion of long-term capital
-- ----
lease obligations plus the current portion of long-term liabilities. This
----
ratio will be calculated at the end of each fiscal quarter, using the results of
that quarter and each of the 3 immediately preceding quarters. The current
portion of long-term liabilities and long-term capital lease obligations will be
measured as of the last day of the preceding fiscal year.
8.6 Profitability. To maintain on a consolidated basis at the Group
-------------
level a positive net income before taxes and extraordinary items and a positive
net income after taxes and extraordinary items for each quarterly accounting
period.
8.7 Other Debts. Not to have outstanding or incur any direct or
-----------
contingent liabilities or lease obligations (other than those to the Bank), or
become liable for the liabilities of others without the Bank's written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade
credit.
(b) Endorsing negotiable instruments received in the usual
course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts, lines of credit, and leases (including, without
limitation, capital leases in favor of Silicon Valley Bank as lessor)
either disclosed in writing to the Bank in KSI's financial statement dated
December 31, 1995, or incurred or entered into after December 31, 1995
19
<PAGE>
and in existence on the date of this Agreement, and refinancings of any
such debts, lines of credit, and leases that do not increase the Borrowers'
maximum liabilities thereunder.
(e) Additional debts and lease obligations for the acquisition
of fixed or capital assets, to the extent permitted elsewhere in this
Agreement.
(f) Additional debts secured by purchase money security
interests permitted under Paragraph 8.8(c) below.
(g) Additional debt to Silicon Valley Bank secured by the
equipment financed or refinanced by such debt, provided that the total
outstanding principal amount of such debt, together with the total
outstanding principal amount of any such debt of any Guarantor to Silicon
Valley Bank, does not exceed Five Million Dollars ($5,000,000) at any one
time.
(h) Additional debts of Borrowers for business purposes which do
not exceed a total principal amount of Five Hundred Thousand Dollars
($500,000) outstanding at any one time.
8.8 Other Liens. Not to create, assume, or allow any security
-----------
interest or lien (including judicial liens) on property any Borrower now or
later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank.
(c) Additional purchase money security interests in personal
property acquired by the Borrowers or any one of them after the date of
this Agreement.
(d) Additional liens against the property of the Borrowers or
any one of them which secure obligations permitted under subparagraphs (d),
(e), (g), and (h) of Paragraph 8.7 above.
(e) Liens for taxes, assessments, or governmental charges or
levies or liens arising in the ordinary course of business in connection
with workers' compensation, unemployment insurance or social security
obligations, or the claims or demands of mechanics, materialmen, carriers,
warehousemen, and like persons, to the extent (i) such liens are not yet
delinquent or remain payable without penalty or are, without threat of loss
or impairment of collateral, being contested in good faith by appropriate
proceedings and (ii) the payment of such liens is adequately covered by
---
20
<PAGE>
insurance or by reserves, bonds, or other security acceptable to the Bank.
(f) Liens (other than liens on the collateral) on the property
of any one or more of the Borrowers securing (i) the non-delinquent
performance of bids, trade contracts (other than for borrowed money),
tenders, or statutory obligations, (ii) contingent obligations on surety or
appeal bonds, or (iii) other non-delinquent obligations of like nature, to
the extent such liens are incurred, in each case, in the ordinary course of
business and such liens in the aggregate would not (even if enforced)
materially impair the use of any of the Borrowers' assets in their
businesses or the Borrowers' financial condition or ability to repay this
credit.
8.9 Capital Expenditures. Not to spend or incur obligations
--------------------
(including the total amount of any capital leases) for more than Six Million
Dollars ($6,000,000) in any single fiscal year to acquire fixed or capital
assets. For purposes of calculating the Borrowers' compliance with this
covenant, any subparagraph (g) of Paragraph 8.7 above shall be included in the
calculation.
8.10 Dividends. Not to declare or pay any dividends on any of the
---------
Borrowers' shares, and not to purchase, redeem or otherwise acquire for value
any of the Borrowers' shares, or create any sinking fund in relation thereto,
except:
(a) dividends payable in capital stock of the Borrowers.
(b) from earnings available for dividends and earned during the
immediately preceding fiscal year, and in any event, not in excess of Eight
Hundred Fifty Thousand Dollars ($850,000) in any one fiscal year on a
combined basis for all Borrowers and Group.
8.11 Loans to Officers, Affiliates, Etc. Not to make any loans,
----------------------------------
advances or other extensions of credit to any Borrower's executives, officers,
or directors or shareholders (or any relatives of any of the foregoing) in an
aggregate outstanding amount exceeding One Hundred Thousand Dollars ($100,000)
at any one time for all such extensions of credit, and not to make any loans,
advances, or other extensions of credit whatsoever to any affiliate of any
Borrower. The Borrowers' compliance with this covenant will be measured by the
Bank at the end of each fiscal quarter.
8.12 Change of Ownership. Not to cause, permit, or suffer any change,
-------------------
direct or indirect, in any Borrower's capital ownership, except for any such
changes resulting from transfers of shares between existing shareholders of such
Borrower.
21
<PAGE>
8.13 Maximum Outstandings. Not to permit the outstanding principal
--------------------
balance of advances under this Agreement to exceed Seven Million Five Hundred
Thousand Dollars ($7,500,000) for a period of at least 30 consecutive days in
each line-year. "Line-year" means the period between the date of this Agreement
and April 15, 1997, and each subsequent one-year period (if any). For the
purposes of this paragraph, "advances" does not include undrawn amounts of
outstanding letters of credit.
8.14 Notices to Bank. To promptly notify the Bank in writing of:
---------------
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000)
against any one or more of the Borrowers (or any Guarantor).
(b) any substantial dispute between any Borrower (or any
Guarantor) and any government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's (or any
Guarantor's) financial condition or operations.
(e) any change in any Borrower's name, legal structure, place of
business, or chief executive office if such Borrower has more than one
place of business.
8.15 Books and Records. To maintain adequate books and records.
-----------------
8.16 Audits. To allow the Bank and its agents to inspect the
------
Borrowers' properties and examine, audit and make copies of books or records
at any reasonable time. If any of the Borrowers' properties, books or records
are in the possession of a third party, the Borrowers authorize that third party
to permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
8.17 Compliance with Laws. To comply with the laws (including any
--------------------
fictitious name statute), regulations, and orders of any government body with
authority over each Borrower's business.
8.18 Preservation of Rights. To maintain and preserve all rights,
----------------------
privileges, and franchises each Borrower now has.
8.19 Maintenance of Properties. To make any repairs, renewals, or
-------------------------
replacements to keep each Borrower's properties in good working condition.
8.20 Perfection of Liens. To help the Bank perfect and protect its
-------------------
security interests and liens, and reimburse it
22
<PAGE>
for related costs it incurs to protect its security interests and liens.
8.21 Cooperation. To take any action reasonably requested by the Bank
-----------
to carry out the intent of this Agreement.
8.22 Insurance.
---------
(a) Insurance Covering Collateral. To maintain all risk property
-----------------------------
damage insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to the
Bank. The insurance must be issued by an insurance company acceptable to
the Bank and must include a lender's loss payable endorsement in favor of
the Bank in a form acceptable to the Bank.
(b) General Business Insurance. To maintain insurance
--------------------------
satisfactory to the Bank as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any of the Borrowers'
properties, public liability insurance including coverage for contractual
liability, product liability and workers' compensation, and any other
insurance which is usual for the Borrowers' business.
(c) Evidence of Insurance. Upon the request of the Bank, to
---------------------
deliver to the Bank a copy of each insurance policy, or, if permitted by
the Bank, a certificate of insurance listing all insurance in force.
8.23 Additional Negative Covenants. Not to, without the Bank's written
-----------------------------
consent:
(a) engage in any business activities substantially different
from the Borrowers' present business.
(b) liquidate or dissolve the Borrowers' or any Borrower's
business.
(c) enter into any consolidation, merger, pool, joint venture,
syndicate, or other combination (except joint ventures entered into by any
Borrower in the ordinary course of its present business) or acquire or
purchase a business or its assets. It is provided, however, that the
Borrowers may enter into mergers or acquisitions in any fiscal year for an
aggregate consideration, including assumption of debt, not in excess of Two
Million Five Hundred Thousand Dollars ($2,500,000) so long as in each case:
(i) the other business entity party to the merger or
acquisition engages in business activities
23
<PAGE>
similar or complimentary to the Borrowers' present business
activities,
(ii) the prior, effective written consent or approval of the
other entity's board of directors or equivalent governing body has
been obtained, and
(iii) the Borrowers have given the Bank at least 30 days'
prior written notice of such merger or acquisition and such notice is
accompanied by
(A) a description of the other entity's business,
(B) financial statements showing that the other entity
has not incurred a net loss, after taxes and extraordinary items,
in excess of One Hundred Thousand Dollars ($100,000) in either of
its two most recent fiscal years, and
(C) a compliance certificate signed by an authorized
financial officer of the Borrowers setting forth information and
computations (in sufficient detail) projecting that the Borrowers
will be in compliance with all financial covenants at the end of
the fiscal quarter during which such merger or acquisition closes
and at the end of each fiscal quarter and fiscal year thereafter.
(d) lease, or dispose of all or a substantial part of the
Borrowers' or any Borrower's business or the Borrowers' or any Borrower's
assets or enter into any sale and leaseback agreement covering any of the
Borrowers' or any Borrower's fixed or capital assets, except in an
aggregate amount not exceeding Three Million Dollars ($3,000,000) in any
fiscal year for all Borrowers on any aggregate basis.
(e) except as permitted under subparagraph (c) immediately
above, not to (i) purchase or acquire, or make any commitment to purchase
or acquire, any capital stock, equity interest, or any obligations or other
securities of any business entity, or (ii) make or commit to make any loan,
advance, or other extension of credit or capital contribution to, or any
other investment in, any such entity, unless in conjunction with the
------
formation of a wholly-owned subsidiary by any Borrower.
(f) sell or otherwise dispose of any assets for less than fair
market value.
(g) voluntarily suspend the Borrowers' or any Borrower's
business for more than 7 days in any 30-day period.
24
<PAGE>
8.24 ERISA Plans. To give prompt written notice to the Bank of:
-----------
(a) The occurrence of any reportable event under Section
4043(b) of ERISA for which the PBGC requires 30 day notice.
(b) Any action by any Borrower to terminate or withdraw from a
Plan or the filing of any notice of intent to terminate under Section 4041
of ERISA.
(c) Any notice of noncompliance made with respect to a Plan
under Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan
under Section 4042 of ERISA.
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrowers will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of any Borrower's use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrowers' or any Borrower's
property or operations or property leased to the Borrowers or any Borrower. The
indemnity includes but is not limited to attorneys' fees (including the
reasonable estimate of the allocated cost of in-house counsel and staff). The
indemnity extends to the Bank, its parent, subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns. For
these purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any federal, state or local
law. This indemnity will survive repayment of the Borrowers' obligations to the
Bank and will not limit any of the Bank's rights and remedies under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 or
under any other federal, state or local law relating to environmental, health,
safety and land use matters.
10. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrowers in default, stop making any additional credit
available to the Borrowers, and require the Borrowers to repay their entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to any Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
25
<PAGE>
10.1 Failure to Pay. Any Borrower fails to make a payment under this
--------------
Agreement when due.
10.2 Lien Priority. The Bank fails to have an enforceable first lien
-------------
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this credit.
10.3 False Information. Any Borrower (or any Guarantor) has given the
-----------------
Bank false or misleading information or representations.
10.4 Bankruptcy. Any Borrower (or any Guarantor) files a bankruptcy
----------
petition, a bankruptcy petition is filed against any Borrower (or any
Guarantor), or any Borrower (or any Guarantor) makes a general assignment for
the benefit of creditors. The default will be deemed cured if any bankruptcy
petition filed against any Borrower (or any Guarantor) is dismissed within a
period of 45 days after the filing; provided, however, that the Bank will not be
obligated to extend any additional credit to the Borrowers during that period.
10.5 Receivers. A receiver or similar official is appointed for any
---------
Borrower's (or any Guarantor's) business, or the business is terminated.
10.6 Judgments. Any judgments or arbitration awards are entered
---------
against any one or more of Borrowers (or any Guarantor), or any one or more of
Borrowers (or any Guarantor) enters into any settlement agreements with respect
to any litigation or arbitration, in an aggregate amount of One Million Dollars
($1,000,000) or more in excess of any insurance coverage.
10.7 Government Action. Any government authority takes action that the
-----------------
Bank believes materially adversely affects any Borrower's (or any Guarantor's)
financial condition or ability to repay.
10.8 Material Adverse Change. A material adverse change occurs in the
-----------------------
Borrowers' (or any Guarantor's) financial condition, properties or prospects, or
ability to repay this credit.
10.9 Cross-Default. Any default occurs under any agreement in
-------------
connection with any credit any Borrower (or any Guarantor) or any of the
Borrowers' other related entities or affiliates has obtained from anyone else or
which any Borrower (or any Guarantor) or any of the Borrowers' related entities
or affiliates has guaranteed if the default consists of failing to make a
payment when due or gives the other lender the right to accelerate the
obligation.
10.10 Default under Related Documents. Any guaranty, subordination
-------------------------------
agreement, security agreement, deed of trust, or
26
<PAGE>
other document required by this Agreement is violated or no longer in effect.
10.11 Other Bank Agreements. Any Borrower (or any Guarantor) fails to meet
---------------------
the conditions of, or fails to perform any obligation under any other agreement
any Borrower (or any Guarantor) has with the Bank or any affiliate of the Bank.
If, in the Bank's opinion, the breach is capable of being remedied, the breach
will not be considered an event of default under this Agreement for a period of
30 days after the date on which the Bank gives written notice of the breach to
the Borrowers; provided, however, that the Bank will not be obligated to extend
any additional credit to the Borrowers during that period.
10.12 ERISA Plans. The occurrence of any one or more of the following
-----------
events with respect to any Borrower, provided such event or events could
reasonably be expected, in the judgment of the Bank, to subject such Borrower to
any tax, penalty or liability (or any combination of the foregoing) which, in
the aggregate, could have a material adverse effect on the financial condition
of such Borrower with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan which is,
in the reasonable judgment of the Bank likely to result in the termination
of such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to terminate
a Plan) or such Borrower's full or partial withdrawal from a Plan.
10.13 Retention of Certain Executive Officers. William A. Bianco fails to
---------------------------------------
remain either President and Chief Executive Officer or Executive Vice President
and Chief Operating Officer of each Borrower or David J. Shimman fails to remain
either President and Chief Executive Officer or Executive Vice President and
Chief Operating Officer of each Borrower.
10.14 Other Breach Under Agreement. Any Borrower fails to meet the
----------------------------
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article. If, in the Bank's
opinion, the breach is capable of being remedied, the breach will not be
considered an event of default under this Agreement for a period of 30 days
after the date on which the Bank gives written notice of the breach to such
Borrower; provided, however, that the Bank will not be obligated to extend any
additional credit to the Borrowers during that period.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
----
information provided to the Bank and all
27
<PAGE>
financial covenants will be made under generally accepted accounting principles,
consistently applied.
11.2 California Law. This Agreement is governed by California law.
--------------
11.3 Successors and Assigns. This Agreement is binding on the
----------------------
Borrowers' and the Bank's successors and assignees. The Borrowers agree that
they may not assign this Agreement without the Bank's prior consent. The Bank
may sell participations in or assign this loan, and may exchange financial
information about the Borrowers with actual or potential participants or
assignees. If a participation is sold or the loan is assigned, the purchaser
will have the right of set-off against the Borrowers.
11.4 Arbitration.
-----------
(a) This paragraph concerns the resolution of any controversies or
claims between any one or more of Borrowers and the Bank, including but not
limited to those that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business
conducted between any one or more of Borrowers and the Bank,
including claims for injury to persons, property or business
interests (torts).
(b) At the request of any Borrower or the Bank, any such
controversies or claims will be settled by arbitration in accordance with
the United States Arbitration Act. The United States Arbitration Act will
apply even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations,
the filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the
28
<PAGE>
authority to decide whether any such claim or controversy is barred by the
statute of limitations and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy
or claim, at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrowers and the Bank must consent to
submission of the claim or controversy to arbitration. If all parties do not
consent to arbitration, the controversy or claim will be settled as follows:
(i) The Borrowers and the Bank will designate a referee (or
panel of referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in Association-
sponsored proceedings;
(ii) The designated referee (or the panel of referees) will
be appointed by a court as provided in California Code of Civil Procedure
Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel)
will be an active attorney or a retired judge; and
(iv) The award that results from the decision of the referee
(or the panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California Code of Civil
Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrowers or the
Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the
arbitration proceeding to obtain:
29
<PAGE>
(A) an interim remedy; and/or
(B) additional or supplementary
remedies.
(i) The pursuit of or a successful action for interim,
additional or supplementary remedies, or the filing of a court action,
does not constitute a waiver of the right of the Borrowers or the Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit. However, if the
controversy or claim arises from or relates to an obligation to the Bank
which is secured by real property located in California at the time of the
proposed submission to arbitration, this right is limited according to the
provision above requiring the consent of both the Borrowers and the Bank
to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing
this Agreement, the Bank has the option to exercise the power of sale
under the deed of trust or mortgage, or to proceed by judicial
foreclosure.
11.5 Severability; Waivers. If any part of this Agreement is not
---------------------
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
11.6 Administration Costs. The Borrowers shall pay the Bank for all
--------------------
reasonable costs incurred by the Bank in connection with administering this
Agreement.
11.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any
---------------
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. In
the event that any case is commenced by or against any of the Borrowers under
the Bankruptcy Code (Title 11, United States Code) or any similar or successor
statute, the Bank is entitled to recover costs and reasonable attorneys' fees
incurred by the Bank related to the preservation, protection, or enforcement of
any rights of the Bank in such a case. As used in this paragraph, "attorneys'
fees" includes the allocated costs of the Bank's in-house counsel.
11.8 Joint and Several Liability.
---------------------------
30
<PAGE>
(a) Each Borrower agrees that it is jointly and severally liable to the
Bank for the payment of all obligations arising under this Agreement, and that
such liability is independent of the obligations of the other Borrower(s). The
Bank may bring an action against any Borrower, whether an action is brought
against the other Borrower(s).
(b) Each Borrower agrees that any release which may be given by the Bank to
the other Borrower(s) or any guarantor will not release such Borrower from its
obligations under this Agreement.
(c) Each Borrower waives any right to assert against the Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the other
Borrower(s) or any other party liable to the Bank for the obligations of the
Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower(s) and of all
circumstances which bear upon the risk of nonpayment. Each Borrower waives any
right it may have to require the Bank to disclose to such Borrower any
information which the Bank may now or hereafter acquire concerning the financial
condition of the other Borrower(s).
(e) Each Borrower waives all rights to notices of default or nonperformance
by any other Borrower under this Agreement. Each Borrower further waives all
rights to notices of the existence or the creation of new indebtedness by any
other Borrower.
(f) The Borrowers represent and warrant to the Bank that each will derive
benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that the Bank
will not be required to inquire as to the disposition by any Borrower of funds
disbursed in accordance with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation, reimbursement,
indemnification and contribution (contractual, statutory or otherwise),
including without limitation, any claim or right of subrogation under the
Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute, which such
Borrower may now or hereafter have against any other Borrower with respect to
the indebtedness incurred under this Agreement. Each Borrower waives any right
to enforce any remedy which the Bank now has or may hereafter have against any
other Borrower, and waives any benefit of, and any right to participate in, any
security now or hereafter held by the Bank.
31
<PAGE>
11.9 One Agreement. This Agreement and any related security or other
-------------
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements
between the Bank and the Borrowers concerning this credit;
(b) replace any prior oral or written agreements between the Bank
and the Borrowers concerning this credit; and
(c) are intended by the Bank and the Borrowers as the final,
complete and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
11.10 Notices. All notices required under this Agreement shall be
-------
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses as
the Bank and the Borrowers may specify from time to time in writing.
11.11 Headings. Article and paragraph headings are for reference only
--------
and shall not affect the interpretation or meaning of any provisions of this
Agreement.
11.12 Counterparts. This Agreement may be executed in as many
------------
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
11.13 Commitment Expiration. The Bank's commitment to extend credit
---------------------
under this Agreement will expire on May 29, 1996, unless this Agreement and any
documents required by this Agreement have been signed and returned to the Bank
on or before that date.
This Agreement is executed as of the date stated at the top of
32
<PAGE>
the first page.
Bank of America National
Trust and Savings Association Kinetic Systems, Inc.
By /s/ By /s/ David I. Shimmon
-------------------------------- -------------------------------------
Title V.P. Title Exec. Vice President
----------------------------- -----------------------------------
By By /s/ Marie R. Bianco
------------------------------- --------------------------------------
Title Title Exec. Vice President
----------------------------- -----------------------------------
Address where notices to
the Bank are to be sent: KSI Mfg. & Services, Inc.
101 Park Center Plaza
San Jose, CA 95113
By /s/ David I. Shimmon
-------------------------------------
Title Exec. Vice President
---------------------------------
By /s/ Marie R. Bianco
-------------------------------------
Title Exec. Vice President
---------------------------------
Kinetic Systems
International, Inc.
By /s/ David I. Shimmon
-------------------------------------
Title Exec. Vice President
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By Marie R. Bianco
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Title Exec. Vice President
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Address where notices to
the Borrowers are to be sent:
3080 Raymond Street
Santa Clara, CA 95054
with a copy to:
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33
<PAGE>
EXHIBIT 11.1
THE KINETICS GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C>
Year ended September 30, 1996:
Shares used in calculation of pro forma net income per common
share:
Weighted average common shares outstanding....................... 7,500,000
Redeemable convertible preferred stock, if converted............. 1,730,432
Shares related to SAB Nos. 55, 64 and 83......................... 812,500
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Total.......................................................... 10,042,932
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Net income applicable to common stockholders....................... $ 7,799,000
Add back: dividends and accretion on redeemable convertible
preferred stock................................................... 932,000
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Total.......................................................... $ 8,731,000
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Pro forma net income per common share.......................... $ 0.87
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Shares used in calculation of supplemental pro forma net income per
common share:
Weighted average common shares outstanding, as computed above.... 10,042,932
Shares of common stock for which proceeds are assumed to be used
to retire existing indebtedness................................. 967,742
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Total.......................................................... 11,010,674
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Net income applicable to common stockholders, as computed above.... $ 8,731,000
Add back: Interest on indebtedness assumed to be retired........... 416,000
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Total.......................................................... $ 9,147,000
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Supplemental pro forma net income per common share............. $ 0.83
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EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
THE KINETICS GROUP, INC.
bioKINETICS, Inc., a Delaware corporation
microKINETICS, Inc., California corporation
Quality Assurance Management, Inc., a California corporation
KSI Mfg. & Services, Inc., a California corporation
Hi-Tech Tool Rental, Inc., a California corporation
KSI West Coast Mfg, Inc. DBA X-50 Sales & Mfg., a California corporation
Submicron Products, Inc., a California corporation
Kinetic Systems Caribe, Inc., a Delaware corporation
ProComp, Inc., a Delaware corporation
Kinetic Systems International, Inc., a California corporation
Kinetic Systems de Mexico, S.A. de C.V., a Mexico corporation
Kinetic Systems Singapore Pte. Ltd., a Singapore corporation
Kinetic Systems France SARL, a France corporation
K.M.I. Micro Electronics Ltd., an Israel corporation
Kinetic Systems Italy SrL, an Italy corporation
Kinetic Systems, Inc., a California corporation
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to
the use of our report dated December 11, 1996, in the Registration Statement
(Form S-1) and related Prospectus of The Kinetics Group, Inc. for the
registration of 4,255,000 shares of its common stock.
Our audit also included the financial statement schedule of The Kinetics
Group, Inc. listed in Item 16 of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Francisco, California
December 12, 1996
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The foregoing report is in the form that will be signed upon completion of
stockholder approval of the three-for-four reverse stock split and amendment
of the Certificate of Incorporation described in Note 6 to the consolidated
financial statements.
San Francisco, California
December 12, 1996
