<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CUMETRIX, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 5045 95-4574138
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
1304 JOHN REED COURT CITY OF INDUSTRY, CALIFORNIA 91745
(626) 968-9868
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
MAX TOGHRAIE, CHIEF EXECUTIVE OFFICER
1304 JOHN REED COURT
CITY OF INDUSTRY, CALIFORNIA 91745
(626) 968-9868
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
------------------------
COPIES TO:
MURRAY MARKILES, ESQ. RUBI FINKELSTEIN, ESQ.
Jessica Cullen Smith, Esq. Orrick, Herrington & Sutcliffe LLP
Troop Meisinger Steuber & Pasich, LLP 666 Fifth Avenue
10940 Wilshire Boulevard New York, New York 10103
Los Angeles, California 90024 (212) 506-5000
(310) 824-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) REGISTRATION FEE
<S> <C> <C> <C>
Common Stock, no par value............................... 2,070,000 Shares $5.00 $3,136
</TABLE>
(1) Includes 270,000 shares of Common Stock issuable upon exercise of an option
granted to the Underwriter to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(a).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
This Preliminary Prospectus and the information contained herein are subject to
completion or amendment. These securities may not be sold nor may offers to buy
be accepted prior to the time the Registration Statement becomes effective.
Under no circumstances shall this Preliminary Prospectus constitute an offer to
sell or a solicitation of an offer to buy, nor shall there be any sale of these
securities, in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
such jurisdiction.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1998
1,800,000 SHARES
CUMETRIX, INC.
COMMON STOCK
------------------
CUMETRIX, Inc., a California company ("CUMETRIX" or the "Company"), is
hereby offering (the "Offering") 1,800,000 shares of common stock, no par value
per share (the "Common Stock"). It is currently anticipated that the initial
public offering price of the Common Stock will be between $4.00 and $5.00 per
share. Prior to the Offering, there has been no public market for the Common
Stock and there can be no assurance that a trading market will develop or, if
developed, that it will be sustained after the Offering. For information
relating to the factors considered in determining the initial offering price to
the public, see "Underwriting."
Application is intended to be made for and it is contemplated that upon
consummation of the Offering, the Common Stock will be approved for quotation on
the Nasdaq SmallCap Market ("Nasdaq") under the trading symbol " ."
-------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON PAGE 6 AND "DILUTION"
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
(1) Does not include additional compensation payable to the Underwriter in the
form of a 3% non-accountable expense allowance or the Company's agreement to
sell to the Underwriter five year warrants to purchase 180,000 shares of
Common Stock at 120% of the initial public offering price per share of
Common Stock (the "Underwriter's Warrants"). See "Underwriting" for
information concerning indemnification and contribution arrangements and
other compensation payable to the Underwriter.
(2) Before deducting expenses estimated at $ payable by the Company including
the Underwriter's non-accountable expense allowance. Of the Proceeds to the
Company, $ is being distributed to certain of the Company's existing
shareholders in payment of notes issued. See "Use of Proceeds."
(3) The Company has granted the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
prospectus, to purchase up to 270,000 additional shares of Common Stock at
the Price to the Public less Underwriting Discounts and Commissions, solely
to cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriter subject to prior
sale, when, as and if issued by the Company, delivered to and accepted by the
Underwriter and subject to approval of certain legal matters by its counsel and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of the certificates representing the Common
Stock offered hereby will be made against payment therefor at the offices of
Joseph Stevens & Company, Inc., 33 Maiden Lane, New York, New York 10038 on or
about , 1998.
-------------------
JOSEPH STEVENS & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE MARKET PRICE, PURCHASES OF
THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITER IN THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH ARE NOT
HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER "RISK
FACTORS." PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED BY THIS PROSPECTUS
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" SECTION, AS WELL AS THE OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 10.960591-FOR-1 STOCK SPLIT (THE "STOCK SPLIT") OF
THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED IN OCTOBER 1997, AND ASSUMES (I)
THE EXPIRATION OF A CONTINGENT WARRANT (THE "CASI WARRANT") TO PURCHASE SHARES
OF THE COMPANY'S COMMON STOCK, SEE "CERTAIN TRANSACTIONS," (II) NO EXERCISE OF
THE UNDERWRITER'S OVER-ALLOTMENT OPTION, (III) NO GRANT OF ADDITIONAL OPTIONS
UNDER THE COMPANY'S 1997 STOCK PLAN (THE "STOCK INCENTIVE PLAN"), (IV) NO
EXERCISE OF 100,000 WARRANTS (THE "BRIDGE WARRANTS") OF THE COMPANY, EACH
WARRANT EXERCISABLE DURING THE 36-MONTH PERIOD COMMENCING ONE YEAR FROM THE DATE
THE WARRANTS WERE ISSUED TO PURCHASE ONE SHARE OF COMMON STOCK AT AN INITIAL
EXERCISE PRICE OF $3.00 PER SHARE, SUBJECT TO ADJUSTMENT, ISSUED TO THE
PURCHASERS OF 18 MONTH MATURITY PROMISSORY NOTES (THE "BRIDGES NOTES") OF THE
COMPANY BEARING INTEREST AT A RATE OF 10% PER ANNUM ORIGINALLY ISSUED IN A
FINANCING (THE "BRIDGE FINANCING"), SEE "RECENT BRIDGE FINANCING," AND (V) NO
EXERCISE OF THE UNDERWRITER'S WARRANTS, EACH EXERCISABLE TO PURCHASE ONE SHARE
OF COMMON STOCK AT AN INITIAL EXERCISE PRICE EQUAL TO 120% OF THE INITIAL PUBLIC
OFFERING PRICE OF THE COMMON STOCK. SEE "MANAGEMENT--STOCK OPTION PLAN,"
"CERTAIN TRANSACTIONS" AND "UNDERWRITING."
THE COMPANY
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), system
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. The
Company has entered the system configuration business and intends to build upon
its vendor and customer relationships to become a leading provider of
software-enabled custom configuration to its target markets both domestically
and internationally. The Company intends to implement a fully automated systems
integration and configuration process, referred to as the Automated Custom
System Assembly Solution, or "ACSA Solution" incorporating licensed proprietary
software. The Company believes the ACSA Solution will enable the Company to
assemble multiple computer systems and custom configure the software loaded on
these systems to each customer's end user's unique specifications at a fraction
of the cost and time required by other commercially available configuration
processes. The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
Future ACSA Centers may be located at the facilities of its customers. This
technology is intended to enable the Company's customers to outsource their
procurement, warehousing, assembly, staging, and shipping processes. The Company
will use a portion of the proceeds of the Offering to complete the construction
of and operate its first ACSA Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD ROMs and CD Recorders, network adapters, hubs, small
computer systems interfaces ("SCSIs"), integrated device enhancements ("IDEs")
and ZIP drives as well as memory and central processing units ("CPUs") for
desktop and notebook computer products. The Company also assembles
built-to-order computer systems for its target markets.
The Company's sales have grown from approximately $10,291,800 for the period
from April 2, 1996 (inception) through September 30, 1996, and $25,940,200 for
the Company's first fiscal year ending March 31, 1997 to approximately
$29,389,100 for the first six months of fiscal 1998 primarily because of
development of an experienced sales management team with strong customer
relationships, expansion of
3
<PAGE>
the sales force, quick delivery of a broad selection of Computer Products and
competitive pricing offered by the Company. The Company's gross profit margins
have improved from approximately 1.7% and 3.1% of revenues in the six month
period ending September 30, 1996 and the year ended March 31, 1997,
respectively, to 4.2 % for the six month period ending September 30, 1997 due to
a number of factors including strong product demand, more favorable direct
manufacturer pricing and an improved sales mix achieved by the Company which
favors components with higher profit margins and computer system sales. The
Company expects that implementation of the ACSA Centers will increase sales of
higher margin built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners identified in Asia,
but is not currently negotiating any acquisition opportunities. There can be no
assurance that the Company will successfully establish any joint ventures or
identify any acquisition opportunities or that if such opportunities are
presented that they will be on terms and conditions acceptable to the Company.
The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On December 22, 1997, the Company changed its name
from Data Net International, Inc. to CUMETRIX, Inc. The Company's executive
offices are located at 1304 John Reed Court, City of Industry, California,
91745; and its telephone number is (626) 968-9868, and its facsimile number is
(626) 961-1868.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 1,800,000 shares
Common Stock outstanding before
the Offering.................... 4,750,000 shares(1)
Common Stock outstanding after the
Offering........................ 6,550,000 shares(1)
Expansion of the Company's ACSA Center; marketing and
sales for the ACSA Solution; repayment of Bridge Notes
and other indebtedness; and for working capital and
general corporate purposes. See Use of Proceeds.
Use of proceeds...................
Proposed Nasdaq SmallCap Market
Symbol.......................... [ ]
</TABLE>
- ------------------------
(1) Does not include (i) 307,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's 1997 Stock Option Plan
(the "Stock Option Plan"), which have an exercise price of $2.70 per share,
(ii) 45,000 shares of Common Stock issuable pursuant to the exercise of
outstanding warrants at an exercise price of $3.00 per share, (iii) 100,000
shares of Common Stock issuable upon the exercise of the Bridge Warrants
which have an exercise price of $3.00 per share, and (iv) 192,283 shares
reserved for issuance upon the exercise of options which may be granted
under the Stock Option Plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 2, 1996 THREE MONTHS ENDED SIX MONTHS ENDED
(INCEPTION) JUNE 30 SEPTEMBER 30
TO --------------------- ----------------------
MARCH 31, 1997 1996 1997 1996 1997
-------------- --------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net Sales................................ $ 25,940,203 $2,345,982 $10,847,145 $10,291,806 $29,389,055
Cost of products......................... 25,139,001 2,298,682 10,423,376 10,118,931 28,142,220
-------------- --------- ---------- ---------- ----------
Gross profit........................... 801,202 47,300 423,769 172,875 1,246,835
Selling, general and administrative
expenses............................... 751,133 74,745 312,244 285,573 610,638
-------------- --------- ---------- ---------- ----------
Income (loss) from operations............ 50,069 (27,445) 111,525 (112,698) 636,197
Other expense, net....................... (15,205) (355) (477) (5,179) (642)
-------------- --------- ---------- ---------- ----------
Income (loss) before provision for income
taxes.................................. 34,864 (27,800) 111,048 (117,877) 635,555
Provision for income taxes............... 9,500 -- 44,500 600 254,222
-------------- --------- ---------- ---------- ----------
Net income (loss)...................... $ 25,364 $ (27,800) $ 66,548 $ (118,477) $ 381,333
-------------- --------- ---------- ---------- ----------
-------------- --------- ---------- ---------- ----------
Net income (loss) per share.............. $ 0.01 $ (0.01) $ 0.01 $ (0.03) $ 0.08
-------------- --------- ---------- ---------- ----------
-------------- --------- ---------- ---------- ----------
Shares used in per share computations.... 4,143,597 3,099,306 4,745,460 3,646,002 4,748,003
-------------- --------- ---------- ---------- ----------
-------------- --------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, 1997
-------------------------------------------
PROFORMA
AT MARCH 31, ACTUAL PROFORMA(1) AS
1997 ----------- ------------ ADJUSTED(1)(2)
------------ (UNAUDITED) (UNAUDITED) ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $ 154,160 $(199,986) $ 620,014 $ 6,810,014
Total assets........................................ 1,855,241 8,498,995 9,018,995 14,408,995
Total liabilities................................... 1,579,877 7,542,298 7,568,698(3) 6,442,298
Retained earnings................................... 25,364 406,697 406,697 333,097(4)
Shareholders' equity................................ 275,364 956,697 1,450,297 7,966,697
</TABLE>
- ------------------------------
(1) Pro forma amount is adjusted to give effect to (i) the receipt of the net
proceeds of $820,000 from the Bridge Financing which closed in December
1997, and (ii) the application of the proceeds thereof including payment of
$250,000 and $50,000 of the principal amount owing under a note (the "CASI
Note") issued to Computer-Aided Software Integration, Inc. ("CASI") and a
note (the "Glasgal Note") issued to an affiliate of Glasgal Communications,
Inc. ("Glasgal"), the parent of CASI.
(2) Adjusted to reflect (i) the proceeds of the sale of 1,800,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $4.50 per share after deducting commissions and estimated offering
expenses (estimated at $1.5 million); and (ii) the application of the net
proceeds of the Offering, including payment of $400,000, $700,000 and
$100,000 due under the Bridge Notes, the CASI Note and the the Glasgal Note,
respectively.
(3) Debt is net of original issue discount and deferred financing costs of
$73,600 incurred in the Bridge Financing.
(4) As adjusted to reflect a non-recurring interest expense of $73,600 for the
unamortized portion of the original issue discount and financing costs
related to the Bridge Financing.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
LIMITED OPERATING HISTORY. The Company commenced operations in April 1996;
therefore, there is only limited financial information in existence upon which
an investment decision may be based. Although the Company has achieved
profitability, the ability of the Company to sustain profitability will depend
in part upon the successful and timely introduction and operation of its ACSA
Centers, continuation of the Company's close relationships with its vendors and
customers, successful marketing of existing products and the Company's ability
to finance inventories and growth and to collect trade receivables in a timely
manner. The likelihood of the success of the Company in implementing its ACSA
Centers must be considered in light of the difficulties and risks inherent in a
new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations for the ACSA Center business. There can be no assurance that the
Company will be able to generate and sustain profitability in the future. See
"Business--ACSA Growth Strategy."
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon the
services of Max Toghraie and James Ung, its Chief Executive Officer and
President, respectively. The success of the Company to date has been in part
dependent upon their efforts and abilities, and the loss of the services of
either of them for any reason could have a material adverse effect upon the
Company. In addition, the Company's work force includes executives and employees
with significant knowledge and experience in the Computer Products distribution
industry. The Company's future success will be strongly influenced by its
ability to continue to recruit, train and retain a skilled work force. While the
Company believes that it would be able to locate suitable replacements for its
executives or other personnel if their services were lost to the Company, there
can be no assurance that the Company would be able to do so on terms acceptable
to the Company. In particular, the location and hiring of suitable replacements
for Mr. Toghraie and Mr. Ung could be very difficult. The Company maintains a
key-man life insurance policy on the lives of Messrs. Toghraie and Ung with
benefits of $1,000,000 each, payable to the Company in the event of their death.
The benefits received under these policies would not be sufficient to compensate
the Company for the loss of the services of Mr. Toghraie or Mr. Ung should
suitable replacements not be employed. See "Management."
RELATIONSHIP WITH VENDORS. A key element of the Company's past success and
future business strategy involves the establishment of relationships with
certain major distributors and Computer Product manufacturers. Purchases from
these vendors account for the majority of the Company's aggregate purchases for
fiscal 1997. Certain of these vendors provide the Company with substantial
incentives in the form of rebates passed through from the manufacturer,
discounts, credits and cooperative advertising. There can be no assurance that
the Company will continue to receive such incentives in the future. Other than
ordinary purchase orders, the Company does not have written supply, distribution
or franchise agreements with any of its Computer Product vendors. Although the
Company believes that it has established close working relationships with its
principal vendors, the Company's success will depend, in large part, on
maintaining these relationships and developing new vendor relationships for its
existing and future product and service lines. Because the Company does not have
written contracts with any of its vendors, there can be no assurance that the
Company will be able to maintain these relationships. Periodically, Computer
Product suppliers consolidate their distribution networks and otherwise
restructure or limit their distribution channels. There can be no assurance that
the Company will continue to be selected to resell products by its principal
vendors. Termination or interruption of such relationships or modification of
the terms the Company receives from these vendors would materially adversely
affect the Company's financial position, operating results, and cash flows. See
"Business--Vendor Relationships and Procurement."
Certain of the products offered by the Company are subject to manufacturer
allocations, which limit the number of units of such products available to the
Company's vendors, which in turn may limit the
6
<PAGE>
number of units available to the Company. In order to offer the products of most
manufacturers, the Company is required to obtain authorizations from the
manufacturers to act as a reseller of such products, which authorizations may be
terminated at the discretion of the manufacturers at any time. There can be no
assurance that the Company will be able to obtain or maintain authorizations to
offer products, directly or indirectly, from new or existing manufacturers.
Termination of the Company's rights to act as a reseller of the products of one
or more significant manufacturers would have a material adverse effect on the
Company's financial position, operating results, and cash flows.
FINANCING. The Company's business is capital intensive in that the Company
is required to finance the purchase of Computer Products in order to fill sales
orders. In order to obtain necessary capital, the Company relies primarily on
unsecured vendor credit lines and a line of credit provided by Finova Capital
Corporation ("Finova") that is collateralized by accounts receivable and
inventory. As a result, the amount of credit available to the Company may be
adversely affected by factors such as delays in collection or deterioration in
the quality of the Company's accounts receivable, economic trends in the
computer industry, interest rate fluctuations and the lending or credit policies
of the Company's lenders and vendors. Many of these factors are beyond the
Company's control. Any decrease or material limitation on the amount of capital
available to the Company under its financing arrangements or vendor credit lines
will limit the ability of the Company to fill existing sales orders or expand
its sales levels and, therefore, would have a material adverse effect on the
Company's financial position, operating results, and cash flows. In addition,
while the Company does not have significant exposure to interest rate
fluctuations under its current financing, any significant increases in interest
rates will increase the cost of possible future financing to the Company which
would have a material adverse effect on the Company's financial position,
operating results, and cash flows. The Company is dependent on the availability
of accounts receivable financing on reasonable terms and at levels that are high
relative to its equity base in order to maintain and increase its sales. There
can be no assurance that such financing will be available to the Company in the
future. The inability of the Company to have continuous access to such financing
at reasonable costs would severely and adversely impact the Company's financial
position, operating results, and cash flows. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RISK OF PRODUCT RETURNS. As is typical of the computer industry, the
Company incurs expenses as a result of the return of products by customers. Such
returns may result from defective goods, inadequate performance relative to
customer expectations, distributor shipping errors and other causes which are
outside the Company's control. Although the Company's distributors and
manufacturers have specific return policies that enable the Company to return
certain types of goods for credit, to the extent that the Company's customers
return products which are not accepted for return by the distributor or
manufacturer of such products, the Company will be forced to bear the cost of
such returns. Any significant increase in the rate of product returns coupled
with the unwillingness by the Company's distributors or manufacturers to accept
goods for return could have a material adverse effect on the Company's financial
position, operating results, and cash flows. See "Business--Inventory
Management."
PRODUCT MIX; PRODUCT MARGINS. The Company's gross profit margins have
increased from 1.7% to 4.2% in the six months ending September 30, 1996 and
1997, respectively, due to a number of factors, including strong product demand,
the ability of the Company to obtain favorable pricing, and a sales mix of
products with higher profit margins. However, given the significant levels of
competition that characterize the Computer Products market, there can be no
assurance that the Company will maintain the current gross profit margins or be
able to achieve further increases in profit margins. From time to time, product
margins will also be reduced as a result of marketing strategies implemented by
the Company. For instance, introductory pricing implemented by the Company to
develop market awareness of product lines, particularly disk drives, of vendors
new to the Company will have an adverse effect upon gross profit margins and,
potentially, earnings during the period promotional pricing is offered.
Moreover, in order to attract and retain many of its larger customers, the
Company frequently must agree to volume discounts
7
<PAGE>
and maximum allowable mark-ups that serve to limit the profitability of sales to
such customers. Accordingly, to the extent that the Company's sales to such
customers increase, the Company's gross profit margins may be reduced, and
therefore any future increases in net income will have to be derived from
continued sales growth or effective expansion into higher margin business
segments, neither of which can be assured. Furthermore, low margins increase the
sensitivity of the business to increases in costs of financing, because
financing costs to carry a receivable can be very high compared to the low
amount of gross profit on the sale underlying the receivable itself. Any failure
by the Company to maintain or increase its profit margins and sales levels could
have a material adverse effect on the Company's results of operations and
prospects for future growth. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION; IMPORTANCE OF ACSA TO
GROWTH. The Company's ability to successfully implement, market and introduce
the ACSA Solution services on a timely basis will be a significant factor in the
Company's ability to improve its operating margins and remain competitive. The
Company's ability to market the ACSA Solution successfully will depend on the
Company convincing potential customers of the benefits of the ACSA Solution. The
Company has only recently commenced marketing the ACSA Solution. The Company is
currently constructing its first ACSA Center located in City of Industry. No
ACSA Center is currently in operation and the Company currently has no sales
revenue attributable to the ACSA Solution or a ACSA Center. Although the Company
is engaged in negotiations and discussions with a number of potential customers,
there can be no assurance that any such discussions will lead to significant
sales of the ACSA Solution, or that the ACSA Solution will attain market
acceptance. Although the Company intends to devote a substantial portion of the
proceeds of this Offering to implementation and marketing of ACSA Solution
services, there can be no assurance that the commitment and use of such funds
will result in successful implementation, marketing and sales of ACSA Solution
services. Any failure by the Company to anticipate or respond in a
cost-effective and timely manner to market trends or customer requirements, or
any significant delays in introduction of ACSA services, could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--ACSA Growth Strategy."
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR ACSA. The Company believes that
the purchase of the Company's ACSA Solution services will entail an
enterprise-wide decision by prospective customers and require the Company to
engage in a lengthy sales cycle, estimated at between three and twelve months,
as the Company will be required to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's ACSA
Solution services and products. For these and other reasons, the sales and
customer implementation cycles will be subject to a number of significant delays
over which the Company has little or no control. Delay in the sale or customer
implementation of a limited number of transactions could have a material adverse
effect on the Company's business and results of operations and could cause the
Company's operating results to vary significantly from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
DEPENDENCE ON CASI FOR DEVELOPMENT AND ENHANCEMENT OF CONFIGURATION
SOFTWARE. Under the Company's non-exclusive license and reseller agreements
with CASI, CASI retains the source code of the Configurator software required to
operate the automated software configuration functions of the Company's planned
ACSA Solution and ACSA Centers, and retains all rights to modify and enhance the
Configurator Software. CASI has agreed to provide the Company with all
enhancements and upgrades to the Configurator software used internally or
distributed by CASI to its customers, and to develop additional enhancements
requested by the Company at the Company's sole expense. Any enhancements
requested by the Company and implemented by CASI at CASI's expense may be
incorporated in the generally distributed version of CASI's software. If CASI
determines not to fund development of an enhancement then CASI must prepare the
enhancement at pre-agreed rates and ownership of the requested enhancement will
belong to the Company. Failure by CASI to promptly and adequately perform
8
<PAGE>
its obligations under its license agreement with the Company would have a
material adverse effect on the Company. Furthermore, there can be no assurance
that CASI will fully comply with its contractual obligations to the Company,
that CASI will dedicate sufficient software development capacity to satisfy the
Company's requirements, or that the Company's remedies in the event CASI does
not perform its obligations will be adequate. The Company has no capability to
internally develop any enhancements or upgrades. Failure or delay by CASI to
fulfill the Company's anticipated needs for enhancement and upgrading of the
Configurator software would adversely affect the Company's ability to market
ACSA services and to become and remain competitive in the software configuration
market. In the event that CASI fails to meet its obligations under the license,
the Company has, among other rights, the contractual right to the source code
underlying the software, but there can be no assurance that the Company will be
able to obtain the source code in a timely manner, if at all, because CASI is in
possession of the only copies of the source code. Even if the Company is able to
obtain the source code under such circumstances, internal maintenance and
enhancement of the source code could place a significant financial burden on the
Company. See "Business--The ACSA Market."
LIMITED MARKETING CAPABILITIES. The Company's operating results will depend
to a large extent on its ability to successfully market the ACSA Solution
services to personal computer manufacturers and multi-user system buyers. The
Company currently has limited marketing capability. The Company intends to use a
portion of the proceeds of the Offering to hire additional sales and marketing
personnel and outside consultants to market the ACSA Solution. There can be no
assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the ACSA Solution. See
"Business--The ACSA Market."
MANAGEMENT OF GROWTH. The Company has grown rapidly since inception in
April 1996, with net sales reaching $25,940,200 in the Company's first fiscal
year and reaching $29,389,100 for the six months ended September 30, 1997, and
employees increasing from 3 at inception to 22 at December 15, 1997.
Implementation of the Company's business plan, including implementation of ACSA
Solution services and the general strains of the Company's growth will require
that the Company significantly expand its operations in all areas. This growth
in the Company's operations and activities will place a significant strain on
the Company's management, operational, financial and accounting resources.
Successful management of the Company's operations will require the Company to
continue to implement and improve its financial and management information
systems. The Company's ability to manage its future growth, if any, will also
require it to hire and train new employees, including management and technical
personnel, and motivate and manage its new employees and integrate them into its
overall operations and culture. The Company recently has made additions to its
management team, including appointing Max Toghraie as Chief Executive Officer in
September 1997 and is in the process of expanding its accounting staff and
modifying its internal procedures to prepare to function as a public company, a
process which is expected to continue following the Offering. The Company's
failure to manage implementation of its business plan would have a material
adverse effect on the Company's business, operating results and financial
condition.
In the future, the Company may acquire complementary companies, products or
technologies, although no specific acquisitions currently are pending or under
negotiation. Acquisitions involve numerous risks, including adverse short-term
effects on the combined business' reported operating results, impairments of
goodwill and other intangible assets, the diversion of management's attention,
the dependence on retention, hiring and training of key personnel, the
amortization of intangible assets and risks associated with unanticipated
problems or legal liabilities. See "Business--The ACSA Growth Strategy."
CONSTRUCTION OF FIRST ACSA CENTER. The Company intends to use approximately
$0.3 million of the net proceeds from the Offering to complete construction of
and to equip its first ACSA Center. It is expected that the construction will
require a substantial time commitment of certain members of management. The
first ACSA Center is expected to be completed by May 1998. Any delay in
completion of the first ACSA
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<PAGE>
Center could result in delays in the commencement of sales of assembly and
custom software configuration services and adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to complete the ACSA Center at the budgeted price.
Additionally, there can be no assurance that the ACSA Center will be available
on time or that the Company will be successful in timely hiring and training
engineers and technicians necessary to commence operations of the ACSA Center.
Any such delay would delay the Company's ability to commence offering the ACSA
Solution and have a material adverse effect upon the Company's business,
operating results and financial condition. See "Business--Facilities."
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS. The market for the
Company's ACSA technology is characterized by rapidly changing technology and
frequent new product introductions. Even if the Company's ACSA Solution services
using its licensed Configurator-TM- software gains initial market acceptance,
the Company's success will depend, among other things, upon its ability to
enhance the ACSA Solution services and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or offer new services successfully, that such new
products or services will gain market acceptance, or that the Company will be
able to respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a loss of market share
or revenues. See "Business--The ACSA Market."
INDUSTRY EVOLUTION AND PRICE REDUCTIONS; CHANGING METHODS OF
DISTRIBUTION. The personal computer industry is undergoing significant change.
The industry has become more accepting of large-volume, cost-effective channels
of distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer resellers are consolidating operations and acquiring
or merging with other resellers to increase efficiency. This current industry
reconfiguration has resulted in increased pricing pressures. Decreasing prices
of Computer Products require the Company to sell a greater number of products to
achieve the same level of net sales and gross profit. The continuation of such
trend would make it more difficult for the Company to maintain or to increase
its net sales and net income. In addition, it is possible that the historically
high rate of growth of the personal computer industry may slow at some point in
the future. If the growth rate of the personal computer industry were to
decrease, the Company's financial position, operating results, and cash flows
could be materially adversely affected. Furthermore, new methods of distribution
and sales of Computer Products, such as on-line shopping services and catalogs
published on CD-ROM, may emerge in the future. Computer Products and software
manufacturers have sold, and may in the future intensify their efforts to sell,
their products directly to end-users. From time to time, certain vendors have
instituted programs for the direct sale of large orders of Computer Products and
software to certain major corporate accounts. These types of programs may
continue to be developed and used by various vendors. While the Company attempts
to anticipate future distribution trends, any of these distribution methods or
competitive programs, if expanded, could have a material adverse effect on the
Company's financial position, operating results, and cash flows.
AVAILABILITY OF COMPONENTS. The computer component and computer assembly
businesses have from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend to either slow down shipments or
place their customers "on allocation," reducing the number of units sold to each
customer. While the Company believes that it has well-established relationships
with vendors and that it has not been adversely affected by recent shortages in
certain storage and other computer components, no assurance can be given that
future shortages will not adversely impact the Company. See "Business--Vendors
Relationships and Procurement."
10
<PAGE>
COMPETITION. The Company faces intense competition, both in its selling
efforts and purchasing efforts, from the significant number of companies that
configure and/or assemble personal computers, manufacture or distribute disk
drives and offer software configuration services. Many of these companies, such
as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom,
Inc. in the Computer Products distribution market, large computer manufacturers
such as IBM Corp. and Compaq Computer Corporation, which provide custom
configuration and automated software configuration for standardized systems,
large distributors such as Ingram Micro Inc., Vanstar Corp., En Point
Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the
systems integration and network services market, have substantially greater
assets and possess substantially greater financial and personnel resources than
those of the Company and may develop software, or services or products which are
comparable to the ACSA Solution. Many competing distributors also carry or offer
brands or product lines which the Company does not carry. Generally, large disk
drive and personal computer component manufacturers and large distributors do
not focus their direct selling efforts on small to medium sized OEMs and
distributors, which constitute the vast majority of the Company's customers;
however, as the Company's customers increase in size, disk drive and component
manufacturers may find it cost effective to focus direct selling efforts on
those customers, which could result in the loss of customers or pressure on
margins. In addition, CASI and/or Glasgal Communications, Inc. ("Glasgal"), the
parent corporation of CASI, may directly enter into the Company's integration
and configuration markets using the software the Company has licensed from CASI.
While no operating division or subsidiary of Glasgal is currently competing in
the Company's markets, there can be no assurance that Glasgal will not decide to
directly compete with the Company in the future. Further, the terms of the
Company's license agreement with CASI allows CASI to license the software used
in the ACSA Solution and the ACSA Centers to new or existing direct competitors
of the Company. There can be no assurance that the Company will be able to
continue to compete effectively with existing or potential competitors. See
"Business--Competition."
ELECTRONICS INDUSTRY CYCLICALITY. The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
corporate end-users of personal computers, as well as component distributors
such as the Company. In addition, the life-cycle of existing personal computer
products and the timing of new product development and introduction can affect
demand for disk drives and other personal computer components. Any downturns in
the personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
FOREIGN TRADE REGULATION. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea and the Philippines. The
purchase of goods manufactured in foreign countries is subject to a number of
risks, including economic disruptions, transportation delays and interruptions,
foreign exchange rate fluctuations, imposition of tariffs and import and export
controls and changes in governmental policies, any of which could have a
material adverse effect on the Company's business and results of operations. The
ability to remain competitive with respect to the pricing of imported components
could be adversely affected by increases in tariffs or duties, changes in trade
treaties, strikes in air or sea transportation, fluctuation in currency and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on the Company's
business. The Company's ability to remain competitive could also be affected by
other governmental actions related to, among other things, anti-dumping
legislation and international currency fluctuations. While the Company does not
believe that any of these factors adversely impact its business at present,
there can be no assurance that these factors will not materially adversely
affect the Company in the future. Any significant disruption in the delivery of
merchandise from the Company's suppliers, substantially all of whom are foreign,
would also have a material adverse impact on the Company's business and results
of operations. See "Business--Vendor Relationships and Procurement."
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<PAGE>
NO EARTHQUAKE INSURANCE. The Company's executive office, warehouse and
assembly facility is located in a Company-leased facility in City of Industry,
California, an area which experienced damage in the 1994 Northridge, California
earthquake. The Company does not currently carry insurance against earthquake-
related risks.
FLUCTUATIONS IN QUARTERLY EARNINGS. The Company's business is subject to
certain quarterly influences. Net sales and operating profits are generally
higher in the third quarter due to the purchasing patterns of personal computer
integrators and resellers and are generally lower in the second quarter due
primarily to lower industry shipments. Quarterly results may also be adversely
affected by a variety of other factors, including the timing of acquisitions and
related costs, the release of new products, promotions, and component pricing
and availability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONFLICT OF INTERESTS. David Tobey, a director of the Company is the
founder, the President, Chief Executive Officer and a principal stockholder of
Computer-Aided Software Integration, Inc. ("CASI") and an employee of CASI's
parent, Glasgal Communications, Inc. ("Glasgal"). CASI is a vendor and licensor
of the Company. Mr. Tobey has an employment agreement with CASI whereby Mr.
Tobey is obligated to assign to CASI all ideas, inventions and designs created
or developed by Mr. Tobey (alone or with others) relating to computer
integration and development tools. The Company has entered into a licensing
agreement (the "CASI License") and a reseller agreement (the "CASI Reseller
Agreement") with CASI relating to the Company's non-exclusive license to use and
resell CASI's Configurator software. While CASI does not currently compete with
the Company, there can be no assurance that CASI or Glasgal will not compete
directly with the Company in the future. In addition, the terms of the CASI
License do not restrict CASI's ability to license the software to direct
competitors of the Company. CASI and Glasgal market automated configuration
services and may license the Configurator software in competition with the
Company. As a result, conflict may result between Mr. Tobey's interests and
obligations to CASI and Glasgal and his obligations as a Director of the
Company. The license fee for the CASI Configuration software was $1.1 million,
of which $150,000 was advanced on the Company's behalf by an officer of CASI's
parent, Glasgal and is evidenced by a promissory note (the "Glasgal Note"), and
$950,000 was paid by delivery to CASI of a non-interest bearing promissory note
(the "CASI Note"). The Company repaid $250,000 principal amount of the CASI Note
and $50,000 of the principal amount of the Glasgal Note out of the proceeds of
the Company's Bridge Financing in December 1997. The Company intends to repay
the outstanding $100,000 principal amount of the Glasgal Note and the $700,000
principal amount of the CASI Note out of the proceeds of this Offering. The
Glasgal Note provides that the Company has also issued CASI a contingent warrant
(the "CASI Warrant") pursuant to which CASI may apply any amount then due and
unpaid if the Company defaults under the CASI Note. The CASI Warrant will expire
upon full payment of the CASI Note. The Company believes that all of these
transactions were on terms no less favorable than were available from
unaffiliated third parties. There can be no assurance that the Company will not
enter into transactions with affiliated parties in the future.
IMMEDIATE AND SUBSTANTIAL DILUTION. The proposed initial public offering
price is substantially higher than the book value per outstanding share of
Common Stock. Specifically, investors will sustain immediate dilution of $3.28
per share based on the pro forma net tangible book value of the Company at
September 30, 1997 of $.31 per share after giving effect to the Bridge
Financing. Investors in the Offering therefore will bear a disproportionate part
of the financial risk associated with the Company's business while effective
control will remain with the Company's directors and executive officers. See
"Dilution."
POSSIBLE ISSUANCE OF PREFERRED STOCK; BARRIERS TO TAKEOVER. The Company's
Articles of Incorporation authorize the issuance of up to 2,000,000 shares of
Preferred Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, because the rights and preferences for
any series of Preferred Stock may be set by the Company's Board of Directors in
its sole discretion, the rights and preferences of
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<PAGE>
any such Preferred Stock are likely to be superior to those of the Common Stock
and thus could adversely affect the rights of the holders of Common Stock. See
"Description of Securities." The Company currently has no commitments or
contracts to issue any additional securities. Any securities issuances might
result in a reduction in the book value or market price of the outstanding
shares. Further, any new issuances could be used for anti-takeover purposes or
might be used as a method of discouraging, delaying or preventing a change of
control of the Company. Additionally, certain provisions of the Company's
Articles of Incorporation and Bylaws could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. See Description of
Capital Stock--Anti-Takeover Provisions.
NO DIVIDENDS ANTICIPATED. The Company has never declared or paid dividends
on its Common Stock. After the consummation of this Offering, the Company does
not intend for the foreseeable future to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business. See "Dividend Policy."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE;
ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been
no public market for the Common Stock. Although the Company has applied for
approval for inclusion of the Common Stock on the Nasdaq SmallCap Market
("Nasdaq"), there can be no assurance that an active trading market for the
Common Stock will develop as a result of the Offering or, if a trading market
does develop, that it will continue. In the absence of such a market, investors
may be unable readily to liquidate their investment in the Common Stock. The
trading price of the Common Stock could be subject to wide fluctuations in
response to quarter to quarter variations in operating results, news
announcements relating to the Company's business (including new product
introductions by the Company or its competitors), changes in financial estimates
by securities analysts, the operating and stock price performance of other
companies that investors may deem comparable to the Company as well as other
developments affecting the Company or its competitors. In addition, the market
for equity securities in general has been volatile and the trading price of the
Common Stock could be subject to wide fluctuations in response to general market
trends, changes in general conditions in the economy, the financial markets or
the manufacturing or retail industries and other factors which may be unrelated
to the Company's performance. The public offering price of the shares of Common
Stock has been determined by negotiations between the Company and the
Underwriter and does not necessarily bear any relationship to the Company's book
value, assets, past operating results, financial condition or any other
established criteria of value. There can be no assurance that the shares offered
by this Prospectus will trade at market prices in excess of the initial public
offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock by existing
shareholders could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital. Upon completion of the
Offering, the Company will have 6,550,000 shares of Common Stock outstanding. Of
those shares, the 1,800,000 shares of Common Stock offered by this Prospectus
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
4,750,000 shares of Common Stock outstanding are "restricted securities," as
that term is defined by Rule 144. Under lock-up agreements with the Underwriter,
each existing shareholder has agreed that he or it will not, directly or
indirectly, sell, assign or otherwise transfer any shares of Common Stock owned
by it for a period of (a) in the case of management and founding shareholders of
the Company who collectively hold 4,450,000 shares of Common Stock, a period of
18 months after the effective date of the Registration Statement of which this
Prospectus is a part (the "Management Lock-Up Period") except with the
Underwriter's prior written consent and (b) in the case of the holders of
300,000 shares of Common Stock issued in the Company's Bridge Financing, a
period of 12 months after the effective date of the Registration Statement of
which this Prospectus is a part, and thereafter for an additional six (6)
months, without the written consent of the Underwriter (the "Bridge Holder
Lock-Up Period"); provided, however, that (i) the Management Lock-up Period
shall immediately terminate if the average closing bid price of the Common
Stock, if the Common Stock is quoted on the NASDAQ system, or the average
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<PAGE>
closing sale price of the Common Stock, if the Common Stock is listed on the
American Stock Exchange, equals or exceeds $9.00 per share (subject to customary
adjustments for stocksplits, combinations, consolidations and similar
transactions) for any 30 consecutive calendar days, and (ii) that, for
twenty-four (24) months following the effective date of the Registration
Statement any sales of the Company's securities subject to the lock-up
agreements shall be made through the Underwriter in accordance with its
customary brokerage practices either on a principal or agency basis. Once the
lock-up agreements expire, all of the 4,750,000 shares of Common Stock will
become eligible for immediate sale, subject to compliance with the volume
limitations of Rule 144 by the holders of these shares. See "Shares Eligible for
Future Sale" and "Underwriting."
ELIMINATION OF CUMULATIVE VOTING. The Articles of Incorporation of the
Company provide that at such time as the Company has (i) shares listed on the
New York Stock Exchange or the American Stock Exchange, (ii) securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the Company has at least 800 or more holders of its Common
Stock as of the record date of the Company's most recent annual meeting of
shareholders, the cumulative voting rights of shareholders will cease. Upon
closing of this Offering the Company believes that it will have more than 800
holders. This will have the effect of making it more difficult for minority
shareholders to obtain representation on the Board of Directors.
BROAD DISCRETION OF MANAGEMENT AND THE BOARD OF DIRECTORS IN USE OF
PROCEEDS. Although the Company intends to apply the net proceeds of the
Offering in the manner described herein under "Use of Proceeds," the Company's
management and its Board of Directors have broad discretion within such proposed
uses as to the precise allocation of the net proceeds, the timing of
expenditures and all other aspects of the use thereof. In addition,
approximately 62% of the net proceeds of the Offering will be allocated and used
for working capital and other general corporate purposes. The Company reserves
the right to reallocate the net proceeds of the Offering among the various
categories set forth under "Use of Proceeds" as it, in its sole discretion,
deems necessary or advisable based upon prevailing business conditions and
circumstances. See "Use of Proceeds."
POSSIBLE CONTROL BY INSIDERS. Upon completion of the Offering, the
executive officers and directors will beneficially own approximately 67.42% of
the outstanding Common Stock and will be able to elect all the Company's
directors and thereby direct the policies of the Company. See "Principal
Shareholders" and "Management."
UNDERWRITER'S POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that a
significant portion of the Common Stock offered hereby will be sold to customers
of the Underwriter. Although the Underwriter has advised the Company that it
intends to make a market in the Common Stock, it will have no legal obligation
to do so. The price and the liquidity of the Common Stock may be significantly
affected by the degree, if any, of the Underwriter's participation in the
market. No assurance can be given that any market activities of the Underwriter,
if commenced, will be continued. See "Underwriting."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes
"forward-looking statements." All statements other than statements of historical
fact included in this Prospectus, including, without limitation, the statements
under "Offering Summary," "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," regarding the
Company's strategies, plans, objectives and expectations; the Company's ability
to provide custom assembly, configuration and distribution services of computer
equipment and peripherals to technology companies; the ability of the Company to
establish and operate an ACSA Center and to automate its custom configuration
process and systems integration solutions for its customers; the ability of the
Company to successfully market the ACSA Solution; the ability of the Company to
develop processes to position itself as a low-cost leader for outsourcing system
assembly and distribution services; the Company's future operating results; and
other matters are all forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that
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<PAGE>
those expectations will prove to be correct. Important factors that could cause
actual results to differ materially from the Company's expectations are set
forth in these "Risk Factors," as well as elsewhere in this Prospectus. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these "Risk Factors."
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RECENT BRIDGE FINANCING
In December 1997, the Company completed a financing (the "Bridge Financing")
consisting of the sale of 20 units, each comprised of: (i) an unsecured
promising note (each a "Bridge Note") of the Company in the principal amount of
$20,000, bearing interest at a rate of 10% per annum payable upon the earlier of
the closing of the Offering or 18 months from the date of issuance; (ii) 15,000
shares of Common Stock of the Company, and (iii) 5,000 warrants of the Company,
each warrant exercisable to purchase one share of Common Stock at an initial
exercise price of $3.00 per share, subject to adjustment, during the 36-month
period commencing one year from the date the warrants are issued (the "Bridge
Warrants"). The Company repaid $250,000 of the principal amount of the CASI Note
and $50,000 of the Glasgal Note out of the proceeds of the Bridge Financing. The
Company intends to repay the remainder of its indebtedness under the CASI Note
and the Glasgal Note using the proceeds of this Offering. See "Use of Proceeds."
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USE OF PROCEEDS
The net proceeds to the Company from its sale of the 1,800,000 shares of
Common Stock offered by this Prospectus (at an assumed initial public offering
price of $4.50 per share), after deducting the estimated underwriting discounts
and offering expenses, are estimated to be approximately $6,590,000 ($7,647,050
if the Over-Allotment Option is exercised in full).
The Company anticipates allocating the net proceeds of the Offering among
the foregoing uses approximately as follows:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
APPLICATION NET PROCEEDS NET PROCEEDS
- -------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Repayment of the Bridge Notes, Glasgal Note and CASI Notes.......... $ 1,200,000 18%
Construction of first ACSA Center................................... 300,000 5
Sales and marketing for first ACSA Center........................... 1,000,000 15
Working capital..................................................... 4,090,000 62
------------ ---
------------ ---
Total........................................................... $ 6,590,000 100%
------------ ---
------------ ---
</TABLE>
The Company is also conducting the Offering to create a market for its
Common Stock, to facilitate future access by the Company to the public equity
markets and to enhance the Company's public image and credibility to support its
marketing efforts.
The CASI Note is non-interest bearing and is due and payable on March 31,
1998, or the closing of the Offering, whichever is sooner. The Glasgal Note
bears interest at the rate of 10% per annum, and is required to be repaid on
February 28, 1998, or the closing of the Offering, whichever is sooner. The
Bridge Notes bear interest at a rate of 10% per annum and are payable upon the
earlier of the closing of the Offering or 18 months from the date of issuance.
The aggregate balance of the CASI Note, the Glasgal Note and the Bridge Notes
was $1.2 million as of December 23, 1997.
The Company believes that the proceeds of the Offering, funds from
operations and available lines of credit will be sufficient to support the
Company's capital needs for the next 12 months. The Company intends to maintain
flexibility in the use of the proceeds of the Offering (other than amounts to
retire the Bridge Notes, the Glasgal Note and the CASI Note). The amounts
actually expended for each use of the proceeds, if any, are at the discretion of
the Company and may vary significantly depending upon a number of factors,
including requirements for launching new product lines, marketing, advertising
and working capital to support growth. Accordingly, management reserves the
right to reallocate the proceeds of the Offering as it deems appropriate. The
Company may also use a portion of the net proceeds to acquire businesses,
products or proprietary rights, or to enter into joint ventures; however, the
Company currently has no commitments or agreements relating to any of these
types of transactions other than those disclosed in this Prospectus. Until the
net proceeds of the Offering are used, the Company intends to invest them in
United States government securities, short-term certificates of deposit, money
market funds or other short-term interest bearing investments.
DIVIDEND POLICY
The Company has not and does not currently intend to pay dividends on its
Common Stock following the Offering and plans to follow a policy of retaining
earnings to finance the growth of its business. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, contractual
and legal restrictions and other factors deemed relevant by the Board of
Directors at that time.
17
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at September 30,
1997 was $956,697, or $0.22 per share. The pro forma net tangible book value of
the Company's Common Stock at September 30, 1997, after giving effect to the
Bridge Financing was $1,450,297, or $0.31 per share. Pro forma net tangible book
value per common share represents the book value of the Company's tangible
assets less total liabilities divided by the number of shares of Common Stock
outstanding, after giving effect on a pro forma basis to the Bridge Financing.
Dilution per share to new investors represents the difference between the amount
per share paid by purchasers of Common Stock of the Company pursuant to the
Offering and the pro forma as adjusted net tangible book value per share of
Common Stock immediately after completion of the Offering. After giving effect
to the sale of the 1,800,000 shares of Common Stock offered hereby and the
application of the net proceeds therefrom, the as adjusted pro forma net
tangible book value of the Common Stock at September 30, 1997 would have been
$7,966,697 or $1.22 per share. This represents an immediate increase in pro
forma net tangible book value of $0.91 per share of Common Stock to existing
shareholders and an immediate dilution of $3.28 (73%) per share of Common Stock
to new investors purchasing Common Stock pursuant to this Offering. The
following table illustrates the per share effect of this dilution on an
investor's purchase of shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price........................................ $ 4.50
Pro forma net tangible book value per share as of September 30, 1997....... $ 0.31
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ $ 0.91
---------
As adjusted pro forma net tangible book value per share...................... $ 1.22
---------
Dilution per share to new investors.......................................... $ 3.28
---------
---------
</TABLE>
The following table summarizes, as of September 30, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid, and the average price per share paid by existing
shareholders and by new investors purchasing shares of Common Stock pursuant to
this Offering, after giving effect on a pro forma basis to the Bridge Financing.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION PAID
SHARES PURCHASED AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 4,750,000 72.5% $ 1,150,000 12.4% $ 0.24
New investors....................... 1,800,000 27.5 8,100,000 87.6 4.50
---------- ----- ------------ ----- -----
Total........................... 6,550,000 100.0% $ 9,250,000 100.0%
---------- ----- ------------ ----- -----
---------- ----- ------------ ----- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At December 23, 1997, there were an aggregate of 452,715
shares of Common Stock issuable upon exercise of outstanding options and
warrants at a weighted average exercise price of $2.80 per share comprised of
(i) 307,715 shares of Common Stock issuable upon the exercise of stock options
issued under the Company's Stock Option Plan, which have an exercise price of
$2.70 per share, (ii) 45,000 shares of Common Stock issuable pursuant to the
exercise of outstanding warrants at an exercise price of $3.00 per share, (iii)
100,000 shares of Common Stock issuable upon the exercise of the Bridge Warrants
which have an exercise price of $3.00 per share.
18
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1997 (unaudited), (ii) the pro forma capitalization of the
company giving effect to the Bridge Financing completed in December 1997, and
(iii) pro forma as adjusted to give effect to the sale of the 1,800,000 shares
of Common Stock offered by the Company hereby at the assumed initial public
offering price of $4.50 per share, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by the Company, and the
application of the net proceeds thereof as set forth in "Use of Proceeds." This
table should be read in conjunction with the Financial Statements and related
notes contained therein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. The
following unaudited pro forma financial data may not represent the results of
operations or financial position which actually would have been obtained if the
transactions described above had been completed as of the date indicated or
which may be obtained in the future.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 (UNAUDITED)
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
------------ ------------- -------------
<S> <C> <C> <C>
Debt, net of deferred financing costs................................ $ 1,114,305 $ 1,140,705(3) $ 14,305
------------ ------------- -------------
Shareholders' equity
Preferred Stock, no par value:
Authorized--2,000,000 shares
Issued and outstanding: None..................................... -- -- --
Common Stock, no par value:
Authorized--20,000,000 shares
Issued and outstanding: (4)
Actual: 4,450,000
Pro forma: 4,750,000
As adjusted: 6,550,000......................................... 550,000 1,043,600 7,633,600
Retained earnings.................................................... 406,697 406,697 333,097(5)
------------ ------------- -------------
Total shareholders' equity........................................... 956,697 1,450,297 7,966,697
------------ ------------- -------------
Total capitalization(1).............................................. $ 2,071,002 $ 2,591,002 $ 7,981,002
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- --------------------------
(1) Pro forma is adjusted to give effect to (i) the receipt of the net proceeds
of $820,000 from the Bridge Financing which closed in December 1997, and
(ii) the application of the proceeds thereof including payment of $250,000
of the CASI Note and $50,000 of the Glasgal Note.
(2) Adjusted to reflect (i) the proceeds of the sale of 1,800,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $4.50 per share after deducting commissions and estimated offering
expenses (estimated at $1.5 million); and (ii) the application of the net
proceeds of the Offering, including payment of $400,000, $700,000 and
$100,000 due under the Bridge Notes, the CASI Note and the the Glasgal Note,
respectively.
(3) Debt is net of the original issue discount deferred financing costs of
$73,600 incurred in the Bridge Financing.
(4) Does not include (i) 307,717 shares of Common Stock issuable upon the
exercise of stock options issued under the Company's Stock Option Plan,
which have an exercise price of $2.70 per share, (ii) 45,000 shares of
Common Stock issuable pursuant to the exercise of outstanding warrants at an
exercise price of $3.00 per share, (iii) 100,000 shares of Common Stock
issuable upon the exercise of the Bridge Warrants which have an exercise
price of $3.00 per share, and (iv) 192,283 shares reserved for issuance upon
the exercise of options which may be granted under the Stock Option Plan.
(5) As adjusted to reflect a non-recurring interest expense of $73,600 for the
unamortized portion of the original issue discount and deferred financing
costs related to the Bridge Financing.
19
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the year
ended March 31, 1997 and the balance sheet data at March 31, 1997 are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in this Prospectus. The statement of operations data set
forth below with respect to the three months ended June 30, 1996 and 1997, and
the six months ended September 30, 1996 and 1997 are derived from the unaudited
financial statements prepared on the same basis as the audited financial
statements. In the opinion of management, all unaudited financial information
includes all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the information presented. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes and other financial information appearing elsewhere in this Prospectus.
The statement of operations data for the three months ended June 30, 1997 and
the six months ended September 30, 1997 are not necessarily indicative of the
results for the entire year.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 2, 1996 JUNE 30 SEPTEMBER 30
(INCEPTION) TO -------------------- ----------------------
MARCH 31, 1997 1996 1997 1996 1997
-------------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Nonaffiliates................................. $ 25,407,403 $2,274,285 $9,827,145 $10,057,566 $27,997,755
Affiliate(1).................................. 532,800 71,697 1,020,000 234,240 1,391,300
-------------- --------- --------- ---------- ----------
25,940,203 2,345,982 10,847,145 10,291,806 29,389,055
Cost of products:
Nonaffiliates................................. 24,615,411 2,227,881 9,430,764 9,886,677 26,827,812
Affiliate(1).................................. 523,590 70,801 992,612 232,254 1,314,408
-------------- --------- --------- ---------- ----------
25,139,001 2,298,682 10,423,376 10,118,931 28,142,220
Gross profit:
Nonaffiliates............................... 791,992 46,404 396,381 170,889 1,169,943
Affiliate(1)................................ 9,210 896 27,388 1,986 76,892
-------------- --------- --------- ---------- ----------
801,202 47,300 423,769 172,875 1,246,835
Selling, general and administrative expenses.... 751,133 74,745 312,244 285,573 610,638
-------------- --------- --------- ---------- ----------
Income (loss) from operations................... 50,069 (27,445) 111,525 (112,698) 636,197
Other expense, net.............................. (15,205) (355) (477) (5,179) (642)
-------------- --------- --------- ---------- ----------
Income (loss) before provision for income
taxes......................................... 34,864 (27,800) 111,048 (117,877) 635,555
Provision for income taxes...................... 9,500 -- 44,500 600 254,222
-------------- --------- --------- ---------- ----------
Net income (loss)............................. $ 25,364 $ (27,800) $ 66,548 $ (118,477) $ 381,333
-------------- --------- --------- ---------- ----------
-------------- --------- --------- ---------- ----------
Net income (loss) per share..................... $ 0.01 $ (0.01) $ 0.01 $ (0.03) $ 0.08
-------------- --------- --------- ---------- ----------
-------------- --------- --------- ---------- ----------
Shares used in per share computations........... 4,143,597 3,099,306 4,745,460 3,646,002 4,748,003
-------------- --------- --------- ---------- ----------
-------------- --------- --------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30
--------------------
AT MARCH 31, 1997 1996 1997
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................ $ 154,160 $ (67,800) $(199,986)
Total assets......................................................... 1,855,241 1,467,881 8,498,995
Total liabilities.................................................... 1,579,877 1,419,458 7,542,298
Retained earnings (deficit).......................................... 25,364 (118,477) 406,697
Shareholders' equity................................................. 275,364 48,423 956,697
</TABLE>
- ------------------------------
(1) Represents sales at fair market value made to Samax Technology Inc., a
company controlled by the mother of Mr. Max Toghraie. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
SELECTED FINANCIAL DATA, FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. MOREOVER, THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS."
OVERVIEW
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software peripherals. In December of 1996, the
Company entered the system configuration business. This process required certain
organizational and operational changes to effectively position the Company as a
provider of configuration and integration solutions to various levels within the
distribution, integration and end-user markets. In February 1997, the Company
began negotiations on its first systems integration and configuration order and
by April 1997 had secured a non-binding (7,000 Unit PC systems) configuration
order on a twelve-month delivery schedule, under which approximately 2,130
systems have been shipped.
In order to enhance its competitive advantage in the systems integration
market, the Company has entered into a perpetual non-exclusive licensing
agreement with Computer Aided Software Integration, Inc. ("CASI") to license
CASI's Configurator software for use in the development and commercialization of
Company's ACSA Solution. The Company paid CASI a one-time license fee of $1.1
million. The license fee was paid (i) by delivering to CASI a non-interest
bearing promissory note in the principal amount of $950,000 (the "CASI Note"),
and (ii) a cash payment of $150,000 funded by the Glasgal Note. The payments
under the CASI Note will be capitalized and amortized over the useful life of
the software, which, for accounting purposes, is currently estimated to be
between three and five years.
The Company believes that the ACSA Solution will operate as a fully
automated systems integration and configuration process. When operational, the
ACSA Solution will enable the Company to assemble systems and custom configure
the software loaded on the systems to each customer's varied end-user
specifications. The Company anticipates that the ACSA Solution will enable it to
deliver multi-unit assembled hardware systems with pre-loaded software custom
configured to suit each end-user at a lower cost and time required by other
commercially available configuration processes. The Company anticipates a
portion of the proceeds from this Offering will be used to finance construction
of the Company's initial ACSA Center and to fund ACSA Solution marketing
activities. Costs incurred in connection with the construction of the ACSA
Center will be capitalized and amortized over the useful life of the ACSA
Center, which is expected to be between three and five years for accounting
purposes.
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company for the
year ended March 31, 1997, for the three month periods ended June 30, 1996 and
June 30, 1997, and for the six month periods ended September 30, 1996 and 1997.
The Company has a limited history of operations.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997.
NET SALES. Net sales consists of gross sales (invoice price), less sales
returns, sales discounts and allowance taken for approved early payment by
certain customers. Sales are recognized upon product shipment. Net sales for the
year ended March 31, 1997 were $25,940,203. This revenue was achieved by
21
<PAGE>
growth of the Company's sales force from 2 persons at inception to 4 persons at
the end of the first fiscal year and financed by the initial capitalization and
the Company's available vendor credit of approximately $2.0 million at March 31,
1997. Net sales to an affiliate represents sales at fair market value made to
Samax Technology, Inc. ("Samax"), a company controlled by the mother of Mr. Max
Toghraie.
COST OF PRODUCTS. Cost of products consists primarily of product costs,
freight charges, and labor cost, and includes cost incurred at the time of
purchase, freight in and outside warehouse cost. Cost of products was
$25,139,001, representing 96.9% of net sales for the period. The cost of
products for the year ended March 31, 1997 is almost entirely attributable to
product purchase costs, with freight, labor and outside warehouse costs in the
aggregate representing less than 1% of the total cost of products.
Except for a limited inventory maintained to satisfy anticipated systems
assembly and integration orders, the Company generally does not place orders for
product purchases until it has received a customer purchase order for the
product. The merchandise is then shipped to either the customer or the Company's
warehouse. The distributor typically ships its products within one or two days
of receipt of a purchase order and consequently, substantially all of the
Company's revenues in any quarter result from orders received in that quarter.
The Company records as inventory merchandise being configured, its limited
inventory for the systems configuration business, and merchandise purchased from
vendors but not yet shipped to customers. As a result, the Company generally
reflects five to seven days of cost of products as inventory.
GROSS PROFITS. Gross profits for the year ended March 31, 1997 were
$801,202. Gross profits as a percentage of net sales was 3.1% for the period
ended March 31, 1997. The Company's gross profit ratio is mainly attributable to
strong product demand, the ability of the Company to purchase inventory at
favorable prices, and management's focus on a sales mix which favors products
with higher profit margins and computer system integration sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling expenses includes
costs for marketing activities to promote the Company's products and services
throughout its distribution channels, marketing personnel costs, advertising,
promotions, brochures, travel and trade shows. General and administrative
expenses include salaries of management and administrative personnel, insurance
costs and professional fees. Selling, general and administrative expenses for
the period ended March 31, 1997 were $751,133 and are expected to increase as
the Company expands in anticipation of growth and commences focusing the
business on marketing the ACSA Solution.
NET INCOME. Net income for fiscal year ended March 31, 1997 was $25,364.
THREE MONTHS ENDED JUNE 30, 1997 AND 1996.
NET SALES. Net sales for the three months ended June 30, 1997 were
$10,847,145 compared to $2,345,982 for the three months ended June 30, 1996
which was the Company's first quarter of operations. This increase of
approximately $8,501,163 is attributable to growth of the Company's sales force
from 3 to 6 individuals at the end of each period, additional capital in the
amount of an aggregate of $550,000, and an increase in the Company's available
combined credit (including its vendor credit and the Finova Line) from $1.1
million to $3.2 million (as a 90 day average available credit for the respective
periods). In addition, at the beginning of the quarter ending June 30, 1997, the
Company retained new management and implemented a commission structure
concurrent with a significant increase in sales quotas and minimum margin
policies. During the same period, the Company also began marketing its
integration and configuration services, which resulted in net sales of
approximately $500,000 for the quarter ended June 30, 1997. Net sales to an
affiliate represents sales at fair market value made to Samax, Inc. ("Samax"), a
company controlled by the mother of Mr. Max Toghraie. For the three month period
ended June 30, 1997, the Company had sales of approximately $1.02 million to
Samax. At June 30, 1997, the Company had approximately $465,800 included in
trade receivables attributed to Samax.
22
<PAGE>
COST OF PRODUCTS. Cost of products increased $8,124,694 from $2,298,682 to
$10,423,376 for the three months ended June 30, 1996 and 1997, respectively.
This increase is mainly attributable to the increase in net sales. Cost of
products represented 98.0% and 96.1% of net sales for the three months ended
June 30, 1996 and 1997, respectively. The decrease in cost of products as a
percentage of net sales is primarily due to management's focus on a sales mix
which favors products with higher profit margins and computer system integration
sales.
GROSS PROFITS. Gross profits for three months ended June 30, 1997 were
$423,769 compared to $47,300 in the three month ended June 30, 1996. Gross
profits as a percentage of net sales were 3.91% for the three months ended June
30, 1997 compared to 2.02% for the three months ended June 30, 1996. This
represents a 93.6% increase in gross profit ratios, and is mainly attributable
to strong product demand, the ability of the Company to purchase inventory at
favorable prices, management's focus on a sales mix which favors products with
higher profit margins and computer system integration sales, a more efficient
shipping process implemented in the first quarter, tighter control and
management of labor costs and implementation of operational objectives requiring
management to focus on increasing efficiency. The Company also instituted
security measures in its shipping and receiving department intended to
substantially eliminate inventory shrinkage. Although the Company is seeking to
expand into higher margin, value added services, the Company believes that the
gross profit on its core distribution operations will remain relatively stable
but will be subject to seasonal fluctuations and to flucuations resulting from
introduction of product lines. Introductory pricing implemented by the Company
to develop market awareness of product lines, particularly disk drives, of
vendors new to the Company generally has an adverse effect on gross profit
margins and, potentially earnings, during periods when promotional pricing is
offered. Therefore, management's primary objective remains profit improvement
through strategic implementation of its planned ACSA operations. See "Risk
Factors--Product Mix; Product Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for three months ended June 30, 1997 were $312,244
compared to $74,745 for the three months ended June 30, 1996, the Company's
first quarter of operations. The increase of $237,499 in selling, general and
administrative expenses is attributable primarily to recognition of a one-time
loss (the "Receivable Write-Off") on a receivable in the amount of $100,000 upon
the Company's waiver of a guarantee of Mr. Max Toghraie of an investment as a
partial inducement for Mr. Toghraie to accept additional management
responsibilities, and increases in staff and overhead to support the higher
levels of sales and marketing activity. The Company increased the salaries of
executive officers during this period to levels the Company believes to be
commensurate with current market levels. These salary increases represent, in
the aggregate, an increase in expense to the Company of approximately $30,000
per quarter. Also included in selling, general and administrative expenses are
direct costs associated with increased marketing activities to promote the
Company's products and services throughout its distribution channels as well as
a significant increase in sales and marketing personnel costs of approximately
$43,000. The Company intends to continue its sales force expansion and to
increase its spending on advertising and joint marketing promotions and trade
shows for the remainder of the current fiscal year.
Selling, general and administrative expenses (excluding recognition of the
Receivable Write-Off) as a percentage of net sales decreased by 37.5% from 3.2%
for three months ended June 30, 1996 to 2.0% for three months ended June 30,
1997. This decrease is a result of economies of scale achieved through
significant increases in sales volume as well as employment of various
operational controls and organizational efficiencies. The Company intends to
continue strict monitoring of its fixed and variable cost structure to achieve
optimum operational performance.
NET INCOME (LOSS). Net income (loss) for the three-month period ended June
30, 1996 was $(27,800) compared to $66,548 for the three-month period ended June
30, 1997. The increase of $94,348, is mainly attributed to increase of net sales
of approximately $8,500,000 and economies of scale.
23
<PAGE>
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
NET SALES. Net sales for the six months ended September 30, 1997 were
$29,389,055 compared to $10,291,806 for the six months ended September 30, 1996
which was the Company's first six months of operations. This increase of
approximately $19,097,249 is attributable to growth of the Company's sales force
from 4 to 7 individuals at the end of each period, and an increase in the
Company's available combined credit (including its vendor credit and the Finova
Line), from $2.6 million to $9.3 million (as a 90 day average available credit
for the respective periods) which allowed the Company to increase its ability to
purchase product to fulfill more sales orders. In addition, at the beginning of
the six month period ending September 30, 1997, the Company retained new
management and implemented a commission structure concurrent with a significant
increase in sales quotas and minimum margin policies. During the same period,
the Company also began marketing its integration and configuration services,
which resulted in net sales of approximately $1,033,284 for the six month period
ended September 30, 1997. Net sales to an affiliate represents sales at fair
market value made to Samax. For the six month period ended September 30, 1997,
the Company had sales of approximately $1.39 million to Samax. At September 30,
1997, the Company had approximately $201,400 included in trade receivables
attributed to Samax.
COST OF PRODUCTS. Cost of products increased $18,023,289 from $10,118,931
to $28,142,220 for the six months ended September 30, 1996 and 1997,
respectively. This increase is mainly attributable to the increase in net sales.
Cost of products represented 98.3% and 95.8% of net sales for the six months
ended September 30, 1996 and 1997, respectively. The decrease in cost of
products as a percentage of net sales is primarily due to management's focus on
a sales mix which favors products with higher profit margins and computer system
integration sales.
GROSS PROFITS. Gross profits for six months ended September 30, 1997 were
$1,246,835 compared to $172,875 in the six month ended September 30, 1996. Gross
profits as a percentage of net sales were 4.2% for the six months ended
September 30, 1997 compared to 1.7% for the six months ended September 30, 1996.
This represents a 147% increase in gross profit ratios, and is mainly
attributable to strong product demand, the ability of the Company to purchase
inventory at favorable prices, management's focus on a sales mix which favors
products with higher profit margins and computer system integration sales, a
more efficient shipping process implemented in the first quarter, tighter
control and management of labor costs and implementation of operational
objectives requiring management to focus on increasing efficiency. See "Risk
Factors--Product Mix; Product Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for six months ended September 30, 1997 were $610,638
compared to $285,573 for the six months ended September 30, 1996, the Company's
six months of operations. The increase of $325,065 in selling, general and
administrative expenses is attributable primarily to the Receivable Write-Off of
$100,000 incurred in the first quarter and to increased staff and overhead to
support the higher levels of sales and marketing activity. The Company also
increased the salaries of executive officers during this period to levels the
Company believes to be commensurate with current market levels. These salary
increases represent, in the aggregate, an increase in expense to the Company of
approximately $30,000 per quarter. Direct costs associated with increased
marketing activities to promote the Company's products and services throughout
its distribution channels as well as a significant increase in sales and
marketing personnel costs account for approximately $116,300 of this increase.
The Company intends to continue its sales force expansion and to increase its
spending on advertising and joint marketing promotions and trade shows for the
remainder of the current fiscal year. In addition, the Company hired additional
personnel in finance and administration to facilitate growth of the Company's
infrastructure and revenue expansion costing approximately $28,340, year-end
audit and printing and consulting fees of $23,700. Selling, general and
administrative expense (excluding the Receivable Write-Off of $100,000) as a
percentage of net sales decreased by 39.3% from 2.8% for six months ended
September 30, 1996 to 1.7% for six months ended September 30, 1997. This
decrease is a result of economies of scale achieved through significant
increases in sales volume as well as
24
<PAGE>
employment of various operational controls and organizational efficiencies. The
Company intends to continue strict monitoring of all its fixed and variable cost
structure to achieve optimum operational performance. See "Certain Transactions"
and Note 7 to the Financial Statements.
NET INCOME (LOSS)
Net income (loss) for the six-month period ended September 30, 1996 was
($118,477) compared to $381,333 for the six-month period ended September 30,
1997. The increase of $499,810 is mainly attributable to an increase of net
sales of $19,097,249 and economies of scale.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital expenditure
requirements through a combination of cash flows from operations, bank
financing, vendor credit lines, the sale of equity and the Bridge Financing. At
December 1, 1997, the Company had vendor credit lines and a credit facility
aggregating $16.5 million, consisting of a $7.5 million credit line provided by
Finova (the "Finova Line") and approximately $9.0 million in unsecured vendor
credit. Under the Finova Line, the Company orders product from vendors approved
by Finova and agrees to pay Finova within 30 days of purchase of the ordered
products. Unless the Company fails to pay Finova within this 30 day period, all
finance costs associated with this line are charged by Finova to the Company's
vendor. The Finova line is terminable at Finova's discretion at any time without
notice. The Company believes that it can currently obtain similar financing on
comparable terms from competitors of Finova. However, if Finova terminates the
Finova Line and the Company for any reason fails to replace the Finova line with
comparable financing, the business of the Company would be materially adversely
effected. The Company also believes that expansion of its infrastructure to
accommodate its current expected growth rate will require a substantially higher
level of liquidity and capital. Specifically, the Company's planned ACSA
operations are expected to require significant capital expenditure over the next
twelve months. The Company believes that the proceeds of the Offering, and funds
from operations and available lines of credit, will be sufficient to support the
Company's capital needs for the next twelve (12) months. See "Risk
Factors--Financing."
In December 1997, the Company completed a financing (the "Bridge Financing")
consisting of the sale of 20 units, each comprised of: (i) an unsecured
promissory note (each a "Bridge Note") of the Company in the principal amount of
$20,000, bearing interest at a rate of 10% per annum payable upon the earlier of
the closing of the Offering or 18 months from the date of issuance; (ii) 15,000
shares of Common Stock of the Company, and (iii) 5,000 warrants of the Company,
each warrant exercisable to purchase one share of Common Stock at an initial
exercise price of $3.00 per share, subject to adjustment, during the 36-month
period commencing one year from the date the warrants are issued (the "Bridge
Warrants"). The Company repaid $250,000 of the principal amount of the CASI Note
and $50,000 of the Glasgal Note out of the proceeds of the Bridge Financing. The
Company intends to repay the remainder of its indebtedness under the CASI Note
and the Glasgal Note using the proceeds of the Offering. See "Use of Proceeds."
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business.
While the Company has no present plans, commitments or agreements with respect
to any potential acquisitions or joint ventures, the Company may consummate
acquisitions or enter into joint ventures, which may require the Company to make
additional capital expenditures. Such expenditures may be significant and
require external sources of funding.
INCOME TAXES
The Company provides for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109 entitled
"Accounting for Income Taxes." The Company provides for federal and state income
taxes based on statutory rates. The provision for income taxes differ
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from the amounts computed by applying the statutory federal income tax rate to
income before taxes primarily due to the effect of state income taxes net of the
related federal tax benefit.
Deferred income taxes are provided for income/expense items reported in
different periods for income tax and financial statement purposes. Deferred
income taxes are primarily attributable to temporary differences resulting from
depreciation, state income taxes and various accrued expenses. The Company has
no current "tax loss carry forwards."
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations. There can be no assurance, however, that the Company's
business will not be affected by inflation in the future.
BACKLOG
The Company's backlog is not meaningful due to short turnaround cycles in
its core distribution operations and only one order received as of the date
hereof in its developing systems configuration business.
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BUSINESS
GENERAL
The Company distributes computer equipment and related hardware components
and software ("Computer Products") to value added resellers ("VARs"), system
integrators ("SIs"), original equipment manufacturers ("OEMs"), independent
software vendors ("ISVs") and major government and corporate accounts. The
Company has entered the system configuration business and intends to build upon
its vendor and customer relationships to become a leading provider of
software-enabled custom configuration to its target markets both domestically
and internationally. The Company intends to implement a fully automated systems
integration and configuration process, referred to as the Automated Custom
System Assembly Solution, or "ACSA Solution" incorporating licensed proprietary
software. The Company believes the ACSA Solution will enable the Company to
assemble multiple computer systems and custom configure the software loaded on
these systems to each customer's end user's unique specifications at a fraction
of the cost and time required by other commercially available configuration
processes. The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
Future ACSA Centers may be located at the facilities of its customers. This
technology is intended to enable the Company's customers to outsource their
procurement, warehousing, assembly, staging, and shipping processes. The Company
will use a portion of the proceeds of the Offering to complete the construction
of and operate its first ACSA Center.
The Company's Computer Products business procures and distributes a broad
and comprehensive range of Computer Products including components and systems
networking products. These products include components such as high capacity
storage devices, CD ROMs and CD Recorders, network adapters, hubs, small
computer systems interfaces ("SCSIs"), integrated device enhancements ("IDEs")
and ZIP drives as well as memory and central processing units ("CPUs") for
desktop and notebook computer products. The Company also assembles
built-to-order computer systems for its target markets.
The Company's sales have grown from approximately $10,291,800 for the period
from April 2, 1996 (inception) through September 30, 1996, and $25,940,200 for
the Company's first fiscal year ending March 31, 1997 to approximately
$29,389,100 for the first six months of fiscal 1998 primarily because of
development of an experienced sales management team with strong customer
relationships, expansion of the sales force, quick delivery of a broad selection
of Computer Products and competitive pricing offered by the Company. The
Company's gross profit margins have improved from approximately 1.7% and 3.1% of
revenues in the six month period ending September 30, 1996 and the year ended
March 31, 1997, respectively, to 4.2 % for the six month period ending September
30, 1997 due to a number of factors including strong product demand, more
favorable direct manufacturer pricing and an improved sales mix achieved by the
Company which favors components with higher profit margins and computer system
sales. The Company expects that implementation of the ACSA Centers will increase
sales of higher margin built-to-order computer systems and service revenues.
The Company intends to expand through enhancing existing and establishing
additional strategic relationships with leading master distributors and
manufacturers and by developing custom assembly and software configuration
relationships with computer resellers, manufacturers and integrators. The
Company also intends to enter into joint venture or license arrangements with
foreign partners in South America, Mexico and Asia. The Company's strategy is to
access these markets by identifying foreign joint venture partners or licensees
with substantial industry presence capable of effectively utilizing the ACSA
Solution. The Company also intends to utilize management's extensive network of
domestic and foreign contacts to explore possible acquisition opportunities. The
Company is exploring joint ventures with potential partners identified in Asia,
but is not currently negotiating any acquisition opportunities. There can be no
assurance that the Company will successfully establish any joint ventures or
identify any acquisition opportunities or that if such opportunities are
presented that they will be on terms and conditions acceptable to the Company.
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The Company was incorporated in California on April 2, 1996 under the name
Data Net International, Inc. On December 22, 1997, the Company changed its name
from Data Net International, Inc. to CUMETRIX, Inc. The Company's executive
offices are located at 1304 John Reed Court, City of Industry, California,
91745; and its telephone number is (626) 968-9868, and its facsimile number is
(626) 961-1868.
COMPUTER PRODUCTS BUSINESS
The Company's principal business upon which its growth strategy is built is
the procurement and distribution of a broad and comprehensive range of Computer
Products. These products include, components such as high capacity storage
devices, CD ROMs and CD Recorders, network adapters, hubs, SCSIs, IDEs and ZIP
drives as well as memory and CPU's for desktop and notebook products. The
Company also assembles built-to-order computer systems for its target market.
Two significant strengths of the Company are its well-developed vendor
relationships and its ability to effectively manage its cash and inventory.
COMPUTER PRODUCTS MARKET
The computer hardware and component market is heavily dependent on worldwide
personal computer demand and shipments. According to a Hambrecht & Quist
research report dated August 19, 1997 on the PC Hardware Market entitled, "VIEW
FROM THE CHANNEL," worldwide personal computer unit shipments have increased
from 47 million units in 1994 to 83 million scheduled shipments for the 1997
calendar year, and unit volume is expected to grow to an estimated 112 million
by the 1999 calendar year. The Computer Products market is generally segmented
between top-level warehousing master distributors, who distribute to VARs, OEMs,
SIs and other distributors. Master distributors are required to purchase
significant volumes of Computer Products to obtain their manufacturer
relationships and pricing. The Company generally procures its components from
these master distributors and distributes these products to medium sized VARs,
SIs, ISVs and OEMs. The Company believes that a valuable asset of the Company is
its position in the distribution channel, between that of master distributors
and lower level VARs, SIs and ISVs because unlike master distributors, the
Company, without maintaining large inventories, can focus its procurement on
only those components which it has expertise in marketing to its target markets.
COMPUTER PRODUCTS BUSINESS STRATEGY
The Company has structured its Computer Products business in a manner
designed to maximize net profit margins while competing on the basis of price
and service. The Company generated approximately 98.6% and 96.5% of revenues in
the fiscal year ended March 31, 1997 and the six months ended September 30,
1997, respectively, from its Computer Product distribution and procurement
operations. The remainder of the Company's revenues in each period were derived
primarily from system assembly and sale. The Company's sales have grown from
approximately $10,291,806, to approximately $29,389,055 for the six months ended
September 30, 1996, and 1997, respectively, primarily because of the development
of an experienced sales management team with strong customer relationships,
expansion of the sales force, quick delivery of a broad selection of Computer
Products and competitive pricing offered by the Company.
Although the Company is seeking to expand into higher margin, value-added
services, the Company believes that the gross profit on its core distribution
operations will remain relatively stable. Therefore, management's primary
objective remains gross profit improvement through strategic implementation of
its planned ACSA operations. The Company's gross profit margins have improved
from approximately 1.7 % and 3.1% of revenues in the six months period ended
September 30, 1996 and the fiscal year ended March 31, 1997, respectively, to
4.2% for the six month period ended September 30, 1997 due to a number of
factors, including strong product demand, more favorable direct manufacturing
pricing, and an improved sales mix achieved by the Company which favors
components with higher profit margins and computer system integration sales.
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COMPUTER PRODUCT CUSTOMERS AND SALES
The Company has more than 700 active customers, including Alpha Computers,
East Gate Micro, Inc. and Data Impressions Inc. For the fiscal year ended March
31, 1997 and the six months ended September 30, 1997, no customer accounted for
more than 10% of sales. During fiscal 1997, the Company had sales of
approximately $532,800 to Samax, a company owned by the mother of Mr. Max
Toghraie. For the six month period ended September 30, 1997, the Company had
sales of approximately $1.39 million to Samax. At September 30, 1997, the
Company had approximately $201,400 in trade receivables attributed to Samax. The
Company does not believe that its business would be materially adversely
affected by the loss of this or any other individual customer.
The Company currently markets its distribution services via a direct sales
staff, with use of telemarketing techniques to identify, qualify and close
business. At the beginning of the 1997 calendar year, the Company began an
aggressive campaign to develop a channel program to sell its Computer Products
through OEMs, SIs, and ISVs. As of September 30, 1997, 44% of the Company's
accounts have been originated through this channel program, and they provide the
majority of revenues to the company.
As of September 30, 1997, the Company employed seven sales representatives.
All sales representatives are managed by the Company's President. The Company's
sales representatives have been highly effective in developing and maintaining
customer relationships, averaging approximately $8.2 million of sales per
representative on an annualized basis based on the six months ended September
30, 1997. The Company believes that sales per representative of $8.2 million,
would, if achieved for fiscal 1998, compare very favorably with its competitors.
See "Risk Factors--Limited Operating History."
The Company's representatives compete for sales on the basis of product
knowledge, product selection targeted to the Company's customer base and
competitive pricing. The Company offers an aggressive return merchandise policy
("RMA") that is attractive to its customers. The Company is able to offer such a
policy because of RMA allowances it has negotiated from its vendors. The Company
experienced loss on returns of less than one percent of shipments in the fiscal
year ended March 31, 1997 and the six months ended September 30, 1997,
respectively, because it was able to return substantially all of the returned
products to manufacturers for immediate cash refunds or credits. See "Risk
Factors--Risk of Product Returns."
VENDOR RELATIONSHIPS AND PROCUREMENT
The Company has relationships with a large number of manufacturers and
distributors around the world. The Company is a reseller of selected product
lines and single components from major manufacturers, including Western Digital
Corporation, Adaptec Inc., Fujitsu Computer Products of America, Samsung
Electronics Co. Ltd., Quantum Corporation, Maxtor Corporation, 3Com Corporation,
Creative Labs Corporation, Matrox Electronics Systems, Ltd., Goldstar L.G.
Electronics, Intel Corporation, Toshiba Corporation, Pioneer Electronics Corp.
and Sony Electronics. In the distribution channel, major suppliers include DSS
Technology Distribution Partners, Inc. ("DSS"), Maxtor Corporation, Canara
Technologies, Alpha Computers, DTK Computer, Tech Data Computer, Merisel
Incorporated and Toshiba Corporation. For the six months ended September 30,
1997, DSS, a master distributor of hard drives to the Company, accounted for
48.3%, of the Company's purchases. For the six month period ended September 30,
1997, the Company had purchases of approximately $598,200 from Samax. The
Company believes that its relationships with DSS and its other vendors is
satisfactory and does not believe that the loss of its relationship with DSS or
any other of its vendors would materially adversely affect its business. See
"Risk Factors--Relationship with Vendors."
The Company receives discounts from major Computer Product manufacturers and
master distributors as a result of its volume purchases. The Company routinely
negotiates stock rotation and price protection privileges with certain of its
major vendors. Additionally, DSS has featured the Company in its national
advertising campaigns.
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The Company also benefits from its ability to effectively dispose of excess
inventory of major manufacturers and master distributors due to the Company's
well developed sales channel. In this way, major distributors and manufacturers
rely on the Company as a release valve for inventory when excess supplies must,
due to contractual commitments, be shipped by such manufacturers to the
Company's master distributor vendors. In return for the Company's willingness to
accept such excess inventory, the Company is afforded pricing concessions and
rebates by the vendor. As a result, the Company receives favorable pricing from
master distributors who desire to reduce inventory growth or to be assured of
satisfying volume purchase commitments to manufacturers without adversely
impacting downstream pricing. Also, because the Company is relied upon by its
vendors to take their excess inventory, the Company is rewarded with
preferential allocation, allowing the Company to maintain availability and
increase its margins during component shortages. See "Risk Factors--Availability
of Components" and "--Foreign Trade Regulation."
The Company promptly pays its vendors, typically paying within 30 days from
receipt of invoice. This policy also encourages the Company's vendors to
expedite shipments to the Company as these shipments can be quickly converted to
cash flow.
INVENTORY MANAGEMENT
The Company's strong vendor relationships enable it to receive prompt and
consistent deliveries. As a result, the Company, unlike many resellers of
Computer Products, maintains a very limited inventory, and avoids many of the
costs associated with the traditional distribution model, including capital
costs associated with the warehousing of products, obsolescence costs, inventory
finance costs, the costs of computer inventory and tracking systems, and the
costs associated with the need to employ personnel for stocking and shipping
duties.
Unlike master warehousing distributors who supply the Company, the Company
has the added flexibility of not being required to maintain large inventories to
achieve its favored pricing. The Company believes that although the pricing it
receives is not as favorable as the pricing received by master warehousing
distributors, the Company benefits by avoiding the need to stock and finance
often rapidly depreciating Computer Products. In the Company's judgment, it is
often more cost effective to purchase Computer Products from its vendors on an
as-needed basis than to stock the quantities of parts required to receive volume
discounts available to the Company's vendors.
The Company is leanly staffed and focuses on rapid inventory turns. The
Company's warehouse is 4,000 square feet and, as of September 30, 1997, employed
21 people. In the first six months ended September 30, 1997, the Company shipped
$28.1 million of Computer Products, turning inventory 9.9 times.
Rather than merely focusing on price discounts from vendors, the Company has
negotiated favorable RMA terms with its vendors permitting rapid replacement of
parts returned by customers. Rapid replacement of such parts, allows the Company
to reduce inventory costs (by increasing the speed of inventory turns) and
improves customer satisfaction. See "Risk Factors--Risk of Product Returns."
The Company also closely coordinates its sales efforts and procurement,
particularly in the area of high volume parts such as computer drives. In many
cases, entire shipments of products are already sold or under order by the
Company's customers prior to their purchase by the Company.
CASH MANAGEMENT
The Company has traditionally collected its receivables in 21 days or less
while generally paying its key vendors and the Company's Finova Line in 30 days,
thereby allowing the Company to finance its growth at low cost. At December 1,
1997, the Company had vendor credit lines and a credit facility aggregating
$16.5 million, consisting of a $7.5 million under the Finova Line and
approximately $9.0 million in unsecured
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vendor credit. Under the Finova Line, the Company orders product from vendors
approved by Finova and agrees to pay Finova within 30 days of purchase of the
ordered products. Unless the Company fails to pay Finova within this 30 day
period, all finance costs associated with this line are charged by Finova to the
Company's vendor. The Company also maintains its margins by carefully screening
the credit records of its new and existing customers and by requiring check
guarantees from almost all smaller customers who pay by check.
ACSA GROWTH STRATEGY
The Company intends to create a new high volume, custom system and software
configuration solution attractive to major computer system sellers, installers
and end-users both domestically and internationally. The ACSA Solution is
intended to replace a manual process with an automated assembly line. The
Company intends to complete construction of and to equip its first ACSA Center
with a portion of proceeds of this Offering. The Company's planned ACSA Centers
will introduce its integrated, rapid, low-cost, automated custom software
configuration solution to a market burdened by slow, high-cost, labor-intensive
manual software configuration methods.
The Company intends to market the ACSA Solution to the Company's base of
Computer Products customers and vendors and create strategic alliances with
joint venture partners and licensees in domestic and overseas markets.
Establishing joint ventures with well positioned partners is expected to benefit
the Company by reducing capital expenditures required from the Company for each
ACSA Center launch, as well as by providing the Company with market presence
established by the Company's selected partners. This initiative also is expected
to result in increased volume to the Company's systems sales, thereby providing
the Company's traditional business with a more favorable sales mix and improved
operating results. The Company also intends to utilize management's extensive
network of domestic and foreign contacts to explore possible acquisition
opportunities. The Company is exploring joint ventures with potential partners
identified in Asia, but is not currently negotiating any acquisition
opportunities. There can be no assurance that the Company will successfully
establish any joint ventures or identify any acquisition opportunities or that
if such opportunities are presented that they will be on terms and conditions
acceptable to the Company.
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THE ACSA MARKET
The market for fully-configured computer systems is both diverse and
expanding. Distribution channels are already established and include:
- OEMs and ISVs
These vendors provide solutions to vertical markets and must provide
turnkey systems that are heavily customized to their marketplace
requirements. These vendors have historically provided integration
services in addition to their primary products to ensure delivery of the
complete product to their customer. However, due to their small size and
scope of services, these vendors find it very difficult to offer
cost-effective, quality integration services--often providing these
services at a loss. The Company intends to offer these vendors a more
profitable, higher quality alternative.
- SIs
These markets represented an annual market of $54 billion in 1994,
according to a 1996 study by International Data Corporation ("IDC")
entitled, "The Outlook for the Services Industry." It is estimated by IDC
that system integration services will grow at a compound annual growth
rate of over 36%, and represent the fastest growing segment of the
computer-related services market. IDC predicts 4,000,000 upgrades to
Microsoft Windows 95-TM- platforms this year alone. At an average price of
$40 per desktop for turnkey system assembly, the current market potential
for these new systems alone is approximately $320 million and will grow to
over $485 million by fiscal year 1999.
- Federal and State Government
The government marketplace for technology is the largest in the world. The
United States Government is expected to purchase $25 billion of computer
equipment and services. State and local governments are expected to
purchase an additional $30 billion. In a 1995 study, the Software
Publishers Association ("SPA") found that education institutions were
spending $1 billion annually on technology, but that more than 50 percent
of the over 5.5 million computers were obsolete and unable to access the
Internet. The government marketplace represents a market segment slightly
larger in potential than the system integrators market (although some
overlap may occur in the estimated market sizes).
- International Emerging Markets
ASIA/PACIFIC REGIONAL MARKETS. A recent IDC study found that almost 17
million systems will be shipped in the Asia/Pacific Region in 1996, "which
will allow the region to substantially outpace worldwide PC market growth
by 16%." A study conducted in April 1997 by the SPA found that unit sales
were up 73% in 1996, with a 79% increase in the fourth quarter,
demonstrating the increasing growth rates throughout the year. Based upon
the studies reported above, the Asia/Pacific region represents the largest
potential market for sales increases in the Company's distribution and
system assembly services, roughly twice as large in annual volume and
growth rate as the systems integration or U.S. government market sectors.
LATIN AMERICAN MARKETS. An April 1997 study by SPA found that unit sales
in Latin America grew by 78% in 1996, with growth in the fourth quarter
exceeding 110%. The strongest country in both studies was Brazil, which
represented more than 40% of the growth. Another study by IDC confirmed
that Latin America is undergoing unprecedented growth in system demand.
According to this study, Latin American users are seeking lower-cost ways
to increase network capacity and flexibility. The study also found that
growth in the market is expected to remain in the double-digits through
the end of the millennium, stimulated from continued corporate network
re-engineering, the move to client/server and multimedia applications, and
with increasing impetus coming from the Internet.
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THE ACSA OPPORTUNITY
The Company believes that ACSA Solution and the automated methodology it
represents will enable it to successfully expand on its existing systems and
Computer Products sales and achieve higher margin sales of the ACSA services as
an increasing percentage of total revenues. Currently, most SIs and VARs are
unable to offer, and most corporate and institutional buyers with large numbers
of networked servers, PCs or workstations are unable to procure, systems with
non-uniform preconfigured software. For instance, a hypothetical purchaser of
1,000 workstations cannot presently specify diverse software configurations for
each workstation without incurring the potentially prohibitive cost of
labor-intensive custom software installation and configuration. The Company
estimates that a typical manual assembly and software configuration process for
custom systems requires three to five hours per workstation, excluding time
required for re-builds due to inexperienced labor or accidental typographical
errors. Consequently, these enterprises either specify uniform software
configurations for each workstation, thereby depriving some end-users of
valuable software applications while unnecessarily purchasing licenses for
others, or bear the high cost of manual software configuration for each
non-standard setup. As a result, many computers are installed with less than
optimal software configuration and any necessary custom software configuration
is provided by high cost consultants or management information systems staff.
The Company believes that the ACSA Solution will enable the Company to
successfully offer the first single-sourced, high volume, fully automated
computer assembly and custom software configuration service that uniquely
configures each workstation.
In marketing system assembly and integration services to VARs, OEMs, SIs and
ISVs, the Company expects that the planned ACSA Solution will enable the Company
to enjoy a significant advantage over traditional system configurators who
currently offer automated software configuration for only a limited subset of
business software applications and who are presently unable to offer custom
software configuration services. See "Risk Factors--Lengthy Sales and
Implementation Cycles for ACSA" and "-- Competition."
The Company believes that its relationships with customers and vendors in
the Computer Products channel provides it with an ideal platform to aggressively
explore and successfully market the ACSA Solution to OEMs, ISVs, VARs and SIs.
Historically the systems integration market has been heavily dependent on these
vendors for its computer and software procurement needs. The Company expects
such dependence to increase as corporate and government information technology
departments are under increasing pressure to outsource their network and
personal computer configuration operations to shorten customer delivery time,
reduce labor cost, better manage the uncertainties of component pricing and
improve the quality control process.
THE ACSA SOLUTION
The Company is assembling technologies to automate the process of custom
configuration and integration in ACSA Centers of entire system solutions for its
customers. The technology to be employed by each ACSA Center is based upon
successful systems in use in flexible manufacturing environments. The ACSA
Center automation process will move components to each unskilled worker to be
assembled and loaded using the Integrator's Workbench Product Series ("IWPS")
software created by CASI and licensed by the Company. See "Risk
Factors--Dependence on CASI for Developments and Enhancement of Configuration
Software" "--Conflicts of Interests". The IWPS "Configurator" component
automates the loading and personalized setup of workstations, servers and
network devices, saving significant labor costs and ensuring accurate and
consistent installations. The Company believes that units coming off the
automated assembly line can be uniquely configured at the rate of up to 18 units
per hour. The ACSA Centers are expected to enable the Company to:
- Meet customer demands for custom systems utilizing the latest technologies
where the assembly is outsourced but the customer closely controls the
design and software configuration
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- Shorten the time required to assemble complex, custom solutions
- Eliminate up to 80% of the costs of manual labor normally associated with
custom software loading and configuration.
- Obtain ISO 9000 certification for systems assembly processes
- Construct or have joint venture partners construct permanent or temporary
ACSA Centers for customers
Even assuming that the manual laborers are able to produce consistent,
error-free configurations, the ACSA Center is expected by the Company to be able
to provide significant increases in productivity. The Company believes that a
fully operational ACSA Center will be able to configure 72 machines in the time
a manual laborer takes to configure one. This technology is intended to enable
the Company's customers to outsource their procurement, warehousing, assembly,
staging, and shipping processes. By implementing manufacturing processes that
automate the assembly of custom systems, the Company intends to position itself
as a low cost, high value provider of outsourcing services to the systems
distribution and end-user markets. The Company has commenced construction of two
assembly lines at its first ACSA Center located in the City of Industry,
California which can support up to 16 assembly lines. Construction of its first
ACSA Center is expected to be completed as of May 1998. See "Facilities," and
"Risk Factors --First ACSA Center."
Each ACSA Center assembly line is modularly designed to enable the Company
and its customers to realize high productivity and profits from varying job lot
size and location. Highest optimization is reached in configurations of eight
assembly lines, however these may be combined to create larger facilities, or
scaled back to create smaller ones with corresponding increases or decreases in
labor and productivity. ACSA Centers can be located in a central facility, or be
constructed at a customer's location in a few weeks.
COMPETITION
The markets for the Company's products and services are extremely
competitive and is characterized by rapid and constantly changing market
conditions, price fluctuations and technological change. Pricing is very
aggressive and the Company expects pricing pressures to continue. The Company
competes with a large number and wide variety of resellers of Computer Products,
including traditional personal computer retailers, computer superstores,
consumer electronics and office supply superstores, mass merchandisers, national
direct marketers (including VARs and specialty retailers, distributors,
franchisers, manufacturers and national computer retailers which have commenced
their own direct marketing operations to end-users). Many of these companies
compete principally on the basis of price and may have lower costs than the
Company. Many of the Company's competitors are larger, have substantially
greater resources and offer a broader range of services than does the Company.
The Company competes with, among others, CompuCom Systems, Inc., En Point
Technologies, Inc. and Vanstar Corp. in the Computer Products distribution
market.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most if not all of these factors, there can be no assurance that it
will continue to do so in the future. The industry has come to be characterized
by aggressive price cutting, and the Company expects that pricing pressures will
continue to increase in the foreseeable future. In addition, the Computer
Products industry is characterized by rapid changes in technology and associated
inventory and product obsolescence, rapid changes in consumer preferences, short
product life cycles and evolving industry standards. The Company will need to
continually provide competitive prices, superior product selection and delivery
response time in order to remain competitive. If the Company were to fail to
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compete favorably with respect to any of these factors, the Company's business
and operating results would be adversely affected.
CASI and/or Glasgal may directly enter into the Company's integration and
configuration markets using the software the Company has licensed from CASI.
While no operating division or subsidiary of Glasgal is currently competing in
the Company's markets, there can be no assurance that Glasgal will not decide to
directly compete with the Company in the future. Further, the terms of CASI's
license allow CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. See "Risk
Factors--Conflicts of Interest."
The primary competition for the ACSA Centers will most likely be large
computer manufactures such as IBM Corp. and Compaq Computer, Inc. which provide
custom configuration and automated software configuration for standardized
systems, large distributors such as Ingram Micro Inc., Vanstar Corp., Tech Data
Computer and CompuCom Systems, Inc. in the systems integration and network
services market, network software and equipment providers such as Cisco Systems
Inc. that sell networking hardware and offer automated software configuration to
ensure compatibility between networks and hardware, and the internal departments
within the target markets currently performing hardware and/or software
configuration, and consulting and integration companies which offer manual
software configuration services. There are also retail chains such as Comp USA
and MicroAge that offer configuration and distribution services. These
competitors currently offer configuration services primarily for STANDARDIZED
solutions, based upon generic configurations for limited numbers of products.
While some of these competitors offer the high level of customization available
from a ACSA Center, they do so at high hourly rates. Although no assurance can
be given, the Company believes that leveraging its manufacturing process and
licensed proprietary software will enable it to offer increased variety and
customization with significant improvements in response times at prices below
these competitors standardized solutions. There can be no assurance that the
Company will be able to compete successfully against existing competitors or
future entrants into the market. See "Risk Factors--Competition."
EMPLOYEES
As of December 15, 1997, the Company had 22 full time employees. At that
time, the Company employed eight sales, two technical support, five
administrative and finance, three customer service and four warehousing and
delivery related personnel. The Company does not have any unionized employees
and believes its relationship with its employees is satisfactory.
The Company's expansion may significantly strain the Company's management,
financial and other resources. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company's operating results.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurances that the
Company will be successful in retaining or recruiting key personnel. See "Risk
Factors--Management of Growth."
FACILITIES
The Company's corporate headquarters is located in City of Industry,
California. The Company leases approximately 6,200 square feet of office and
warehousing space, which lease expires on April 30, 1998.
The Company has entered into a lease for approximately 21,900 square feet of
office and warehouse space, located in the City of Industry. The Company expects
to move its operations into its new premises by February 1, 1998. The Company
believes the increased space will more adequately meet the Company's
35
<PAGE>
current needs. The Company believes that if needed, additional office space will
be available on acceptable terms in the future.
The Company intends to use approximately $300,000 of the net proceeds from
the Offering to complete construction of and to equip its first ACSA Center at
this facility. It is expected that the construction will require a substantial
time commitment of certain members of management. The Company expects to
complete the first ACSA Center as of May 1998. Any delays in completion of the
first ACSA Center could result in delays in the commencement of sales of
assembly and custom software configuration services. There can be no assurance
that the Company will be able to complete the ACSA Center at the budgeted price.
Additionally, there can be no assurance that the ACSA Center will be available
on time or that the Company will be successful in timely hiring and training
engineers and technicians necessary to commence operations of the ACSA Center.
Any such delays would have a material adverse effect upon the Company's
business, operating results and financial condition. See "Risk Factors --First
ACSA Center."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company, their ages and present
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------------------- --- -------------------------------------
<S> <C> <C>
Max Toghraie..................................... 35 Chief Executive Officer, Director
James Ung........................................ 36 President, Director
Mei Yang......................................... 35 Secretary, Treasurer, Director
David Tobey...................................... 37 Director
Nancy Hundt...................................... 29 Director
</TABLE>
MAX TOGHRAIE, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Toghraie has served
as the Chief Executive Officer of the Company since September 1997, and as a
director since April 1997. He has also served as a consultant to the Company
since its inception. Mr. Toghraie served as a trading group manager for D'Argent
Inc., an international trading company from 1992 through December 1996. During
the past 5 years, he has been involved with various privately held development
stage companies as a director and/or a consultant.
JAMES UNG, PRESIDENT AND DIRECTOR. Mr. Ung is a co-founder of the Company
and has served as its President since April 1997 and as a director since the
Company's inception. From February 1992 until joining the Company, Mr. Ung was
Director of Operations of American Systec Corporation, a privately held systems
distribution and configuration company in Brea, California. From 1989 to 1992,
Mr. Ung served as Vice President of Marketing at PC Systems Design, a California
based systems integration and distribution company. James Ung is married to Mei
Yang.
MEI YANG, SECRETARY, TREASURER AND DIRECTOR. Ms. Yang has served as a
director of the Company since its inception. Ms. Yang has served as a secretary
and treasurer of the Company since March 1997. From 1990 to 1996, Ms. Yang was
the Chief Operating Officer of American Systec Corporation. At American Systec
Corporation, she was responsible for the accounting department and the
development of the domestic sales and marketing infrastructure. Ms. Yang was the
accounting manager at the Business Integration Group from 1987 to 1990. Mei Yang
is married to James Ung.
DAVID TOBEY, DIRECTOR. Mr. Tobey has served as a director of the Company
since July 1997. Mr. Tobey is the founder and has served as President and CEO of
CASI from February 1995 to the present and is a principal stockholder of CASI, a
subsidiary of Glasgal, a NASDAQ traded company. CASI is a supplier of
configuration management software for system deployment and customization. He
also founded and served as the Executive Director of the Integrating Technology
Consortium, an integration standards, certification, and education organization
focused on the hospitality industry from June 1994 to October 1997. Prior to
founding CASI in February 1995, Mr. Tobey was the Senior Vice President of
Corporate Services from April 1993 to April 1995 for Hotel Information Systems
where he was responsible for articulating and managing the development of
strategic initiatives and corporate operations in marketing, product
development, and professional services. From September 1986 to April 1993, Mr.
Tobey was the founder and served as Chairman/CEO of Stratcon, a systems
integration company in the legal market and later as CTO of automation Partners,
into which Stratcon merged in 1990. Mr. Tobey has also consulted with numerous
technology and service companies and is a frequent speaker at international
conferences on technology and management topics.
NANCY HUNDT, DIRECTOR. Ms. Hundt has served as a director of the Company
since its inception. Ms. Hundt is a co-founder of the Company. She has a
background in the optical industry and has served as a representative of the
American Board of Opticianery, an optical industry retail group. Ms. Hundt acts
as
37
<PAGE>
a consultant to the optical industry and has served over the last five years as
Chief Operating Officer of Academy Optical, Inc.
INDEPENDENT DIRECTORS
Directors are elected for one year terms which expire at the next annual
meeting of Shareholders. Officers are elected annually by the Board of Directors
to hold office until the first meeting of the Board following the next annual
meeting of shareholders and until their successors have been elected and
qualified. Upon consummation of the Offering, the Company's Bylaws provide that
the Board of Directors will be divided into two classes, Class 1 and Class 2,
Class 1 to be comprised of three directors, and Class 2 to be comprised of four
directors. At each annual meeting of shareholders, successors of the class of
directors whose term expires at that annual meeting will be elected for a
two-year term or until their successors have been elected and qualified.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal year
ended March 31, 1997, to the Company's former President and Vice President of
Operations. No other officer, director, or employee earned more than $100,000
for the fiscal year ended March 31, 1997. The Company operated without a Chief
Executive Officer in the fiscal year ended March 31, 1997. In September 1997,
the Company hired Max Toghraie to serve as Chief Executive Officer at an annual
salary of $192,000. See "--Employment Agreements."
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
--------------------------------------
NAME AND PRINCIPAL POSITION ANNUAL SALARY OTHER COMPENSATION
- ---------------------------------------------------------- ------------- -----------------------
<S> <C> <C>
Tommy Tang(2), President.................................. $ 132,000 $ 0
Sherry Haynes(3), Vice President-Operations............... $ 70,000 $ 0
</TABLE>
- ------------------------
(1) The named executive officers did not receive any annual compensation, stock
options, restricted stock awards, stock appreciation rights, long term
incentive plan payouts, or any perquisites or other personal benefits,
securities or property that exceeded the lesser of $50,000 or 10% of the
salary and bonus for such officer during the fiscal year ended March 31,
1997.
(2) Mr. Tang resigned from the Company in May 1997 and his position was assumed
by Mr. Ung, who is being compensated at a rate of $192,000 per annum. See
"--Employment Agreements"
(3) Ms. Haynes resigned from the Company in June 1997 and her duties were
assumed by Mei Yang, who is being compensated at a rate of $72,000 per
annum. See "--Employment Agreements."
BOARD COMMITTEES
AUDIT COMMITTEE. Following the Offering, the Company's Board of Directors
intends to establish an Audit Committee. The Audit Committee's functions will
include recommending to the Board of Directors the engagement of the Company's
independent certified public accountants, reviewing with those accountants the
plan and results of their audit of the financial statements and determining the
independence of the accountants.
COMPENSATION. Following the Offering, the Company's Board of Directors
intends to establish a Compensation Committee. The Compensation Committee will
review and makes recommendations with respect to compensation of officers and
key employees, and will be responsible for the grant of options and other awards
under the Company's Stock Option Plan. The current executive's salaries were set
by the Board. See "--Stock Option Plan."
38
<PAGE>
DIRECTOR COMPENSATION
Nonemployee directors of the Company currently are paid $500 for their
personal attendance at any meeting of the Board and $100 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Max Toghraie to
serve as Chief Executive Officer. The agreement is for an initial term of five
years commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Mr.
Toghraie is entitled to an annual base salary of $192,000 and has been issued
options to to purchase 126,046 shares of the Company's Common Stock at $2.70 per
share pursuant to the Company's Stock Option Plan. The Company will also provide
Mr. Toghraie with other customary benefits, including health, life and
disability insurance, an automobile allowance and reimbursement for ordinary
business expenses. If Mr. Toghraie's employment is terminated "without cause,"
all of his options immediately vest, and he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement, and 24 months.
The Company has entered into an employment agreement with James Ung to serve
as President. The agreement is for an initial term of five years commencing July
1, 1997 and will automatically be extended for consecutive periods of one year
unless the Company elects to terminate the agreement. Mr. Ung's base salary from
July 1, 1997 until September 30, 1997 was $144,000 per annum, and effective
September 30, 1997 increased to $192,000. Mr. Ung has been issued options to
purchase 98,645 shares of the Company's Common Stock at $2.70 per share pursuant
to the Company's Stock Option Plan. The Company will also provide Mr. Ung
customary benefits, including health, life and disability insurance, an
automobile allowance and reimbursement for ordinary business expenses. If Mr.
Ung's employment is terminated "without cause" he will be entitled to receive a
payment equal to the then effective base salary for the lesser of the remainder
of the term of the agreement and six (6) months.
The Company has entered into an employment agreement with Mei Yang to serve
as Secretary and Treasurer. The agreement is for an initial term of five years
commencing July 1, 1997 and will automatically be extended for consecutive
periods of one year unless the Company elects to terminate the agreement. Ms.
Yang's base salary from June 1, 1997 until September 30, 1997 was $44,000 per
annum, and, effective September 30, 1997 increased to $72,000. Ms. Yang has been
issued options to purchase 27,404 shares of the Company's Common Stock at $2.70
per share pursuant to the Company's Stock Option Plan. The Company will also
provide Ms. Yang customary benefits, including health, life and disability
insurance, an automobile allowance and reimbursement for ordinary business
expenses.
STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Stock Option Plan") in
July 1997. Each officer, other employee, director or consultant of the Company
or any of its future subsidiaries is eligible to be considered for the grant of
awards under the Stock Option Plan. A maximum of 500,000 shares of Common Stock
may be issued pursuant to awards granted under the Stock Option Plan, subject to
certain adjustments to prevent dilution. Any shares of Common Stock subject to
an award which for any reason expires or terminates unexercised are again
available for issuance under the Stock Option Plan. The Stock Option Plan
terminates in 2007 and no option may be granted under the Stock Option Plan
after July 1, 2007, although options previously granted may be thereafter
amended consistent with the Stock Option Plan.
ADMINISTRATION. The Stock Option Plan will be administered by the Company's
Board of Directors or by a committee whose members serve at the pleasure of the
Board. The Board intends to appoint the
39
<PAGE>
Company's Compensation Committee to administer the Plan after the Offering.
Subject to the provisions of the Stock Option Plan, the Board has full and final
authority to select to whom awards will be granted, to grant the awards and to
determine the terms and conditions of the awards and the number of shares to be
issued pursuant thereto.
The Stock Option Plan authorizes the Board to enter into any type of
arrangement with an eligible award and recipient that, by its terms, involves or
might involve the issuance of (i) shares of Common Stock, (ii) an option,
warrant, convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(iii) any similar security or benefit with a value derived from the value of the
Common Stock. No person may receive awards representing more than 40% of the
number of shares of Common Stock covered by the Stock Option Plan (i.e., 200,000
shares).
PAYMENT. The Board shall determine the extent to which awards shall be
payable in cash, shares of Common Stock or any combination thereof.
AWARDS. Stock awards under the Stock Option Plan are not restricted to any
specified form or structure and may include arrangements such as sales, bonuses
and other transfers of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock for
any lawful consideration, including cash payment, services rendered, or the
cancellation of indebtedness.
The Board may amend or terminate the Stock Option Plan at any time and in
any manner, subject to the following: (i) no recipient of any award may, without
his or her consent, be deprived of the award or of any of his or her rights
under or relating to the award as a result of the amendment or termination; and
(ii) if any rule or regulation promulgated by the Securities and Exchange
Commission (the "Commission"), the Internal Revenue Service, other applicable
law, or any national securities exchange or quotation system upon which any of
the Company's securities are listed requires that the amendment be approved by
the Company's shareholders, then the amendment will not be effective until it
has been approved by the Company's shareholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation, as amended, (the "Articles")
include a provision that eliminates the personal liability of its directors to
the Company and its shareholders for monetary damages to the fullest extent
permissible under California law. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derives an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of a serious injury to the Company or
its shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders, (vi) under Section 310 of the California
Corporations Code (the "California Code") (concerning contracts or transactions
between the Company and a director) or (vii) under Section 316 of the California
Code (concerning directors' liability for improper dividends, loans and
guarantees). The provision does not extend to acts or omissions of a director in
his capacity as an officer. Further, the provision will not affect the
availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation of a director's fiduciary duty to the
Company or its shareholders.
40
<PAGE>
The Company's Articles also include an authorization for the Company to
indemnify its agents (as defined in Section 317 of the California Code), through
bylaw provisions, by agreement or otherwise, to the fullest extent permitted by
law. Pursuant to this provision, the Company's Bylaws, as amended, provide for
indemnification of the Company's directors, officers, employees and other
agents. In addition, the Company, at its discretion, may indemnify persons whom
the Company is not obligated to indemnify. The Bylaws also allow the Company to
enter into indemnity agreements with individual directors, officers, employees
and other agents. The Company has entered into indemnification agreements
designed to provide the maximum indemnification permitted by law with all the
directors and executive officers of the Company. These agreements, together with
the Company's Bylaws and Articles, may require the Company, among other things,
to indemnify these directors and executive officers against certain liabilities
that may arise by reason of their status or service as directors or executive
officers (other than liabilities resulting from willful misconduct of a culpable
nature), to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification, and to obtain directors' and
officers' insurance if available on reasonable terms. The Company intends to
purchase and maintain directors' and officers' liability insurance.
Section 317 of the California Code, the Company's Bylaws and the Company's
indemnification agreements with its directors and executive officers make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify those persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
41
<PAGE>
CERTAIN TRANSACTIONS
David Tobey, a director of the Company, is the founder, and the current
President, Chief Executive Officer and a principal stockholder of CASI. CASI is
a subsidiary of Glasgal Communications, Inc. The Company and CASI have entered
into (i) a license agreement (the "CASI License") pursuant to which the Company
has received a worldwide, perpetual, royalty-free, nonexclusive (except as to
the countries comprising South America (excluding Central America) and Malaysia
where the license is exclusive for a term of five years) and non-transferable
license to reproduce and use CASI's IWPS software including CASI's Configurator
and router software products, and (ii) a reseller agreement (the "Reseller
Agreement") pursuant to which the Company may market, distribute and support
CASI's products throughout the world. The Company paid CASI a one-time license
fee of $1,100,000. The license fee was paid (i) by delivering to CASI a
non-interest bearing promissory note in the principal amount of $950,000 (the
"CASI Note"), and (ii) a cash payment of $150,000 funded by a loan to the
Company in such amount by an officer of Glasgal (the "Glasgal Loan") described
below. In connection with its license of the Configurator Software from CASI,
the Company issued to CASI a contingent warrant (the "CASI Warrant") exercisable
if the Company defaults on payment of the $950,000 principal amount due under
the CASI Note. Under the CASI Note, CASI's sole remedy for a payment default is
to apply any amount then due and unpaid under the CASI Note to the purchase of
the Company's Common Stock at a price of $4.50 per share. The CASI Note bears
default interest at a rate of 5% per annum. The exercise price of the CASI
Warrant was determined by negotiation between the Company and CASI and should
not be construed to be predictive of or to imply that any price increases in the
Company's securities will occur. The CASI Warrant does not confer upon the
Warrant holder any voting or other rights of a shareholder of the Company. The
Company will fully repay the Glasgal Loan and the CASI Note, out of the proceeds
of this offering. Upon delivery to CASI of the CASI Note, the CASI License was
fully paid and the Company has no further license fee obligations. Under the
CASI License, the Company is entitled to receive maintenance for the
Configurator Software for a fee of $25,000 per annum, payable in equal quarterly
installments. Maintenance is limited to debugging and delivery to the Company of
any enhancements or upgrades to the Configurator Software used internally by
CASI or released by CASI to its customer base. The Company is also entitled to
request that CASI provide enhancements and additional features on CASI's
licensed Configurator system specified by the Company. CASI may develop such
enhancements and features at CASI's expense and incorporate them as part of
CASI's generally released Configurator Software, or, if CASI declines to develop
the enhancements and features at its own expense, the Company is able to require
CASI to perform such development services at preferential rates and any
resulting work product of CASI will be owned by the Company. If CASI ceases to
provide support or enhancements or otherwise fails to perform its obligations to
the Company, the Company's remedies include access to CASI's source code for the
Configurator software. The Company's license to the Configurator Software
includes a license to modify and maintain the source code from and after such
time, if any, as the Company receives access to the Configurator Software source
code. See "Risk Factors--Conflicts of Interests."
In connection with the Glasgal Loan, the Company executed a promissory note
(the "Glasgal Note") in favor of the officer of Glasgal who made the Glasgal
Loan. The Glasgal Note provides that the Company is obligated to pay $50,000 on
November 31, 1997 and $100,000 on February 28, 1998; provided, however, that if
the Company consummates an initial public offering (an "IPO") of its securities
pursuant to a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, $100,000 of the proceeds of such
IPO shall be immediately applied to prepayment $100,000 due to be paid on
February 28, 1997. The Glasgal Note bears interest at a rate of 10% per annum,
and accrued interest is due with the payments indicated above. In the event that
the Company completes an IPO prior to February 28, 1997 and fails to pay the
Glasgal Note in full by that date, or, the Glasgal Note is not paid in full on
or prior to February 28, 1997 in any event, the Glasgal Note shall be converted
into such number of shares of Common Stock of the Company as shall equal the
principal amount then outstanding plus accrued interest divided by a fraction,
the numerator of which shall equal the greater of $20,000,000 or the
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<PAGE>
fair market value of the Company, and the denominator of which shall be the
number of shares of Common Stock of the Company outstanding immediately prior to
such conversion.
Under the Reseller Agreement, the Company has an exclusive right for a
period of five years to resell CASI's licensed software in South America
(excluding Central America) and Malaysia and a non-exclusive worldwide right (i)
to market, distribute, license and support the CASI's Configurator software in
object-code form, and (ii) to use CASI's Configurator software to provide
services to the Company's customers and sublicensees. CASI has agreed that it
will not enter into any agreement with a third party which provides for the
right to license or resell the CASI's Configurator software products in the
countries comprising Asia, the Pacific Rim, Japan or Australia without allowing
the Company a first right of refusal to create an agreement with such third
party as a distributor and/or sub-licensee and/or first offering the Company the
right to license or resell on terms and conditions, including price, equivalent
to those contained in the proposed third party agreement. CASI has retained the
right to use its software in Malaysia and South America only for CASI's own
configuration centers.
The Company loaned approximately $40,000 aggregate principal amount to Mr.
Max Toghraie, the Chief Executive Officer of the Company and a director, in
exchange for a promissory note dated February 12, 1997, at a rate of 5.7% per
annum. The loan was fully repaid on June 16, 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,305 from Samax, a company owned by the mother of
Mr. Max Toghraie. For the six month period ended September 30, 1997, the Company
had sales of approximately $1.39 million to and purchases of approximately
$598,200 from Samax. At September 30, 1997, the Company had approximately
$201,400 and $0 included in trade receivables and accounts payable,
respectively, attributed to Samax.
The receivable from director at March 31, 1997 resulted from the purchase by
the Company of 200,000 shares and 100,000 warrants in Evolutions, Inc.
("Evolutions") which at March 31, 1997, was personally guaranteed by Max
Toghraie. Subsequent to June 13, 1997, the board of directors and shareholders
voted to release Max Toghraie from this guarantee as partial inducement for Max
Toghraie to accept additional management responsibilities at the Company,
including agreeing to become the chief executive officer. The Company has
determined, due to significant cash flow difficulties encountered by Evolutions,
that its investment is worthless. Accordingly, the Company has recognized a
one-time loss of $100,000 during the first quarter of 1997 which is included in
selling, general and administrative expenses.
In June 1997, Mr. James Ung and Ms. Mei Yang signed individual guarantees of
the Company's Finova Line.
On December 3, 1997, the Company executed a lease for approximately 21,900
square feet of office and warehouse space in the City of Industry, California.
The lease term is three years, and the base rent is $11,169 per month. On
December 3, 1997, James Ung and Mei Yang signed an individual guarantee (the
"Guarantee") of the Company's obligations under the lease, which Guarantee shall
terminate upon the earlier occurrence of (i) the date upon which the Company's
net worth exceeds 50% of the Company's net worth on the date of the Guarantee or
(ii) the date the Company becomes a public company.
The Company believes that, with the exception of the determination to
release Mr. Toghraie from his guarantee, the transactions described above were
on terms no less favorable to the Company than could have been obtained in arm's
length transactions from unaffiliated third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 1, 1997, certain information
concerning the beneficial ownership of Common Stock, by (i) each stockholder
known by the Company to own beneficially five percent or more of the outstanding
Common Stock, (ii) each director, (iii) each executive officer named in this
Prospectus (a "Named Executive Officer"), and (iv) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------
PERCENT OF TOTAL
------------------------
NAME AND ADDRESS OF DIRECTORS, NAMED BEFORE AFTER
EXECUTIVE OFFICERS AND 5% SHAREHOLDERS NUMBER OFFERING OFFERING
- --------------------------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Max Toghraie(2) ................................................................. 45,298 * *
254 Cedar Heights
Thousand Oaks, CA 91360
James Ung and Mei Yang(3) ....................................................... 2,237,417 46.65% 33.92%
2010 E. Roundtree Court
Walnut, CA 91789
Nancy Hundt(4) .................................................................. 2,193,989 46.17% 33.48%
450 Belcaro
Agoura, CA 91301
David Tobey(5) .................................................................. 5,515 * *
1545 Shadowtree Ct.
Colorado Springs, CO 80921
All Executive Officers and Directors as a group (5 persons)(6)................... 4,482,219 92.46% 67.42%
</TABLE>
- ------------------------
* less than one (1) percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if he has the right to
acquire voting or investment power within 60 days. Except as otherwise
noted, each individual or entity has sole voting and investment power over
the securities listed.
(2) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
December 1, 1997.
(3) Mr. Ung and Ms. Yang are married. Includes 35,451 shares issuable upon the
exercise of options granted under the Stock Option Plan to Mr. Ung on July
1, 1997 exercisable at $2.70 per share within 60 days of December 1, 1997,
and 9,848 shares issuable upon the exercise of options granted under the
Stock Option Plan to Ms. Yang on July 1, 1997 exercisable at $2.70 per share
within 60 days of December 1, 1997, 1,096,059 shares owned by Mr. Ung, and
1,096,059 shares owned by Ms. Yang.
(4) Includes 1,871 shares issuable upon the exercise of options granted under
the Stock Option Plan on July 1, 1997 exercisable at $2.70 per share within
60 days of December 1, 1997.
(5) Shares issuable upon the exercise of options granted under the Stock Option
Plan on July 1, 1997 exercisable at $2.70 per share within 60 days of
December 1, 1997.
(6) Includes an aggregate of 97,983 shares issuable upon the exercise of options
granted under the Stock Option Plan on July 1, 1997 exercisable at $2.70 per
share within 60 days of December 1, 1997.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
without par value, and 2,000,000 shares of Preferred Stock, without par value.
At December 23, 1997, the Company had 27 holders of record of the Common Stock.
The following statements are brief summaries of certain provisions relating to
the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to vote
and have cumulative voting rights for the election of directors. The Articles of
Incorporation of the Company provide that at such time as the Company has (i)
shares listed on the New York Stock Exchange or the American Stock Exchange, or
(ii) securities designated for trading as a national market security on the
National Association of Securities Dealers Automatic Quotation System (or any
successor national market system) if the Company has at least 800 or more
holders of its Common Stock as of the record date of the Company's most recent
annual meeting of shareholders, the cumulative voting rights of shareholders
will cease. The holders of Common Stock are entitled to receive dividends
ratably when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled, subject to the rights of
holders of Preferred Stock issued by the Company, if any, to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision is made for each class of stock, if any, having
preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the shares of Common Stock issuable
pursuant to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
BRIDGE WARRANTS
The Bridge Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock. The exercise prices of the Bridge Warrants
was arbitrarily determined by the Company and the purchasers thereof and should
not be construed to be predictive of or to imply that any price increases in the
Company's securities will occur. The Bridge Warrants do not confer upon the
Bridge Warrant holder any voting or other rights of a shareholder of the
Company.
REGISTRATION RIGHTS
The 300,000 shares of Common Stock issued in the Bridge Financing and the
shares of Common Stock issuable upon exercise of the Bridge Warrants are
entitled to demand registration rights on one occasion, at the expense of the
Company, as well as "piggyback" registration rights with respect to any
45
<PAGE>
registration of equity securities of the Company for a period of five (5) years,
commencing November 26, 1998 (unless the Company files a Form S-8, S-4 or
comparable registration statement).
TRANSFER AGENT AND REGISTRATION
Continental Stock Transfer and Trust Company, New York, New York, is the
transfer agent and registrar for the Common Stock.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering the Company will have outstanding 6,550,000
shares of Common Stock (6,820,000 if the Underwriter's over allotment option is
exercised in full) not including shares issuable upon exercise of outstanding
options warrants. Of such shares 4,750,000 are subject to the resale limitations
contained in Rule 144 promulgated under the Securities Act. In general, under
Rule 144, as currently in effect, a person (or persons whose shares are
aggregated), with respect to restricted securities that satisfy a one-year
holding period, may sell within any three-month period a number of restricted
shares which does not exceed the greater of 1% of the then outstanding shares of
such class of securities or the average weekly trading volume during the four
calendar weeks prior to such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. Rule 144 also permits, under
certain circumstances, a person who is not an affiliate of the Company, to sell
restricted securities that satisfy a two-year holding period, without regard to
the volume or other resale limitations. The above is a brief summary of Rule 144
and is not intended to be a complete description of the Rule.
The "restricted" shares of Common Stock may in the future be eligible for
sale pursuant to Rule 144. Under lock-up agreements with the Underwriter, each
existing shareholder has agreed that he or it will not, directly or indirectly,
sell, assign or otherwise transfer any shares of Common Stock owned by it for a
period of (a) in the case of management and founding shareholders of the Company
who collectively hold 4,450,000 shares of Common Stock, a period of 18 months
after the effective date of the Registration Statement of which this Prospectus
is a part (the "Management Lock-Up Period") except with the Underwriter's prior
written consent, and (b) in the case of the holders of 300,000 shares of Common
Stock issued in the Company's Bridge Financing, a period of 12 months after the
effective date of the Registration Statement of which this Prospectus is a part,
and thereafter for an additional six (6) months, without the written consent of
the Underwriter (the "Bridge Holder Lock-Up Period"); provided, however, that
(i) the Management Lock-up Period shall immediately terminate if the average
closing bid price of the Common Stock, if the Common Stock is quoted on the
NASDAQ system, or the average closing sale price of the Common Stock, if the
Common Stock is listed on the American Stock Exchange, equals or exceeds $9.00
per share (subject to customary adjustments for stock splits, combinations,
consolidations and similar transactions) for any 30 consecutive calendar days,
and (ii) that, for twenty-four (24) months following the effective date of the
Registration Statement any sales of the Company's securities subject to the
lock-up agreements shall be made through the Underwriter in accordance with its
customary brokerage practices either on a principal or agency basis. Once the
lock-up agreements expire, all of the 4,750,000 shares of Common Stock will
become eligible for immediate sale, subject to compliance with the volume
limitations of Rule 144 by the holders of these shares.
UNDERWRITING
Joseph Stevens & Company, Inc. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firm commitment basis,
all of the Common Stock offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and that the
Underwriter may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions not in excess of
$ per share of Common Stock, of which amount a sum not in excess of
$ per share of Common Stock may in turn be reallowed by such dealers to
other dealers. After the initial distribution of the shares of Common Stock
offered hereby has been completed, the public offering price, concessions and
reallowances may be changed by the
47
<PAGE>
Underwriter. The Underwriter has informed the Company that it does not expect
sales to discretionary accounts by the Underwriter to exceed five percent of the
securities offered by the Company hereby.
The Company has granted to Underwriter an option, exercisable within 45 days
of the date of this Prospectus, to purchase from the Company at the offering
price, less underwriting discounts and the non-accountable expense allowance,
all or part of an additional 270,000 shares of Common Stock on the same terms
and conditions of this Offering for the sole purpose of covering
over-allotments, if any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Common
Stock underwritten, $30,000 of which has been paid to date.
In connection with this offering, the Underwriter and certain selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriter also may create a short position for the account of the Underwriter
by selling more Common Stock in connection with this Offering than it is
committed to purchase from the Company, and in such case may purchase Common
Stock in the open market following completion of this Offering to cover all or a
portion of such short position. The Underwriter may also cover all or a portion
of such short position, up to 270,000 shares of Common Stock, by exercising the
Over-Allotment Option. In addition, the Underwriter may impose "penalty bids"
under contractual arrangements whereby it may reclaim from a dealer
participating in this Offering for the account of the Underwriter, the selling
concession with respect to shares of Common Stock that are distributed in this
Offering but subsequently purchased for the account of the Underwriter in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the prices of the Common Stock at levels above that which
might otherwise prevail in the open market. None of the transactions described
in the paragraph is required, and if they are undertaken, they may be
discontinued at any time.
Each officer and director of the Company and all of the holders of the
issued and outstanding shares of Common Stock, other than the investors in the
Bridge Financing, have agreed (i) not to directly or indirectly, issue, offer to
sell, sell, grant an option for the sale of transfer, pledge, assign,
hypothecate, or otherwise encumber or dispose of (collectively, "Transfer"), any
securities issued by the Company, including shares of Common Stock or securities
convertible into or exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of Common Stock for a period of eighteen
(18) months from the effective date of the Registration Statement (the Lock-Up
Period), without the prior written consent of the Underwriter provided, however,
that the Lock-up Period shall immediately terminate if the average closing bid
price of the Common Stock, if the Common Stock is quoted on the NASDAQ system,
or the average closing sale price of the Common Stock, if the Common Stock is
listed on the American Stock Exchange, equals or exceeds $9.00 per share
(subject to customary adjustments for stocksplits, combinations, consolidations
and similar transactions) for any 30 consecutive calendar days, and (ii) that,
for twenty-four (24) months following the effective date of the Registration
Statement any sales of the Company's securities shall be made through the
Underwriter in accordance with its customary brokerage practices either on a
principal or agency basis. An appropriate legend shall be marked on the face of
certificates representing all such securities.
Each purchaser in the Bridge Financing has agreed (i) not to Transfer any
securities purchased by the investor in the Bridge Financing for a period of
twelve (12) months from the effective date of the Registration Statement and
thereafter for an additional period of six (6) months, without the consent of
the Underwriter, and (ii) that, for a period of twenty-four (24) months
following the effective date of the Registration Statement, any sales of the
securities purchased in the Bridge Financing shall be made through the
Underwriter in accordance with its customary brokerage practices either on a
principal or
48
<PAGE>
agency basis. An appropriate legend shall be marked on the face of the
certificates representing all such securities.
In connection with this Offering, the company has agreed to issue and sell
to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five (5) year Underwriter's Warrants
(the "Underwriter's Warrants") to purchase 180,000 shares of Common Stock. The
Underwriter's Warrants are exercisable at any time during a period of four (4)
years commencing twelve months after the effective date of the Registration
Statement at a price of [120% of the public offering price per share] per
share and are restricted from sale, transfer, assignment or hypothecation for a
period of twelve months from the date hereof, except to officers of the
Underwriter. The Shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are identical to those offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for adjustment
of the number of warrants and exercise price under certain circumstances. The
Underwriter's Warrants grant to the holders thereof and to the holders of the
underlying securities certain rights of registration of the securities
underlying the Underwriter's Warrants.
In connection with the Bridge Financing, the Company paid to the
Underwriter, as placement agent, $100,000 in cash as commissions and a
non-accountable expense allowance of $30,000. The Company also paid certain
expenses of the placement agent including the placement agent's legal counsel
fees and issued to the placement agent warrants (the Placement Agent's
Warrants") to purchase 35,000 shares of Common Stock at an exercisable price of
$3.00 per share commencing November 26, 1998. The Placement Agent's Warrants
will be canceled prior to this Offering.
The Company has also agreed that for five (5) years from the effective date
of the Registration Statement, the Underwriter may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that the Underwriter elects not to exercise it Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five (5) years. The Company has agreed to reimburse
the Underwriter's designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings, of the Board of Directors. The
Company has also agreed to retain the Underwriter as the Company's financial
consultant for a period of twenty-four (24) months from the date hereof and to
pay the Underwriter a monthly retainer of $2,000 all of which is payable in
advance on the closing date set forth in the Underwriting Agreement.
The Underwriting Agreement also provides that the Underwriter has a right of
first refusal for a period of eighteen (18) months from the date of this
prospectus with respect to any sale of securities by the Company or any of its
present or future subsidiaries resulting in gross proceeds of $6,000,000 or
less.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining such price, in addition to the prevailing
market conditions, included the history of and the prospects for the industry in
which the Company competes, the market price of the Common Stock, an assessment
of the Company's management, the prospects of the Company, its capital structure
and such other factors that were deemed relevant. The offering price does not
necessarily bear any relationship to the assets, results of operations or net
worth of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each agreement which are filed as exhibits to the Registration Statement. See
"Additional Information."
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock offered
by the Company upon sale will be duly and validly issued, fully paid and
non-assessable. Troop Meisinger Steuber & Pasich, LLP holds warrants to
49
<PAGE>
purchase 45,000 shares of Common Stock of the Company. Orrick, Herrington &
Sutcliffe LLP, New York, has acted as counsel to the Underwriter in connection
with certain legal matters relating to this Offering.
EXPERTS
The financial statements of the Company at March 31, 1997 and for the year
then ended, included in this Prospectus and Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits included
with the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
is qualified in its entirety by this reference. For further information about
the Company and the shares offered by this Prospectus, reference is hereby made
to the Registration Statement and exhibits included with the Registration
Statement. A copy of the Registration Statement, including exhibits, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N .W. Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file reports and other information with the Securities, and Exchange Commission
in accordance with its rules. These reports and other information concerning the
Company may be inspected and copied at the public reference facilities referred
to above as well as certain regional offices of the Securities and Exchange
Commission.
The Securities and Exchange Commission maintains a Web Site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http:\\www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited consolidated financial statements for each of the first
three quarters of each fiscal year.
50
<PAGE>
CUMETRIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of March 31, 1997 and September 30, 1997 (unaudited)..................................... F-3
Statements of operations for the period from April 2, 1996 (inception) to March 31, 1997 and the six month
periods ended September 30, 1996 and 1997 (unaudited).................................................... F-4
Statements of Changes in Shareholders equity for the period from April 2, 1996 (inception) to March 31,
1997 and the six month period ended September 30, 1997 (unaudited)....................................... F-5
Statements of Cash Flows for the period from April 2, 1996 (inception) to March 31, 1997 and the six month
periods ended September 30, 1996 and 1997 (unaudited).................................................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix, Inc.:
We have audited the accompanying balance sheet of CUMETRIX, INC. (a
California corporation-- formerly Data Net International, Inc.) as of March 31,
1997, and the related statement of operations and shareholders' equity and cash
flows for the period from April 2, 1996 (inception) to March 31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cumetrix, Inc. as of March
31, 1997 and the results of its operations and its cash flows for the period
from April 2, 1996 (inception) to March 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 13, 1997
F-2
<PAGE>
CUMETRIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
MARCH 31, -------------
ASSETS 1997
- -------------------------------------------------------------------------------------- ----------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 479,796 $ 349,641
Trade receivables, net of allowance for doubtful accounts of $2,000 at March 31,
1997 and $38,000 at September 30, 1997............................................ 853,090 4,815,825
Receivables from related party...................................................... 39,700 --
Inventories......................................................................... 331,559 2,119,319
Deferred taxes...................................................................... 12,000 32,570
Prepaid expenses.................................................................... 5,318 14,199
----------- -------------
Total current assets............................................................ 1,721,463 7,331,554
----------- -------------
FIXED ASSETS, net 32,278 38,995
----------- -------------
OTHER ASSETS:
Capitalized purchased software costs................................................ -- 1,100,000
Receivable from director............................................................ 100,000 --
Other............................................................................... 1,500 28,446
----------- -------------
Total Assets.................................................................... $ 1,855,241 $ 8,498,995
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 1,455,139 $ 6,095,419
Accrued expenses.................................................................... 87,274 101,095
Income taxes payable................................................................ 21,500 231,479
Current portion of long-term debt................................................... 3,390 1,103,547
----------- -------------
Total current liabilities....................................................... 1,567,303 7,531,540
----------- -------------
LONG-TERM DEBT, net of current portion................................................ 12,574 10,758
----------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized, 2,000,000 shares
Issued and outstanding, none...................................................... -- --
Common stock, no par value: Authorized, 20,000,000 shares
Issued and outstanding, 4,384,236 at March 31, 1997 and 4,450,000 at September 30,
1997.............................................................................. 250,000 550,000
Retained earnings................................................................... 25,364 406,697
----------- -------------
Total shareholders' equity...................................................... 275,364 956,697
----------- -------------
Total liabilities and shareholders' equity...................................... $ 1,855,241 $ 8,498,995
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CUMETRIX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD SIX MONTH PERIOD ENDED
FROM APRIL 2, SEPTEMBER 30,
1996 (INCEPTION) ----------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................................... $ 25,940,203 $ 10,291,806 $ 29,389,055
COST OF PRODUCTS................................................ 25,139,001 10,118,931 28,142,220
----------------- ------------- -------------
Gross profit................................................ 801,202 172,875 1,246,835
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 751,133 285,573 610,638
----------------- ------------- -------------
Income (loss) from operations............................... 50,069 (112,698) 636,197
OTHER EXPENSE, net.............................................. (15,205) (5,179) (642)
----------------- ------------- -------------
Income (loss) before provision for income taxes............. 34,864 (117,877) 635,555
PROVISION FOR INCOME TAXES...................................... 9,500 600 254,222
----------------- ------------- -------------
NET INCOME (LOSS)............................................... $ 25,364 $ (118,477) $ 381,333
----------------- ------------- -------------
----------------- ------------- -------------
NET INCOME (LOSS) PER SHARE..................................... $ 0.01 $ (0.03) $ 0.08
----------------- ------------- -------------
----------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................... 4,143,597 3,646,002 4,748,003
----------------- ------------- -------------
----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CUMETRIX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, April 2, 1996 (inception).............................. -- $ -- $ -- $ --
Sale of common stock.......................................... 4,384,236 250,000 -- 250,000
Net income.................................................... -- -- 25,364 25,364
---------- ---------- ---------- ----------
Balance, March 31, 1997......................................... 4,384,236 250,000 25,364 275,364
Sale of common stock (unaudited).............................. 65,764 300,000 -- 300,000
Net income (unaudited)........................................ -- -- 381,333 381,333
---------- ---------- ---------- ----------
Balance, September 30, 1997 (unaudited)......................... 4,450,000 $ 550,000 $ 406,697 $ 956,697
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CUMETRIX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD SIX-MONTH PERIOD ENDED
FROM APRIL 2, SEPTEMBER 30,
1996 (INCEPTION) ---------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 25,364 $ (118,477) $ 381,333
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 6,634 4,421 1,967
Provision for doubtful accounts........................... 2,000 2,000 36,000
Loss on receivable from director.......................... -- -- 100,000
Changes in assets and liabilities:
Trade receivables......................................... (855,090) (899,552) (3,998,735)
Inventories............................................... (331,559) (103,306) (1,787,760)
Deferred taxes............................................ (12,000) -- (20,570)
Prepaid expenses.......................................... (5,318) (5,318) (8,881)
Other..................................................... (1,500) (35,000) (26,946)
Accounts payable.......................................... 1,455,139 1,380,067 4,640,280
Accrued expenses.......................................... 87,274 21,240 13,821
Income taxes payable...................................... 21,500 600 209,979
----------------- ------------ -------------
Net cash provided by (used in) operating activities..... 392,444 246,675 (459,512)
----------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets....................................... (38,912) (34,995) (8,684)
Purchase of investment guaranteed by director................... (100,000) (100,000) --
Receivables from related parties................................ (39,700) -- 39,700
Purchase of Capitalized Software Costs.......................... -- -- (150,000)
----------------- ------------ -------------
Net cash (used in) provided by investing activities..... (178,612) (134,995) (118,984)
----------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................................... 18,820 18,820 --
Payments on bank borrowings..................................... (2,856) (1,269) (1,659)
Proceeds from Note.............................................. -- -- 150,000
Proceeds from stock issuance.................................... 250,000 166,900 300,000
----------------- ------------ -------------
Net cash provided by financing activities............... 265,964 184,451 448,341
----------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH................................... 479,796 296,131 (130,155)
CASH, beginning of period......................................... -- -- 479,796
----------------- ------------ -------------
CASH, end of period............................................... $ 479,796 $ 296,131 $ 349,641
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CUMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
1. LINE OF BUSINESS
Cumetrix, Inc., formerly Data Net International, Inc. (the Company) was
incorporated on April 2, 1996 in the state of California. The Company
distributes computer peripherals, components, accessories and assembles computer
systems. The Company currently sells a majority of its products to distributors,
systems integrators, and retail stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS
a. CASH
Cash includes currency on hand and deposit accounts to which funds may be
deposited or withdrawn at any time without prior notice or penalty. At times,
cash balances in the Company's accounts may exceed federally insured limits.
b. TRADE RECEIVABLES
Trade receivables represent unsecured balances due from its customers with
the Company at risk to the extent such amounts become uncollectible. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
c. INVENTORIES
Inventories consist primarily of purchased finished goods and are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method of accounting.
d. FIXED ASSETS
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures 7 years
Office equipment 5 years
Vehicles 5 years
Leasehold improvements 5 years
</TABLE>
The Company's fixed assets are recorded at cost and includes significant
expenditures that increase the asset lives. Ordinary maintenance and repairs are
charged to operations as incurred
When assets are sold or otherwise disposed of, the recorded cost and related
accumulated depreciation or amortization are removed from the accounts and any
resulting gain or loss is recognized.
e. STATEMENT OF CASH FLOWS
The Company prepares its statement of cash flows using the indirect method
as defined under Statement of Financial Accounting Standards No. 95 (SFAS No.
95). In July 1997, the Company licensed
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
software for $1,100,000 by issuing a note and obtaining a loan from a related
party (see Note 9). Supplemental disclosures of cash flow information are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash paid for interest......................................... $ 1,431 $ 720 $ 349
Cash paid for income taxes..................................... $ -- $ -- $ 13,000
</TABLE>
f. USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
g. CONCENTRATION OF RISK
During the period from April 2, 1996 (inception) to March 31, 1997, one
vendor accounted for 43 percent of purchases. There are many vendors in this
industry and management believes that the other vendors could provide similar
products on comparable terms. Management believes that a change in suppliers
would not cause any material effect to the Company's operations or loss of
sales.
During fiscal 1997, no customer accounted for more than 10 percent of net
sales.
h. REVENUE RECOGNITION
Revenue is recorded at the time of shipment net of allowances for estimated
sales returns and allowances.
i. UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The unaudited financial statements for the six-month periods ended September
30, 1997 and 1996, have been prepared in conformity with generally accepted
accounting principles. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading. These unaudited financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. The
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.
j. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income tax assets or
liabilities are computed based on the temporary difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate in effect for the year in which the differences are expected
to reverse. Deferred income tax expenses or credits are based on the changes in
the deferred income tax assets or liabilities from period to period.
F-8
<PAGE>
k. NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128
revises and simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS No. 129 requires additional disclosures
regarding the Company's capital structure. SFAS No. 128 will be adopted for the
period ended December 31, 1997 and SFAS No. 129 will be adopted for the year
ending March 31, 1998.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures About Segments on Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income. SFAS No. 131 requires disclosure for each segment that is
similar to those required under current standards and additional quarterly
disclosure requirements. Both standards will be adopted on April 1, 1998.
The Company has not determined the impact of these statements.
l. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
related periods. For all periods presented, per share information was computed
pursuant to the rules of the Securities and Exchange Commission, which require
that the dilutive effect of common shares issued by the Company during the 12
months immediately preceding the Company's initial public offering plus the
number of common shares issuable pursuant to the issue of warrants or the grant
of options during the same period, be included in the calculation of the shares
outstanding from the beginning of all periods presented.
A summary of the shares used to compute income (loss) per share is as
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD SIX-MONTH PERIOD ENDED
FROM APRIL 2, SEPTEMBER 30,
1996 (INCEPTION) ----------------------
TO MARCH 31, 1997 1996 1997
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Weighted average common shares outstanding....... 3,310,573 2,808,565 4,447,484
Dilutive effect of common stock equivalents...... -- -- --
Additional dilutive effect of shares, options and
warrants issued within 12 months of initial
public offering................................ 833,024 837,437 300,519
----------------- ---------- ----------
Weighted average common shares used to compute
income (loss) per share........................ 4,143,597 3,646,002 4,748,003
----------------- ---------- ----------
----------------- ---------- ----------
</TABLE>
m. INDUSTRY RISK FACTORS
ELECTRONICS INDUSTRY CYCLICALITY--The personal computer component
distribution industry has been affected historically by general economic
downturns, which have had an adverse economic effect upon manufacturers and
end-users of personal computers, as well as component distributors such as the
Company. In addition, the life-cycle of existing personal computer products and
the timing of new product development and introduction can affect demand for
disk drives and other personal computer components. Any downturns in the
personal computer component distribution industry, or the personal computer
industry in general, could adversely affect the Company's business and results
of operations.
FOREIGN SUPPLIERS REGULATION--A significant number of the products
distributed by the Company are manufactured in Taiwan, China, Korea and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
F-9
<PAGE>
interruptions, foreign exchange rate fluctuations, imposition of tariffs, import
and export controls and changes in governmental policies, any of which could
have a material adverse effect on the Company's business and results of
operations. While the Company does not believe that any of these factors
adversely impact its business significantly at present, there can be no
assurance that these factors will not materially adversely affect the Company in
the future. Any significant disruption in the delivery of merchandise from the
Company's suppliers, substantially all of whom are foreign, would also have a
material adverse impact on the Company's business and results of operations.
Currently all purchases are made in U.S. dollars.
3. FIXED ASSETS, NET
Fixed assets, net, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1997
----------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures............................................. $ 8,260 $ 8,260
Office equipment................................................... 9,039 17,723
Vehicles........................................................... 21,320 21,320
Leasehold improvements............................................. 293 293
----------- -------------
38,912 47,596
Less--Accumulated depreciation and amortization.................... (6,634) (8,601)
----------- -------------
$ 32,278 $ 38,995
----------- -------------
----------- -------------
</TABLE>
4. INCOME TAXES
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ SIX-MONTH
PERIOD ENDED
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal........................................................ $ 14,500 $ 233,573
State.......................................................... 7,000 41,219
Deferred:
Federal........................................................ (8,700) (15,804)
State.......................................................... (3,300) (4,766)
------------ -------------
Provision for income taxes....................................... $ 9,500 $ 254,222
------------ -------------
------------ -------------
</TABLE>
The approximate tax effect of temporary differences which gave rise to
significant deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Depreciation and amortization.................................... $ (434) $ (5,916)
Reserves......................................................... 2,408 20,030
Accrued liabilities.............................................. 4,006 1,197
Unicap........................................................... 6,020 17,259
------------ -------------
$ 12,000 $ 32,570
------------ -------------
------------ -------------
</TABLE>
F-10
<PAGE>
4. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed at
the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
SEPTEMBER 30,
MARCH 31, ----------------------
1997 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Federal income tax provision at the statutory rate........ $ 11,854 $ (40,078) $ 216,089
State taxes, net of federal benefit....................... 2,092 (7,073) 38,133
Change in valuation allowance............................. -- 50,344 --
Other items, net.......................................... (4,446) (2,593) --
----------- ---------- ----------
Provision for income taxes................................ $ 9,500 $ 600 $ 254,222
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
5. RELATED PARTY TRANSACTIONS
In February 1997, a director borrowed $39,700 from the Company. The
receivable is evidenced by an unsecured note due in 120 days on June 15, 1997,
with interest at 5.75 percent. The note was repaid in June 1997.
During fiscal 1997, the Company had sales of approximately $532,800 to and
purchases of approximately $804,300 from a corporation owned by a related party.
At March 31, 1997, the Company had $12,400 and $132,700 included in trade
receivables and accounts payable, respectively, related to these transactions.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases a facility under a lease agreement which expires on April
30, 1998. The following is a schedule of future minimum lease payments required
under this operating lease as of March 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 47,616
1999......................................................................... 3,968
---------
$ 51,584
---------
---------
</TABLE>
Total rental expense for the year ended March 31, 1997 was approximately
$49,000.
F-11
<PAGE>
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LONG-TERM DEBT
The Company has borrowed from a bank for its delivery van. The loan bears
interest at 8.9 percent per annum with monthly installments of principal and
interest of approximately $400. The following is a schedule of future minimum
required payments:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
<S> <C>
1998......................................................................... $ 3,390
1999......................................................................... 3,707
2000......................................................................... 4,054
2001......................................................................... 4,426
2002......................................................................... 387
---------
$ 15,964
---------
---------
</TABLE>
7. RECEIVABLE FROM DIRECTOR
The receivable from director at March 31, 1997 resulted from the purchase by
the Company of 200,000 shares and 100,000 warrants for $100,000 in Evolutions,
Inc. (Evolutions) which at March 31, 1997, was personally guaranteed by a
director of the Company. Subsequent to June 13, 1997, the board of directors and
shareholders voted to release this director from this guarantee as partial
inducement for this individual to accept additional management responsibilities
at the Company, including agreeing to become the chief executive officer. The
Company has determined, due to significant cash flow difficulties encountered by
Evolutions, that its investment is worthless. Accordingly, the Company has
recorded a $100,000 loss during the first quarter of 1997 which is included in
selling, general and administrative expenses.
8. SUBSEQUENT EVENTS
COMMON STOCK
On April 7, 1997, a relative of a shareholder purchased 65,764 shares of
common stock for $300,000. In addition, the Company granted to this party an
option to acquire up to an additional 372,659 common shares at $4.56 per share.
The options expired on October 7, 1997 unexercised.
FINANCING ARRANGEMENT
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation. The terms for purchases are net 30 and are
collateralized by inventory and accounts receivable. Unless the Company fails to
pay Finova within this 30 day period, all finance costs associated with this
line are charged by Finova to the Company's vendors. This arrangement is
personally guaranteed by two officers of the company. At September 30, 1997, the
Company had a payable to Finova Capital Corporation of approximately $3,098,200
included in accounts payable.
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
RELATED PARTY TRANSACTIONS
For the six-month period ended September 30, 1997, the Company had sales of
approximately $1,391,300 to and purchases of approximately $598,200 from a
corporation owned by a related party. At September 30, 1997, the Company had
$201,400 and $0 included in trade receivables and accounts payable,
respectively, from this related party.
F-12
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
CONCENTRATION OF RISK
During the six-month period ended September 30, 1997, one vendor accounted
for 48.3 percent of purchases. During the six-month period ended September 30,
1997, no customer accounted for more than 10 percent of net sales.
SOFTWARE LICENSE
In September 1997, the Company signed a software license and a reseller
agreement with Computer Aided Software Integration, Inc. (CASI), a subsidiary of
Glasgal Communications, Inc. The Company paid CASI a one-time license fee of
$1,100,000 for the configuration software. The license agreement is generally a
worldwide royalty-free and nonexclusive license to reproduce and use the
software. The Company has capitalized this amount and will start to amortize
these costs once the Company puts the software into use. The license fee was
paid in the form of a non-interest bearing promissory note for $950,000 and a
cash payment of $150,000 loaned to the Company by an officer of Glasgal (Glasgal
Note) with interest at 10 percent. The CASI note is due in installments of
$250,000 and $700,000 on October 31, 1997 and February 28, 1998, respectively.
These amounts are included in current portion of long-term debt in the September
30, 1997 Balance Sheet. In addition, the Company has a maintenance fee of
$25,000 per year, payable in equal quarterly installments. The Company also
issued CASI a contingent warrant exercisable in the event of default of the note
at $4.50 per share. This warrant is convertible into 211,581 shares of common
stock.
STOCK SPLIT
In October 1997, the Company effected a 10.960591 for one common stock split
and increased the number of authorized shares of common stock to 20,000,000. All
information in the accompanying financial statements has been retroactively
restated to reflect these changes.
PREFERRED STOCK
In October 1997, the Company authorized 2,000,000 shares of preferred stock.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key executives. These
agreements have terms of five years.
STOCK OPTIONS
In July 1997, the Company established the 1997 Stock Incentive Plan (the
"Plan"). Under the Plan, options are generally granted to employees and
directors at an exercise price equal to fair market value, as determined by the
board of directors. The Company has reserved 500,000 shares of the Company's
common stock for issuance under the Plan. On July 1, 1997, the Company granted
options to purchase up to 307,717 shares of common stock with an exercise price
of $2.70 per share. The plan terminates in 2007.
F-13
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
Information regarding the Company's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE WEIGHTED
UNDER EXERCISE AVERAGE AGGREGATE
OPTION PRICE FAIR VALUE PRICE
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1997.............................................. -- $ -- $ -- $ --
Granted............................................................ 307,717 2.70 0.72 830,836
Canceled........................................................... -- -- -- --
Exercised.......................................................... -- -- -- --
--------- ----- ----- ----------
BALANCE, September 30, 1997.......................................... 307,717 $ 2.70 $ 0.72 $ 830,836
--------- ----- ----- ----------
--------- ----- ----- ----------
</TABLE>
Information about the Company's options outstanding at September 30, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE NUMBER OF SHARES OUTSTANDING CONTRACTUAL LIFE
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
$2.70 307,717 9.75 years
</TABLE>
The Company accounts for stock options granted to non-employees in
accordance with SFAS No. 123 which requires non-cash compensation expense be
recognized over the expected period of benefit. The Company accounts for its
stock options granted to employees and directors under Accounting Principles
Board No. 25 (APB 25), under which no compensation cost has been recognized. As
of September 30, 1997, options for 80,941 shares were exercisable.
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income would
have decreased as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
AS REPORTED PRO FORMA
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net income..................................................................... $ 381,333 $ 345,333
Earnings per share............................................................. $ 0.08 $ 0.07
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants: risk-free interest rate of 6.31 percent; expected lives of five
years; no expected volatility and no dividends would be issued during the option
terms.
PRIVATE PLACEMENT
In December 1997, the Company completed a private placement for $1,000,000
with net proceeds of approximately $820,000. The Company sold 20 units for
$50,000 per unit. Each unit consisted of (i) an unsecured promissory note for
$20,000, bearing interest at 10 percent due eighteen months from the date of
issue or upon closing of a $2,000,000 financing, (ii) 15,000 shares of common
stock at $2.00 per share, and (iii) 5,000 warrants exercisable at $3.00 per
share into common stock for three years, commencing one year after of issuance.
The proceeds were used, in part, to pay $250,000 of the CASI note and $50,000 of
the Glasgal Note.
F-14
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO UNDERWRITER, DEALER, SALES REPRESENTATIVE OR 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 OFFERING AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Recent Bridge Financing........................ 16
Use of Proceeds................................ 17
Dividend Policy................................ 17
Dilution....................................... 18
Capitalization................................. 19
Selected Financial Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 27
Management..................................... 37
Certain Transactions........................... 42
Principal Shareholders......................... 44
Description of Capital Stock................... 45
Shares Eligible for Future Sale................ 47
Underwriting................................... 47
Legal Matters.................................. 49
Experts........................................ 50
Additional Information......................... 50
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[CUMETRIX
LOGO]
1,800,000 SHARES
OF
COMMON STOCK
--------------
PROSPECTUS
--------------
JOSEPH STEVENS & COMPANY, INC.
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee--Securities and Exchange Commission........................... $ 3,136.00
NASD filing fee................................................................ 1,535.00
American Stock Exchange fee.................................................... 33,000.00
Accounting fees and expenses................................................... 90,000.00
Legal fees and expenses (other than blue sky).................................. 150,000.00
Blue sky fees and expenses, including legal fees............................... 10,000.00
Underwriters' expenses......................................................... 243,000.00
Printing; stock certificates................................................... 100,000.00
Transfer agent and registrar fees.............................................. 2,500.00
Directors and Officers' Insurance.............................................. 50,000.00
Miscellaneous.................................................................. 16,829.00
-------------
Total...................................................................... $ 700,000.00
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Registrant and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Registrant or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code") (concerning contracts or
transactions between the Registrant and a director) or (vii) under Section 316
of the California Code (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Registrant's shareholders for any violation of a director's fiduciary duty to
the Registrant or its shareholders.
The Registrant's Articles of Incorporation also include an authorization for
the Registrant to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this latter provision, the
Registrant's Bylaws provide for indemnification of the Registrant's directors,
officers and employees. In addition, the Registrant, at its discretion, may
provide indemnification to persons whom the Registrant is not obligated to
indemnify. The Bylaws also allow the Registrant to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and provide
the maximum indemnification permitted by law. These agreements,
II-1
<PAGE>
together with the Registrant's Bylaws and Articles of Incorporation, may require
the Registrant, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable nature),
to advance expenses to them as they are incurred, provided that they undertake
to repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification, and to obtain directors' and officers'
insurance if available on reasonable terms.
Section 317 of the California Code and the Registrant's Bylaws make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
The Registrant maintains director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Proposed form of Underwriting Agreement...................................... 1.1
Registrant's Restated Articles of Incorporation.............................. 3.1
Registrant's Amended and Restated Bylaws..................................... 3.2
Registrant's Form of Indemnification Agreement............................... 10.3
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1997, the Company issued warrants to purchase shares of common
stock of the Company to Troop Meisinger Steuber & Pasich, LLP. Troop Meisinger
Steuber & Pasich, LLP, represented that (i) it acquired the warrants for its own
account with the present intention of holding such warrants for investment
purposes only and not with a view to, or for sale in connection with, any
distribution of such warrants (other than a distribution in compliance with all
applicable federal and state securities laws); (ii) it is an experienced and
sophisticated investor and has such knowledge and experience in financial and
business matters that it is capable of evaluating the relative merits and the
risks of an investment in the warrants and of protecting its own interest in
connection with the transaction at issue; (iii) it is willing to bear and is
capable of bearing the economic risk of an investment in the warrants; and (iv)
the Company made available, prior to the date of its warrant agreement, to it
the opportunity to ask questions of the Company and its officers, and to receive
from the Company and its officers information concerning the terms and
conditions of the warrant and the warrant agreement and to obtain any additional
information with respect to the Company, its business, operations and prospects,
as reasonably requested by it; and (v) it is an "accredited investor" as that
term is defined under Rule 501(a)(8) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.
II-2
<PAGE>
In December 1997, the Company completed a financing (the "Bridge Financing")
consisting of the sale of 20 units, each comprised of: (i) an unsecured
promising note (each a "Bridge Note") of the Company in the principal amount of
$20,000, bearing interest at a rate of 10% per annum payable upon the earlier of
the closing of the Offering or 18 months from the date of issuance; (ii) 15,000
shares of Common Stock of the Company, and (iii) 5,000 warrants of the Company,
each warrant exercisable to purchase one share of Common Stock at an initial
exercise price of $3.00 per share, subject to adjustment, during the 36-month
period commencing one year from the date the warrants are issued (the "Bridge
Warrants"). Joseph Stevens & Co., Inc. acted as placement agent and there was no
public solicitation or advertising in connection with the offering. The
transaction was exempt from the registration requirements of the Securities Act
of 1933 (the "Act") under Section 4(2) of the Act and Rule 506 of Regulation D
of the Rules and Regulations promulgated thereunder. The proceeds were used by
the Company for working capital, to repay indebtedness and to commence
construction of the Company's first ACSA Center.
On April 12, 1996, the Company sold 2,192,118 shares of its Common stock to
Nancy Hundt in consideration of $200,000 cash. On November 12, 1997, Ms. Hundt
signed an investment representation which states that she purchased the shares
for her own account and not with a view to resale or distribution. On April 12,
1996, Ms. Hundt was appointed, and she accepted, director of the Company. There
were no underwriters involved in the sale of these securities and there was no
public solicitation or advertisement by the Company in connection with the sale
of these securities. This transaction was exempt from the registration
requirements of the Act under section 4(2) of the Act and section 25102(f) of
the California Securities Law. The proceeds were used by the Company as working
capital to cover general start-up costs.
On April 12, 1996, the Company sold 1,096,059 shares of its Common Stock
each to James Ung and Mei Yang, who are married, each of whom paid $25,000 in
consideration therefor. On November 12, 1997, each of Mr. Ung and Ms. Yang
signed an investment representation which states that each of Mr. Ung and Ms.
Yang purchased the shares for their own accounts and not with a view to resale
or distribution. On April 12, 1996, Mr. Ung and Ms. Yang were appointed, and
they each accepted, director of the Company. There were no underwriters involved
in the sale of these securities and there was no public solicitation or
advertisement by the Company in connection with the sale of these securities.
This transaction was exempt from the registration requirements of the Act under
Section 4(2) of the Act and section 25102(f) of the California Securities Law.
The proceeds were used by the Company as working capital to cover general
start-up costs.
On April 7, 1997, the Company sold 65,764 shares of its Common Stock and an
option to purchase an additional 372,659 shares, which option expired October 7,
1997, to Vince Yiang, the brother of Mei Yang, who paid $300,000 in
consideration therefor. On November 12, 1997, Mr. Yiang signed an investment
representation in which Mr. Yiang represents that he purchased the shares for
his own account and not with a view to resale or distribution, and that he has
an individual net worth greater than $1.0 million. There were no underwriters
involved in the sale of these securities and there was no public solicitation or
advertisement by the Company in connection with the sale of these securities.
The transaction was exempt from the registration requirements of the Act under
Section 4(2) of the Act. The proceeds were used by the Company as general
working capital.
II-3
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
1.2 Form of Underwriter's Warrant Agreement.*
1.3 Form of Financial Advisory and Consulting Agreement.*
3.1 Articles of Incorporation of Registrant.
3.2 Certificate of Amendment to Articles of Incorporation, dated December 22, 1997.
3.3 Bylaws of Registrant.
3.4 Amendment to Bylaws of Registrant, dated December , 1997, affecting Name Change.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Standard Sublease Agreement, dated April 9, 1996, between ITT Barton Instruments and Data Net
International, Inc.
10.2 Employment Agreement, dated May 1, 1997, between the Company and James Ung.
10.3 Employment Agreement, dated July 1, 1997, between the Company and Mei Yoon Yang.
10.4 Executive Employment Agreement, dated July 1, 1997, between the Company and Max Toghraie.
10.5 Amended and Restated License Agreement, dated July 1, 1997, between Computer-Aided Software Integration,
Inc. and the Company.
10.6 Reseller Agreement, made effective as of September 15, 1997, between Computer-Aided Software
Integration, Inc. and the Company.(+)
10.7 Promissory Note, dated July 1, 1997, executed by the Company in favor of Computer Aided Software
Integration, Inc.
10.8 Warrant Agreement, dated July 1, 1997, between the Company and Computer-Aided Software Integration, Inc.
10.9 Promissory Note, dated July 1, 1997, executed by the Company in favor of Ralph Glasgal.
10.10 Lease Agreement, dated December 3, 1997, between the Company and Fortune Dynamic, Inc.*
10.11 Guaranty, dated December 3, 1997, given by James Ung to Fortune Dynamic, Inc.
10.12 Dealer Loan and Security Agreement, dated June 3, 1997, between the Company and FINOVA Capital
Corporation.
10.13 Individual Guaranty, dated June 3, 1997, between FINOVA Capital Corporation and James Ung and Mei Yang.
10.14 Amended and Restated 1997 Stock Plan.
10.15 Form of Nonstatutory Stock Option Agreement.
10.16 Form of Financial Advisory and Consulting Agreement between the Company and Joseph Stevens & Company,
Inc.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
II-4
<PAGE>
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on December 23,
1997.
<TABLE>
<S> <C> <C>
CUMETRIX, INC.
By: /s/ MAX TOGHRAIE
-----------------------------------------
Max Toghraie
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Max
Toghraie and James Ung, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer
/s/ MAX TOGHRAIE and Director December 23, 1997
- ------------------------------
/s/ JAMES UNG President and Director December 23, 1997
- ------------------------------
Secretary, Treasurer,
/s/ MEI YANG Principal Accounting December 23, 1997
- ------------------------------ Officer and Director
/s/ NANCY HUNDT Director December 23, 1997
- ------------------------------
/s/ DAVID TOBEY Director December 23, 1997
- ------------------------------
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
DATA NET INTERNATIONAL, INC.
The undersigned, James Ung and Mei Yang, do hereby certify that:
1. They are the President and Secretary, respectively, of Data Net
International, Inc., a California corporation (the "Corporation").
2. The Articles of Incorporation of this Corporation are restated to read
as follows:
I.
The name of this Corporation is Data Net International, Inc.
II.
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 California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the
California Corporations Code.
III.
(a) The liability of the directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
(b) This Corporation is authorized to provide for, whether by bylaw,
agreement or otherwise, the indemnification of agents (as defined in
Section 317 of the General Corporation Law of California) of this
Corporation in excess of that expressly permitted by such Section 317 for
those agents, for breach of duty to this Corporation and its shareholders
to the extent permissible under California law (as now or hereafter in
effect). In furtherance and not in limitation of the powers conferred by
statute:
(i) this Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of this
Corporation, or is serving at the request of this Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not this Corporation would
have the power to indemnify against such liability under the provisions of
law; and
1
<PAGE>
(ii) this Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter
into contracts providing indemnification to the fullest extent authorized
or permitted by law and including as part thereof provisions with respect
to any or all of the foregoing to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or
elsewhere.
No such bylaw, agreement or other form of indemnification shall be
interpreted as limiting in any manner the rights which such agents would
have to indemnification in the absence of such bylaw, agreement or other
form of indemnification.
(c) Any repeal or modification of the foregoing provisions of this Article
III by the shareholders of this Corporation shall not adversely affect any
right or protection of a director of this Corporation existing at the time
of such repeal or modification.
IV.
(a) This Corporation is authorized to issue 20,000,000 shares of Common
Stock, no par value (hereinafter referred to as the "Common Stock"), and
2,000,000 shares of Preferred Stock, no par value (hereinafter referred to
as the "Preferred Stock").
(b) Such Preferred Stock may be issued from time to time in one or more
series as shall be authorized by the Board of Directors of this
Corporation. The Board of Directors of this Corporation shall, prior to
the issuance of any such shares of any series of Preferred Stock, fix (i)
the number of shares of each such series of Preferred Stock and (ii) such
distinctive designation or title of each such series of Preferred Stock
with such rights, privileges, powers and preferences thereof.
(c) Upon the filing of this restatement of the Articles of Incorporation
of this Corporation, each outstanding share of Common Stock shall, without
any further action on the part of the Corporation, be split and converted
into 10.960591 shares of Common Stock.
V.
Cumulative voting for the election of directors of this Corporation shall
be eliminated effective upon the date this Corporation becomes, and for as
long as this Corporation is, a "listed corporation" within the meaning of
Section 301.5 of the General Corporation Law of California.
3. The foregoing restatement of the Articles of Incorporation has been
duly approved by the Board of Directors of this Corporation.
2
<PAGE>
4. The foregoing restatement of the Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with Section
902 of the General Corporation Law of California. The total number of
outstanding shares of this Corporation is 4,450,000 shares of Common Stock. The
number of shares voting in favor of the restatement equaled or exceeded the vote
required. The percentage vote required was more than 50% of the Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Executed at Los Angeles, California, on October 22, 1997.
/s/ JAMES UNG
--------------------------------
James Ung, President
/s/ MEI YANG
--------------------------------
Mei Yang, Secretary
3
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
DATA NET INTERNATIONAL, INC.
(California corporation #1781368)
The undersigned, James Ung and Mei Yang, do hereby certify that:
1. They are the President and Secretary, respectively, of Data Net
International, Inc., a California corporation (the "Corporation").
2. Article I of the Articles of Incorporation of this Corporation is amended
to read as follows:
I.
The name of this Corporation is CUMETRIX, Inc.
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors of this Corporation.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section
902 of the California Corporation Code. The total number of shares of the
Corporation issued and outstanding is 4,742,500 shares. The number of
shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote was more than 50%.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and
correct of my own knowledge.
Executed at City of Industry, California, on December 20, 1997.
/s/ JAMES UNG
------------------------
James Ung, President
/s/ MEI YANG
------------------------
Mei Yang, Secretary
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
DATA NET INTERNATIONAL, INC.
A CALIFORNIA CORPORATION
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
DATA NET INTERNATIONAL, INC.
A CALIFORNIA CORPORATION
Page
----
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. PRINCIPAL EXECUTIVE OFFICE. . . . . . . . . . . . . . . 1
Section 2. OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - SHAREHOLDERS MEETINGS . . . . . . . . . . . . . . . . . . . . 1
Section 1. PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . 1
Section 2. ANNUAL MEETINGS.. . . . . . . . . . . . . . . . . . . . 1
Section 3. SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . 1
Section 4. NOTICE AND REPORTS TO SHAREHOLDERS. . . . . . . . . . . 2
Section 5. QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 6. ADJOURNED MEETING AND NOTICE THEREOF. . . . . . . . . . 3
Section 7. VOTING. . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8. VALIDATION OF DEFECTIVELY CALLED OR NOTICED
MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. ACTION WITHOUT MEETING. . . . . . . . . . . . . . . . . 5
Section 10. PROXIES.. . . . . . . . . . . . . . . . . . . . . . . . 6
Section 11. INSPECTORS OF ELECTION. . . . . . . . . . . . . . . . . 6
Section 12. RECORD DATE.. . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . 7
i
<PAGE>
Section 1. POWERS. . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. NUMBER AND QUALIFICATIONS . . . . . . . . . . . . . . . 8
Section 3. ELECTION AND TERM OF OFFICE . . . . . . . . . . . . . . 8
Section 4. VACANCIES . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5. PLACE OF MEETING. . . . . . . . . . . . . . . . . . . . 9
Section 6. REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . 9
Section 7. SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . 9
Section 8. QUORUM AND REQUIRED VOTE. . . . . . . . . . . . . . . . 10
Section 9. VALIDATION OF DEFECTIVELY CALLED OR OTICED
MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . 10
Section 10. ADJOURNMENT.. . . . . . . . . . . . . . . . . . . . . . 10
Section 11. ACTION WITHOUT MEETING. . . . . . . . . . . . . . . . . 10
Section 12. FEES AND COMPENSATION.. . . . . . . . . . . . . . . . . 10
Section 13. COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV - OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 1. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. ELECTION OF OFFICERS. . . . . . . . . . . . . . . . . . 12
Section 3. SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . 12
Section 4. REMOVAL AND RESIGNATION OF OFFICERS.. . . . . . . . . . 12
Section 5. VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . 12
Section 6. CHAIRMAN OF THE BOARD.. . . . . . . . . . . . . . . . . 12
Section 7. PRESIDENT.. . . . . . . . . . . . . . . . . . . . . . . 12
ii
<PAGE>
Section 8. VICE PRESIDENTS.. . . . . . . . . . . . . . . . . . . . 13
Section 9. SECRETARY.. . . . . . . . . . . . . . . . . . . . . . . 13
Section 10. CHIEF FINANCIAL OFFICER.. . . . . . . . . . . . . . . . 13
ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYES AND
OTHER AGENTS . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. . . . . . . . . . . . 14
Section 2. ACTIONS OTHER THAN BY THE CORPORATION.. . . . . . . . . 14
Section 3. ACTIONS BY THE CORPORATION. . . . . . . . . . . . . . . 15
Section 4. SUCCESSFUL DEFENSE BY AGENT.. . . . . . . . . . . . . . 15
Section 5. REQUIRED APPROVAL.. . . . . . . . . . . . . . . . . . . 15
Section 6. ADVANCE OF EXPENSES.. . . . . . . . . . . . . . . . . . 16
Section 7. OTHER CONTRACTUAL RIGHTS. . . . . . . . . . . . . . . . 16
Section 8. LIMITATIONS.. . . . . . . . . . . . . . . . . . . . . . 16
Section 9. INSURANCE.. . . . . . . . . . . . . . . . . . . . . . . 16
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. . . . . 17
ARTICLE VI - RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . 17
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. . . . . . 17
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. . . . . . . . . . 18
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE
RECORDS.. . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4. INSPECTION BY DIRECTORS.. . . . . . . . . . . . . . . . 18
Section 5. ANNUAL REPORT TO SHAREHOLDERS.. . . . . . . . . . . . . 18
Section 6. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 19
iii
<PAGE>
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION.. . . . . . . . 20
Section 8. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.. . . . . . . 20
Section 9. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED.. . . 20
Section 10. CERTIFICATES FOR SHARES.. . . . . . . . . . . . . . . . 20
Section 11. LOST CERTIFICATES.. . . . . . . . . . . . . . . . . . . 21
Section 12. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . 21
Section 13. STOCK PURCHASE PLANS. . . . . . . . . . . . . . . . . . 21
Section 14. CONSTRUCTION AND DEFINITIONS. . . . . . . . . . . . . . 21
ARTICLE VII - AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 1. AMENDMENT BY SHAREHOLDERS . . . . . . . . . . . . . . . 21
Section 2. AMENDMENT BY DIRECTORS. . . . . . . . . . . . . . . . . 22
iv
<PAGE>
AMENDED AND RESTATED BYLAWS
Bylaws for the regulation, except
as otherwise provided by statute or
its Articles of Incorporation, of
Data Net International, Inc.
(a California corporation)
ARTICLE I
CORPORATE OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of the corporation is hereby fixed and located at:
1304 John Reed Court
City of Industry, California 91745
The Board is hereby granted full power and authority to change the principal
executive office from one location to another. Any such change shall be noted
in the Bylaws opposite this Section, or this Section may be amended to state the
new location.
Section 2. OTHER OFFICES. Branch or subordinate business offices may
at any time be established by the Board at any place or places.
ARTICLE II
SHAREHOLDERS' MEETINGS
Section 1. PLACE OF MEETINGS. Meetings of the shareholders shall be
held at the principal executive office of the corporation, or at any other place
within or without the State of California as may from time to time be designated
for that purpose by the Board.
Section 2. ANNUAL MEETINGS. The annual meeting of shareholders shall
be held each year on a date and at a time designated by the Board. At the
annual meeting the shareholders shall elect directors, consider reports of the
affairs of the corporation, and transact any other proper business.
1
<PAGE>
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders for
the purpose of taking any action which the shareholders are permitted to take
under the General Corporation Law of the State of California (herein, as the
same may from time to time hereafter be amended, referred to as the "General
Corporation Law") may be called at any time by the Chairman or a Co-Chairman of
the Board, the Chief Executive Officer or the President, or by the Board, or by
any Vice President, or by one or more shareholders entitled to cast not less
than 10 percent of the votes of the meeting. Upon request in writing to the
Chairman or a Co-Chairman of the Board, Chief Executive Officer, President, Vice
President or Secretary by any person (other than the Board) entitled to call a
special meeting of shareholders that a special meeting be held for any proper
purpose, the officer receiving the request shall forthwith cause notice to be
given to the shareholders entitled to vote that a meeting will be held at the
time requested by the person or persons calling the meeting, not less than 35
nor more than 60 days after the receipt of the request. If the notice is not
given within 20 days after receipt of the request, the persons entitled to call
the meeting may give the notice.
Section 4. NOTICE AND REPORTS TO SHAREHOLDERS. Written notice of each
meeting of shareholders, annual or special, shall be given to each shareholder
entitled to vote thereat, not less than 10 nor more than 60 days before the date
of the meeting. The notice of each such annual or special meeting of
shareholders shall state the place, the date, and the hour of the meeting, and
(1) in the case of a special meeting, the general nature of the business to be
transacted at the meeting (and no other business may be transacted at the
meeting), or (2) in the case of the annual meeting, those matters which the
Board, at the time of the mailing of the notice, intend to present for action by
the shareholders, and any proper matter may be presented at the meeting for
action, provided, however, that the notice shall specify the general nature of a
proposal, if any, to take action with respect to approval of (i) a contract or
other transaction with an interested director pursuant to Section 310 of the
General Corporation Law, (ii) amendment of the Articles of Incorporation
pursuant to Section 902 of the General Corporation Law, (iii) a reorganization
of the corporation pursuant to Section 1201 of the General Corporation Law, (iv)
voluntary dissolution of the corporation pursuant to Section 1900 of the General
Corporation Law or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, if any, pursuant to Section
2007 of the General Corporation Law. The notice of any meeting at which
directors are to be elected shall include the names of nominees intended at the
time of the notice to be presented by management for election.
Notice of a shareholders' meeting or any report shall be given either
personally or by first-class mail (or in the case the corporation's outstanding
shares are held of record by 500 or more persons on the record date for the
shareholders' meeting, notice may be sent by third-class mail) or other means
of written communication, charges prepaid, addressed to such shareholder at the
address of such shareholder appearing on the books of the corporation or given
by the shareholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, the notice or report
shall be deemed to have been given if sent to that shareholder by mail or other
means of written communication addressed to the place where the principal
executive office of the corporation is situated, or if published at least once
in some
2
<PAGE>
newspaper of general circulation in the county in which said principal executive
office is located. The notice or report shall be deemed to have been given at
the time when delivered personally or deposited in the mail or sent by other
means of written communication. An affidavit of mailing of any notice or report
in accordance with the provisions of this Section, executed by the Secretary,
Assistant Secretary or any transfer agent of the corporation shall be prima
facie evidence of the giving of the notice.
If any notice or any report addressed to the shareholder at the address of
that shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices or reports shall be deemed to
have been duly given without further mailing if the same shall be available for
the shareholder upon written demand of the shareholder at the principal
executive office of the corporation for a period of one year from the date of
the giving of the notice or report to all other shareholders.
Section 5. QUORUM. A majority of the shares entitled to vote, present
in person or by proxy, shall constitute a quorum for the transaction of business
at any meeting of shareholders. Except as provided in the next sentence, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless a vote of a greater number is required by the General
Corporation Law or the Articles of Incorporation of the Corporation (the
"Articles of Incorporation"). The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
Section 6. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares present, either in
person or by proxy, but in the absence of a quorum no other business may be
transacted at such meeting, except as expressly provided in Section 5 of this
Article with respect to the right of the shareholders present at a duly called
or held meeting to continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
When any shareholders' meeting, either annual or special, is adjourned to
another time and place, it shall not be necessary to give any notice of the time
and place of the adjourned meeting or of the business to be transacted thereat,
other than by announcement of the time and place thereof at the meeting at which
such adjournment is taken; provided, however, that if any such shareholders'
meeting is adjourned for 45 days or more, or if after adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given as in the case of an original meeting. At the adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
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Section 7. VOTING. The shareholders entitled to notice of any meeting
or to vote at any such meeting shall only be persons in whose names shares stand
on the stock records of the corporation on the record date determined in
accordance with Section 12 of this Article; provided, however, that if no such
record date shall be fixed by the Board, only persons in whose names shares
stand on the stock records of the corporation at the close of business on the
business day next preceding the day on which notice of the meeting is given or
if such notice is waived, at the close of business on the business day next
preceding the day on which the meeting of shareholders is held, shall be
entitled to vote at such meeting, and such day shall be the record date for such
meeting.
Voting shall in all cases be subject to the provisions of Sections 702
through 704, inclusive, of the General Corporation Law (relating to voting of
shares held by fiduciaries, held in the name of a corporation, or held in joint
ownership).
The shareholders' vote may be VIVA VOCE or by ballot; provided, however,
that all elections for directors must be by ballot upon demand made by a
shareholder at the meeting and before the voting begins.
Section 8. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, or who, although
present, has, at the beginning of the meeting, properly objected to the
transaction of any business because the meeting was not lawfully called or
convened or to particular matters of business legally required to be included in
the notice, but not so included, signs a written waiver of notice, or a consent
to the holding of such meeting, or an approval of the minutes thereof. The
waiver of notice or consent need not specify either the business to be
transacted or the purpose of any annual or special meeting of shareholders,
except that the waiver of notice or consent shall state the general nature of
the proposal of any action taken or proposed to be taken with respect to
approval of (i) a contract or other transaction with an interested director
pursuant to Section 310 of the General Corporation Law, (ii) amendment of the
Articles of Incorporation pursuant to Section 902 of the General Corporation
Law, (iii) a reorganization of the corporation pursuant to Section 1201 of the
General Corporation Law, (iv) voluntary dissolution of the corporation pursuant
to Section 1900 of the General Corporation Law, or (v) a distribution and
dissolution other than in accordance with the rights of outstanding preferred
shares, if any, pursuant to Section 2007 of the General Corporation Law. If
such statement is not included in such written waiver of notice or consent, then
any shareholder approval at the meeting, other than unanimous approval of those
entitled to vote, to any such matters shall be invalid. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at the meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of any matter legally
required to be included in the notice of meeting, but not so included, if that
objection is expressly made at the meeting and before any vote is taken on such
matter.
Section 9. ACTION WITHOUT MEETING. Any action which may be taken at
any annual or special meeting of shareholders may be taken without a meeting and
without prior notice, except as hereinafter set forth, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take that action at a meeting at which all shares entitled to
vote on that action were present and voted. Notwithstanding the foregoing,
directors may not be elected without a meeting by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors; provided, however, that a director may be elected at any time to fill
a vacancy on the Board (other than a vacancy created by the removal of a
director) that has not been filled by the directors, by the written consent of
the holders of a majority of the outstanding shares entitled to vote for the
election of directors. Any shareholder giving a written consent, or the
shareholder's proxy holder, or a transferee of the shares, or a personal
representative of the shareholder or their respective proxy holders, may revoke
the consent by a writing received by the Secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the Secretary, but not thereafter. Such revocation
is effective upon its receipt by the Secretary of the corporation.
If the consents of all shareholders entitled to vote have not been
solicited in writing, or if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting to
those shareholders entitled to vote and who have not consented in writing to the
action authorized by such approval. Such notice shall be given, and shall be
deemed to have been given, in the same manner as provided in Section 4 of this
Article. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the General Corporation Law, (ii) indemnification of agents of the corporation
pursuant to Section 317 of the General Corporation Law, (iii) a reorganization
of the corporation pursuant to Section 1201 of the General Corporation Law, or
(iv) a distribution and dissolution other than in accordance with the rights of
outstanding.preferred shares pursuant to Section 2007 of the General Corporation
Law, the notice shall be given at least 10 days before the consummation of any
action authorized by such approval.
Unless, as provided in Section 12 of this Article, the Board has fixed a
record date for the determination of shareholders entitled to notice of and to
give such written consent, the record date for such determination shall be the
day on which the first written consent is given. All such written consents
shall be filed with the Secretary of the corporation and shall be maintained in
the corporate records.
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Section 10. PROXIES. Every person entitled to vote shares shall have
the right to do so either in person or by one or more persons authorized by a
written proxy executed by such shareholder or his duly authorized agent and
filed with the Secretary of the corporation. Any proxy duly executed which does
not state that it is irrevocable shall continue in full force and effect until
(i) an instrument revoking it is filed with the Secretary of the corporation or
a duly executed proxy bearing a later date is presented to the meeting prior to
the vote pursuant thereto, (ii) the person executing the proxy attends the
meeting and votes in person, or (iii) written notice of the death or incapacity
of the maker of such proxy is received by the corporation before the vote
pursuant thereto is counted; provided, however, that no proxy shall be valid
after the expiration of 11 months from the date of its execution, unless
otherwise provided in the proxy. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
705(e) and Section 705(f) of the General Corporation Law.
Section 11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
no inspectors of election are so appointed, the chairman of any such meeting
may, and on the request of any shareholder or his proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares present in person or by proxy shall determine
whether one or three inspectors are to be appointed. In case any person
appointed as inspector fails to appear or refuses to act, the vacancy may, and
on the request of any shareholder or a shareholder's proxy shall, be filled by
appointment by the Board in advance of the meeting, or at the meeting by the
chairman of the meeting.
The duties of such inspector shall be as prescribed by Section 707 of the
General Corporation Law and shall include: determining the number of shares
outstanding and voting power of each; the shares represented at the meeting; the
existence of a quorum; the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and performing such acts as may be proper to conduct the
election or vote with fairness to all shareholders. If there are three
inspectors of election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all.
Section 12. RECORD DATE. The Board may fix, in advance, a record date
for the determination of the shareholders entitled to notice of any meeting or
to vote or entitled to give consent to corporate action in writing without a
meeting, to receive any report, to receive any dividend or distributions or any
allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 days nor less than
10 days prior to the date of any meeting nor more than 60 days prior to any
other event for the purposes of which it is fixed. When a record date is so
fixed, only shareholders of record at the close of
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business on that date are entitled to notice of and to vote at any such meeting,
to give consent without a meeting, to receive any report, to receive dividends,
distributions or allotments of rights, or to exercise the rights, as the case
may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the General
Corporation Law and any limitations in the Articles of Incorporation and these
Bylaws as to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate power shall be exercised by or under the direction of the
Board. The Board may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other persons, provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board.
Without prejudice to such powers, but subject to the same limitation, it is
hereby expressly declared that the directors shall have the following powers in
addition to other powers enumerated in these Bylaws:
(a) To select and remove all officers, agents and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the Articles of Incorporation, and with these ByLaws; fix their
compensation; and require from them security for faithful service;
(b) To conduct, manage and control the affairs and business of the
corporation, and to make rules and regulations therefor consistent with law,
with the Articles of Incorporation and with these Bylaws;
(c) To change the principal executive office or the principal
business office in the State of California from one location to another; to fix
and locate from time to time one or more other offices of the corporation within
or without the State of California; to cause the corporation to be qualified to
do business and to conduct business in any other state, territory, dependency
or country; and to designate any place within or without the State of California
for the holding of any shareholders' meeting or meetings, including annual
meetings;
(d) To adopt, make and use a corporate seal; to prescribe the forms
and certificates of stock; and to alter the form of the seal and certificates;
(e) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms and for such consideration as may be lawful;
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(f) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities therefor.
Section 2. NUMBER AND QUALIFICATIONS. The number of directors
constituting the entire Board shall be not less than four (4) nor more than
seven (7) as fixed from time to time by a duly adopted resolution of the Board;
provided, however, that if the Company becomes a "listed corporation" within the
meaning of section 301.5 of the General Corporation Law of the State of
California, the number of directors shall not be less than six (6); provided
further than an amendment to the Articles or a Bylaw reducing the number of
directors to a number less than five cannot be adopted if the votes cast against
its adoption at a meeting or the shares not consenting to its adoption in the
case of action by written consent are equal to more than 16-2/3% of the
outstanding shares entitled to vote; and provided further that the number of
directors constituting the entire Board shall be five until otherwise fixed by a
duly adopted resolution of the Board, or until such time as the Company becomes
a "listed corporation" as discussed above.
Section 3. ELECTION AND TERM OF OFFICE. The directors of the
Corporation shall be divided into two classes, designated Class I and Class II.
The term of the initial Class I directors shall terminate on the date of the
1998 annual meeting of stockholders and the term of the Class II directors shall
terminate on the date of the 1999 annual meeting of stockholders. At each
annual meeting of stockholders beginning in 1998, successors to the class of
directors whose term expires at that annual meeting shall be elected for a
two-year term. If the number of directors is changed, any increase or decease
shall be apportioned between the classes so as to maintain the number of
directors in each class as nearly equal as reasonably possible, and any
additional directors of either class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent directors. A director shall hold
office until the annual meeting for the year in which his term expires and until
his successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office. Any
vacancy on the Board of Directors, however resulting, shall be filled only by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director and not by the shareholders. Any director elected to
fill a vacancy shall hold office for a term that shall coincide with the terms
of the class to which such director shall have been elected.
Section 4. VACANCIES. A vacancy or vacancies in the Board shall be
deemed to exist in case of the death, resignation or removal of any director, or
if the authorized number of directors be increased, or if the shareholders fail,
at any annual or special meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
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Any director may resign effective upon giving written notice to the
Chairman of the Board, the Chief Executive Officer, the President, the Secretary
or the Board, unless the notice specifies a later date for the effectiveness of
such resignation. If the Board accepts the resignation of a director tendered
to take effect at a future time, the Board or the shareholders shall have the
power to elect a successor to take office when the resignation is to become
effective.
Vacancies in the Board (other than a vacancy created by the removal of a
director) may be filled by a majority of the remaining directors, though less
than a quorum, or by a sole remaining director, and each director so elected
shall hold office until the next annual meeting and until such director's
successor has been elected; subject, however, to the right of any shareholder or
shareholders of the corporation holding at least 5% in the aggregate of the
outstanding voting shares of the corporation, in accordance with the provisions
of Section 305(c) of the General Corporation Law, to a special meeting to elect
the entire Board in the event that after the filling of any such vacancy by the
directors, the directors elected by the shareholders shall constitute less than
a majority of the directors then in office.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, and shall have the right, to
the exclusion of the directors, to fill any vacancy or vacancies created by the
removal of one or more directors. The election of any director or directors to
fill a vacancy or vacancies created by the removal of one or more directors
shall require the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) or the
unanimous written consent of all shares entitled to vote for the election of
directors.
No reduction of the authorized number of directors shall have the effect of
removing any directors prior to the expiration of his term of office.
Subject to the provisions of Section 303(a) of the General Corporation Law,
any or all of the directors may be removed from office, without cause, if such
removal is approved by a vote of a majority of the outstanding shares entitled
to vote.
Section 5. PLACE OF MEETING. Regular and special meetings of the Board
shall be held at any place within or without the State of California which has
been designated from time to time by resolution of the Board or by written
consent of the members of the Board. In the absence of such designation,
regular meetings shall be held at the principal executive office of the
corporation.
Section 6. REGULAR MEETINGS. Immediately following each annual meeting
of shareholders, the Board shall hold a regular meeting at the place of that
annual meeting or at such other place as shall be fixed by the Board for the
purpose of organization, election of officers and the transaction of other
business.
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Other regular meetings of the Board shall be held without call at such time
and place as the Board may from time to time deem appropriate; provided,
however, should the day fall upon a legal holiday, then said meeting shall be
held at the same time on the next day thereafter ensuing which is a full
business day. Call and notice of regular meetings of the Board are hereby
dispensed with.
Section 7. SPECIAL MEETINGS. Special meetings of the Board for any
purpose or purposes may be called at any time by the Chairman or a Co-Chairman
of the Board, the Chief Executive Officer, the President, any Vice President,
the Secretary or by any two directors.
Written notice of the time and place of special meetings shall be delivered
personally to each director or communicated to each director by telephone or by
telegraph or mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation or, if it is
not so shown on such records or is not readily ascertainable, at the place at
which the meetings of the directors are regularly held. In case such notice is
mailed, it shall be deposited in the United States mail in the place in which
the principal executive office of the corporation is located at least four days
prior to the time of the holding of the meeting. In case such notice is
delivered personally or by telephone or telegraph, it shall be delivered
personally or by telephone or to the telegraph company at least 48 hours before
the time of the holding of the meeting. The notice need not specify the place
of the meeting, if the meeting is to be held at the principal executive office
of the corporation, or the purpose of the meeting.
Section 8. QUORUM AND REQUIRED VOTE. Presence of a majority of the
authorized number of directors at a meeting of the Board constitutes a quorum
for the transaction of business, except to adjourn as hereinafter provided.
Members of the Board may participate in a meeting through use of conference
telephone or similar communications equipment, and such members shall be
considered present in person, as long as all members participating in such
meeting can hear one another. Subject to the provisions of Section 5(a) of
Article V of these Bylaws, every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of a
director or directors, provided that any action taken is approved by at least a
majority of the required quorum for such meeting.
Section 9. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of the Board, however called and noticed or
wherever held, shall be as valid as though made or performed at a meeting duly
held after regular call and notice, if a quorum is present and if, either before
or after the meeting, each of the directors not present or who, though present,
has prior to the meeting or at its commencement protested the lack of proper
notice to such director, signs a written waiver of notice or a consent to
holding such meeting or approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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Section 10. ADJOURNMENT. A majority of the directors present, whether
or not a quorum is present, may adjourn any meeting to another time and place.
Notice of the time and place of holding an adjourned meeting need not be given
to absent directors if the time and place is fixed at the meeting adjourned;
provided, however, that if the meeting is adjourned for more than 24 hours,
notice of adjournment to another time or place shall be given prior to the time
of the adjourned meeting to the directors who are not present at the time of the
adjournment.
Section 11. ACTION WITHOUT MEETING. Any action by the Board may be
taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board and
shall have the same force and effect as a unanimous vote of the Board.
Section 12. FEES AND COMPENSATION. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
Board.
Section 13. COMMITTEES. The Board may appoint one or more committees,
each consisting of two or more directors, and delegate to such committees any of
the authority of the Board except with respect to:
(a) The approval of any action for which the General Corporation Law,
the Articles of Incorporation or these Bylaws also require shareholders'
approval or approval of the outstanding shares;
(b) The filling of vacancies on the Board or on any committee;
(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) The amendment or repeal of any resolution of the Board which by
its express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board; or
(g) The appointment of other committees of the Board or the members
thereof.
Any such committee must be designated by resolution adopted by a majority
of the authorized number of directors and may be designated an Executive
Committee or by such other
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name as the Board shall specify. The appointment of members and alternate
members of any such committee shall require the affirmative vote of a majority
of the authorized number of directors. The Board shall have the power to
prescribe the manner in which proceedings of any such committee shall be
conducted. In the absence of any such prescription, such committee shall have
the power to prescribe the manner in which its proceedings shall be conducted.
Unless the Board or such committee shall otherwise provide, the regular and
special meetings and other actions of any such committee shall be governed by
the provisions of this Article applicable to meetings and actions of the Board.
Minutes shall be kept of each meeting of each committee.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
President, a Secretary and a Chief Financial Officer. The corporation may also
have, at the discretion of the Board, a Chief Executive Officer, a Chairman or
Co-Chairmen of the Board, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article. Any
number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by the Board,
and each shall serve at the pleasure of the Board, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint, and may
empower the Chief Executive Officer or the President to appoint, such other
officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in these Bylaws or as the Board may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Without prejudice to
the rights, if any, of an officer under any contract of employment, any officer
may be removed, either with or without cause, by the Board, at any regular or
special meeting of the Board, or, except in case of an officer chosen by the
Board, by any officer upon whom such power of removal may be conferred by the
Board.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
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Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular election or appointment to
such office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman or a Co-Chairman of the
Board, or both, if such an officer or officers be elected, shall, if present,
preside at all meetings of the Board and exercise and perform such other powers
and duties as may be from time to time assigned to him or them by the Board. If
there is no President nor Chief Executive Officer, the Chairman or a Co-Chairman
of the Board, or both, shall in addition be Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in Section 7 of this
Article.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board to the Chairman or a Co-Chairman of the Board, or
both, or the Chief Executive Officer, if there be such officers, the President
shall have general supervision, direction and control of the business and the
officers of the corporation. The President shall have such other powers and
duties as may be prescribed by the Board.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President and the Chief Executive Officer, if any, the Vice Presidents, if any,
in order of their rank as fixed by the Board, shall perform all the duties of
the President, and when so acting shall have all the powers of, and be subject
to all the restrictions upon, the President. The Vice Presidents shall have
such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board, the Chief Executive Officer, the
President or the Chairman of the Board.
Section 9. SECRETARY. The Secretary shall keep, or cause to be kept,
at the principal executive office or such other place as the Board may direct, a
book of minutes of all meetings and actions of directors, committees of
directors, and shareholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice given, the names of
those present at directors' meetings or committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the Board, a share register, or a duplicate share
register, showing the names of all shareholders and their addresses, the number
and classes of share held by each, the number and date of certificates issued
for the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board required by the Bylaws or by law to be given,
and he shall keep the
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seal of the corporation, if one be adopted, in safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the Board.
Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares, and shall
send or cause to be sent to the shareholders of the corporation such financial
statements and reports as are bylaw or these Bylaws required to be sent to
them. The books of account shall at all reasonable times be open to inspection
by any director.
The Chief Financial Officer shall deposit all monies and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the Board. The Chief Financial Officer shall disburse the funds
of the corporation as may be ordered by the Board, shall render to the Chief
Executive Officer, the President and directors, whenever they request it, an
account of all transactions undertaken as Chief Financial Officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purposes of this
Article, "agent" means any person who is or was a director, officer, employee or
other agent of the corporation, or is or was serving at the request of the
corporation 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 corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4 or Section 5(c) of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. The corporation
shall indemnify any person who was or is a party, or is threatened to be made a
party, to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of the corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of the
corporation, and in the case of a criminal
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proceeding, had no reasonable cause to believe the conduct of that person was
unlawful. The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of NOLO CONTENDERE or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of the
corporation or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. The corporation shall indemnify
any person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that that person is or was
an agent of the corporation, against expenses actually and reasonably incurred
by that person in connection with the defense or settlement of that action if
that person acted in good faith, in a manner that person believed to be in the
best interests of the corporation and its shareholders. No indemnification
shall be made under this Section 3 for any of the following:
(a) In respect of any claim, issue or matter as to which that person
shall have been adjudged to be liable to the corporation in the performance of
that person's duty to the corporation and its shareholders, unless and only to
the extent that the court in which that proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the case,
that person is fairly and reasonably entitled to indemnification for expenses
and then only to the extent that the court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a pending
action, without court approval; or
(c) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
the corporation has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article, or in defense of any claim,
issue or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this
Article, any indemnification under this Article shall be made by the corporation
only if authorized in the specific case on a determination that indemnification
of the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article, by
any of the following:
(a) A majority vote of a quorum consisting of directors who are not
parties to the proceeding;
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(b) If a quorum as described in Section 5(a) of this Article is not
obtainable, by independent legal counsel in a written opinion;
(c) Approval by the affirmative vote of a majority of the shares of
the corporation represented and voting at a duly held meeting at which a quorum
is present (which shares voting also constitute at least a majority of the
required quorum) or by the written consent of holders of a majority of the
outstanding shares entitled to vote. For this purpose, the shares owned by the
person to be indemnified shall not be considered outstanding or entitled to vote
thereon; or
(d) The court in which the proceeding is or was pending, on
application made by the corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney or other person is opposed by the
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation before the final disposition of
the proceeding on receipt of an undertaking by or on behalf of the agent to
repay the amount of the advance if it shall be determined ultimately that the
agent is not entitled to be indemnified as authorized in this Article.
Section 7. OTHER CONTRACTUAL RIGHTS. The indemnification provided by
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office, to the extent such additional rights to indemnification are authorized
in the Articles of Incorporation of the corporation. The rights to indemnity
hereunder shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person. Nothing contained in this Article
shall affect any right to indemnification to which persons other than directors
and officers of the corporation or any subsidiary hereof may be entitled by
contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Section 4 or Section 5(c), in any
circumstances where it appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, a resolution of the shareholders or an agreement in effect at the
time of the accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
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Section 9. INSURANCE. The corporation shall, if so authorized by the
Board, purchase and maintain insurance on behalf of any agent of the corporation
or its subsidiaries selected by the Board in its authorization, or designated in
the policy of insurance so purchased, against such liabilities asserted against
or incurred by the agent (in his capacity as agent or arising out of his status
as such) as may be set forth in such authorization or in such policy of
insurance, in each case upon such terms and conditions, and subject to such
limitations, as the Board in its sole and absolute discretion determines to be
appropriate, its general authorization to purchase or maintain any policy of
insurance to conclusively establish that it has determined all of the terms,
conditions, and limitations set forth in the policy of insurance in the form so
purchased to be appropriate, and the power to purchase and maintain such
insurance shall exist regardless of whether the corporation would have the power
to indemnify the agent against the insured liabilities under the provision of
this Article. The fact that the corporation owns all or a portion of the shares
of the company issuing a policy of insurance shall not render this subdivision
inapplicable if either of the following conditions are satisfied:
(a) the purchase and maintenance of the policy is authorized by the
Articles of Incorporation of the association and is limited to the extent
provided in subdivision (d) of Section 204 of the General Corporation Law;
(b) (1) the company issuing the insurance policy is organized,
licensed and operated in a manner that complies with the insurance laws and
regulations applicable to its jurisdiction of organization, (2) the company
issuing the policy provides procedures for processing claims that do not permit
the company to be subject to the direct control of the corporation, and (3) the
policy issued provides for some manner of risk sharing between the issuer and
purchaser of the policy, on one hand, and some unaffiliated person or persons,
on the other hand, such as by providing for more than one unaffiliated owner of
the company issuing the policy or by providing that a portion of the coverage
furnished will be obtained from some unaffiliated insurer or reinsurer.
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. The
provisions of this Article shall not apply to any proceeding against any
trustee, investment manager or other fiduciary of an employee benefit plan in
that person's capacity as such, even though that person may also be an agent of
the corporation as defined in Section 1 of this Article. Nothing contained in
this Article shall limit the power of the corporation, upon and in the event of
a determination of the Board to indemnify any trustee, investment manager or
other fiduciary of an employee benefit plan, and the corporation may thereupon
indemnify and purchase and maintain insurance on behalf of any such trustee,
investment manager or other fiduciary.
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ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the Board, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
A shareholder or shareholders of the corporation holding at least 5% in the
aggregate of the outstanding voting shares of the corporation may (i) inspect
and copy the records of shareholders' names and addresses and shareholdings
during usual business hours on five business days' prior written demand on the
corporation, and (ii) obtain from the transfer agent, if any, for the
corporation, on written demand and on the tender of such transfer agent's usual
charges for such list, a list of the shareholders' names and addresses, who are
entitled to vote for the election of directors, and their shareholdings, as of
the most recent record date for which the list has been compiled or as of a date
specified by the shareholder after the date of demand. This list shall be made
available to any such shareholder by the transfer agent on or before the later
of 5 days after the demand is received or the date specified in the demand as
the date as of which the list is to be compiled. The record of shareholders
shall also be open to inspection on the written demand of any shareholder or
holder of a voting trust certificate, at any time during usual business hours,
for a purpose reasonably related to the holder's interests as a shareholder or
as the holder of a voting trust certificate. Any inspection and copying under
this Section 1 may be made in person or by an agent or attorney of the
shareholder or holder of a voting trust certificate making the demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office the original or a copy of the Bylaws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in this state, the Secretary shall, upon the written
request of any shareholder, furnish to that shareholder a copy of the Bylaws as
amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the Board and any committee or committees of the Board shall be kept at such
place or places designated by the Board or, in the absence of such designation,
at the principal executive office of the corporation. The minutes shall be kept
in written form and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at
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any reasonable time during usual business hours, for a purpose reasonably
related to the holder's interests as a shareholder or as the holder of a voting
trust certificate. The inspection may be made in person or by an agent or
attorney, and shall include the right to copy and make extracts. These rights
of inspection shall extend to the records of each subsidiary corporation of the
corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. Unless otherwise expressly
required by the General Corporation Law or by this Section 5, the annual report
to shareholders referred to in Section 1501 of the General Corporation Law is
hereby expressly waived and dispensed with; provided, that nothing herein set
forth shall be construed to prohibit or restrict the right of the Board to issue
such annual or other periodic reports to the shareholders of the corporation as
they may from time to time consider appropriate.
In the event that the corporation shall have 100 or more shareholders of
record (determined as provided in Section 605 of the General Corporation Law) at
the close of any fiscal year of the corporation, the Board shall cause a report
to be sent to the shareholders not later than 120 days after the close of said
fiscal year, and each fiscal year thereafter ensuing. The report shall be sent
at least 15 days (or 35 days if sent by third-class mail as permitted by Section
4 of Article II) before the annual meeting of shareholders to be held during the
next fiscal year in the manner specified in Section 4 of Article II of these
Bylaws for reports to shareholders of the corporation. The annual report shall
contain a balance sheet as of the end of the fiscal year and an income statement
and statement of changes in financial position for the fiscal year, accompanied
by any report of independent accountants or, if there is no such report, the
certificate of an authorized officer of the corporation that the statements were
prepared without audit from the books and records of the corporation. The
annual report shall also contain a brief description, as required by Section
1501(b) of the General Corporation Law, of (i) any transaction with interested
officers, directors or shareholders during the previous fiscal year; and (ii)
any indemnification or advance made during the fiscal year to any officer or
director of the corporation.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each such period, that has been prepared by the corporation shall be
kept on file in the principal executive office of the corporation for 12 months,
and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall be
mailed to any such shareholder.
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If any shareholder or shareholders holding at least 5% of the outstanding
shares of any class of stock of the corporation makes a written request to the
corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the then current fiscal year ended more than
30 days before the date of the request, and a balance sheet of the corporation
as of the end of that period, the Chief Financial Officer shall cause that
statement to be prepared, and shall deliver personally or mail that statement or
statements to the person making the request within 30 days after the receipt of
the request. If the corporation has not sent to the shareholders its annual
report for the last fiscal year, this report shall likewise be delivered or
mailed to the requesting shareholder or shareholders within 30 days after the
request.
If the corporation has not sent to the shareholders its annual report for
the last fiscal year, upon the written request of any shareholder made to the
corporation for an income statement for the fiscal year ended more than 120 days
before the date of the request, the Chief Financial Officer shall cause that
statement to be prepared, together with a statement of change in financial
position and a balance sheet as of the end of that period and shall deliver
personally or mail all such statements to the person making the request within
30 days after receipt of the request.
The corporation shall also, on the written request of any shareholder, mail
to the shareholder a copy of the last annual, semi-annual, or quarterly income
statement which it has prepared, and a balance sheet as of the end of that
period.
The quarterly income statements and balance sheet referred to in this
Section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall each year during the calendar month in which its Articles of Incorporation
were originally filed with the California Secretary of State, or at any time
during the immediately preceding 5 calendar months, file with the California
Secretary of State a statement on the prescribed form and in compliance with
Section 1502 of the General Corporation Law.
Section 8. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board.
Section 9. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
Board, except as otherwise provided in these Bylaw, may authorize any officer or
officers or agent or agents to enter into any contract or execute any instrument
in the name of and on behalf of the corporation, and this authority may be
general or confined to specific instances; and, subject to the provisions of
Section 313 of the General Corporation Law, unless
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so authorized or ratified by the Board or within the agency power of an officer,
no officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 10. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any of the shares are fully paid, and the Board may authorize
the issuance of certificates for shares as partly paid provided that
certificates representing such shares shall state the amount of the
consideration to be paid for them and the amount paid. All certificates shall
be signed in the name of the corporation by the Chairman or a Co-Chairman of the
Board or the Chief Executive Officer or the President or Vice President and by
the Chief Financial Officer or an Assistant Treasurer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of 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 on a certificate
shall have ceased to be that officer, transfer agent or registrar before that
certificate is issued, it may be issued by the corporation with the same effect
as if that person were an officer, transfer agent or registrar at the date of
issue.
Section 11. LOST CERTIFICATES. Except as provided in this Section 11,
no new certificate for shares shall be issued to replace an old certificate
unless the latter is surrendered to the corporation and cancelled at the same
time. The Board may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board may require, including
provision for indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
Section 12. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman or a Co-Chairman of the Board, the Chief Executive Officer, the
President, any Vice President or any other person authorized by resolution of
the Board or by any of the foregoing designated officers, is authorized to vote
on behalf of the corporation any and all shares of any other corporation or
corporations, foreign or domestic, standing in the name of the corporation. The
authority granted to these officers to vote or represent on behalf of the
corporation any and all shares held by the corporation in any other corporation
or corporations may be exercised by any of these officers in person or by any
person authorized to do so by proxy duly executed by these officers.
Section 13. STOCK PURCHASE PLANS. The corporation may adopt and carry
out a stock purchase plan or agreement or stock option plan or agreement
providing for the issue and sale for such consideration as may be fixed of its
unissued shares, or of issued shares acquired or to be acquired, to one or more
of the employees or directors of the corporation or of a subsidiary or to a
trustee on their behalf and for the payment for such shares in installments or
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at one time, and may provide for aiding any such persons in paying for such
shares by compensation for services rendered, promissory notes, or otherwise.
Section 14. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law shall govern the construction of these Bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
ARTICLE VII
AMENDMENT
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these Bylaws may be amended or repealed by the vote of holders of a majority of
the outstanding shares entitled to vote; provided, however, that if the Articles
of Incorporation set forth the number of authorized directors of the
corporation, then the authorized number of directors may be changed only by an
amendment of the Articles of Incorporation.
Section 2. AMENDMENT BY DIRECTORS. In addition to the rights of the
shareholders as provided in Section 1 of this Article VII, bylaws, other than a
bylaw or an amendment of a bylaw changing the authorized number of directors
(except to fix the authorized number of directors pursuant to a bylaw providing
for a variable number of directors), may be adopted, amended or repealed by the
board of directors.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) that I am the duly elected and acting Secretary of Data Net
International, Inc., a California corporation; and
(2) that the foregoing Bylaws, comprising 22 pages, constitute the
Bylaws of said Corporation as of July 2, 1997, as duly adopted by the Board of
Directors.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 19th day
of December 1997.
/s/ Mei Yang
---------------------------------
Mei Yang, Secretary
<PAGE>
STANDARD SUBLEASE
American Industrial Real Estate Association
1. PARTIES. This Sublease, dated, for reference purposes only, April 9, 1996,
is made by and between ITT Barton Instruments, a division of International
Telephone and Telegraph, a Delaware corporation (herein called "Sublessor") and
Data Net International 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 Los Angeles, State of California, commonly known as 1304 John Reed, City of
Industry, CA and described as an approximate 6200 SF portion of a larger
concrete tilt-up industrial building. 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 twenty-four and
one/half (24 1/2) months commencing on April 15, 1996 and ending on April 30,
1998 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 obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee shall
not be obligated to pay rent until possession of 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.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $3,968.00, in advance, on the first (1st) day of each month
of the term hereof. Sublessee shall pay Sublessor upon the execution hereof
$1,984.00 as rent for April 15, 1996 to April 30, 1996. 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.
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5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $3,968.00 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 Sublease. 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 the general
office use, warehousing and distribution of computer parts, and for no other
purpose.
6.2. COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that the Premises, in its
existing state, but without regard to the use for which Sublessee will use the
Premises, does not violate any applicable building code regulation or ordinance
at the time that this Sublease is executed. In the event that it is determined
that this warranty has been violated, then it shall be the obligation of the
Sublessor, after written notice from Sublessee, to promptly at Sublessor's sole
cost and expense, rectify any such violation. In the event that Sublessee does
not give to Sublessor written notice of the violation of this warranty within 1
year from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(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.
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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 Sublessee 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.
7. MASTER LEASE.
7.1. 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 April 2, 1993, wherein Northern Trust of
California, N.A., a national banking association, not individually, but in its
capacity as special trustee under Trust #22-81962 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 ________________________________________________.
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.
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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.
4
<PAGE>
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 guarantor's 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
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor nor anyone else liable under
the master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(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 Guarantor 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.
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<PAGE>
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 Per
Separate Agreement, 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
$XXXXXXX for brokerage services rendered by Broker to Sublessor in this
transaction.
10.2. Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein, or any option or right substantially
similar thereto, either to extend the term of this Sublease, to renew the is
Sublease, to purchase the Premises, or to lease or purchase adjacent property
which Sublessor may own or in which Sublessor has an interest, or if Broker is
the procuring cause of any lease, sublease, or sale pertaining to the Premises
or any adjacent property which Sublessor may own or in which Sublessor has an
interest, then as to any of said transactions Sublessor shall pay to Broker a
fee, in cash, in accordance with the schedule of Broker in effect at the time of
the execution of this Sublease. Notwithstanding the foregoing, Sublessor's
obligation under this paragraph 10.2 is limited to a transaction in which
Sublessor is acting as a sublessor, lessor or seller.
10.3. Master lessor agrees, by its consent to this Sublease that if
Sublessee shall exercise any option or right of first refusal granted to
Sublessee by Master Lessor in connection with this Sublease, or any option or
right substantially similar thereto, either to extend the Master Lease, to renew
the Master Lease, to purchase the Premises or any part thereof, or to lease or
purchase adjacent property which Master Lessor may own or in which Master Lessor
has an interest, or if Broker is the procuring cause of any other lease or sale
entered into between Sublessee and Master Lessor pertaining to the Premises, any
part thereof, or any adjacent property which Master Lessor owns or in which it
has an interest, then as to any of said transactions Master Lessor shall pay to
Broker a fee, in cash, in accordance with the schedule of Broker in effect at
the time of its consent to this Sublease.
10.4. Any fee due from Sublessor or master Lessor hereunder shall be due
and payable upon the exercise of any option to extend or renew as to any
extension or renewal, upon the execution of any new lease, as to a new lease
transaction or the exercise of a right of first refusal to lease, or at the
close of escrow, as to the exercise of any option to purchase or other sale
transaction.
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<PAGE>
10.5. Any transferee of Sublessor's interest in this Sublease, or of
master Lessor's interest in the master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this paragraph 10.
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.
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 TO STANDARD SUBLEASE FOR ITEMS: 13, 14, 15, & 16.
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.
-------------------------------------------------
Signatures on Next Page
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<PAGE>
Executed at ---------------------------------
---------------------- By
on -------------------------------
------------------------------- By
address -------------------------------
-------------------------- "Sublessor" (Corporate Seal)
- ---------------------------------
Executed at ITT-Barton Instruments, a division
---------------------- of International Telephone and
on Telegraph,a Delaware Corporation.
-------------------------------
address
--------------------------
- --------------------------------- By
-------------------------------
"Sublessor" (Corporate Seal)
Executed at DataNet International,
---------------------- a California Corporation.
on
-------------------------------
address
--------------------------
- --------------------------------- By
-------------------------------
By
-------------------------------
"Master Lessor" (Corporate Seal)
Executed at
---------------------- -------------------------------
on -------------------------------
------------------------------- -------------------------------
address -------------------------------
-------------------------- "Guarantors"
- ---------------------------------
8
<PAGE>
ADDENDUM TO
STANDARD SUBLEASE DATED APRIL 9, 1996
BY AND BETWEEN
ITT BARTON INSTRUMENTS (SUBLESSOR)
AND
DATA NET INTERNATIONAL, INC. (SUBLESSEE)
13. Sublessee Agrees to:
A. Promptly move out of the Subleased Premises on the Sublease
Termination Date or on the Termination of this Sublease.
B. Indemnify, defend and hold Sublessor harmless from any loss,
attorney's fees, expenses, or claims arising out of use of the
Sublease Premises or resulting from Sublessee's failure to comply
with the "Master Lease."
C. Maintain liability insurance for the Subleased Premises and the
conduct of Sublessee's business which shall be consistent with and
meet the criteria established in section 4.04 (A) of the "Master
Lease". Sublessor shall be named as an additional insured, in the
amounts stated in the "Master Lease."
D. Deliver certificates of insurance to Sublessor before the Sublease
Commencement Date and thereafter when requested.
14. Sublessee Agrees Not To:
A. Alter the Subleased Premises with out prior written approval from
Sublessor. Approval shall not be unreasonably withheld.
B. Allow a lien to be placed on the Subleased Premises.
C. Assign this Sublease or sublease any portion of the Subleased
Premises without Sublessor's prior written consent.
15. General Provisions:
Please see default language as defined in Article Ten (10) of the "Master
Lease."
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<PAGE>
16. Building Improvements:
Sublessor, at Sublessor's sole cost and expense, shall complete the
following building improvements prior to Sublease commencement:
A. Re-carpet existing office.
B. Repair damaged flooring in the bathrooms.
C. Re-paint office walls.
D. Re-tack the ceiling insulation in warehouse.
Sublessor____________ Sublessee ______
page 1 of 1
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
Data Net International, Inc. (the "Company") and James Ung ("Employee"), as of
the 1st day of May, 1997.
I. EMPLOYMENT.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from May 1st,
1997, to and including April 30th, 2002. This Agreement is subject to renewal
only as set forth in Section VI below.
II. DUTIES.
A. Employee shall serve during the course of his employment as President
of the company, and shall have such other duties and responsibilities as the
Chief Executive Officer of the Company shall determine from me to time.
B. Employee agrees to devote substantially all of his time, energy and
ability to the business of the Company. Nothing herein shall prevent Employee,
upon approval of the Board of Directors of the Company, from serving as a
director or trustee of other corporations or businesses which are not in
competition with the business of the Company as set forth in Section IV hereof
or in competition with any present or future affiliate of the Company. Nothing
herein shall prevent Employee from investing in real estate for his own account
or from becoming a partner or a stockholder in any corporation, partnership or
other venture not in competition with the business of the Company as set forth
in Section IV hereof or in competition with any present or future affiliate of
the Company.
C. For term of this Agreement, Employee shall report to the Chief
Executive Officer of the Company or his designee.
III. COMPENSATION.
A. The Company will pay to Employee a base salary at the rate of
$144,000.00 per year. Such salary shall be earned monthly and shall be payable
in periodic installments no less frequently than monthly in accordance with the
Company's customary practices. Amounts payable shall be reduced by standard
withholding and other authorized deductions. The Company may in its discretion
increase Employee's salary but it may not reduce it during the term of this
agreement.
B. BONUS. Employee shall be entitled to receive a quarterly bonus based
upon the following formula: 15% of the Gross Profit (as defined below) of the
Computer Hardware
<PAGE>
Distribution Division of Employer in excess of $100.000.00
during the relevant fiscal quarter. "Gross Profit" means all revenues generated
by the Computer Hardware Distribution Division less cost of goods sold,
insurance shipping and credit/check guarantee fees. The bonus will be paid
within 45 days after the end of each fiscal quarter of Employer based upon sales
during the fiscal quarter. Any disputes regarding the computation of Gross
Profit will be determined by the Employer's independent public accountants whose
determination will be final and binding. Employer agrees to maintain sufficient
accountants to determine the Gross Profit.
C. WELFARE BENEFIT PLANS. Employee and/or his family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the Company
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other peer executives of the Company. Employee will be compensated for up to
ten sick days per year.
D. EXPENSES. Employee shall have access to an expense account in the sum
of $20,400.00 per year. Employee shall be entitled to withdraw from the expense
account to pay for all reasonable employment expenses incurred by his in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
E. FRINGE BENEFITS. Employee shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. VACATION. Employee shall be entitled to two weeks paid vacation per
year, in accordance with the plans, policies, programs and practices as in
effect generally with respect to other peer executives of the Company.
G. CAR ALLOWANCE. Employee shall be entitled to a car allowance in the
sum of $500.00 per month.
H. The Company reserves the right to modify, suspend or discontinue any
and all of the above plans, practices, policies and programs at any time without
recourse by Employee so long as such action is taken generally with respect to
other similarly situated peer executives and does not single out Employee.
IV. TERMINATION.
A. DEATH OR DISABILITY. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that the Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), it may give to Employee written notice in
accordance with Section XIX of its intention to terminate Employee's
employment. In such event, Employee's employment with the Company shall
terminate effective on the 30th day
2
<PAGE>
after receipt of such notice by Employee, provided that, within the 30 days
after such receipt, Employee shall not have returned to full-time performance
of his duties. For purposes of this Agreement, "disability" shall mean a
physical or mental impairment which substantially limits a major life
activity of Employee and which renders Employee unable to perform the
essential functions of his position, even with reasonable accommodation which
does not impose an undue hardship on the Company. The Company reserves the
right, in good faith, to make the determination of disability under this
Agreement based upon information supplied by Employee and/or his medical
personnel, as well as information from medical personnel (or others) selected
by the Company or its insurers. "Incapacity" as used herein shall be limited
only to such Disability which substantially prevents the Company from
availing itself of the services of Employee.
B. CAUSE. The Company may at any time terminate Employee's employment
for Cause. For purposes of this Agreement, "cause" shall mean that the Company,
acting in good faith based upon the information then known to the Company,
determines that Employee has engaged in or committed: willful misconduct; gross
negligence; theft, fraud or other illegal conduct; refusal or unwillingness to
perform his duties; sexual harassment; conduct which reflects adversely upon, or
making any remarks disparaging of, the Company, its Board, officers, directors,
advisors or employees or its affiliates or subsidiaries; insubordination; any
willful act that is likely to and which does in fact have the effect of injuring
the reputation, business or a business relationship of the Company; violation of
any fiduciary duty; violation of any duty of loyalty; and breach of any term of
this Agreement.
C. OTHER THAN CAUSE OR DEATH OR DISABILITY. The Company may terminate
Employee's employment at any time, with or without cause, upon [6 months']
written notice.
D. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
1. DEATH OR DISABILITY. If Employee's employment is terminated by
reason of Employee's Death or Disability, this Agreement shall terminate without
further obligations to Employee or his/her legal representatives under this
Agreement, other than for (a) payment of the sum of (i) employee's annual base
salary through the date of termination to the extent not heretofore paid and
(ii) any compensation previously deferred by Employee (together with any accrued
interest or earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in clauses (i) and
(ii) shall be hereinafter referred to as the "Accrued Obligations"), which shall
be paid to Employee or his estate or beneficiary, as applicable, in a lump sum
in cash within 30 days of the date of termination; and (b) payment to Employee
or his estate or beneficiary, as applicable, any amounts due pursuant to the
terms of any applicable welfare benefit plans.
2. CAUSE. If Employee's employment is terminated by the Company for
Cause, this Agreement shall terminate without further obligations to Employee
other than for the timely payment of Accrued Obligations. If it is subsequently
determined that the Company did
3
<PAGE>
not have Cause for termination under this Section IV-D-2, then the Company's
decision to terminate shall be deemed to have been made under Section IV-D-3
and the amounts payable thereunder shall be the only amounts Employee may
receive for his termination.
3. OTHER THAN CAUSE OF DEATH OR DISABILITY. If the Company
terminates Employee's employment for other than Cause or Death or Disability,
this Agreement shall terminate without further obligations to Employee other
than for the timely payment of Accrued Obligations.
4. EXCLUSIVE REMEDY. Employee agrees that the payments contemplated
by this Agreement shall constitute the exclusive and sole remedy for any
termination of his employment and Employee covenants not to assert or pursue any
other remedies, at law or in equity, with respect to any termination of
employment.
V. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Los Angeles County, California in accordance with
California Civil Procedures Code Sections 1282-1284.2. In the event either
party institutes arbitration under this Agreement, the party prevailing in any
such litigation shall be entitled, in addition to all other relief, to
reasonable attorneys' fees relating to such arbitration. The non-prevailing
party shall be responsible for all costs of the arbitration, including but not
limited to, the arbitration fees, court reporter fees, etc.
VI. RENEWAL.
This Agreement shall be automatically renewed for one additional year each
year after the expiration of the stated term, unless one party or the other
gives notice, in writing, at least (30) days prior to the expiration of this
Agreement (or any renewal) of their desire to terminate the Agreement or modify
its terms.
VII. ANTI-SOLICITATION.
Employee promises and agrees that during the term of this Agreement or
renewal in accordance with Section VI above, he will not influence or attempt to
influence customers of the Company or any of its present or future subsidiaries
or affiliates, either directly or indirectly to divert their business to any
individual, partnership, firm, corporation or other entity then in competition
with the business of the Company, or any subsidiary or affiliate of the Company.
VIII. JOINING FORMER COMPANY EMPLOYEES.
4
<PAGE>
Employee promises and agrees that for one year following his termination of
employment other than pursuant to Section IV-C above or Disability above or
expiration of this Agreement, he will not enter business or work with any person
who was employed with the Company, and who earned annually $25,000 or more as a
Company employee during the last six months of his or her won employment, in any
business, partnership, firm, corporation or other entity then in competition
with the business of the Company or any subsidiary or affiliate of the Company.
IX. SOLICITING EMPLOYEES.
Employee promises and agrees that he will not, for a period of one year
following termination of his accordance with Section VI above, directly or
indirectly solicit any of the Company employees who earned annually $25,000 or
more as a Company employee during the last six months of his or her own
employment to work for any business, individual, partnership, firm, corporation,
or other entity then in competition with the business of the Company or any
subsidiary or affiliate of the Company.
X. CONFIDENTIAL INFORMATION.
A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including but in no way limited to development, marketing,
organizational, financial, management, administrative, production,
distribution and sales information, data, specifications and processes
presently owned or at any time in the future developed, by the Company or its
agents or consultants, or used presently or at any time in the future in the
course of its business that is not otherwise part of the public domain
(collectively, the "confidential Material"). All such confidential Material
is considered secret and will be available to Employee in confidence. Except
in the performance of duties on behalf of the Company, Employee shall
disclose or use any such Confidential Material, unless such Confidential
Material ceases (through no fault of Employee's) to be confidential because
it has become party of the public domain. All records, files, drawings,
documents, equipment and other tangible items, wherever located, relating in
any way to the Confidential Material or otherwise to the Company's business,
which Employee prepares, uses or encounters, shall be and remain the
Company's sole and exclusive property and shall be included in the
Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, Employee shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Employee's
possession or under Employee's control.
B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material by any means whatsoever
and any time before, during or after Employee's employment with the Company
shall constitute unfair Competition. Employee agrees that Employee shall not
engage in Unfair Competition either during the time employed by the Company or
any time thereafter.
5
<PAGE>
XI. SUCCESSORS.
A. This Agreement is personal to Employee and shall not, without the
prior written consent of the Company, be assignable by Employee.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
XII. WAIVER.
No waiver of any breach of any term or provisions of this Agreement shall
be construed to be, nor shall be, a waiver of any other breach of this
agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.
XIII. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by Employee and an officer of the Company following
authorization by the Board of Directors of the Company.
XIV. SAVING CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not effect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
XV. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning Employee's employment with the Company and the other
subject matters addressed herein between the parties. It is extended by the
parties as a complete and exclusive statement of the terms of their agreement.
It supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matter hereof. Any
representation, promise or agreement, not specifically included in this
Agreement shall not be binding upon or enforceable against either party. This
is a fully integrated agreement.
XVI. GOVERNING LAW.
6
<PAGE>
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XVII. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XVIII. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly give if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to Employee at 20110
Roundtree Court, Walnut, CA 91789, or addressed to the Company at 1304 John Reed
Court, City of Industry, CA 91745. Either party may change the address at which
notice shall be given by written notice given in the above manner.
XIX. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be
used in lieu of the original for any purpose.
XX. LEGAL COUNSEL.
Employee and the Company recognize that this is a legally binding contract
and acknowledge and agree that they have had the opportunity to consult with
legal counsel of their choice.
In witness whereof, the parties hereto have executed this Agreement as of
the date first above written.
Data Net International
By
---------------------------- -------------------------------
Its Chief Executive Officer "Employee"
7
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 (the "Amendment"), dated as of July 1, 1997, to that
certain Employment Agreement (the "Employment Agreement") by and between , Data
Net International, Inc. (the "Company") and James Ung ("Employee"), dated as of
the 1st day of May, 1997, with reference to the following facts:
RECITALS
WHEREAS, Employee is currently serving as President of the Company pursuant
to the terms and conditions of the Employment Agreement;
WHEREAS, Employee and the Company have orally agreed to amend the
Employment Agreement;
WHEREAS, Employee and the Company wish to memorialize the terms and
conditions of the Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee agree as
set forth below.
1. Sections III(A), III(B), IV(C) and IV(D)(3) of the Employment Agreement
shall be deleted in their entirety.
2. The following provisions shall be inserted as Sections III(A) and (B) to
the Employment Agreement:
III. COMPENSATION.
A. SALARY. The Company will pay to Employee a base salary at the
annual rate of $144,000.00 up to and including September 30, 1997 and thereafter
at the annual rate of $192,000.00 during the remaining term of his employment
pursuant to the Employment Agreement. Such salary shall be earned monthly and
shall be payable in periodic installments no less frequently than monthly in
accordance with the Company's customary practices. The Company may in its
discretion increase Employee's salary pursuant to this Paragraph III(A), but it
may not reduce it during the term of the Employment Agreement. If Employee
accepts such increase, the Employment Agreement will continue in full force and
effect whether or not it has been amended to reflect such increase.
B. STOCK OPTIONS. The Company shall grant to Employee, concurrent
with the execution of this Amendment, options to purchase 9,000 shares of the
Company's Common Stock (the "Options"), exercisable at a per share exercise
price of $29.55 per share, subject to the vesting requirements set forth in the
Option Certificate to be signed by Employee, a copy of which is attached hereto
and made a part hereof.
<PAGE>
3. The following provisions shall be inserted as Sections IV(C) and (D)(3) to
the Employment Agreement:
IV. TERMINATION.
C. OTHER THAN CAUSE OR DEATH OR DISABILITY. The Company may
terminate Employee's employment other than for the reasons set forth in
Paragraphs IV(A) and (B) of the Employment Agreement upon written notice.
D. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
3. If the Company terminates Employee's employment for other
than Cause or Death or Disability, it shall continue to pay to Employee, in
installments in the same manner and at the same times the Company pays base
salaries to other executive officers of the Company, Employee's then current
base salary pursuant to Paragraph III(A) of the Employment Agreement, as
amended, for the lesser of (i) six (6) months, commencing on the date of notice
of termination pursuant to this Paragraph IV(C) or (ii) the remainder of the
term of this Agreement (the "Severance Period"), and the Company shall continue
to provide Executive benefits pursuant to Paragraph III(C) of this Agreement
during the Severance Period until comparable benefits are obtained by Employee
from another employer.
4. Other than the deletion and addition of the terms set forth in paragraphs
1, 2 and 3 above, all terms of the Employment Agreement shall remain in full
force and effect.
5. This Amendment has been negotiated and entered into in the State of
California and shall be construed in accordance with the laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on
its behalf by its duly authorized officer and Employee has executed the same as
of the day and year first above written.
Data Net International, Inc.
By
---------------------------- -----------------------------
Its Chief Executive Officer Employee
<PAGE>
OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Data Net International, Inc., a California
corporation (the "COMPANY"), has granted to the person named below ("OPTIONEE")
a non-statutory stock option (the "OPTION") to purchase shares of the Company's
Common Stock (the "SHARES") under its 1997 Stock Plan and upon the terms and
conditions as follows:
Name of Optionee: James Ung
---------------------------------------
Address of Optionee: 20110 E. Roundtree Court
---------------------------------------
Walnut, CA 91789
---------------------------------------
Number of Shares: 9,000
---------------------------------------
Option Exercise Price: $ 29.55 per share
-------
Date of Grant: July 1, 1997
--------------
Option Expiration Date: July 1, 2007
--------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
One quarter (1/4) of the options shall vest on July 1, 1997. The remaining
three quarters (3/4) shall vest on the first day of each calendar month for
forty seven (47) months thereafter in forty seven (47) equal installments of
one-forty eighth (1/48) of the remaining shares rounded down to the nearest
whole share, and all remaining shares shall vest on July 1, 2001; provided,
however, that if the employment of Optionee pursuant to that certain Employment
Agreement between Optionee and the Company dated May 1, 1997 is terminated
without cause by the Company, then all unvested shares shall vest immediately
upon such termination.
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-statutory Stock Option) (the "OPTION AGREEMENT") which is
attached to this Option Certificate (the "CERTIFICATE") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the
Option Agreement, not by this summary. The Company strongly suggests that
you carefully review the full Option Agreement prior to signing this
Certificate or exercising the Option.
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Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without
cause. See Section 5(d) of the Option Agreement.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company. If your employment ends due to death or permanent disability, the
Option terminates six months after the date of death or disability, and is
exercisable during such six-month period as to the portion of the Option which
had vested prior to the date of death or disability. In all other cases, the
Option terminates 30 days after the date of termination of employment, and is
exercisable during such time period as to the portion of the Option which had
vested prior to the date of termination of employment; PROVIDED, HOWEVER, if you
are terminated "for cause," the Option will terminate 5 days after the date of
termination of your employment and is exercisable during such time period as to
the portion of the Option which had vested prior to the date of termination of
employment. See Section 5 of the Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold, transferred,
assigned or otherwise disposed of to any other person, except on your death.
See Section 15(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Section 4 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any of
your Shares without the prior written consent of the Company or its underwriters
for a period of up to 180 days after the effective date of the offering. See
Section 6(a) of the Option Agreement.
ADJUSTMENTS UPON RECAPITALIZATION: The Option contains provisions which
affect your rights in the event of stock splits, stock dividends, mergers and
other major corporate reorganizations. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to options or stock which may otherwise
have been promised to you. See Section 8 of the Option Agreement.
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<PAGE>
WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
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<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
Data Net International, Inc. (the "Company") and Mei Yoon Yang ("Employee"), as
of the 1st day of July, 1997.
I. EMPLOYMENT.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from July 1,
1997, to and including June 30, 2002. This Agreement is subject to renewal
only as set forth in Section VI below.
II. DUTIES.
A. Employee shall serve during the course of her employment as
Secretary and Treasurer of the Company, and shall have such other duties and
responsibilities as the Chief Executive Officer of the Company shall
determine from time to time.
B. Employee agrees to devote substantially all of her time, energy and
ability to the business of the Company. Nothing herein shall prevent
Employee, upon approval of the Board of Directors of the Company, from
serving as a director or trustee of other corporations or businesses which
are not in competition with the business of the Company as set forth in
Section IV hereof or in competition with any present or future affiliate of
the Company. Nothing herein shall prevent Employee from investing in real
estate for her own account or from becoming a partner or a stockholder in any
corporation, partnership or other venture not in competition with the
business of the Company as set forth in Section IV hereof or in competition
with any present or future affiliate of the Company.
C. During the term of this Agreement, Employee shall report to the
Chief Executive Officer of the Company or his designee.
III. COMPENSATION.
A. The Company will pay to Employee a base salary at the annual rate of
$40,000.00 up to and including September 30, 1997 and thereafter at the
annual rate of $72,000.00 during the remaining term of this Agreement. Such
salary shall be earned monthly and shall be payable in periodic installments
no less frequently than monthly in accordance with the Company's customary
practices. Amounts payable shall be reduced by standard withholding and other
authorized deductions. The Company may in its discretion increase Employee's
salary but it may not reduce it during the term of this agreement.
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B. STOCK OPTIONS. The Company shall grant to Employee, concurrent with
the execution of this Agreement, options to purchase 2,500 shares of the
Company's Common Stock (the "Options"), exercisable at a per share exercise
price of $29.55 per share, subject to the vesting requirements set forth in
the Option Certificate to be signed by Employee, a copy of which is attached
hereto and made a part hereof.
C. WELFARE BENEFIT PLANS. Employee and/or her family, as the case may
be, shall be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death
and travel accident insurance plans and programs) to the extent applicable
generally to other peer executives of the Company. Employee will be
compensated for up to ten sick days per year.
D. EXPENSES. Employee shall have access to an expense account in the
sum of $20,400.00 per year. Employee shall be entitled to withdraw from the
expense account to pay for all reasonable employment expenses incurred by her
in accordance with the policies, practices and procedures as in effect
generally with respect to other peer executives of the Company.
E. FRINGE BENEFITS. Employee shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. VACATION. Employee shall be entitled to two weeks paid vacation per
year, in accordance with the plans, policies, programs and practices as in
effect generally with respect to other peer executives of this Company.
G. CAR ALLOWANCE. Employee shall be entitled to a car allowance in the
sum of $500.00 per month.
H. The Company reserves the right to modify, suspend or discontinue any
and all of the above plans, practices, policies and programs at any time
without recourse by Employee so long as such action is taken generally with
respect to other similarly situated peer executives and does not single out
Employee.
IV. TERMINATION.
A. DEATH OR DISABILITY. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that the Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), it may give to Employee written notice in
accordance with Section XIX of its intention to terminate effective on the
30th day after receipt of such notice by Employee, provided that, within the
30 days after such receipt, Employee shall not have returned to full-time
performance of her duties. For purposes of this Agreement, "disability"
shall mean a physical or mental impairment which substantially limits a
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<PAGE>
major life activity of Employee and which renders Employee unable to perform
the essential functions of her position, even with reasonable accommodation
which does not impose an undue hardship on the Company. The Company reserves
the right, in good faith, to make the determination of disability under this
Agreement based upon information supplied by Employee and/or her medical
personnel, as well as information from medical personnel (or others) selected
by the Company or its insurers. "Incapacity" as used herein shall be limited
only to such Disability which substantially prevents the Company from
availing itself of the services of Employee.
B. CAUSE. The Company may at any time terminate Employee's
employment for Cause. For purposes of this Agreement, "cause" shall mean
that the Company, acting in good faith based upon the information then known
to the Company, determines that Employee has engaged in or committed:
willful misconduct; gross negligence; theft, fraud or other illegal conduct;
refusal or unwillingness to perform her duties; sexual harassment; conduct
which reflects adversely upon, or making any remarks disparaging of, the
Company, its Board officers, directors, advisors or employees or its
affiliates or subsidiaries; insubordination; any willful act that is likely
to and which does in fact have the effect of injuring the reputation,
business or a business relationship of the Company; violation of any
fiduciary duty; violation of any duty of loyalty; and breach of any term of
this Agreement.
C. OTHER THAN CAUSE OR DEATH OR DISABILITY. The Company may
terminate Employee's employment at any time, with or without cause, upon
written notice.
D. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
1. DEATH OR DISABILITY. If Employee's employment is terminated
by reason of Employee's Death or Disability, this Agreement shall terminate
without further obligations to Employee or her/her legal representatives
under this Agreement, other than for (a) payment of the sum of (i) employees
annual base salary through the date of termination to the extent not
heretofore paid and (ii) any compensation previously deferred by Employee
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (i) and (ii) shall be hereinafter referred to as
the "Accrued Obligations"), which shall be paid to Employee or her estate or
beneficiary, as applicable, in a lump sum in cash within 30 days of the date
of termination; and (b) payment to Employee or her estate or beneficiary, as
applicable, any amounts due pursuant to the terms of any applicable welfare
benefit plans.
2. CAUSE. If Employee's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
Employee other than for the timely payment of Accrued Obligations. If it is
subsequently determined that the Company did not have Cause for termination
under this Section IV(D)(2), then the Company's decision to terminate shall
be deemed to have been made under Section IV(D)(3) and the amounts payable
thereunder shall be the only amounts Employee may receive for her termination.
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<PAGE>
3. OTHER THAN CAUSE OR DEATH OR DISABILITY. If the Company
terminates Employee's employment for other than Cause of Death or Disability,
this Agreement shall terminate without further obligations to Employee other
than for the timely payment of Accrued Obligations.
4. EXCLUSIVE REMEDY. Employee agrees that the payments
contemplated by this Agreement shall constitute the exclusive and sole remedy
for any termination of her employment and Employee covenants not to assert or
pursue any other remedies, at law or in equity, with respect to any
termination of employment.
V. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement,
its enforcement or interpretation, or because of an alleged breach, default
or misrepresentation in connection with any of its provisions, shall be
submitted to arbitration, to be held in Los Angeles County, California in
accordance with California Civil Procedures Code Sections 1282-1284.2. In
the event either party institutes arbitration under this Agreement, the party
prevailing in any such litigation shall be entitled, in addition to all other
relief, to reasonable attorneys' fees relating to such arbitration. The non
prevailing party shall be responsible for all costs of the arbitration,
including but not limited to, the arbitration fees, court reporter fees, etc.
VI. RENEWAL.
This Agreement shall be automatically renewed for consecutive periods
ofone year, each after the expiration of the stated term, unless one party or
the other gives notice, in writing, at least thirty (30) days prior to the
expiration of this Agreement (or any renewal) of their desire to terminate
the Agreement or modify its terms.
VII. ANTI-SOLICITATION.
Employee promises and agrees that during the term of this Agreement or
renewal in accordance with Section VI above, she will not influence or
attempt to influence customers of the Company or any of its present or future
subsidiaries or affiliates, either directly or indirectly to divert their
business to any individual, partnership, firm, corporation or other entity
then in competition with the business of the Company, or any subsidiary or
affiliate of the Company.
VIII. JOINING FORMER COMPANY EMPLOYEES.
Employee promises and agrees that for one year following her termination
of employment, other than pursuant to Section IV(A) or (C) above or
expiration of this Agreement, she will not enter business or work with any
person who was employed with the Company, and who earned annually $25,000 or
more as a Company employee during the last six months of her or her own
4
<PAGE>
employment, in any business, partnership, firm, corporation or other entity
then in competition with the business of the Company or any subsidiary or
affiliate of the Company.
IX. SOLICITING EMPLOYEES.
Employee promises and agrees that she will not, for a period of one year
following termination of her employment in accordance with Section VI above,
directly or indirectly solicit any of the Company employees who earned
annually $25,000 or more as a Company employee during the last six months of
her or her own employment to work for any business, individual, partnership,
firm, corporation, or other entity then in competition with the business of
the Company or any subsidiary or affiliate of the Company.
X. CONFIDENTIAL INFORMATION.
A. Employee, in the performance of Employee's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including but in no way limited to development, marketing,
organizational, financial, management, administrative, production,
distribution and sales information, data, specifications and processes
presently owned or at any time in the future developed, by the Company or its
agents or consultants, or used presently or at any time in the future in the
course of its business that is not otherwise part of the public domain
(collectively, the "Confidential Material"). All such Confidential Material
is considered secret and will be available to Employee in confidence. Except
in the performance of duties on behalf of the Company, Employee shall
disclose or use any such Confidential Material, unless such Confidential
Material ceases (through no fault of Employee's) to be confidential because
it has become part of the public domain. All records, files, drawings,
documents, equipment and other tangible items, wherever located, relating in
any way to the Confidential Material or otherwise to the Company's business,
which Employee prepares, uses or encounters, shall be and remain the
Company's sole and exclusive property and shall be included in the
Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, Employee shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Employee's
possession or under Employee's control.
B. Employee hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material by any means
whatsoever and any time before, during or after Employee's employment with
the Company shall constitute unfair Competition. Employee agrees that
Employee shall not engage in Unfair Competition either during the time
employed by the Company or any time thereafter.
XI. SUCCESSORS.
A. This Agreement is personal to Employee and shall not, without the
prior written consent of the Company, be assignable by Employee.
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<PAGE>
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee
shall be deemed substituted for the Company under the terms of this Agreement
for all purposes. As used herein, "successor" and "assignee" shall include
any person, firm, corporation or other business entity which at any time,
whether by purchase, merger or otherwise, directly or indirectly acquires the
stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise.
XII. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall
be construed to be, nor shall be, a waiver of any other breach of this
agreement. No waiver shall be binding unless in writing and signed by the
party waiving the breach.
XIII. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by Employee and an officer of the Company following
authorization by the Board of Directors of the Company.
XIV. SAVING CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not effect other provisions or applications of
the Agreement which can be given effect without invalid provisions or
application and to this end the provisions of this Agreement are declared to
be severable.
XV. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning Employee's employment with the Company and the other
subject matters addressed herein between the parties. It is extended by the
parties as a complete and exclusive statement of the terms of their
agreement. It supersedes and replaces all prior negotiations and all
agreements proposed or otherwise, whether written or oral, concerning the
subject matter hereof. Any representation, promise or agreement, not
specifically included in this Agreement shall not be binding upon or
enforceable against either party. This is a fully integrated agreement.
XVI. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with and governed by,
by the laws of the State of California without regard to principles of
conflict of laws.
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XVII. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
XVIII.NOTICES.
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered or if
mailed by registered or certified mail, postage prepaid, addressed as follows:
If to Employee: Mei Yoon Yang
20110 E. Roundtree Court
Walnut, California 91789
If to Company: Data Net International, Inc.
1304 John Reed Court
City of Industry, CA 91745
Either party may change the address at which notice shall be given by written
notice given in the above manner.
XIX. EXECUTION.
This Agreement is being executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Photographic copies of such signed counterparts
may be used in lieu of the original for any purpose.
XX. LEGAL COUNSEL.
Employee and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have had the opportunity to
consult with legal counsel of their choice.
7
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
Data Net International, Inc.
By
---------------------------------- --------------------------------
Its Chief Executive Officer Employee
8
<PAGE>
OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Data Net International, Inc., a California
corporation (the "COMPANY"), has granted to the person named below ("OPTIONEE")
a non-statutory stock option (the "OPTION") to purchase shares of the Company's
Common Stock (the "SHARES") under its 1997 Stock Plan and upon the terms and
conditions as follows:
Name of Optionee: Mei Yoon Yang
--------------------------------------
Address of Optionee: 20110 E. Roundtree Court
--------------------------------------
Walnut, CA 91789
--------------------------------------
Number of Shares: 2,500
--------------------------------------
Option Exercise Price: $ 29.55 per share
--------
Date of Grant: July 1, 1997
--------------
Option Expiration Date: July 1, 2007
--------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
One quarter (1/4) of the options shall vest on July 1, 1997. The remaining
three quarters (3/4) shall vest on the first day of each calendar month for
forty seven (47) months thereafter in forty seven (47) equal installments of
one-forty eighth (1/48) of the remaining shares rounded down to the nearest
whole share, and all remaining shares shall vest on July 1, 2001; provided,
however, that if the employment of Optionee pursuant to that certain Employment
Agreement between Optionee and the Company dated July 1, 1997 is terminated
without cause by the Company, then all unvested shares shall vest immediately
upon such termination.
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-statutory Stock Option) (the "OPTION AGREEMENT") which is
attached to this Option Certificate (the "CERTIFICATE") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the Option
Agreement, NOT by this summary. The Company strongly suggests that you
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
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Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without
cause. See Section 5(d) of the Option Agreement.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company. If your employment ends due to death or permanent disability, the
Option terminates six months after the date of death or disability, and is
exercisable during such six-month period as to the portion of the Option
which had vested prior to the date of death or disability. In all other
cases, the Option terminates 30 days after the date of termination of
employment, and is exercisable during such time period as to the portion of
the Option which had vested prior to the date of termination of employment;
PROVIDED, HOWEVER, if you are terminated "for cause," the Option will
terminate 5 days after the date of termination of your employment and is
exercisable during such time period as to the portion of the Option which had
vested prior to the date of termination of employment. See Section 5 of the
Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold,
transferred, assigned or otherwise disposed of to any other person, except on
your death. See Section 15(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Section 4 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any
of your Shares without the prior written consent of the Company or its
underwriters for a period of up to 180 days after the effective date of the
offering. See Section 6(a) of the Option Agreement.
ADJUSTMENTS UPON RECAPITALIZATION: The Option contains provisions which
affect your rights in the event of stock splits, stock dividends, mergers and
other major corporate reorganizations. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to options or stock which may
otherwise have been promised to you. See Section 8 of the Option Agreement.
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WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
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EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
Data Net International, Inc. (the "Company") and Max Toghraie ("Executive"), as
of the 1st day of July, 1997.
I. EMPLOYMENT.
The Company hereby employs Executive and Executive hereby accepts such
employment, upon the terms and conditions hereinafter set forth, from July 1,
1997, to and including June 30, 2002. This Agreement is subject to renewal only
as set forth in Section VI below.
II. DUTIES.
A. Executive shall, during course of his employment, serve as Chief
Executive Officer and a director of the Board of Directors of the Company, and
shall have such other duties and responsibilities as the Board of Directors of
the Company shall determine from time to time.
B. Executive agrees to devote substantially all of his time, energy and
ability to the business of the Company. Nothing herein shall prevent Executive,
upon approval of the Board of Directors of the Company, from serving as a
director or trustee of other corporations or businesses which are not in
competition with the business of the Company as set forth in Section IV hereof
or in competition with any present or future affiliate of the Company. Nothing
herein shall prevent Executive from investing in real estate for his own account
or from becoming a partner or a stockholder in any corporation, partnership or
other venture not in competition with the business of the Company as set forth
in Section IV hereof or in competition with any present or future affiliate of
the Company.
C. During the term of this Agreement, Executive shall be the most senior
executive officer in the Company and shall report to the Board of Directors of
the Company.
III. COMPENSATION.
A. The Company will pay to Executive a base salary at the annual rate of
$144,000.00 up to and including September 30, 1997 and thereafter at the annual
rate of $192,000.00 during the remaining term of his employment pursuant to this
Agreement. Such salary shall be earned monthly and shall be payable in periodic
installments no less frequently than monthly in accordance with the Company's
customary practices. Amounts payable shall be reduced by standard withholding
and other authorized deductions. The Company may in its discretion increase
Executive's salary but it may not reduce it during the term of this Agreement.
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B. STOCK OPTIONS. The Company shall grant to Executive, concurrent with
the execution of this Agreement, options to purchase 11,500 shares of the
Company's Common Stock (the "Options"), exercisable at a per share exercise
price of $29.55 per share, subject to the vesting requirements set forth in the
Option Certificate to be signed by Executive, a copy of which is attached hereto
and made a part hereof.
C. WELFARE BENEFIT PLANS. Executive and/or his family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the Company
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other peer executives of the Company. Executive will be compensated for up to
ten sick days per year.
D. EXPENSES. Executive shall have access to an expense account in the sum
of $20,400.00 per year. Executive shall be entitled to withdraw from the
expense account to pay for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
E. FRINGE BENEFITS. Executive shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. VACATION. Executive shall be entitled to two weeks paid vacation per
year, in accordance with the plans, policies, programs and practices as in
effect generally with respect to other peer executives of the Company.
G. CAR ALLOWANCE. Executive shall be entitled to a car allowance in the
sum of $500.00 per month.
H. The Company reserves the right to modify, suspend or discontinue any
and all of the above plans, practices, policies and programs at any time without
recourse by Executive so long as such action is taken generally with respect to
other similarly situated peer executives and does not single out Executive.
IV. TERMINATION.
A. DEATH OR DISABILITY. Executive's employment shall terminate
automatically upon Executive's death. If the Company determines in good faith
that the Disability of Executive has occurred (pursuant to the definition of
Disability set forth below), it may give to Executive written notice in
accordance with Section XIX of its intention to terminate, effective on the 30th
day after receipt of such notice by Executive, provided that, within the 30 days
after such receipt, Executive shall not have returned to full-time performance
of his duties. For purposes of this Agreement, "disability" shall mean a
physical or mental impairment which substantially limits a major life
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activity of Executive and which renders Executive unable to perform the
essential functions of his position, even with reasonable accommodation which
does not impose an undue hardship on the Company. The Company reserves the
right, in good faith, to make the determination of disability under this
Agreement based upon information supplied by Executive and/or his medical
personnel, as well as information from medical personnel (or others) selected
by the Company or its insurers. "Incapacity" as used herein shall be limited
only to such Disability which substantially prevents the Company from
availing itself of the services of Executive.
B. CAUSE. The Company may at any time terminate Executive's employment
for "cause," which shall be based solely upon a good-faith determination by a
majority vote of the Company's Board of Directors that such termination of such
employment is necessary for the welfare of, and in the best interests of, the
Company by reason of: (i) acts of dishonesty, theft, misappropriation of
corporate assets; (ii) willful and repeated failure to follow explicit
instructions of the Company's Board of Directors; (iii) willful malfeasance;
(iv) willful nonfeasance; and (v) breach of any material term of this Agreement.
C. OTHER THAN CAUSE OR DEATH OR DISABILITY. The Company may terminate
Executive's employment other than for the reasons set forth in Sections IV(A)
and (B) above upon written notice.
D. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
1. DEATH OR DISABILITY. If Executive's employment is terminated
by reason of Executive's Death or Disability, this Agreement shall terminate
without further obligations to Executive or his/her legal representatives under
this Agreement, other than for (a) payment of the sum of (i) employees annual
base salary through the date of termination to the extent not heretofore paid
and (ii) any compensation previously deferred by Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each case
to the extent not theretofore paid (the sum of the amounts described in clauses
(i) and (ii) shall be hereinafter referred to as the "Accrued Obligations"),
which shall be paid to Executive or his estate or beneficiary, as applicable, in
a lump sum in cash within 30 days of the date of termination; and (b) payment to
Executive or his estate or beneficiary, as applicable, any amounts due pursuant
to the terms of any applicable welfare benefit plans.
2. CAUSE. If Executive's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
Executive other than for the timely payment of Accrued Obligations. If it is
subsequently determined that the Company did not have Cause for termination
under this Section IV(D)(2), then the Company's decision to terminate shall be
deemed to have been made under Section IV(D)(3) and the amounts payable
thereunder shall be the only amounts Executive may receive for his termination.
3. OTHER THAN CAUSE OR DEATH OR DISABILITY. If the Company
terminates Executive's employment for other than Cause or Death or Disability,
it shall continue to pay to
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Executive, in installments in the same manner and at the same times the
Company pays base salaries to other executive officers of the Company,
Executive's then current base salary pursuant to Section III(A) of this
Agreement, for the lesser of (i) twenty four (24) months, commencing on the
date of notice of termination pursuant to this Section IV(C) or (ii) the
remainder of the term of this Agreement (the "Severance Period"), and the
Company shall continue to provide Executive benefits pursuant to Section
III(C) of this Agreement during the Severance Period until comparable
benefits are obtained by Executive from another employer.
4. EXCLUSIVE REMEDY. Executive agrees that the payments
contemplated by this Agreement shall constitute the exclusive and sole remedy
for any termination of his employment and Executive covenants not to assert or
pursue any other remedies, at law or in equity, with respect to any termination
of employment.
V. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Los Angeles County, California in accordance with
California Civil Procedures Code Sections 1282-1284.2. In the event either
party institutes arbitration under this Agreement, the party prevailing in any
such litigation shall be entitled, in addition to all other relief, to
reasonable attorneys' fees relating to such arbitration. The non prevailing
party shall be responsible for all costs of the arbitration, including but not
limited to, the arbitration fees, court reporter fees, etc.
VI. RENEWAL.
This Agreement shall be automatically renewed for consecutive periods of
one year each, after the expiration of the stated term, unless one party or the
other gives notice, in writing, at least (30) days prior to the expiration of
this Agreement (or any renewal) of their desire to terminate the Agreement or
modify its terms.
VII. ANTI-SOLICITATION.
Executive promises and agrees that during the term of this Agreement or
renewal in accordance with Section VI above, he will not influence or attempt to
influence customers of the Company or any of its present or future subsidiaries
or affiliates, either directly or indirectly to divert their business to any
individual, partnership, firm, corporation or other entity then in competition
with the business of the Company, or any subsidiary or affiliate of the Company.
VIII. JOINING FORMER COMPANY EMPLOYEES.
Executive promises and agrees that for one year following his termination
of employment other than pursuant to Section IV(C) above or Disability above or
expiration of this Agreement,
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he will not enter business or work with any person who was employed with the
Company, and who earned annually $25,000 or more as a Company employee during
the last six months of his or her own employment, in any business,
partnership, firm, corporation or other entity then in competition with the
business of the Company or any subsidiary or affiliate of the Company.
IX. SOLICITING EMPLOYEES.
Executive promises and agrees that he will not, for a period of one year
following termination of his accordance with Section VI above, directly or
indirectly solicit any of the Company employees who earned annually $25,000 or
more as a Company employee during the last six months of his or her own
employment to work for any business, individual, partnership, firm, corporation,
or other entity then in competition with the business of the Company or any
subsidiary or affiliate of the Company.
X. CONFIDENTIAL INFORMATION.
A. Executive, in the performance of Executive's duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including but in no way limited to development, marketing,
organizational, financial, management, administrative, production,
distribution and sales information, data, specifications and processes
presently owned or at any time in the future developed, by the Company or its
agents or consultants, or used presently or at any time in the future in the
course of its business that is not otherwise part of the public domain
(collectively, the "Confidential Material"). All such Confidential Material
is considered secret and will be available to Executive in confidence.
Except in the performance of duties on behalf of the Company, Executive shall
disclose or use any such Confidential Material, unless such Confidential
Material ceases (through no fault of Executive's) to be confidential because
it has become part of the public domain. All records, files, drawings,
documents, equipment and other tangible items, wherever located, relating in
any way to the Confidential Material or otherwise to the Company's business,
which Executive prepares, uses or encounters, shall be and remain the
Company's sole and exclusive property and shall be included in the
Confidential Material. Upon termination of this Agreement by any means, or
whenever requested by the Company, Executive shall promptly deliver to the
Company any and all of the Confidential Material, not previously delivered to
the Company, that may be or at any previous time has been in Executive's
possession or under Executive's control.
B. Executive hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material by any means whatsoever
and any time before, during or after Executive's employment with the Company
shall constitute unfair Competition. Executive agrees that Executive shall not
engage in Unfair Competition either during the time employed by the Company or
any time thereafter.
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XI. SUCCESSORS.
A. This Agreement is personal to Executive and shall not, without the
prior written consent of the Company, be assignable by Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
XII. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
XIII. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by Executive and an officer of the Company following
authorization by the Board of Directors of the Company.
XIV. SAVING CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not effect other provisions or applications of the
Agreement which can be given effect without invalid provisions or application
and to this end the provisions of this Agreement are declared to be severable.
XV. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning Executive's employment with the Company and the other
subject matters addressed herein between the parties. It is extended by the
parties as a complete and exclusive statement of the terms of their agreement.
It supersedes and replaces all prior negotiations and all agreements proposed or
otherwise, whether written or oral, concerning the subject matter hereof. Any
representation, promise or agreement, not specifically included in this
Agreement shall not be binding upon or enforceable against either party. This
is a fully integrated agreement.
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XVI. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XVII. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XVIII. NOTICES.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed as follows:
If to Executive: Max Toghraie
254 Cedar Heights
Thousand Oaks, California 91360
If to Company: Data Net International, Inc.
1304 John Reed Court
City of Industry, CA 91745
Either party may change the address at which notice shall be given by written
notice given in the above manner.
XIX. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be
used in lieu of the original for any purpose.
XX. LEGAL COUNSEL.
Executive and the Company recognize that this is a legally binding contract
and acknowledge and agree that they have had the opportunity to consult with
legal counsel of their choice.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
Data Net International, Inc.
By
------------------------------------ ----------------------------------
Its Executive
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OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Data Net International, Inc., a California
corporation (the "COMPANY"), has granted to the person named below ("OPTIONEE")
a non-statutory stock option (the "OPTION") to purchase shares of the Company's
Common Stock (the "SHARES") under its 1997 Stock Plan and upon the terms and
conditions as follows:
Name of Optionee: Max Toghraie
-----------------------------------------
Address of Optionee: 254 Cedar Heights
-----------------------------------------
Thousand Oaks, CA 91360
-----------------------------------------
Number of Shares: 11,500
-----------------------------------------
Option Exercise Price: $ 29.55 per share
-------
Date of Grant: July 1, 1997
--------------
Option Expiration Date: July 1, 2007
--------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
One-quarter (1/4) of the options ( 2,875 Shares) shall vest on the Date of
Grant. The remaining three-quarters (3/4) of the options ( 8,625 Shares) shall
vest on the first day of each calendar month for forty-seven (47) months
thereafter in equal installments of one-forty eighth (1/48) of the remaining
Shares (179 Shares). All remaining Shares shall vest on July 1, 2001.
ACCELERATION OF VESTING: If the employment of Optionee pursuant to that
certain Employment Agreement between Optionee and the Company dated July 1, 1997
(the "Employment Agreeement") is terminated Without Cause by the Company, as
defined in the Employment Agreement, then all unvested options to purchase
Shares shall vest and become immediately exercisable upon such termination.
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-statutory Stock Option) (the "OPTION AGREEMENT") which is
attached to this Option Certificate (the "CERTIFICATE") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the Option
Agreement, not by this summary. The Company strongly suggests that you
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
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Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without
cause. See Section 5(d) of the Option Agreement.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company. If your employment ends due to death or permanent disability, the
Option terminates six months after the date of death or disability, and is
exercisable during such six-month period as to the portion of the Option
which had vested prior to the date of death or disability. In all other
cases, the Option terminates 30 days after the date of termination of
employment, and is exercisable during such time period as to the portion of
the Option which had vested prior to the date of termination of employment;
PROVIDED, HOWEVER, if you are terminated "for cause," the Option will
terminate 5 days after the date of termination of your employment and is
exercisable during such time period as to the portion of the Option which had
vested prior to the date of termination of employment. See Section 5 of the
Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold,
transferred, assigned or otherwise disposed of to any other person, except on
your death. See Section 15(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Section 4 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any
of your Shares without the prior written consent of the Company or its
underwriters for a period of up to 180 days after the effective date of the
offering. See Section 6(a) of the Option Agreement.
ADJUSTMENTS UPON RECAPITALIZATION: The Option contains provisions which
affect your rights in the event of stock splits, stock dividends, mergers and
other major corporate reorganizations. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to options or stock which may
otherwise have been promised to you. See Section 8 of the Option Agreement.
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WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
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AMENDED AND RESTATED LICENSE AGREEMENT
THIS AMENDED AND RESTATED LICENSE AGREEMENT dated as of July 1st, 1997 (the
"Effective Date"), by and between COMPUTER-AIDED SOFTWARE INTEGRATION, INC. (the
"Licensor"), a Delaware corporation, and DATANET INTERNATIONAL, INCORPORATED
(the "Licensee"), a California corporation.
WHEREAS the Licensor and the Licensee are parties to a license agreement
dated as of April 30, 1997; and
WHEREAS the Licensor and the Licensee desire to amend such agreement and to
restate the agreement as so amended (as so amended and restated, this
"Agreement").
For and in consideration of the mutual covenants contained herein, it is
hereby agreed by and between the undersigned, intending to be bound thereby as
follows:
I. DEFINITIONS
A. SOFTWARE. The term "Software" means authorized copies of all of the
most recent versions of the Licensor computer software programs (in both object
and Source Code, as stipulated below) described in Exhibit A "Software" attached
hereto, including without limitation, technical manuals, user manuals, bug
reports and fixes, enhancements, upgrades, updates, sequels and technical
bulletins.
B. SOURCE CODE. The term "Source Code" means the complete instruction
set for the Software, including all comments and procedural code, such as
compilation switches, job control language statements and a description of
the system/program generation procedure, in a form intelligible to human
programmers and capable of being readily and easily translated into object
code for execution on computer equipment through minimal assembly or
compiling, together with all documentation to facilitate such translation,
assembly and compiling; including, without limitation, programmers' notes,
technical and functional specifications, flow charts, schematics, test
programs, statements of principles of operations, architectural and design
standards, and descriptions of data flows, data structures and control logic.
C. LICENSEE'S BUSINESS. The term "Licensee's Business" shall mean the
business of providing assembly, integration and configuration related solutions
and services to equipment manufacturers, software vendors, system integrators,
government and corporate entities and other businesses seeking such solutions
and services.
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II. LICENSE
In accordance with the terms herein, Licensor grants to Licensee, and
Licensee accepts from Licensor, a worldwide, perpetual, nonexclusive (except as
to the countries comprising South America (excluding Central America) and
Malaysia where the license granted herein shall be exclusive for a term of five
years from the Effective Date) and non-transferable license to reproduce, use
and distribute, and reproduce, disclose to others for the purpose of
maintenance, use, change, modify and otherwise prepare derivative works based on
the Source Code ("License"). The License may be exercised only at Licensee's
configuration centers in Los Angeles or other configuration centers in or
outside of the United States where the equipment on which the Software is used
is more than 50% owned by Licensee or, in the event Licensee leases the
equipment, the Licensee is obligated for more than 50% of the lease payment for
such equipment when used in connection with the Software (collectively
"Permitted Configuration Centers"). The Software shall be used only in
connection with Licensee's Business. Licensee shall not permit any third party
to use the Software. A license may be temporarily transferred to back up
equipment if the particular scheduled equipment is inoperative for more than one
(1) hour. Licensee may make copies, and use the Software for testing purposes.
Licensee may exercise the License with respect to the Source Code upon and
after occurrence of any of the following events (but not prior to the occurrence
of such events):
A. Licensor or Glasgal Communications, Inc. ("Glasgal") ceases doing
business;
B. Licensor or Glasgal becomes insolvent or makes a general assignment
for benefit of creditors;
C. The filing of a petition by or against Licensor or Glasgal for relief
under the laws of bankruptcy;
D. The petition of an appointment or an actual appointment of a receiver
or other custodian for the business or assets of Licensor or Glasgal;
E. Licensor or Glasgal admits in writing its inability to pay its debts
generally as they become due; or
F. Licensor materially breaches any of its obligations under this
Agreement, or the Reseller Agreement between the parties, and such default or
breach has not been cured. As used above, material breach is hereby defined to
include, without limitation, any default or breach that results in a hinderance
to Licensee's ability to operate Licensee's Business.
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III. COPIES
The License granted herein includes the right to copy the Software in
non-printed, machine readable form in whole or in part as necessary for
Licensee's Business. In order to protect Licensor's trade secret and copyrights
in the Software, Licensee agrees to reproduce and incorporate Licensor's trade
secret or copyright notice in any copies, modifications or partial copies.
Licensee shall maintain no more than three copies (or such greater number as
Licensor shall reasonably consent to) of the object code for the Software for
each Permitted Configuration Center at any time.
IV. PRICE AND PAYMENT
Licensee has paid Licensor a license fee of $1.1 million for the Software
and Source Code License, representing payment in full. As of the date hereof,
$150,000 of such fee has been paid to Licensor by Licensee in cash, and an
additional $950,000 of such license fee has been paid by execution and delivery
by Licensee to Licensor of the promissory note attached hereto and incorporated
herein by this reference as Exhibit "A" (the "Note").
Licensor hereby agrees that prior to entering into an agreement to license
the Software or Source Code to any third party for use in the countries
comprising Asia, Japan, the Pacific Rim and Australia, it shall first offer
Licensee the right to such license on terms and conditions, including price,
equivalent to those contained in the proposed third party agreement.
Any payment for any services or other performance by Licensor shall be
payable one hundred and eighty (180) days after receipt of a correct invoice
from Licensor; provided that portions of amounts disputed in good faith by
Licensee will be payable upon resolution of the dispute. Unless otherwise
expressly stated herein, there shall be no additional charges for any materials
and services provided under this Agreement.
V. SOFTWARE OWNERSHIP
Licensor represents and warrants that it is the sole owner (or is an
authorized licensee) of the Software and Source Code and all portions thereof
and that it has the right to modify same and to grant Licensee the Software and
Source Code License and that Licensee shall have no obligation or liability
toward any third parties for the exercise of the License and that Licensee's use
of the Software and Source Code will not infringe any third party rights in any
patent, copyright, trade secret or other proprietary right.
VI. INTENT TO COOPERATE
Both Licensor and Licensee acknowledge that successful implementation of
the Software pursuant to this Agreement shall require their full and mutual best
efforts. The
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parties acknowledge that they shall timely fulfill their responsibilities set
forth in this Agreement.
VII. TITLE TO SOFTWARE SYSTEMS AND CONFIDENTIALITY
The Software and all programs developed hereunder by Licensor and all
copies thereof are proprietary to Licensor and title thereto remains in
Licensor. All applicable rights to patents, copyrights, trademarks and trade
secrets in the Software or any modifications made by Licensor shall remain in
Licensor. Licensee shall not sell, transfer, publish, disclose, display or
otherwise make available the Software or copies thereof to others in violation
of this Agreement. Licensee agrees to take reasonable efforts to secure and
protect each module, software product, documentation and copies thereof in a
manner which Licensee takes to secure and protect its own software in order to
maintain Licensor's rights therein and to take appropriate action by instruction
or agreement with its employees or consultants who are permitted access to each
program or software product to satisfy its obligations hereunder. All copies
made by the Licensee of the Software and other programs developed hereunder,
including translations, compilations, partial copies with modifications and
updated and derivative works, are the property of Licensee. Licensee
acknowledges Licensor's claim that the Software is confidential in nature and
not in the public domain, that the Licensor claims all intellectual and
industrial property rights granted by law therein on behalf of itself or the
licensor(s) and that the Licensor does not hereby grant nor otherwise transfer
any rights or ownership of the Software to the Licensee or any third party
except in accordance with this Agreement. Except as otherwise expressly
permitted hereunder, the Licensee agrees not to copy or otherwise reproduce the
Software, in whole or in part. The Licensee further agrees to take all
reasonable steps which Licensee takes to protect its own software to ensure that
no unauthorized persons shall have access to the Software and that all
authorized persons having access to the Software shall refrain from any such
disclosure, duplication or reproduction.
The Licensee agrees to accord the Software, and both parties agree to
accord all other confidential information relating to this Agreement and each
party's proprietary business information such as pricing and customer identities
at least the same degree and methods of protection as such party undertakes with
respect to its own confidential information, trade secrets and other proprietary
data.
The Licensee agrees not directly or through any agent or intermediary, to
register, apply for registration or attempt to acquire any legal protection for
the Software or any proprietary rights therein or to take any other action which
would or could infringe upon the Licensor's right, title or interest in or to
the Software in any jurisdiction.
Provided that Licensor provides sixty (60) days written notice to Licensee
specifically stating in sufficient detail the violation or breach and such
violation or breach, capable of being cured, is not cured during this sixty (60)
day period, the Licensee acknowledges that,
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in the event of a breach or violation by the Licensee of its obligations under
this Section 7, the Licensor may immediately terminate its performance under
this Agreement without liability to the Licensee and may bring an appropriate
legal action to enjoin any such breach or violation hereof.
All copies of the Software shall retain the copyright notices and
proprietary markings contained in or appearing on the master copy thereof
supplied to the Licensee by the Licensor.
VIII. USE OF TRADE NAMES AND TRADEMARKS
Licensee hereby acknowledges Licensor's claim of ownership of the generic
trade names and marks "CASI", "COMPUTER-AIDED SOFTWARE INTEGRATION", and
"INTEGRATOR'S WORKBENCH PRODUCT SERIES", the Software names. Licensee further
acknowledges that it shall acquire no interest therein by virtue of this
Agreement or the performance by Licensee of its duties and obligations
hereunder, other than the License granted to Licensee under this Agreement.
Licensee agrees not to use the names "CASI" or "COMPUTER-AIDED SOFTWARE
INTEGRATION", or such Software names or marks (or any confusingly similar name
or symbol), in whole or in part, as part of the Licensee's business or trade
name.
The Licensee agrees to notify the Licensor promptly of any known use or
registration by third parties of any trade names or marks which might infringe
the Licensor's trade or Software names or marks. The Licensee acknowledges and
agrees that the Licensor shall have the sole right and duty to protect such
names and marks from a legal action or suit for infringement thereof.
IX. WARRANTY
A. The Licensor warrants that the Software will (i) conform, when
operated in Permitted Configuration Centers to Licensor's current published
specifications and documentation attached hereto or otherwise provided to
Licensee, including without limitation, those specifications set forth in
Licensor's so-called White Sheet Report; and (ii) will be free of defects which
affect the Software's performance. The Licensor does not warrant that the
Software will be defect or error free in all circumstances.
B. Licensor warrants that Licensee will not be required to obtain any
third-party software (other than third party operating system software) in order
to operate the Software or Source Code other than that which is set forth in
this Agreement and that the entering into and carrying out of the terms of this
Agreement will not violate or constitute a breach of any agreement binding on
Licensor.
C. Licensor warrants that the documentation and technical materials
provided by
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Licensor to Licensee will be accurate and complete.
D. Licensor warrants that there is not any disabling code in the Software
or Source Code which would alter, destroy, or inhibit any use of the Software or
Source Code or the data contained therein.
E. Licensor warrants that it will not terminate or attempt to terminate,
by modem or by electronic means or by other means, use of the Software by
Licensee in connection with any dispute.
F. Licensor warrants that the Software is designed to operate in the year
2000 and beyond to store, calculate, process and print year 2000 dates and is
coded so that the progression from the year 1999 to 2000 (and beyond) will not
cause the Software to cease operating, to operate incorrectly or otherwise fail
to meet its documentation.
G. Licensor warrants that it will perform its obligations arising
pursuant to this Agreement in a diligent and professional manner and in
accordance with current industry standards.
H. Licensor warrants that as of the Effective Date Licensor has no
knowledge of any written notice asserting a claim which might reasonably be
expected to impair Licensee's right to use the Software.
I. Licensee must notify Licensor in writing, within twelve (12) months of
delivery of the Software, or any changes or additions to the Software, to
Licensee (not including delivery of any subsequent modifications to the
Software), of its claim of any such defect(s) which Licensee is aware of. If
the Software is defective, Licensor shall remedy such defect in accordance with
the time frames set forth in Exhibit B "SOFTWARE MAINTENANCE AGREEMENT" attached
hereto and incorporated herein by this reference. The Licensee agrees to
provide the Licensor with information available to Licensee to allow the
Licensor to remedy such defect. The Licensor is not responsible for any defect
or error, which Licensee is aware of but not reported within such twelve (12)
month period, or any defect or error in the Software caused by any Licensee
modification, misuse or damage, except as set forth in Exhibit B. Except as set
forth above, the Software is being licensed to the Licensee "AS IS" and without
warranty of any kind.
J. THE ABOVE IS A LIMITED WARRANTY AND THE WARRANTIES SET FORTH IN THIS
AGREEMENT ARE THE ONLY WARRANTIES MADE BY LICENSOR. LICENSOR MAKES AND LICENSEE
RECEIVES NO WARRANTY (EXCEPT AS SET FORTH IN THIS AGREEMENT) EXPRESS OR IMPLIED
AND THERE ARE EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. NEITHER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO
ITS OBLIGATIONS UNDER THIS AGREEMENT
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FOR INDIRECT, SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR INCIDENTAL DAMAGES EVEN IF
IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, INCLUDING, WITHOUT
LIMITATION ANY DAMAGE TO ANY PROPERTY OF THE LICENSEE EXCEPT IN THE CASE OF
WILFUL MISCONDUCT.
K. Correction for difficulties or defects traceable to the Licensee's
errors, or systems changes or modifications made by Licensee, shall be billed
pursuant to Section XVII Additional Consulting Services.
L. Either party's liability arising out of contract, negligence, strict
liability in tort or warranty shall not, except in the case of wilful
misconduct, exceed the amount paid by Licensee under this Agreement.
X. INDEMNITY
A. Licensor hereby agrees to indemnify, defend and hold harmless
Licensee, its shareholders, directors, officer, agents, employees, agents, and
representatives from and against any and all claims, expenses, damages, losses,
costs, fees, royalties or penalties (including reasonable attorneys' fees, costs
and expenses), liability, actions made or brought against Licensee arising out
of any allegation of any infringement of third party's rights, including without
limitation, patent, trademark, copyright, and trade secrets arising out of or
related to this Agreement, provided: (a) Licensee gives prompt written notice of
such claim to Licensor, b) Licensor has sole control of the defense and
settlement negotiation, on condition that Licensee may participate and appoint
any counsel to participate in any defense and settlement negotiation at
Licensee's expense, c) Licensee cooperates with Licensor in such defense and
settlement negotiation, at Licensor's expense and d) the infringement is based
on the use of the latest release of the Software made available to Licensee. In
no event shall Licensee settle any such claim, lawsuit or proceeding without
Licensor's prior written approval.
If, as a result of any claim of infringement against any patent, copyright,
license or other property right, Licensor is enjoined from using the Software,
or if Licensor believes that the Software is likely to become the subject of a
claim of infringement, Licensor at its option and expense may procure the right
for Licensee to continue to use the Software, or replace or modify the Software
so as to make it non-infringing, provided such replacement or modification is
reasonably acceptable to Licensee. If neither of these two options is reasonably
practicable or acceptable to Licensee, Licensor may discontinue the license
granted herein on one hundred and twenty days (120) days' written notice and
indemnify and hold Licensee harmless in accordance with the paragraph set forth
immediately above. The foregoing states the entire liability of Licensor with
respect to infringement of any copyrights, patents, license or other property
rights by the Software or any parts thereof. Upon the occurrence of any event
which triggers Licensor's obligation under this Agreement, Licensee may suspend
any of its obligations under this Agreement and deposit any amount
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owed under this Agreement into an interest-bearing trust account pending final
resolution of such claim, action or liability.
B. Licensor shall defend, indemnify and hold harmless Licensee, and its
respective directors, officers, employees and agents from and against all
claims, demands, causes of action, expenses, damages, losses, costs, fees or
penalties (including reasonable attorneys' fees, expenses and costs of
settlement) whether based upon tort, breach of contract or otherwise of
whatsoever kind and nature arising out of or on account of, or resulting in
whole or part from, any misrepresentation or default in the performance of
Licensor's obligations pursuant to this Agreement, to the extent caused by any
act, error or omission of Licensor, employees of Licensor, or of any other
persons or entities who are directly or indirectly associated with Licensor.
Licensee shall give Licensor prompt notice of any claim or liability hereby
indemnified against by Licensor and thereupon Licensor shall be entitled to
control, and shall assume full responsibility for, the defense of such matter.
The indemnity contained herein shall not be deemed to be a waiver of or in
limitation of any other rights Licensee may have.
XI. BREACH
Except as otherwise specifically set forth herein, Licensor shall have the
right to terminate this Agreement and the license granted herein in the event
Licensee is in default of its obligations under this Agreement (including those
set forth immediately below); upon one hundred and eighty (180) days prior
written notice detailing the reason for termination and providing an opportunity
for Licensee to cure any such default during such period:
A. In the event that Licensee, its officers or employees violates any
provision of this Agreement including, but not limited to, confidentiality and
payment and such violation is not cured during such period;
B. In the event Licensee (i) terminates its business; (ii) becomes
subject to any bankruptcy or insolvency proceeding (whether voluntary or
involuntary) under Federal or state statute or (iii) becomes insolvent, is
otherwise unable to pay its debts as they become due or becomes subject to
direct control by a trustee, receiver or similar authority;
C. In the event the Licensee assigns or transfers this Agreement or any
of its rights or obligations hereunder, without the Licensor's prior written
consent, which shall not be unreasonably withheld; provided however, no consent
is required other than notice in the event Licensee assigns or transfers this
Agreement or any of its rights or obligations hereunder to an affiliate
controlled by, under common control with or controlling Licensee or a successor
to all or substantially all of Licensee's assets used in Licensee's Business.
D. Within five days after termination, Licensee will return to Licensor
the Software and all copies in the form provided by Licensor or as modified by
Licensee, or
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upon request by Licensor destroy the Software and all copies, and certify in
writing that they have been destroyed. Termination shall not relieve Licensee
of its obligations regarding confidentiality of the Software. Termination will
be in addition to and not in lieu of any equitable remedies available to
Licensor.
Licensor shall be provided written notice by Licensee in the event of any
breach or default hereunder by Licensor. Licensor shall have fifteen (15) days
from receipt of such written notice to cure any such breach; provided however,
licensor shall have five days from receipt of such written notice to cure the
first occasion of any breach where Licensor has committed to a fixed time frame
for performance as expressly set forth in this Agreement. In any such instance,
time shall be considered of the essence.
XII. TAXES
Licensee shall, in addition to the other amounts payable under this
Agreement, pay all sales and other taxes, federal, state, or otherwise, however
designated, which are levied or imposed by reason of the transactions
contemplated by this Agreement, other than based on the income derived from
these transactions. Licensee shall pay to Licensor an amount equal to any such
items actually paid, or required to be collected or paid by Licensor at the time
the payment for the services performed or the License granted under this
Agreement.
XIII. HARDWARE REQUIREMENTS
Licensee shall make available for the Software implementation, at each
Permitted Configuration Center, computer equipment and software configurations
equivalent to any configuration which Licensor has approved prior to or during
the term of this Agreement for other licensees or customers.
XIV. DELIVERY, INSTALLATION AND TESTING
Licensee hereby acknowledges receipt of a previous version of the Software.
The Source Code shall be delivered within three days of an event occurring under
Section II that would allow Licensee access to the Source Code.
XV. CUSTOM MODIFICATIONS
All custom modifications to the Software, not including assisting Licensee
in implementation of the Software job control language, shall be undertaken by
Licensor in accordance with Section XVII Additional Consulting Services.
XVI. GENERAL
A. Each party acknowledges that it has read this Agreement, together with
the
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Exhibits hereto, it understands it, and agrees to be bound by its terms, and
further agrees that this is the complete and exclusive statement of the
agreement between the parties, which supersedes and merges all prior proposals,
understandings and all other agreements, oral and written, between the parties
relating to this Agreement. This Agreement may not be modified or altered except
by written instrument duly executed by both parties.
B. Dates or times by which Licensor is required to make performance under
this Agreement shall be postponed automatically to the extent that Licensor is
prevented from meeting them by causes beyond its reasonable control, but no more
than thirty (30) days.
C. This Agreement and the rights, obligations and relations of the
parties hereunder shall be governed by the laws of the State of California
without regard to its rules of conflicts of law. In the event any legal
proceeding is brought to enforce or interpret the provisions of this Agreement
the parties hereby agree to submit to the jurisdiction of the courts of Los
Angeles, California, which shall be the exclusive venue for all such
proceedings.
D. If any provision of this Agreement is invalid under any applicable
statute or rule of law, it is to that extent to be deemed omitted, but this
Agreement shall otherwise remain in full force and effect.
E. Neither party may sell, assign, transfer, convey, delegate, encumber
or sub-license, without the prior written consent of the other party, its
rights, duties or obligations under this Agreement to any person or entity, in
whole or in part, which consent shall not be unreasonably withheld, except as
otherwise provided in Section XI(c). Notwithstanding anything in this Agreement
to the contrary, in the event of a proposed assignment or transfer of the
Agreement by Licensee, and the assignee's use of the Software would materially
increase beyond the anticipated future use of the Software by Licensee, i.e., an
increase to at least 150% of the anticipated future use of the Software by
Licensee, the Licensor shall have the right to charge such assignee an
additional reasonable license fee equivalent to the fees Licensor then charges
to companies that would use the Software in an amount reasonably equivalent to
such assignees' anticipated usage, minus the license fee(s) paid by Licensee
hereunder. In the event such assignee refuses to pay such equivalent fee,
Licensor may in its sole and absolute discretion, refuse to consent to such
assignment or transfer.
F. In the event of any dispute or legal proceeding between the parties
arising out of related to this Agreement or its breach, the prevailing party
shall be entitled to recover from the non-prevailing party all fees, costs and
expenses, including without limitation, all attorney's and expert witness fees
and disbursements incurred in connection with such dispute or legal proceeding.
G. The waiver or failure of either party to exercise in any respects any
right provided for herein shall not be deemed a waiver of any further right
hereunder.
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H. All notices requests, reports, submissions and other communications
permitted or required to be given under this Agreement shall be deemed to have
been duly given if such notice of communication shall be in writing and sent by
personal delivery or by airmail, cable, telegram, telex, facsimile transmission
or other commercial means of rapid delivery, postage or costs of transmission
and delivery prepaid, to the parties at addresses specified herein until such
time as either party hereto shall give the other party hereto not less than ten
(10) days' prior written notice of a change of address in accordance with the
provisions hereof.
XVII. ADDITIONAL CONSULTING SERVICES
During the term of this Agreement, Licensor shall provide Licensee with
various business and technical consulting services as may be requested by
Licensee. Such services shall be provided subject to the following terms and
conditions.
A. Licensee shall be entitled to order services to be provided by
Licensor and Glasgal (or its subsidiaries) under the terms of this Agreement.
This Agreement includes the ability to require the services of any Licensor or
Glasgal "without limitations" (or its subsidiaries) personnel. Such services
shall be provided in a professional and workmanlike manner.
B. Unless otherwise cancelled in writing by Licensee, Licensee agrees to
pay Licensor $100,000 as a refundable Service Retainer Fee one week after the
beginning of each two month period beginning on the Effective Date (the "Service
Period") for all maintenance, installation, training, modification, support and
other services to be provided by Licensor that are not being provided by
Licensor pursuant to Exhibit "B". In the event that in any two month Service
Period the fees for the actual services provided by Licensor total less than
$100,000, Licensee shall subtract the remaining balance of the Service Retainer
Fee and shall pay Licensor the difference as the Minimum Service Fee for the
forthcoming Service Period.
If Licensee requests services during the first year after the execution date of
this Agreement in excess of $150,000 each Service Period, after deducting any
unused balance remaining from prior Service Periods, which by year end is in
excess of $900,000 (at the Exhibit D rates) all such excess requested services
will be provided by Licensor at the then current rate charged to a majority of
its customers. Licensor may charge for such excess services each Service
Period, subject to a year end reconciliation. To the extent total services for
the year (at the Exhibit D rates) are less than $900,000, Licensor shall
immediately refund any payments made by Licensee in excess thereof. After such
year, Licensor may charge for services requested by Licensee in excess of
$600,000 ($150,000 each Service Period), at its then current rates charged to a
majority of its customers, again subject to an annual reconciliation and
otherwise as set forth immediately above.
C. Licensee agrees to pay all reasonable out-of-pocket expenses. Licensee
shall
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have the option to book travel arrangements for Licensor and/or Glasgal (or its
subsidiaries) personnel.
D. Service fees that exceed the Service Retainer Fee shall be due and
payable within thirty (30) days following the end of the Service Period and the
receipt of invoice.
E. Services shall be provided based upon job classifications and at the
hourly rates specified in Exhibit "D" "SCHEDULE OF SERVICE CLASSIFICATIONS AND
RATES" attached hereto and incorporated by this reference herein. In the event
Licensee chose not to pay the Service Retainer Fee for any Service Period,
Licensor has the sole option to change the rates specified in Exhibit "D"
through notification, in writing, to its then current standard rates.
F. Licensor shall submit time records in writing for each month detailing
the personnel, services and time provided to Licensee by the fifth day of the
following month. Licensee shall have five (5) business days to review such time
records for accuracy and submit discrepancies to Licensor. Licensor shall use
its best efforts to ensure that only time spent working on behalf of Licensee is
reported and billed.
G. Licensee agrees to provide Licensor with a purchase order for services
to be provided under the terms herein at least three (3) days prior to the
required start date for the provision of the services.
H. Licensor hereby agrees to provide the Maintenance Services, commencing
on the execution date, set forth in Exhibit "B" in consideration of the payment
by Licensee to Licensor of $6,250 per quarter, payable within thirty (30) days
of receipt of invoice. Such payment shall commence on March 1, 1998. In the
event Licensee chooses not to secure Maintenance Services it will no longer be
obligated to make such payment and Licensor will no longer be obligated to
provide Maintenance Services.
XVIII. TECHNICAL SUPPORT
Licensor will deliver to Licensee any changes, updates, upgrades, or
enhancements to Software (and Source Code when and if Licensee is entitled to it
under the provisions of Section II hereof), including without limitation
programming changes, releases, versions, and other enhancements, along with
updates or revisions to technical materials and documentation to the extent that
they relate to the Software and Source Code within thirty (30) days of the
release to Licensor's own technical, programming, or support staff and in any
event, no later than the release to any customer or licensee of Licensor or
Glasgal and as otherwise set forth in Exhibit B; provided that Licensee is then
current in its payment for Maintenance Services (as defined in Exhibit B). End
User documentation shall be updated on diskette in Microsoft Word for Windows or
such other industry standard program as mutually agreed to by the parties.
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Licensor agrees to perform technically-feasible Software programming
changes requested by Licensee during the term of this Agreement, including
changes to or new formats for inclusion in the Software, in a timely manner and
at rates to be negotiated in good faith by the parties.
XIX. CORPORATE GUARANTEE
Glasgal unconditionally guarantees the performance of Licensor under the
Sections entitled Warranty and Indemnity of this Agreement, including without
limitation any obligation or liabilities of Licensor owed to Licensee
thereunder, heretofore, now or hereafter made, incurred or created, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, and
whether Licensor may be liable individually or jointly with others, or whether
recovery may be or hereafter become barred by any statute of limitations, or
whether such performance may be or hereafter become otherwise unenforceable.
Glasgal authorizes Licensee, without notice or demand and without affecting
its liability under this Agreement, from time to time to (a) renew, compromise,
extend, accelerate, or otherwise change, increase, or decrease Licensor's
performance or the terms of this Agreement
Glasgal waives any defense arising by reason of any disability or other
defense of Licensor or by reason of the cessation from any cause whatsoever of
the liability of Licensor. Until this Agreement has expired and all performance
of Licensor to Licensee shall have been fully performed, Glasgal shall have no
right of subrogation, and waives any right to enforce any remedy, which Glasgal
now has or may hereafter have against Licensor. Guarantor waives all demands
for performance, notices of nonperformance, protests, notices of protest, and of
the creation, or incurring of new or additional obligation or liability of
Licensor.
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LICENSOR: LICENSEE:
COMPUTER-AIDED SOFTWARE DATANET INTERNATIONAL,
INTEGRATION, INC. INCORPORATED
By: /s/ James M. Casi By:
--------------------- ---------------------
Name: James M. Casi Name: James Ung
Title: CFO Title: President
Address: 12477 W. Cedar Dr. Address: 1304 John Reed Ct
Suite 201 Industry, CA 91745
Denver CO 80228
Glasgal Communications, Inc. EXECUTIVE DATE, September 15th, 1997
as to Section XIX Corporate Guaranty
[ILLEGIBLE]
By: /s/ James M. Casi
---------------------------------
Name: James M. Casi
Title: CFO
Address: 20[ILLEGIBLE] Way
Totowa, NJ 07054
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EXHIBIT A
SOFTWARE
Licensor's IWPS Configurator products, version 2.20 or higher. IWPS
Configurator shall include all modules, tools and utilities produced by Licensor
for use with the IWPS Configurator product line.
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EXHIBIT B
SOFTWARE MAINTENANCE AGREEMENT
Article 1
DEFINITIONS.
Terms in this Maintenance Agreement which are capitalized have the meanings
set forth below, or as defined elsewhere in this Agreement.
"Error" means an instance of failure of the Software to meet the
requirements of Section XI, Warranty of this Agreement. An Error is a Class 1
Error if it renders continued use of the Software commercially infeasible in
Licensee's reasonable judgment. An Error is a Class 2 Error if it makes
continued use of the Software seriously inconvenient and substantially reduces
its value to Licensee, in Licensee's reasonable judgment. All other Errors are
Class 3 Errors; in particular, all documentation shortcomings and deviations and
cosmetic errors that do not have the economic consequences defined for Class 1
and Class 2 Errors shall be deemed Class 3 Errors.
Article 2
TERM AND TERMINATION.
2.1 TERM. Commencing upon delivery of the Software, the term for
providing Maintenance Services for such Software shall be three months and shall
automatically renew quarterly, unless Licensee notifies Licensor in writing of
its decision to not renew.
2.2 TERMINATION BY LICENSOR. Licensor may terminate the provision of
Maintenance Services at any time, whereupon Licensee's Source Code License shall
commence.
2.3 TERMINATION BILLING. Licensor shall refund any prepaid charges for
Maintenance Services pro rata from the effective date of any permitted
termination. Licensee shall pay any charges for Maintenance Services rendered
pro rata to the effective date of any permitted termination.
Article 3
CHARGES.
Charges for Maintenance Services shall be as stated in Section XVII.
Additional Consulting Services of the Agreement.
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Article 4
SERVICE RESPONSIBILITIES.
4.1 MAINTENANCE. Licensor shall provide Licensee the maintenance services
described in this Exhibit and the Agreement with respect to the Software and
Source Code, including providing updates and corrections ("Maintenance
Services"). Licensor shall correct all Errors reported by Licensee by means of
the procedures established by this Exhibit. Maintenance Services shall be
performed in a timely and professional manner by qualified maintenance
technicians familiar with the Software and Source Code and its operation.
Licensor shall provide, upon Licensee's request, periodic reports on the status
of Maintenance Services requested by Licensee.
4.2 SUPPORT AND RESPONSE TIME.
(i) Licensor shall provide telephone support solely for the
reporting and correction of suspected Errors ("Support") Monday through Friday,
9:30 a.m. to 5:30 p.m., Mountain Standard Time, except Licensee holidays
("Maintenance Period"). Licensor will also have personnel on call outside of
the Maintenance Period during which time Licensee may request Maintenance
Services. Maintenance Services, both in and outside of the Maintenance Period,
shall be provided as set forth below.
(ii) Licensor shall provide to Licensee, and keep current, a list
of persons and telephone numbers ("Calling List") for Licensee to contact for
Support. Such Calling List shall include: (1) the first person to contact for
the answer or assistance desired, and (2) the persons in successively more
responsible or qualified positions to provide the answer or assistance desired.
(iii) If Licensee desires Maintenance Services, Licensee shall
contact Licensor's telephone Support service in accordance with the Calling
List. Licensor shall make best efforts to respond to Licensee's initial
telephone call with off-site telephone consultation, assistance and advice
relating to Support of the Software within thirty (30) minutes of Licensee's
first call for Maintenance Services or, as to requests for assistance not
involving suspected Class 1 or 2 Errors made outside of the Maintenance Period,
within thirty (30) minutes after the start of the next day occurring during the
Maintenance Period and, in any event, Licensor shall respond within two hours of
such allowed response times. If Licensor fails to so respond; or if Licensee is
unable, after three or more calls within a fifteen (15) minute period, to reach
Licensor's telephone Support service; or if the designated person from the
Calling List is not available when Licensee makes contact with Licensor to
obtain consultation and assistance, then Licensee shall attempt to contact the
next more responsible or qualified person on the Calling List until contact is
made and a designated person responds to the call.
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(iv) After Licensee reports a suspected Class 1 or 2 Error,
Licensor shall provide a correction or workaround as soon as possible. Licensee
shall consult with Licensor to convey the severity of the Error. If Licensor
has not diagnosed and corrected a Class 1 or Class 2 Error on the same day as
Licensee's initial telephone call, Licensee shall submit to Licensor a listing
of output and such other data as Licensor may request and is reasonably
available to Licensee in order to reproduce operating conditions similar to
those present when Licensee detected such Error.
(v) For Class 1 Errors, Licensor shall provide a workaround
reasonable in Licensee's judgment, or a correction, in any event within three
days after receipt of output or other documentation of such Error. Licensor
shall, upon Licensee's request, without limitation, assign fully-qualified
technicians to work with Licensee at Licensee's site without interruption (i.e.,
24 hours per day) until Licensor provides a workaround reasonable in Licensee's
judgment, or a correction.
(vi) For Class 2 Errors, Licensor shall provide a workaround
reasonable in Licensee's judgment, or a correction, in any event within five
days after receipt of output or other documentation of such Error. Licensor
shall, upon Licensee's request, without limitation, assign fully-qualified
technicians to work with Licensee at Licensee's site during Licensee's regular
business hours until Licensor provides a workaround reasonable in Licensee's
judgment, or a correction.
(vii) For Class 3 Errors, Licensor shall correct such Error by
modifying the Software no later than the next update, unless Licensor has
scheduled release of such update less than thirty (30) days after Licensee's
notice, in which case Licensor shall correct the Error in the following update.
4.3 UPDATES. Licensor shall provide Licensee updates to the Software, the
earlier of whenever Licensor makes such updates generally available to its
customers or internally commences commercial use of such updates.
4.4 CONTINUING SUPPORT. Licensee may decline to install an update or
upgrade Licensor offers. In such event, Licensor shall continue the Maintenance
Services for whatever version of the Software that is installed at Licensee,
subject to Licensor's right to terminate this Maintenance agreement as permitted
in article 2.3 TERMINATION BY LICENSOR. Licensor may charge additionally for
such Maintenance Services pursuant to Section XX Additional Consulting Services
provided that Licensee is more than one update or upgrade behind and continues
to decline to install a prior update or upgrade that would cause the Software to
be in compliance with the Warranty.
4.5 COMPATIBILITY. Within ninety (90) days after the supplier of an
operating system ("OS") in use at a Permitted Configuration Center makes a new,
upgraded version or release of such OS generally available to its customers,
Licensor
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shall deliver to Licensee, upon Licensee's request, an update to the Software
and Source Code to ensure its compatibility with such new OS release, or if no
update is necessary, Licensor shall so state to Licensee in writing within such
ninety (90) days. Licensor may charge Licensee for such upgrade pursuant to
Section XVII Additional Consulting Services. In such event, Licensee shall have
the exclusive right to such upgrade and Licensor shall not be entitled to
license, sell, market or distribute such upgrade to any third party.
4.6 EARLY VERSION. Licensor shall, upon Licensee's request, provide
early versions of updates or upgrades prior to general release in order to
provide development feedback. Licensee, at its request, will be included in
Licensor design meetings during the development cycle and Licensor shall make
all reasonable efforts to include general interest features suggested by
Licensee and develop the workpapers and modules that Licensee considers most
important. Licensee may send a reasonable number of employees to attend
end-user group meetings sponsored by Licensor. Licensee shall pay all
out-of-pocket expenses associated therewith.
4.7 TRANSITIONAL SUPPORT. If the provision of Maintenance Services to the
Software covered by this Exhibit is terminated by Licensor as allowed in
Article 2.3 TERMINATION BY LICENSOR, Licensor shall give Licensee at least one
hundred and eighty (180) days' prior notice, whereupon the Source Code License
shall become effective.
Article 5
LICENSEE RESPONSIBILITIES.
5.1 SUSPECTED ERRORS. If Licensee discovers any suspected Error in the
Software Licensee shall analyze the suspected Error to determine if it is the
result of Licensee's misuse or misunderstanding of the Software before seeking
Licensor's assistance.
5.2 LICENSEE RESPONSIBILITY. In the event Licensor determines that the
problem reported by Licensee is directly related to unauthorized alterations of
the Software by Licensee, then
(i) Licensor may charge for employee time expended in accordance with
Section XVII Additional Consulting Services in addition to reasonable
out-of-pocket expenses.
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EXHIBIT D
"SCHEDULE OF SERVICE CLASSIFICATIONS AND RATES"
Service Type Job Class Hourly Rate
- ------------ --------- -----------
Management Consulting Principal $135
Software Development Programmer $100
Technical Consulting Consulting Engineer $95
Deployment Technician (Std Hours) $45
Technician (Overtime) $55
Technician (Holidays) $70
The above rates reflect a preferred rate.
The above rates may be adjusted by Licensor on each anniversary of the
execution date of this Agreement, upon at least 60 days prior written notice to
Licensee, to rates no higher than the lowest effective rate for each category of
Job Class (or functionally equivalent Job Class) charged by Licensor to
Licensor's then most favored customers.
The above rates shall be adjusted by Licensor one year after the execution
date of this Agreement, and shall thereafter continue to be adjusted, as and
when necessary to reduce (but not increase) such rates to the lowest effective
rate for each category of Job Class (or functionally equivalent Job Class) then
charged by Licensor to Licensor's then most favored customers.
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EXHIBIT 10.6
RESELLER AGREEMENT
THIS RESELLER AGREEMENT (the "Agreement") is made effective as of the 15th
day of September, 1997 by and between COMPUTER-AIDED SOFTWARE INTEGRATION, INC.
("CASI"), a Delaware corporation, and DATANET INTERNATIONAL, INC. ("RESELLER"),
a California corporation.
A. CASI markets and supports certain proprietary computer software
products that RESELLER desires to use to provide services to its Customers and
to market to third parties on a non-exclusive basis.
B. RESELLER markets and supports certain hardware and/or software
products and systems and is knowledgeable of the market for CASI products
therein.
C. CASI and RESELLER desire to enter into this Agreement authorizing
RESELLER to market, distribute and support CASI's products upon the terms and
provisions stated herein.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
hereinafter set forth and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto, intending
legally to be bound, hereby agree as follows:
1. DEFINITIONS.
1.1 Products. The term "Products" means authorized copies of the
CASI computer software programs (in object or source code as stipulated below)
and related Documentation (as defined in Section 1.2 hereof) described in
Exhibit A attached hereto and incorporated by reference herein.
1.2 Documentation. The term "Documentation" means all user manuals
and other written materials to be prepared by and provided by CASI to RESELLER
(for redistribution to Customers) describing the installation, operation and
maintenance of the Products, including without limitation, technical manuals,
user manuals, bug reports, enhancements, upgrades, updates, sequels, technical
bulletins.
1.3 Customer. The term "Customer" means a person or entity, which
has either indicated to RESELLER an interest in acquiring one (1) or more of the
Products for use, or is a Licensee and end-user of a Product.
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1.4 Licensee. The term "Licensee" means any Customer to whom
RESELLER has granted a license to use one (1) or more of the Products in
accordance with Article 6 of this Agreement pursuant to a License Agreement.
1.5 License Agreement. The term "License Agreement" means a license
agreement between RESELLER (as sublicensor hereunder) and a Licensee (as a
sublicensee to the RESELLER hereunder) substantially in the form attached hereto
as Exhibit B.
1.6 Trial License Agreement. The term "Trial License Agreement"
means a trial license agreement between RESELLER and a Licensee substantially in
the form attached hereto as Exhibit C, under which a Customer is provided an
opportunity to test the Product without charge (or at minimal charge) for a
limited time.
1.7 Source Code. The term "Source Code" means the complete
instruction set for the Products, including all comments and procedural code,
such as compilation switches and job control language statements and a
description of the system/program generation procedure, in a form intelligible
to RESELLER's human programmers and capable of being readily and easily
translated by them into object code for execution on computer equipment through
minimal assembly or compiling, together with all necessary or proper
documentation to facilitate such translation, assembly and compiling, including,
without limitation, programmers' notes, technical and functional specifications,
flow charts, schematics, test programs, statements of principles of operations,
architectural and design standards, and descriptions of data flows, data
structures and control logic.
1.8 Derivative Work. The term "Derivative Work" means a work that is
solely based on one or more preexisting works, such as a revision, enhancement,
modification, translation, abridgement, condensation, expansion, or any other
form in which such preexisting works may be recast, transformed, or adapted, and
that, if prepared without authorization of the owner of the copyright in such
preexisting work, would constitute a copyright infringement. For purposes
hereof, a Derivative Work shall also include any compilation that incorporates
such a preexisting work if no significant alteration is made to such preexisting
work in including it in the Derivative Work. Unless otherwise provided in this
Agreement, all references to the Products include any Derivative Works provided
by Licensor or made by RESELLER hereunder.
2. APPOINTMENT OF RESELLER.
2.1 Grant of Certain Rights.
(a) CASI hereby grants to RESELLER, and RESELLER hereby accepts,
the non-exclusive worldwide right, subject to the other provisions of this
Agreement, (i) to use and modify the Source Code to the Products to create
Derivative Works of the Products incorporating modifications, enhancements and
custom configurations of the Products,
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(ii) to use the Products and Derivative Works, in Source Code and Object Code
form, to provide services to RESELLER's Customers and sublicensees and (iii) to
market, distribute, license and support the Products and Derivative Works, in
object-code form, to RESELLER's Customers and sublicensees. Notwithstanding
anything herein to the contrary, RESELLER's rights to the Source Code shall only
become effective in the event RESELLER is entitled to receive the Source Code
pursuant to the Restated License (as defined below).
(b) RESELLER acknowledges that CASI shall have the unrestricted right
to market, distribute and support the Products (except in those exclusive
territories as set forth in the Amended and Restated License Agreement entered
into between the parties hereto and Glasgal as of the date of this Agreement
("Restated License")), directly and through authorized third parties, without
any obligation to RESELLER under this Agreement, unless otherwise agreed in
writing by CASI. Notwithstanding the above, CASI shall not enter into any
agreement with a third party which provides for the right to license or resell
the Products in the countries comprising Asia, the Pacific Rim, Japan or
Australia without allowing RESELLER a first right of refusal to create an
agreement with such third party as a distributor and/or sub-licensee and/or
first offering RESELLER the right to license or resell on terms and conditions,
including price, equivalent to those contained in the proposed third party
agreement.
(c) RESELLER shall have the right, without charge, to use one (1)
limited evaluation copy of each Product for demonstration purposes during the
term hereof. Such copy shall be restricted to use for internal testing of the
product, training of Reseller employees, or demonstration to prospective
Customers, and shall be subject to the terms and conditions (other than the
payment terms) of the Trial License Agreement. In addition to the provisions of
the License Agreement, Reseller agrees that it will not use the evaluation copy
on behalf of, or for use by, any Customer, or receive any monetary compensation
from any third party for the use directly or indirectly of the evaluation copy.
Any use of the evaluation copy in support of, or directly applied to, the
provision of integration services shall be a violation of sections 6 and 7 of
this Agreement.
(d) RESELLER shall have the right to engage sub-distributors to
market and distribute the Products, in object code form only, under the same
terms and conditions contained in this Agreement; provided, however, that
RESELLER shall have no right to engage sub-distributors without CASI's consent
unless such sub-distributor qualifies under the following terms: the potential
sub-distributor (or any predecessor or affiliated entity thereto) (i) shall have
been in the computer technology integration business for not less than three (3)
years; and (ii) shall have had annual revenues of not less than One Million
Dollars ($1,000,000) in each of its last three (3) fiscal years.
2.2 No Agency Relationship. This Agreement does not create any
relationship of association, partnership, joint venture or agency between the
parties. RESELLER agrees to conducts its business as an independent contractor.
RESELLER agrees not to display or use the name "CASI" or "COMPUTER-AIDED
SOFTWARE INTEGRATION" or any mark or symbol
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used by CASI in identifying the Products (or permit or authorize the same to be
displayed or used) except as specifically provided in Section 8.1 of this
Agreement. RESELLER further agrees (i) not to assume, create or enter into any
obligation, agreement or commitment on behalf of, or for the account of, CASI or
obligate CASI in any manner other than as stipulated in this Agreement and (ii)
to assume sole responsibility for all expenses incurred by RESELLER in
performing its duties under this Agreement, unless such expenses are made for
the purpose of performing obligations required to be but not actually performed
by CASI hereunder.
3. UNDERTAKINGS OF CASI.
3.1 Duties of CASI. CASI agrees to provide to RESELLER, from CASI's
principal place of business, Maintenance Services, the materials and technical
assistance set forth herein and in Section XVII. Additional Consulting Services
of the Restated License, pursuant to the terms and conditions of such Restated
License.
(a) Copies of all necessary or appropriate Product corrections,
enhancements and new releases which CASI makes available for general
distribution to Licensees enrolled in CASI's maintenance plans, in Object and
Source Code form, for reproduction and distribution (in Object Code only) to
Customers pursuant to Article 4 hereof and for the other purposes set forth in
Section 2.1(a) hereof, as well as any other enhancements or new releases
necessary to allow RESELLER to obtain the full benefit of the rights it
bargained for hereunder;
(b) Copies of all promotional materials, suggested price lists
(including pricing for additional promotional materials) and other materials
which CASI may hereafter develop from time to time to assist RESELLER in
marketing the Products, for use by RESELLER pursuant to Article 4 hereof;
(c) Necessary and appropriate "second level" technical support
by telephone to RESELLER's designated personnel concerning the installation,
operation and maintenance of the Products in cases where RESELLER is unable,
after using reasonable commercial efforts, to resolve a technical problem
encountered by a Licensee or Customer (with such second level technical support
to include, but not be limited to, providing emergency bypasses to solve
technical problems and fixing program errors as identified by RESELLER), along
with all technical support and marketing support required under the CASI License
Agreement (as defined herein).
3.2 Product Standards. CASI shall provide to RESELLER a new version of
each Product at the time that such version is released for general commercial
distribution. CASI reserves the right at any time to modify, revise, replace or
reconfigure any of the Products (so long as it is in a manner compatible with
and does not degrade the performance of the prior version of the Product and
which does not require significant effort from RESELLER in order to prepare for
general commercial use with the Customers or sublicensees of RESELLER).
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3.3 Product Warranty.
(a) CASI warrants for a period of twelve (12) months after the date
hereof, for RESELLER's benefit alone, that each Product, as originally delivered
(or, if subsequently modified by CASI, then in regard to each such modification
as well) and when operated with the equipment configuration and in the operating
environment of a Permitted Configuration Center, as defined in the Restated
License, will perform in accordance with the technical and functional
specifications set forth in the Documentation for such Product provided by CASI.
CASI does not warrant that each Product will be error-free in all circumstances.
In the event of any defect or error, RESELLER agrees to provide CASI with
sufficient information to allow CASI to reproduce and repair the defect or
error. As RESELLER's primary remedy for any defect or error in a Product
covered by such warranty, CASI will correct such errors or defects at CASI's
facility by promptly issuing corrected instructions, a restriction, or a bypass,
in accordance with its' obligation for Maintenance Services, as defined in the
Restated License. CASI is not responsible for any defect or error not reported
during the warranty period (unless such defect or error did not come to
RESELLER's attention until after due use and examination of the Product during
said warranty period) or any defect or error in a Product which RESELLER has
modified, misused or damaged in a manner causing the error or defect.
(b) EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION 3.3, CASI DISCLAIMS
ALL WARRANTIES, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS PROVIDED IN THIS
AGREEMENT, IN NO CASE SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL OR
CONSEQUENTIAL DAMAGES, UNLESS CAUSED BY WILFUL OR KNOWING CONDUCT, INCLUDING,
WITHOUT LIMITATION, ANY SUCH SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE
USE OR OPERATION OF THE PRODUCTS, DELAYS IN DELIVERY OR REPAIR, LOSS OF USE OF
THE PRODUCTS, OR DAMAGE TO ANY DOCUMENTS OR OTHER PROPERTY OF RESELLER OR ITS
LICENSEES, EXCEPT IN THE CASE OF WILFUL MISCONDUCT. Either party's liability
arising out of contract, negligence, strict liability in tort or warranty shall
not, except in the case of wilful misconduct, exceed the amounts paid by
RESELLER under this Agreement. Notwithstanding the foregoing, CASI (i) warrants
that RESELLER will not be required to obtain any third-party software in order
to operate the Products other than that which is set forth in the Restated
License; (ii) warrants that the documentation and technical materials provided
by CASI to RESELLER will be accurate and complete; (iii) warrants that it has
not placed, nor is it aware of, any disabling code in the Products or Source
Code which would alter, destroy, or inhibit any use of the Products or Source
Code or the data contained therein; (iv) covenants and agrees that it will not
terminate or attempt to terminate, by modem or by electronic means or by other
means, use of the Products by RESELLER in connection with any dispute; and (v)
warrants that the Products are designed to operate in the year 2000 and beyond
to store, calculate, process and print year 2000 dates and is coded so that the
progression from
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the year 1999 to 2000 (and beyond) will not cause the Products to cease
operating, to operate incorrectly or otherwise fail to meet its documentation.
4. UNDERTAKINGS OF RESELLER.
4.1 Duties of RESELLER. RESELLER agrees to promote, market,
distribute and support the Products as set forth below and agrees, in
furtherance of the foregoing:
(a) To identify and contact Customers in person, by telephone or
using direct mailings, to demonstrate the Products to Customers and to advise
Customers on the selection, use, functionality, specifications and
price/performance characteristics of the Products in accordance with the
Documentation;
(b) To market and distribute the Products only under License
Agreements in accordance with Article 5 hereof;
(c) To provide reasonable "first level" technical assistance to
Customers and Licensees concerning the installation, operation and maintenance
of the Products;
(d) To distribute corrections and enhancements prepared by CASI
to, and new releases of, the Products to Licensees;
(e) To remit promptly all amounts due to CASI pursuant to
Section 9.1 hereof;
(f) To maintain records concerning the name, address, contact
person, e-mail address, telephone and telefax number of all Customers and
Licensees;
(g) To provide CASI with the periodic reports described in
Section 9.2 hereof;
(h) To maintain an adequate number of experienced personnel who
are properly trained and certified by CASI to promote, license, install,
maintain and otherwise support the Products; and
(i) To notify CASI promptly of any Product defects or other
unresolved technical problems concerning the installation, use, or performance
of the Products.
4.2 Standard of Performance. RESELLER shall use commercially
reasonable efforts to perform each of the duties described in Section 4.1 hereof
in a commercially reasonable manner that reasonably preserves and protects
CASI's business reputation and all of its proprietary rights in the Products.
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4.3 Certain Covenants. RESELLER agrees not to make any warranties to
any third party concerning the Products which are in excess of the warranty
provided to RESELLER by CASI hereunder, except to the extent that such
warranties relate to features of Derivative Works not contained in the original
Products, for which RESELLER will be responsible.
4.4 Indemnification. Unless any of the following bases for liability
on the part of RESELLER arise due to information, guidance or Products provided
to RESELLER by CASI, or arise as a result of a breach by CASI of its'
obligations under this Agreement or the Restated License, RESELLER agrees to
indemnify and hold CASI harmless from and against any and all claims,
liabilities, costs and expenses (including reasonable legal fees and costs), up
to its limit of liability set forth in Section 3.3(b) above, arising out of (i)
the improper installation, support or maintenance of the Products by RESELLER or
its employees or agents, (ii) any misrepresentations by RESELLER or its
employees and agents in respect of the Products, (iii) any violation by RESELLER
of any of the material provisions of this Agreement, (iv) any negligent,
wrongful or intentional acts or omissions on the part of RESELLER or its
employees and agents or (v) any warranty or other claim arising from Customers'
use or inability to use Derivative Works made by or for RESELLER.
5. Reproduction of Products.
5.1 RESELLER may make copies of the master copy of the Product for
the purpose of marketing and distributing such Product to a Customer. Such
copies may be distributed or furnished to a Customer only if RESELLER and
Customer have executed a License Agreement in compliance with the provisions of
Section 6.1 of this Agreement.
5.2 RESELLER agrees not to remove any copyright notice or other
proprietary markings from the master copy of any Product, and each copy of a
Product shall contain the same copyright notices and proprietary markings
contained in or appearing on the master copy of such Product. All copies of the
Product or Documentation licensed to the U.S. Government shall contain an
appropriate "Restricted Rights" or "Limited Rights" legend according to
applicable U.S. government regulations.
5.3 Except as provided in this Agreement or the Restated License,
RESELLER agrees not to duplicate or reproduce, directly or indirectly, any
master copy or any copy of a Product derived therefrom in whole or in part.
6. PRODUCT LICENSES.
6.1 Licensing. RESELLER is authorized to sublicense the Products to
Customers. Each Product License Agreement shall be a signed instrument between
RESELLER and a Customer. RESELLER agrees not to make the Products available to
any Customer unless and until such Customer shall have executed and delivered to
RESELLER a signed License Agreement (except that RESELLER shall substitute its
name for CASI's in such an agreement),
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and RESELLER shall have accepted, executed and delivered such License Agreement.
RESELLER shall thereafter make Products available to such Customer only in
accordance with the terms of such License Agreement.
6.2 Enforcement of License Agreements. RESELLER agrees to use
commercially reasonable efforts, without taking any legal actions, to enforce
each License Agreement under applicable law and to safeguard all material rights
(proprietary or otherwise) of CASI in the Products. RESELLER agrees to notify
CASI promptly following RESELLER's receipt of any material legal notice or
service of process relating to any legal action relating to the Products or to
this Agreement. RESELLER agrees to institute any legal action or other
proceedings or to enter into any compromise without the prior written consent of
CASI.
7. TRADE SECRETS AND PROPRIETARY INFORMATION.
7.1 Proprietary Nature of Products.
(a) RESELLER acknowledges CASI's claim that it is the owner (or
is an authorized licensee) of the Products, that the Products are confidential
in nature and not in the public domain, that CASI claims all intellectual and
industrial property rights granted by law therein on behalf of itself or the
licensor(s) and that CASI does not hereby grant nor otherwise transfer any
rights or ownership of the Products to RESELLER or any third party. Except as
otherwise expressly permitted hereunder, RESELLER agrees not to copy or
otherwise reproduce any Product, in whole or in part, other than as required for
internal use in order to provide, or allow third parties to provide, integration
services to Customers, without CASI's prior written consent. RESELLER further
agrees to take all commercially reasonable steps to ensure that no unauthorized
persons shall have access to any of the Products and that all authorized persons
having access to the Products shall refrain from any such disclosure,
duplication or reproduction except to the extent required in the performance of
RESELLER's duties under this Agreement. Notwithstanding the above, CASI
acknowledges that each Derivative Work which is developed exclusively by or for
RESELLER hereunder, whether by RESELLER's personnel or by CASI as in its
performance of CASI Services hereunder, shall be owned by RESELLER; provided,
however, that RESELLER shall own only the new material embodied in such
Derivative Work and not any preexisting material (unless such preexisting
material has become part of the public domain or does not constitute a material
element of the Derivative Work). Each such Derivative Work shall be assigned a
unique version number by CASI and shall display a statement indicating ownership
and copyright of appropriate modules or features by RESELLER.
(b) RESELLER agrees to accord the Products and all other
confidential information relating to this Agreement at least the same degree and
methods of protection as RESELLER undertakes with respect to its own
confidential information, trade secrets and other proprietary data.
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(c) Except as permitted by law, RESELLER agrees not directly or
through any agent or intermediary, to register, apply for registration or
attempt to acquire any legal protection for any of the Products or any
proprietary rights therein or to take any other action which infringes CASI's
right, title or interest in or to the Products in any jurisdiction.
(d) RESELLER acknowledges that, in the event of a willful
material breach by RESELLER of its obligations under this Article 7, CASI may
bring an appropriate legal action to enjoin any such breach hereof, and shall be
entitled to recover from RESELLER reasonable legal fees and costs in addition to
other appropriate relief.
7.2 Notices and Legends. All copies of the Products and the
Documentation distributed by RESELLER shall retain the copyright notices and
proprietary markings contained in or appearing on the master copy thereof
supplied to RESELLER by CASI; provided, however, that RESELLER may add
proprietary markings relating to Derivative Works to the extent such works are
owned by RESELLER. All copies of the Products and Documentation licensed to the
United States Government shall contain an appropriate "Restricted Rights" or
"Limited Rights" legend according to applicable United States government
regulations.
8. USE OF TRADE NAMES AND TRADEMARKS.
8.1 Scope of Use.
(a) RESELLER hereby acknowledges CASI's claim of ownership of
the trade names and marks "CASI", "COMPUTER-AIDED SOFTWARE INTEGRATION", and
"INTEGRATOR'S WORKBENCH PRODUCT SERIES", each of the Product names and all
related trademarks and service marks. RESELLER further acknowledges that it
shall acquire no interest therein by virtue of this Agreement or the performance
by RESELLER of its duties and obligations hereunder. RESELLER agrees not to use
the names "CASI" or "COMPUTER-AIDED SOFTWARE INTEGRATION", or any of the Product
names or marks (or any confusingly similar name or symbol), in whole or in part,
as part of RESELLER's business or trade name.
(b) CASI hereby grants to RESELLER during the term of this
Agreement the non-exclusive, worldwide limited right to use the proprietary
Product names and marks only in connection with the performance of RESELLER's
duties under this Agreement. RESELLER agrees not to use such names or marks in
connection with any other products or services other than as in its generic
sense to describe the function of the products or services provided by Licensee.
(c) RESELLER agrees to identify CASI as the owner of the
Products in all Documentation and promotional material. CASI reserves the right
to reasonably approve all material promotional material but only for the purpose
of ensuring that RESELLER properly
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uses CASI's proprietary names and marks. Upon termination of this Agreement,
RESELLER agrees and undertakes not to use such proprietary names and marks.
8.2 Protection Against Infringement. During the term of this
Agreement, RESELLER agrees to notify CASI promptly of (i) any known use or
registration by third parties of any trade names or marks which might infringe
CASI's trade or Product names or marks and (ii) any notice or claim of
infringement against RESELLER based on or resulting from RESELLER's use of such
names and marks. RESELLER acknowledges and agrees that CASI shall have the sole
right and duty to protect such names and marks from a legal action or suit for
infringement thereof.
9. PRICE, PAYMENT AND REPORTS.
9.1 Price and Payment.
(a) RESELLER shall pay CASI the license fees and CASI Service
fees set forth in the attached Exhibit D, which is hereby incorporated by this
reference herein, on the terms set forth therein.
(b) CASI agrees to supply the Products for resale to Licensees
and Customers by RESELLER pursuant to Article 5 hereof at current list prices,
less the applicable Product discounts specified in Exhibit D. All prices are
exclusive of taxes, shipping, insurance and other charges, and are subject to
change on not less than sixty (60) days' written notice to RESELLER, as more
specifically set forth in Exhibit D.
(c) RESELLER agrees to pay CASI for each Product licensed to a
Customer not later than sixty (60) days after delivery of such Product to such
Customer, so long as RESELLER has received payment from such Customer.
(d) Past due amounts shall accrue interest from the due date
thereof until paid in full, at the prime rate as published in the Wall Street
Journal, plus two percent per annum, or the maximum rate otherwise permitted by
applicable law, whichever shall be lower.
(e) In the event that RESELLER shall, at any time, be in arrears
on payments in excess of $200,000 owing to CASI or otherwise in material default
of this Agreement, CASI may, upon one hundred and eighty (180) days' prior
written notice to RESELLER, seek whatever remedies are available to it at law or
in equity, including the right to terminate, if RESELLER fails to cure such
default during such period.
(f) In the event that any License Agreement shall be canceled or
terminated for any reason or CASI breaches any of its obligations under this
Agreement or the Restated License, the amount payable by RESELLER to CASI
hereunder shall be reduced proportionately based on payments actually received
and retained by RESELLER.
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9.2 Periodic Reports. Within twenty (20) days after the last day of
each calendar month, RESELLER agrees to prepare and transmit to CASI by telefax
a report stating the company name, address, contact name, phone number, Product,
hardware manufacturer and model number, operating system and release number of
each Product licensed, shipped or installed that month.
9.3 Financial Review. CASI shall have the right, during the term of
this Agreement and for a period of one (1) year following termination thereof
through an independent third party ("CPA"), upon not less than fifteen (15) days
prior written notice to RESELLER, to conduct a review at RESELLER's principal
business offices of RESELLER's books and records relating to this Agreement and
to make copies thereof at CASI's expense. If the results of such a review shall
disclose a deficiency in amounts payable by RESELLER to CASI in excess of five
percent (5%) of the amounts actually paid or reported as payable to CASI
hereunder for any period which is so reviewed, then RESELLER shall promptly
reimburse CASI for such amounts and for the cost of such review, including, but
not limited to, reasonable professional fees and travel expenses. The CPA shall
be one of the largest six accounting firms which is not currently providing
service to or has provided service to CASI and shall have entered into an
agreement with RESELLER agreeing not to disclose any information of RESELLER to
CASI, except for the amount of deficiency.
10. TERM AND BREACH.
10.1 Term of Agreement. The term of this Agreement shall be
perpetual, commencing as of the effective date hereof.
10.2 Breach by RESELLER. Notwithstanding the provisions of Section
10.1 hereof, CASI may seek whatever remedies are available to it at law or in
equity, including the right of termination at any time after the occurrence of
any of the following events:
(a) Pursuant to a final judgment or order of a court with
competent jurisdiction, RESELLER is declared bankrupt, and such judgment or
order remains unstayed or unappealed (by filing of motion after judgment or
order or filing of appeal to higher governmental authority) and in effect for 60
days;
(b) RESELLER assigns or transfers this Agreement or any License
Agreement or Trial Agreement or any of its rights to obligations hereunder or
thereunder, without CASI's prior written consent, which consent CASI shall not
unreasonably withheld;
(c) RESELLER violates any material provision of this Agreement
and fails to cure such violation upon one hundred and eighty (180) days
written notice detailing the violation; or
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(d) RESELLER becomes insolvent.
10.3 Termination by RESELLER. Notwithstanding the provisions of Section
6.1 hereof, RESELLER may terminate this Agreement at any time after the
occurrence of any of the following events:
(a) Pursuant to a final judgment or order of a court with
competent jurisdiction, CASI is declared bankrupt, and such judgment or order
remains unstayed or unappealed (by filing of motion after judgment or order or
filing of appeal to higher governmental authority) and in effect for 60 days; or
(b) CASI assigns or transfers this Agreement or any License
Agreement or Trial Agreement or any of its rights to obligations hereunder or
thereunder, without RESELLER's prior written consent, which consent shall not be
unreasonably withheld; or
(c) CASI violates any material provision of this Agreement.
10.4 Continuing Obligations. No termination of this Agreement for any
reason whatsoever shall in any way affect the continuing obligations of the
parties under Sections 4.4, 7.1, 9.1 (but only as payments, reports or other
obligations for any prior months or the then-current month during which
termination occurs) and 10.4 hereof.
11. GENERAL PROVISIONS.
11.1 Complete Agreement. This Agreement, together with the Exhibits
hereto and the Restated License, sets forth the entire agreement and
understandings between the parties hereto with respect to the subject matter
hereof. This Agreement merges all previous discussions and negotiations between
the parties and supersedes and replaces any and every other agreement, which may
have existed between CASI and RESELLER.
11.2 Modification or Amendment. Except to the extent and in the
manner specified in this Agreement, any modification or amendment of any
provisions of this Agreement must be in writing and bear the signature of the
duly authorized representative of each party.
11.3 No Implied Waivers. The failure of either party to exercise any
right or option it is granted herein, or to require the performance by the other
party hereto of any provision if this Agreement, or the waiver by either party
of any breach of this Agreement shall not prevent a subsequent exercise or
enforcement of such provisions or be deemed a waiver of any subsequent breach of
the same or any other provision of this Agreement.
11.4 Assignability. Neither party shall sell, assign, transfer,
convey, delegate or encumber any of its rights, duties or obligations hereunder,
and shall not suffer or permit any
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encumbrance thereof, by operation of law or otherwise, without the prior written
consent of the other party, not to be unreasonably withheld; provided, that each
party reserves the right to assign or transfer this Agreement or any of its
rights, duties and obligations hereunder, to any of its direct or indirect
subsidiary or affiliate.
11.5 Notices. All notices, requests, reports, submissions and other
communications permitted or required to be given under this Agreement shall be
deemed to have been duly given if such notice of communication shall be in
writing and sent by personal delivery or by airmail, cable, telegram, telex,
facsimile transmission or other commercial means of rapid delivery, postage or
costs of transmission and delivery prepaid, to the parties at addresses
specified herein until such time as either party hereto shall give the other
party hereto not less than ten (10) days' prior written notice of a change of
address in accordance with the provisions hereof.
11.6 Law Governing Agreement. The validity of this Agreement and the
rights, obligations and relations of the parties hereunder shall be construed
and determined under and in accordance with the substantive laws of the State of
California, without regard to its rules of conflicts of law. In the event any
legal proceeding is brought to enforce or interpret the provisions of this
Agreement, the parties hereby agree to submit to the jurisdiction of the courts
of Los Angeles, California, which shall be the exclusive venue for all such
proceedings.
11.7 Severability. If any provision of this Agreement is determined
by a court of competent jurisdiction to be in violation of any applicable law or
otherwise invalid or unenforceable, such provision shall to such extent as it
shall be determined to be illegal, invalid or unenforceable under such law be
deemed null and void, but this Agreement shall otherwise remain in full force
and effect.
11.8 Publicity. RESELLER shall not publicize or disclose to any
third party by other means any of the terms or provisions of this Agreement, or
the discussions relating thereto, without the prior written consent of a duly
authorized officer of CASI, except as required by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
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CASI: RESELLER:
COMPUTER-AIDED SOFTWARE DATANET INTERNATIONAL, INC.
INTEGRATION, INC., a Delaware a California corporation
corporation
By: /s/ James M. Casi By:
Name: James M. Casi Name: James Ung
Title: CFO Title: President
Address: 12477 W. Cedar Dr. Address: 1305 John Reed Court
Suite 201 City of Industry, CA 91745
Denver, CO 80228
Telephone: 303-987-3499 Telephone: 818-968-9868
Fax: 303-987-3923 Fax: 818-937-1986
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LIST OF EXHIBITS
EXHIBIT A Product
EXHIBIT B Form of Customer License Agreement
EXHIBIT C Form of Trial License Agreement
EXHIBIT D Price and Quantity Terms
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EXHIBIT A
PRODUCTS
1. IWPS Configuration-TM-
CASI's IWPS Configurator products, version 2.20 or higher. IWPS Configurator
shall include all modules, tools and utilities produced by CASI for use with the
IWPS Configurator product line as described on the then current IWPS
Configurator Pricing Schedule.
16
<PAGE>
EXHIBIT B
FORM OF CUSTOMER LICENSE AGREEMENT
[To be provided at a later date]
17
<PAGE>
EXHIBIT C
FORM OF TRIAL LICENSE AGREEMENT
[To be provided at a later date]
18
<PAGE>
EXHIBIT D
PRICE AND QUANTITY TERMS
A. RESELLER shall pay CASI for each License Agreement entered into, a fee
equal to the suggested retail price set forth on CASI's then most current IWPS
Configuration Pricing Schedule, minus the discount set forth immediately below
in Section B. CASI reserves the right to change the suggested retail price of
the IWPS CONFIGURATOR, upon sixty (60) days' prior written notice to RESELLER,
provided that CASI hereby offers the IWPS CONFIGURATOR for sale to RESELLER on
terms, including price, no worse than it offers such item to any of its other
customers, licensees or distributors; and provided further, that any such price
increase shall not, in the aggregate over the term of this Agreement, exceed
125% of the lower of (i) its suggested retail price as of the date of this
Agreement, or (ii) the price that is no worse than offered to its other
customers, licensees or distributors.
B. Discounts. Discounts for the IWPS CONFIGURATOR will be set on a
projected annual commitment basis for sales of the Product and shall be
evaluated quarterly for performance; that is, the IWPS CONFIGURATOR discount for
each quarter will be set based on the RESELLER's ability to successfully achieve
at least 25% of its annual commitment each quarter based on the quantity of IWPS
CONFIGURATOR products sold in the prior quarter. Notwithstanding whether
RESELLER achieves its quarterly commitment, the following quantity discount
schedule shall apply; provided that, at the end of each annual period a
reconciliation shall be done so that if RESELLER exceeds its Annual Commitment,
it shall receive a payment equal to the difference between the higher discount
percentage applicable, times the amount of all sales made, minus the discount,
times all sales made, already taken.
<TABLE>
<CAPTION>
Annual Commitment Discount Per Unit
----------------- -----------------
<S> <C>
0 to $250,000 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION %
$250,000 to $799,999 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION %
$800,000 to $1,599,999 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION %
$1,600,000 to $3,200,000 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION %
Over $3,200,000 CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION %
</TABLE>
For the twelve (12) month period commencing on the date of this
Agreement, RESELLER agrees to an Annual Commitment of $800,000 to $1,599,999.
The parties agree to negotiate an Annual Commitment for each successive twelve
(12) month period, and appropriate discounts related thereto; provided that, in
the event the parties fail to agree, the Annual Commitment and discounts set
forth above, or, as applicable, the most recently agreed to Annual Commitment
and discounts shall continue to apply to each successive period.
19
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE 'ACT') OR STATE SECURITIES LAWS AND NO
TRANSFER OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION
THEREFROM WITH RESPECT TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A
SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT
FROM THE REQUIREMENTS OF THE ACT.
As of July 1, 1997 $950,000.00
Non-Interest Bearing
Promissory Note Due March 31, 1998
Data Net International, Incorporated, a California corporation (together
with its successors and assigns, "Issuer"), for value received hereby
promises to pay to Computer-Aided Software Integration, Inc., a Delaware
corporation (together with its successors, transferees and assigns,
"Noteholder"), by wire transfer of immediately available funds to an account
designated by Noteholder by notice to Issuer the principal sum of NINE
HUNDRED AND FIFTY THOUSAND DOLLARS ($950,000) ("Note Amount"), as provided
herein.
This Note (the "Note") is delivered to Noteholder as payment in full for
the license fee (the "License Fee") for the licenses and rights provided to
Issuer pursuant to that certain Amended and Restated License Agreement dated
as of the date hereof by and between Issuer and Noteholder (the "License
Agreement"). This Note is an amendment and restatement of, and issued in
substitution for, that certain Note of the Issuer dated April 30, 1997 in
favor of Noteholder in the principal amount of $1,500,000.00 (the "April
Note"). The execution and delivery of this Note shall render the April Note
null, void, canceled, terminated and satisfied in all respects, and Issuer
shall have no liability in connection therewith after such execution and
delivery.
1. TERMS OF NOTE. The Note Amount shall not accrue interest and shall be
due and payable in two installments (the "First Installment" and the "Second
Installment," respectively), payable in the amounts and on the dates as
follows:
PAYMENT DATE PRINCIPAL PAYMENT
------------ -----------------
First
Installment: October 31, 1997 $250,000
Second
Installment: February 28, 1998 $700,000
1
<PAGE>
;provided, however, that:
(i) in the event that Issuer in its sole discretion consummates a
Qualified Financing (as hereinafter defined) prior to payment of the
First Installment, the first $250,000 of proceeds of such Qualified
Financing shall be immediately applied to pre-payment of the Second
Installment; and
(ii) in the event that Issuer in its sole discretion consummates a
Qualified IPO (as hereinafter defined) prior to payment of the Second
Installment, the first $350,000 of proceeds of such Qualified
Financing shall be immediately applied to pre-payment of the Second
Installment.
For purposes of this Note, (i) a Qualified Financing shall mean a
subordinated debt or equity financing transaction or a series of subordinated
debt or equity financing transactions which yield gross proceeds to the
Issuer or any of its subsidiaries of at least $1,000,000, and (ii) a
Qualified IPO shall mean an initial underwritten offering by the Issuer of
its securities to the public pursuant to a registration statement filed with
the Securities Exchange Commission under the Securities Act of 1933, as
amended.
Whenever any payment of this Note shall be stated to be due on a day,
which is not a Business Day, such payment shall be made on the next
succeeding Business Day. For purposes of this Note, "Business Day" means any
day except a Saturday, Sunday or other day on which commercial banks in the
City of New York are authorized by law to close.
2. EVENT OF DEFAULT DEFINED; ACCELERATION OF PAYMENT. In case one or
more of the following events ("Events of Default") (if it shall be voluntary
or pursuant to any final judgment, decree or order of any court or any final
order of any administrative or governmental body) shall have occurred and be
continuing:
a. Failure on the part of Issuer to pay any installment under this Note
when due at maturity, upon acceleration or otherwise and such default
continues for a period of more than thirty (30) days after the date on which
written notice specifying such failure, stating that such notice is a "Notice
of Default" hereunder and demanding that Issuer remedy the same, shall have
been given by registered or certified mail, return receipt requested, to
Issuer; or
b. Material failure on the part of Issuer duly to observe or perform
any of the material covenants or agreements on the part of Issuer contained
in the License Agreement, for a period of thirty (30) days after the date on
which written notice specifying such failure, stating that such notice is a
"Notice of Default" hereunder and demanding that Issuer remedy the same,
shall have been given by registered or certified mail, return receipt
requested, to Issuer; or
c. A material final judgment or order (not covered by insurance) for
the payment of money in excess of $500,000 shall be rendered against Issuer
(treating any deductibles as not so
2
<PAGE>
covered) shall be rendered against Issuer and such judgment or order shall
continue unsatisfied, unstayed or unappealed (by filing of motion after
judgment or order or filing of appeal to higher governmental authority) for a
period of 30 days; or
d. Issuer makes an assignment for benefit of creditors involving all of
its assets; or
e. Issuer pursuant to or within the meaning of title 11, U.S. Code or
any succeeding federal law ("Bankruptcy Law"):
i. Commences a voluntary case or proceeding, which is not
dismissed within ninety (90) days of commencement,
ii. Consents to the entry of an order for relief against it
effectuating the transfer of all of its assets in an involuntary case or
proceeding, unless such case or proceeding is dismissed within ninety (90)
days of commencement, or
iii. Consents to the appointment of any receiver, trustee,
assignee for the benefit of creditors, liquidator or similar official under
any Bankruptcy Law (a "Custodian") for it or for all or substantially all of
its property, which Custodian is not removed within ninety (90) days of
appointment, or
iv. A court of competent jurisdiction enters a final order or
decree under any Bankruptcy Law that:
v. Is for relief against Issuer effectuating the transfer of all
of its assets in an involuntary case or proceeding, unless such case or
proceeding is dismissed within ninety (90) days,
vi. Appoints a Custodian of Issuer for all or substantially all of the
property of Issuer, which Custodian is not removed within ninety (90) days of
appointment, or
vii. Orders the complete liquidation of all of the assets of Issuer,
And such order or decree remains unstayed or unappealed (by filing of
motion after judgment or order or filing of appeal to higher governmental
authority) and in effect for 60 days;
Then, (i) in each case where a material Event of Default occurs (other
than a material Event of Default under Section 3(e) or 3(f) hereof), the
Noteholder, by thirty (30) days notice in writing to Issuer (the
"Acceleration Notice"), may declare the aggregate Note Amount to be due, and
upon the passage of such thirty (30) days, the same shall become due;
PROVIDED that if a material Event of Default under Section 3(e) or 3(f)
occurs, the Note Amount shall become and be immediately due upon receipt of
written notice of such default to Issuer on the part of the Noteholder.
Subject to Section 7 below, the Noteholder may exercise this option to
accelerate on the terms of this Note during any default by Issuer regardless
of any prior forbearance.
3
<PAGE>
Upon the occurrence of, and during the continuation of, any material
Event of Default (or, in the case of those Events of Default with allotted
cure periods, upon expiration of the allotted cure period of such material
Event of Default) the principal amount of this Note shall bear interest at a
rate of 5% per annum (the "Default Interest").
3. DEFAULT BY NOTEHOLDER OR GLASGAL. If Noteholder or Glasgal
Communications, Inc. or any of its subsidiaries or affiliates (collectively,
AGlasgal@) breaches the License Agreement or any other agreement by and among
Issuer and Noteholder and/or Glasgal, then this Note shall be immediately
rendered null, void, canceled, terminated and satisfied in all respects, and
Issuer shall have no liability in connection therewith after such execution
and delivery.
4. PREPAYMENT. The Issuer may prepay the unpaid principal balance of
this Note in whole or in part, without penalty at any time. The principal
amount of this Note may be prepaid only in cash.
5. TRANSFER. This Note is assignable and transferable by Noteholder
only with the consent of Issuer and only upon compliance with the provisions
of Section 2 above, and by Issuer with Noteholders consent.
6. NO WAIVER. No failure on the part of Noteholder to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver thereof;
nor shall any single exercise of any right hereunder preclude any other or
further exercise thereof or the exercise of any other right hereunder. The
remedies herein provided have been negotiated by the parties, are cumulative
and are exclusive of any other remedies provided by law.
7. NO COLLECTION. Notwithstanding any provision of Section 3 of this
Note, the License Agreement or otherwise, no suit may be brought to collect
this Note or for payment of the License Fee; instead, Noteholder shall only
be able, and its exclusive remedy for any default under this Note or the
failure to pay the License Fee shall be to apply the entire amount due
hereunder to payment for the Common Stock of the Issuer pursuant to the terms
of that certain Warrant Agreement of even date herewith by and between the
Issuer and the Noteholder.
8. AMENDMENT. No amendment or waiver of any provision of this Note,
nor consent to any departure by the Issuer herefrom, shall in any event be
effective unless the same shall be in writing and signed by Noteholder and
then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
9. MISCELLANEOUS. This Note shall be governed by and be construed in
accordance with the laws of the State of California without regard to the
conflicts of law rules of such state. Issuer hereby assents to extensions of
the time of payment, or forbearance or other indulgence without notice. The
Section headings herein are for convenience only and shall not affect the
construction hereof. After delivery of an indemnity in form and substance
reasonably satisfactory to Issuer, Issuer agrees to issue a replacement Note
if this Note has been lost, stolen, mutilated or destroyed.
4
<PAGE>
10. NOTICES. All notices, requests and other communications to either
party hereunder shall be in writing by nationally recognized overnight mail
carrier, certified mail, return receipt requested or facsimile and shall be
given,
If to Issuer to:
Data Net International, Incorporated
1304 John Reed Court
City of Industry, California 91745
Attn: Maxwell Riazi
Fax: (805) 492-4294
if to Noteholder:
Computer-Aided Software Integration, Inc.
c/o Glasgal Communications, Inc.
20C Commerce Way
Totowa, New Jersey 07512
Attention: Chief Financial Officer
Telephone: (201) 890-4800
Fax: (201) 890-2888
with a copy (which shall not constitute notice) to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022-1170
Attention: Robert H. Friedman, Esq.
Telephone: (212) 753-7200
Fax: (212) 755-1467
if to Glasgal:
Glasgal Communications, Inc.
20C Commerce Way
Totowa, New Jersey 07512
Attention: Chief Financial Officer
Telephone: (201) 890-4800
Fax: (201) 890-2888
Any notice sent by nationally recognized overnight mail carrier shall be
deemed to be delivered to the address shown on the mailing receipt upon
actual receipt by the recipient. Any
5
<PAGE>
notice sent by certified mail, return receipt requested, shall be deemed
to be delivered 3 days after mailing. Any notice sent by facsimile shall be
deemed delivered upon the receipt by sender of written confirmation of
transmission so long as within 24 hours such notice is also sent by regular
mail to the appropriate address written above.
IN WITNESS WHEREOF, Issuer has caused this Note to be executed as of the
date first above written.
DATANET INTERNATIONAL, INCORPORATED
By: /s/ JAMES UNG
------------------------------
Name: James Ung
-----------------------
Title: President
-----------------------
Agreed and Accepted:
Computer-Aided Software Integration, Inc.
By: /s/ JAMES CACI
--------------------------
Name: James Caci
Title: CFO
Dated: July 1, 1997
------------------------
6
<PAGE>
THIS WARRANT AGREEMENT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
OF
DATA NET INTERNATIONAL, INC.
This agreement ("Warrant") certifies that for value received, COMPUTER
AIDED SOFTWARE INTEGRATION, INC., Inc. ("CASI") is entitled, subject to the
terms set forth below, to purchase from Data Net International, Inc. (the
"Company"), for consideration consisting of cancellation of all obligations
of the Company to CASI, including cancellation of the entire outstanding
principal amount (the "Due Amount"), due and payable to CASI pursuant to that
certain promissory note issued by the Company to CASI on the date hereof (the
"Note"), that number of fully paid and nonassessable shares of Common Stock
(the "Shares") of the Company, as is equal to the quotient of (x) the Due
Amount, divided by (y) $49.26 (the "Price Per Share"), up to a maximum of
32,918 Shares. The Company represents and warrants to CASI that as of the
date of this Warrant, there are 406,000 shares of Common Stock issued and
outstanding.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable in whole, but not in part at the
option of CASI within the period (the "Exercise Period") commencing upon the
occurrence of a default under Section 2(a) of the Note (a "Payment Default")
and ending at 6:00 p.m., Los Angeles time on the thirtieth day following the
date of the Payment Default (the "Exercise Period") by delivering to the
Company the Notice of Exercise attached as Exhibit "A" hereto, and execution
and delivery to the Company of the Note Cancellation attached as Exhibit "B"
hereto. The right of CASI to exercise this Warrant shall expire, if not
exercised during the Exercise Period.
2. EXERCISE PRICE. The aggregate exercise price of this Warrant shall
be cancellation of the Due Amount and the Note.
3. EXERCISE OF WARRANT. The purchase rights represented by this
Warrant are exercisable by the CASI in whole, but not in part, during the
Exercise Period, by the surrender of this Warrant and the Notice of Exercise
attached hereto duly completed and executed on behalf of CASI, at the office
of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the CASI at the address of the CASI
appearing on the books of
<PAGE>
the Company), and upon execution and delivery to the Company of the Note
Cancellation attached as Exhibit "B" hereto.
Except as specifically provided in Section 1, this Warrant shall be
deemed to have been exercised immediately prior to the close of business on
the date of its surrender for exercise as provided above, and the person
entitled to receive the Shares issuable upon such exercise shall be treated
for all purposes as the holder of record of such Shares as of the close of
business on such date. As promptly as practicable on or after such date, the
Company at its expense shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
Shares issuable upon such exercise.
4 ADJUSTMENTS.
4.1. STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and
subject to the provisions of Section 4.4 below, the number of outstanding
shares of Common Stock is increased by a stock dividend payable in shares of
Common Stock or by a split-up of shares of Common Stock or other similar
event, then, on the effective date thereof, the number of shares issuable on
exercise of this Warrant shall be increased in proportion to such increase in
outstanding shares and the then applicable Per Share Price shall be
correspondingly decreased.
4.2. AGGREGATION OF SHARES. If after the date hereof, and subject
to the provisions of Section 4.4, the number of outstanding shares of Common
Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date
of such consolidation, combination or reclassification, the number of shares
issuable on exercise of this Warrant shall be decreased in proportion to such
decrease in outstanding shares and the then applicable Per Share Price shall
be correspondingly increased.
4.3. REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If after the
date hereof any capital reorganization or reclassification of the Common Stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation or other similar event shall be effected, then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale, lawful
and fair provision shall be made whereby CASI shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities, or assets as may be
issued or payable with respect to or in exchange for the number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented by this Warrant, had such reorganization, reclassification,
consolidation, merger, or sale not taken place and in such event appropriate
provision shall be made with respect to the rights and interests of CASI to the
end that the provisions hereof (including, without limitation, provisions for
adjustments of the Per Share Price and of the number of shares purchasable upon
the exercise of this Warrant) shall thereafter
2
<PAGE>
be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof.
4.4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the CASI would otherwise
be entitled, the Company shall make a cash payment equal to the product of
(x) the Price Per Share, multiplied by (y) such fraction.
5. RIGHTS OF SHAREHOLDERS. CASI shall not be entitled to vote or
receive dividends or be deemed the holder of the Shares for any purpose, nor
shall anything contained herein be construed to confer upon CASI, as a holder
of this Warrant, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value, or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise
until this Warrant shall have been exercised as provided herein.
6. TRANSFER OF WARRANT PROHIBITED; COMPLIANCE WITH SECURITIES LAWS.
6.1 TRANSFERABILITY OF WARRANT. This Warrant may not be
transferred or assigned in whole or in part.
6.2 COMPLIANCE WITH SECURITIES LAWS.
6.2.1 CASI of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the Shares to be issued upon exercise hereof are being
acquired solely for CASI's own account and not as a nominee for any other
party, and for investment, and that the CASI will not offer, sell or
otherwise dispose of the Shares to be issued upon exercise hereof except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended (the "Act") or any state securities laws. Upon exercise
of this Warrant, CASI shall, if requested by the Company, confirm in writing,
in a form satisfactory to the Company, that the Shares so purchased are being
acquired solely for CASI's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale.
6.2.2 The Shares issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the following form (in
addition to any legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER
MAY NOT BE SOLD OR
3
<PAGE>
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE
OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE CASI OF RECORD
HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY.
6.2.3 CASI represents and warrants to the Company that CASI is an
"accredited investor" within the meaning of Regulation D of the Securities and
Exchange Commission under the Act.
7. MARKET STAND-OFF; CALL RIGHT. CASI agrees that if CASI does not
enter into an agreement with the underwriters of an initial underwritten
public offering by the Company (i) in form and substance acceptable to such
underwriters, and (ii) which provides that CASI agrees to not sell, make any
short sale of, loan, hypothecate, pledge, grant any option for the repurchase
of, or otherwise dispose or transfer for value or otherwise engage in any of
the foregoing transactions with respect to any securities of the Company
without the prior written consent of the underwriters, for such period of
time from and after the effective date of such registration statement as may
be requested by such underwriters, then the Company or its assigns shall have
the right (the "Call Right") to purchase from CASI, and CASI shall sell to
the Company or its assigns, all of the Shares, for a purchase price equal to
the Due Amount canceled by CASI upon exercise of this Warrant, plus interest
thereon from the date of exercise of this Warrant at a rate of 12% per annum
(the "Call Price"). The Call Right may be exercised by delivery to CASI of
written notice (a "Call Notice") of exercise and the closing of the exercise
of the Call Right (the "Call Closing") shall occur upon such date and at such
time as is specified in the Call Notice. At the Call Closing, CASI shall
deliver to the Company or its assigns a certificate or certificates
evidencing all of the Shares, duly endorsed for transfer to the Company or
its assignee, as specified in the Call Notice, against delivery to CASI of a
cashiers check in the amount of the Call Price.
8. RESERVATION OF STOCK. The Company covenants that during the term
this Warrant is exercisable, the Company will reserve a sufficient number of
Shares to provide for the issuance upon the exercise of this Warrant and,
from time to time, will take all steps necessary to amend its Certificate of
Incorporation to provide sufficient reserves of Shares issuable upon exercise
of this Warrant. The Company further covenants that the Shares that may be
issued upon the exercise of this Warrant, upon exercise of this Warrant and
payment of the Exercise Price, all as set forth herein, will be free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously or otherwise specified
herein).
9. AMENDMENTS. Any term of this Warrant may be amended only with the
written consent of the Company and the CASI. No waivers of, or exceptions to,
any term, condition or
4
<PAGE>
provision of this Warrant, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term,
condition or provision.
10. MISCELLANEOUS.
10.1 SEVERABILITY AND GOVERNING LAW. Should any Section or any part
of a Section within this Warrant be rendered void, invalid or unenforceable
by any court of law for any reason, such invalidity or unenforceability shall
not void or render invalid or unenforceable any other Section or part of a
Section in this Warrant. THIS WARRANT IS MADE AND ENTERED INTO IN THE STATE
OF CALIFORNIA AND THE LAWS OF SAID STATE SHALL GOVERN THE VALIDITY AND
INTERPRETATION HEREOF AND THE PERFORMANCE BY THE PARTIES HERETO OF THEIR
RESPECTIVE DUTIES AND OBLIGATIONS HEREUNDER.
10.2 COUNTERPARTS. This Warrant may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10.3 CAPTIONS AND SECTION HEADINGS. Section titles or captions
contained in this Warrant are inserted as a matter of convenience and for
reference purposes only, and in no way define, limit, extend or describe the
scope of this Warrant or the intent of any provision hereof.
10.4 ATTORNEYS' FEES. In the event that any dispute among the
parties to this Warrant should result in litigation, the prevailing party in
such dispute shall be entitled to recover from the losing party its
reasonable fees and expenses of attorneys and accountants in connection
therewith.
10.5 ENTIRE AGREEMENT. This Warrant contains the entire
understanding of the parties and there are no further or other agreements or
understandings, written or oral, in effect between the parties relating to
the subject matter hereof unless expressly referred to herein.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Warrant as of the date written below.
Dated: As of July 1, 1997
DATA NET INTERNATIONAL, INC.
By: /s/ JAMES UNG
---------------------------
Its: President
---------------------------
AGREED AND ACCEPTED:
COMPUTER AIDED SOFTWARE INTEGRATION, INC.
By: /s/ JAMES CACI
---------------------------
Its: Chief Financial Officer
---------------------------
6
<PAGE>
NOTICE OF EXERCISE
To: Data Net International, Inc.
(1) The undersigned hereby elects to purchase _______ Shares of
_______________ pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price for such Shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the Shares are being acquired solely for the account of the
undersigned and not as a nominee for any other party, and for investment, and
that the undersigned will not offer, sell or otherwise dispose of any such
Shares except under circumstances that will not result in a violation of the
Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said Shares in the
name of the undersigned or in such other name as is specified below:
--------------------------
(Name)
--------------------------
(Name)
- --------------- -------------------------
(Date) (Signature)
7
<PAGE>
NOTE CANCELLATION FORM
FOR VALUE RECEIVED, the undersigned holder and owner of that certain
promissory note in the original principal amount of $950,000 issued by Data Net
International, Inc. (the "Company") to the undersigned on September __, 1997
(the "Note") hereby tenders such Note, marked "CANCELED" across its face, and
hereby cancels and waives any claims of the undersigned for payment of
principal, interest, expenses and fees due to or claimed by the undersigned
under or pursuant to the Note. The undersigned represents and warrants that the
undersigned has not assigned any of its rights or claims at any time existing or
arising under the Note to any person, and agrees to indemnify, defend and hold
the Company harmless against liability or assertions of liability on the part of
the Company to any person other than the undersigned under or pursuant to the
provisions of the Note.
Dated:
----------------------
COMPUTER AIDED SOFTWARE INTEGRATION, INC.
By:
-----------------------------
Its:
----------------------------
8
<PAGE>
PROMISSORY NOTE
$150,000 JULY 1, 1997
WHEREAS, Ralph Glasgal (the "Lender") desires to loan to Data Net
International, Incorporated, a California Corporation (the "Borrower") and
the Borrower desires to borrow from the Lender, the principal amount of
$150,000 pursuant to the terms and conditions contained in this promissory
Note (the "Note").
NOW, THEREFORE, for good and valuable consideration herein
contained, lender hereby agrees to loan to Borrower, and Borrower hereby
promises to pay to the order of lender or his successors or assignees, the
principal amount of one hundred fifty thousand ($150,000) dollars on the
following schedule:
PAYMENT DATE PRINCIPAL PAYMENT
------------ ------------------
First Installment--November 31, 1997 $ 50,000
Second Installment--February 28, 1998 100,000
Provided, however, that (i) in the event that the Borrower in its sole
discretion consummates a qualified financing (as hereinafter defined) prior
to the payment of the first installment, $50,000 of the proceeds of such
qualified financing shall be immediately applied to repayment of the first
installment; and (ii) in the event that Borrower in its sole discretion
consummates a qualified IPO (as hereinafter defined) prior to payment of the
second installment, $100,000 of proceeds of such qualified financing shall be
immediately applied to prepayment of second installment.
For purposes of this Note, (i) a Qualified Financing shall mean a
subordinated debt or equity financing transaction or a series of subordinated
or equity financing transactions, which yield gross proceeds to the Borrower
or any of its subsidiaries of at least $1,000,000 and (ii) a Qualified IPO
shall mean an initial underwritten offering by the Borrower of its securities
to the public pursuant to a registration statement filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
Borrower also promises to pay interest on the $150,000 principal
amount of this Note at a rate of ten percent (10%) per
<PAGE>
annum (on the basis of a 360 day year and actual number of days elapsed)
from and including the date hereof until such principal sum shall be paid in
full according to this formula of (10%) per annum. Beginning July 1st 1997,
interest accrued shall be included in the 1st and 2nd installments indicated
above.
All payments of principal and interest in respect of this Note
shall be made in lawful money of the United States of America in immediately
available funds to Lender, at his office located at c/o Glasgal
Communications Inc., 20 Commerce Way, Tetowa, New Jersey 07512 or at such
other place as shall be designated in writing by Lender for such purpose.
Borrower hereby waves diligence, presentment, dishonor, demand,
notice and protest and, to the full extent permitted by law, the right to
plead any statute of limitations as a defense to any demand hereunder.
Borrower promises to pay all costs and expenses, including reasonable
attorneys' fees, incurred in the collection and enforcement of this Note.
The Borrower reserves the right to prepay the unpaid principal
balance of this Note in whole, at any time, without penalty or premium.
In the event that a qualified financing does not occur prior to
November 30, 1997, and as a result this Note is not paid in full on or prior
to Feb. 28, 1998, this Note shall be converted into such number of shares of
the common stock of the Borrower as shall equal the principal amount then
outstanding plus accrued interest divided by a fraction, the number of which
shall equal the greater of $20,000,000 or the fair market value of the
Borrower at the time of such conversion, and the denominator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
conversion (the "Common Stock").
Whenever any payment on this Note shall be stated to be due on a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law, regulation or executive order to
remain closed (a "Legal Holiday"), such payments shall be made on the next
succeeding day which is not a Legal Holiday and such extension of time shall
be included in the computation of the payment of interest on this Note.
The terms of this Note are not subject to amendment except by
written agreement of Lender and Borrower and Borrower may not assign its
obligations hereunder without the prior written consent of Lender.
<PAGE>
This Note shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, Borrower has duly executed this Note, the
day and year first above written.
DATA NET INTERNATIONAL, INCORPORATED
By: /s/ MAX TOGHRAIE
---------------------------------
Name: Max Toghraie
Title: Chief Executive Officer
By: RALPH GLASGAL
Signed: /s/ RALPH GLASGAL
--------------------------------
<PAGE>
GUARANTY
This guaranty, dated as of December 3, 1997, is given by James Ung, whose
principal office is located at 1304 John Reed Court Industry (the "Guarantor"),
to Fortune Dynamic, Inc., a California corporation, located at 17503 Rowland
Street, City of Industry, California (the "Landlord").
RECITALS
At the request of the Guarantor, the Landlord has entered into a lease
dated October 28, 1997 with Data Net International, Inc., a California
corporation (the "Tenant"), pursuant to which the Landlord leases to the
Tenant an office\warehouse building, consisting of approximately 21,900
square feet of space located at 957 Lawson Street, City of Industry,
California (the "Lease"); and
The Landlord would not have entered into the Lease except for the request
of the Guarantor and the execution and delivery to this guaranty; and
In consideration of the Landlord entering into the Lease with a Tenant;
The Guarantor agrees as follows:
1. GUARANTY.
The Guarantor, for himself and his legal representatives, guarantees
the prompt payment when due, or whenever payment may become due
under the terms of the Lease, all payments of rent, additional rent,
and all other charges, expenses and costs of every kind and nature,
which are or may be due now or in the future under the terms of the
Lease, any agreements or documents related to the Lease, or any
other transaction between the Landlord and the Tenant directly or
indirectly related to the Lease; and the complete timely
performance, satisfaction and observation of the terms and
conditions of the Lease, rules and regulations and related
obligations arising by reason of the Lease, required to be
performed, satisfied or observed by the Tenant.
2. CONVERGE OF GUARANTY.
This guaranty extends to any and all liability which the Tenant has
or may have to the Landlord by reason of matters occurring before
the signing of the Lease by the parties or commencement of the term
of the Lease or by matters occurring after the expiration of the
term of the Lease by reason of removal of Tenant, property,
surrender of possession or other matters. This guaranty extends to
any successor
<PAGE>
of the Tenant, any assignee or sublessee of the Tenant, to any
extensions or renewals of the Lease, and to any term established by
reason of the holdover of the Tenant, and assignee or sublessee.
3. PERFORMANCE GUARANTY.
In the event the Tenant fails to perform, satisfy or observe the terms
and conditions of the Lease, rules and regulations, and related Lease
obligations required to be performed, satisfy or observed by the
Tenant, the Guarantor will promptly and fully perform, satisfy and
observe the obligation or obligations in place of the Tenant. The
Guarantor shall pay, reimburse and indemnify the Landlord for any and
all damages, costs, expenses, losses and other liabilities arising for
resulting from the failure of the Tenant to perform, satisfy or
observe any of the terms and conditions of the Lease, rules and
regulations and related obligations.
4. WAIVER OF NOTICES.
Without notice to or further assent form the Guarantor, the Landlord
may waive or modify any of the terms and conditions of the Lease, any
rules and regulations or related Tenant obligations; or compromise,
settle or extent the time and payment of any amount due from the
Tenant or the time or performance of any obligation of the Tenant.
These actions may be take by the Landlord without discharging or
otherwise affecting the obligations of the Guarantor.
5. LEASE SECURITY.
This guaranty shall remain in full force and effect, and the Guarantor
fully responsible, without regard to any security deposit or other
collateral for the performance of the terms and conditions of the
Lease, or the receipt, disposition, application, or release of any
security deposit or other collateral, now or hereafter held by or for
the Landlord.
6. UNCONDITIONAL OBLIGATIONS.
The liability of the Guarantor is direct, immediate, absolute,
continuing, unconditional and unlimited. The Landlord shall not be
required to pursue any remedies it may have against the Tenant or
against any security deposit or other collateral as a condition to
enforcement of this guaranty. Nor shall the Guarantor be discharged
or released by reason of the discharge and release of a Tenant for
any reason, including a discharge in bankruptcy, receivership or
other proceedings, a disaffirmation or rejection of the Lease by a
trustee, custodian, or other representative in bankruptcy, a stay or
other enforcement restriction, or any other reduction, modification,
impairment or limitations of the liability of the Tenant or
2
<PAGE>
any remedy of a Landlord. The Guarantor assumes all responsibility
for being and keeping himself informed of Tenant's financial condition
and assets, and of all other circumstances bearing upon the risk of
nonperformance by a Tenant under the Lease. The Guarantor agrees that
Landlord shall have no duty to advise the Guarantor of information
known to it regarding such circumstances or risks.
7. LIMITATIONS ON GUARANTY.
The Guarantor's liability hereunder shall terminate and Guarantor
shall have no further liability towards the Landlord on the sooner
to occur of the following events: (1) the date upon which the
Tenant's net worth exceeds 150% of the Tenant's net worth as of the
date of this guaranty, or (2) the date the Tenant, or its successor,
becomes a public company. Should any of the foregoing events occur
during the term of the Lease, and as a condition precedent to the
termination of the Guarantor's liability hereunder, the Guarantor
shall provide the Landlord documentary proof of the occurrence of
said event to the reasonable satisfaction of the Landlord.
8. SUBORDINATION OR SUBROGATION RIGHTS.
The guarantor subordinates any and all claims which the Guarantor has
or may have against the Tenant by reason of subrogation for payments
or performance under this Guaranty or claims for any other reason or
cause. The Guarantor agrees not to assert any claim which it has or
may have against the Tenant, including claims by reason of subornation
under this guaranty, until such time as the payment and other
obligations of the Tenant to the Landlord are fully satisfied and
discharged.
9. BINDING EFFECT.
This guaranty is binding upon the Guarantor, his legal
representatives and assigns, and is binding upon and shall inure it to
the benefit of the Landlord, its successors and assigns. No
assignment or delegation by the Guarantor shall release the Guarantor
of his obligations under this guaranty. The term 'Tenant' used in
this guaranty includes also the first and any successive assignee or
sublessee of the Tenant or any assignee or sublessee of the Tenant.
10. MODIFICATIONS.
This guaranty may not be modified orally, but only by a writing signed
by both the Guarantor and the Landlord. Modifications include any
waiver, change, discharge, modification, or termination.
3
<PAGE>
11. GOVERNING LAW.
This guaranty shall be deemed to be made under, and shall be governed
by, the laws of the State of California in all respects, including
matters of construction, validity, and performance.
12. INVALIDITY.
If any provision of this guaranty contravenes or is held invalid under
the laws of any jurisdiction, this guaranty shall be construed as
though it did not contain that provision, and the rights and
liabilities of the parties to this guaranty shall be construed and
enforced accordingly.
In witness whereof the Guarantor has duly signed this Guaranty on the date
stated above.
Witness: Guarantor:
/s/ Steven J. Ballitt /s/ James Ung
- ------------------------ ------------------------
Signature James Ung
Steven J. Ballitt
- ------------------------
Printed Name
12/3/97
- ------------------------
Date
The undersigned, spouse of the Guarantor, James Ung, hereby consents to his
execution of the above Guaranty and to his performance of all obligations
arising thereunder.
Date: 12/3/97 /s/ Mei Yang
------------------------ ------------------------
Mei Yang
4
<PAGE>
Exhibit 10.12
DEALER LOAN AND SECURITY AGREEMENT
FINOVA Capital Corporation Data net International, Inc.
1060 First Avenue 1304 John Reed Court
Suite 100 City of Industry, CA 91745
King of Prussia, PA 19406
Gentlemen:
1. We are an authorized dealer of goods manufactured and/or distributed
by various manufacturers and distributors (hereinafter called
"Manufacturer"). As such, we from time to time buy goods from Manufacturer to
be held by us as our Inventory for sale by us in the normal course of our
business. We may, as mere fully set forth herein, from time to time obtain
loans from you in order to finance the purchase of certain of such goods,
including parts and accessories therefor, from Manufacturer, and desire by
this Agreement to set forth in writing our understanding of our loan
arrangements with you and secure repayment of such loans and other related
debts and liabilities we may have to you, whether now existing or hereafter
arising.
2. Upon our request from time to time, you may, at your sole discretion
and without any obligation to do so, make loans to us, under such terms and
with such conditions as you shall specify, to enable us to acquire rights in
Inventory from Manufacturers pre-approved by you for financing programs. We
understand that each such loan will be solely at your discretion, and we
expressly disclaim any right to expect otherwise, either from the course of
our dealing, our need therefor, your dealings with others, your arrangements
with Manufacturer, or otherwise. Conversely, nothing herein will prevent us
from obtaining financing from other sources, provided that you are completely
satisfied that such other financing will not jeopardize our ability to comply
with our financial obligations to you and that adequate procedures will be
implemented to absolutely assure your ability to identify your Collateral.
Accordingly, we will obtain both your written permission prior to arranging
such other financing and such acknowledgments and undertakings from our other
lenders as you may require.
We understand that certain terms and conditions applicable to loans
obtained by us from you will be set forth in materials to be made available
from time to time to us and other dealers, the terms of which, as revised
from time to time, being deemed incorporated herein by reference. We
understand that these materials are subject to change by you at any time and
from time to time, and expressly assume the risk of confirming directly with
you, upon our request for each loan, the exact terms and conditions then
being stated by you, including without limitation rate of interest and terms
of repayment. In no event will we view such materials as a commitment or
other offer on your part to lend, and we will have no right to any loan under
any particular terms until actually made and under the terms so made. We
understand and agree that the full amount of each loan will be paid to you on
its due date without deduction for any sums due from Manufacturer or any
Credit Memo that may have
<PAGE>
been issued to you, unless you have previously notified us that you have
received and applied the amount of the Credit Memo Issued by the Manufacturer.
We understand that you may, from time to time, issue advices to us. Such
advices may include, but need not be limited to, periodic or monthly
statements of our account, periodic letter advices in the nature of
statements of account, issued from time to time, and letter forms or other
forms of notices of due dates of finance plan payments and of the specific
terms of loans which we have with you. Unless we, within ten (10) days from
the date of any such advice, give you written and itemized objection to the
contents of such advice, we shall be fully bound thereby and acknowledge that
the content of such advice is true, correct, and complete, and accurately
reflects our obligations to you as the date thereof.
In connection with each loan requested, we will deliver to you such other
writings as you shall require, which may include notes or other appropriate
evidence of debt. Such notes or other evidences of debt, Manufacturer
invoices, and other like materials as may be revised from time to time
("Collateral Documents"), together with this Agreement, contain our entire
understanding, and we acknowledge that we will not be relying upon any prior
oral or written promises or undertakings or future oral promises between us.
No modification hereof or of the Collateral Documents will be binding upon
you unless in a writing duly executed on your behalf by an officer holding
the rank of Vice President or higher.
We hereby authorize you to disburse the proceeds of each loan directly to
Manufacturer on our behalf. Further, we shall and hereby authorize
Manufacturer to deliver its invoice for Inventory, together with all
Certificates of Origin, directly to you. You may assume that all such
invoices so submitted are authentic and accurate and that they have been
submitted on our behalf and with our permission. Receipt by you from us or
Manufacturer of an invoice for Inventory shall be your authority to make a
loan to us under terms and conditions then being stated by you. In addition
we shall and hereby authorize the Manufacturer to issue all Credit Memos
directly to you.
We acknowledge that the term "Prime Rate," as used in the Collateral
Documents in reference to the rate of interest applicable to loans to us,
will mean the average of the Prime Rates (the base rate for corporate loans
at large U.S. money center commercial banks) quoted in the Wall Street
Journal under the caption "Money Rates," and agree that the interest rate
applicable to our loans from you will automatically change from time to time
effective upon each change in the published Prime Rate. We further agree
that interest on our loans from you will be calculated on the basis of a 360
day year but will be chargeable for the actual days that principal is
outstanding in the then current year.
3. We acknowledge that our financial arrangements with you are
completely independent of our arrangements with Manufacturer, and that
neither you nor Manufacturer are an agent for or acting on behalf of the
other. We are not relying, in our understanding with you, on any statements,
promises or representations, oral or written, made by Manufacturer, whether
or not purportedly on your behalf, relating to the subject matter hereof and
of our loans with you. Although we may receive official literature,
brochures and other written materials disseminated by you through
Manufacturer, we expressly assume the risk
2
<PAGE>
that the materials so received are the most current, up to date materials
then authorized by you to be disseminated. None of our obligations to you
will be affected or impaired, or be subject to any defense, set-off,
counterclaim, crossclaim or recoupment, by reason of any claim which we now
or hereafter have against Manufacturer or its agents, including without
limitation any claim for breach of express or implied warranty of title, or
otherwise related to the condition of the Collateral or our dealings with
Manufacturer.
4. As used herein, the following terms shall have the following meaning:
a) "Inventory" means all present and future Inventory, as that
term is defined in the Pennsylvania Uniform Commercial Code ("Code"),
together with all parts and accessories, and all replacements, substitutions
and additions thereof or thereto.
b) "Accounts" means all present and future Accounts, as that term
is defined in the Code.
c) "General Intangibles" means all present and future General
Intangibles, as that term is defined in the Code, and shall include, without
limitation, all Credit Memos and other sums due from Manufacturer, all books,
records, ledgers, journals, check books, computer tapes and disks, print outs
and other information and sources of information, and all licenses, permits,
franchises, tradenames and other rights and privileges used or useful in the
conduct of our business and the sale of Inventory.
d) "Proceeds" means present and future Proceeds, as that term is
defined in the Code, and shall include, without limitation, insurance payable
by reason of loss or damage to any of the Collateral. All Proceeds received
by us will be held in trust for you until our loans are paid, and we will
promptly deliver all Proceeds to you.
e) "Collateral" means, individually and collectively, Inventory,
Accounts, General Intangibles and Proceeds.
5. a) In order to secure repayment to you of each loan made by you to
us the proceeds of which enable us to acquire rights in or the use of
inventory, we hereby grant to you a purchase money security interest in such
Inventory, the Proceeds thereof and all General Intangibles relate thereto,
to secure repayment of such loan. It is intended by this subparagraph (a)
that only the Inventory so acquired, with Proceeds and related General
Intangibles, will secure the loan the proceeds of which enable us to acquire
rights in or the use of such Inventory.
b) In order to secure repayment to you of all debts and
liabilities we may now or hereafter have to you under this Agreement or any
other agreement, whether such debt or liability be obtained by you by
assignment, negotiation or otherwise, and whither direct or indirect, primary
or secondary, absolute or contingent, or otherwise, including but not limited
to all loans made by you to us, whither now existing or hereafter acquired,
and the Proceeds of all of the foregoing.
3
<PAGE>
c) All payments made by us will be deemed to be applied by you
first to the loan (i) the proceeds of which enabled us to acquire rights in
or the use of inventory which we have previously sold and (ii) with the
earliest due date.
6. We hereby represent to you that all information provided by us to
you in connection with our application for each loan from you is and will be
complete and accurate in every respect. WE WILL IMMEDIATELY NOTIFY YOU IN
WRITING OF ANY CHANGE IN ANY OF THIS INFORMATION.
7. We will from time to time execute and/or deliver or cause to be
executed and/or delivered to you such financing statements, amendments to
financing statements, continuation statements, documents of title,
manufacturers' certificates of origin, warehouse receipts, bills of lading,
vehicle titles, waivers, consents and such other manner of things, and take
all manner of actions, as you may from time to time request which are in your
sole opinion necessary or desirable in order to perfect, protect, maintain,
continue, realize and/or enforce your rights and security interest granted
herein. This shall include, without limitation, the written waiver by the
landlord of each location at which any Collateral is located. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement and may be filed in any public office as a financing
statement.
8. We will maintain the Inventory in excellent, salable condition,
consistent with the highest standards in the industry, and will comply with
all applicable laws relating to our use thereof. We will provide you or your
designated representatives with access, at any time, during normal business
hours, whether announced or unannounced, to each location at which any
Collateral is located, to inspect and examine the Inventory and other
Collateral and business records, including without limitation all financial
records. We agree, at our sole cost, to keep all Inventory insured against
risks covered by standard forms of fire, theft and extended coverage and such
other risks as may be reasonably required by you and under policies issued by
an insurance company or companies and in amounts satisfactory to you. You
shall be named to the extent your interest may appear under a Lender's Loss
Payable Clause in such policy, which shall provide that the insurance cannot
be canceled without at least thirty (30) days prior written notice to you and
shall insure you notwithstanding any act or neglect on our part. At our
expense, we shall furnish you with evidence of the same in form satisfactory
to you, and shall provide you with a Certificate thereof naming you as
certificate holder. We will promptly remit to you in the form received, with
all necessary endorsements, any Proceeds of such insurance. You may make and
settle claims and endorse our name on any checks or drafts. You may apply
any Proceeds of Insurance which may be received by you toward payment of any
obligations or liabilities owed to you by us, whether or not then due, in
such order of application as you may determine.
Loss, damage or destruction of all or any of the Collateral shall
not affect or diminish our liabilities to you and we assume all
responsibility and risk for the existence, character, quality, condition,
value, and delivery of Inventory.
9. We will pay and/or cause to be paid all taxes, levies and other
governmental charges and assessments payable on or with respect to the
Collateral and any premises at
4
<PAGE>
which the Collateral is located, which if unpaid may result in a lien or
imposition thereon. Such taxes, levies, charges and assessments will be paid
prior to the date that any penalty for late payment may be assessed with
respect thereto, and if requested by you we will, at our expense, provide you
with receipts or other evidence of payment in form satisfactory to you.
10. We will not suffer or permit any lien, security interest, charge,
claim or encumbrance to be placed on any of the Collateral, other than in
your favor, or suffer or permit any interest to exist therein which is
adverse to your own. We represent that we are, and agree to remain, the sole
and absolute owner of the Collateral, until sold in the ordinary course of
our business, and are and will remain qualified under he terms of all
applicable laws and under our dealership arrangements with Manufacturer to
conduct our business as presently conducted, with all necessary governmental
and other licenses, consents and authorizations having been obtained.
11. At your option, without any obligation to do so, you may pay and
discharge taxes, liens, levies, security interests or other encumbrances
against the Collateral, may pay for insurance on and for the maintenance and
preservation of the collateral and perform on our behalf any other obligation
required to be performed by us hereunder but which we have failed to so do.
We shall reimburse you on demand for any payment made or any expense incurred
by you pursuant to the authority hereof, with interest at the highest rate
chargeable on any of our loans with you, and will pay you a late charge of
1.5% per month of the amount due to you, or the highest legally permissible
rate if lower.
12. We will furnish you such information regarding our business and
financial condition as you may request from time to time, including without
limitation such financial statements, in such form and bearing such
certifications, as you shall require. We agree that you may audit or cause
to be audited our books and records at any and all times, during normal
business hours, whether announced or unannounced, and to permit you access to
each location at which any of our General Intangibles are located.
13. We will provide you with written notice of the following matters
immediately upon the occurrence thereof:
a) A change in any information provided by us to you herein, in
any application made by us in connection with any loan, or otherwise,
including without limitation, any change in the location of any Collateral or
in any other circumstances regarding the collateral or our business
operations;
b) Loss, theft, or substantial damage or destruction of any of the
Collateral or related to our business operations generally; or
c) Any other matter which might have a material adverse affect on
our financial condition or operations or which, upon the giving of notice or
passage of time, or both, would result in an event of default by us hereunder.
5
<PAGE>
14. Any one or more of the following shall be an event of default by us
under this Agreement:
a) Failure by us or any person jointly or otherwise liable to you
for our obligations to you, as surety, guarantor or otherwise ("Other
Obligor") to pay any amount due you, as and when due, contained or referred
to herein or in any other instrument, document, or agreement to which we or
such Other Obligor are a party or by which we or such Other Obligor are bound
to you, whether now existing or hereafter created; or
b) Failure by us or any Other Obligor to perform or comply with
any other obligation, covenant or liability contained or referred to herein
or in any other instrument, document, or agreement to which we or such Other
Obligor are a party or by which we or such Other Obligor are bound to you,
whether now existing or hereafter created, and such failure, if reasonably
susceptible of cure, is not cured within fifteen (15) days of the occurrence
thereof; or
c) If any warranty, representation, or statement made or furnished
to you by us or on our behalf or on behalf of an Other Obligor, including any
representation made on our behalf by Manufacturer, proves to be false,
misleading or incomplete in any respect; or
d) Loss, theft or substantial damage or destruction of any of the
Collateral, or the making of any levy, seizure, or attachment thereof or
thereon; or
e) Dissolution, merger, consolidation, sale or other disposition
of a controlling interest in our ownership or of substantially all of our
assets, termination of existence, insolvency, business failure, appointment
of a receiver, trustee, sequestrator, conservator, or other judicial
representative, whether similar or dissimilar, for us or for all or any part
of our property, assignment by us for the benefit of creditors or the
commencement of any proceeding by or against us under any provision of any
federal or state bankruptcy or insolvency laws; or
f) Failure by us to pay any obligation(s) or liability(ies)
whatsoever, past, present or future, when due to any other creditor, or the
occurrence of any event of default by us under any agreement with any of our
respective creditors, including without limitation the occurrence of an event
of default under any lease relating to any premises upon which all or any
part of our Inventory or other Collateral is located; or
g) If we give notice of a Bulk Sale or intended Bulk Sale, or call
a meeting of our respective unsecured creditors or offer a composition or
extension to such creditors, or cease to operate our respective business.
15. Upon the occurrence of an event of default, you shall have the right
to repossess the Inventory and also any and all rights available under the
Code, including, without limitation, the right to declare any and all unpaid
balances of principal, interest, costs and expenses arising out of any and
all of our obligations or liabilities to you, whether past, present or
future, direct or indirect, matured or unmatured, liquidated or unliquidated,
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immediately due and payable without notice to or demand on us. We
irrevocably authorize you or your agent to enter all premises to take
possession of and remove the Inventory and other Collateral and release you
from any and all liability with respect to such entry or removal. We shall
in case of default, if you so request, assemble and deliver the Inventory and
other Collateral, at our expense, to a place to be designated by you. We
shall pay all of the costs you incur in the enforcement of any of our
obligations to you or the collection of any liabilities owed to you by us,
including, without limitation, costs, expenses and reasonable attorneys'
fees. If any notification of intended disposition of any of the Inventory or
other Collateral is required by law, such notification shall be deemed
reasonably and properly given if mailed by ordinary mail or overnight
delivery service at least ten (10) days before such disposition, postage
prepaid, addressed to us, either at our address shown in this Agreement, or
at such other address as we may have designated to you in writing.
16. To the extent permitted by applicable law, we authorize you, your
designee, the Clerk of the Court, or any attorney of any Court, in the
Commonwealth of Pennsylvania or any other state, to appear for us at any time
in any and all actions and to confess judgment against us for all sums then
owed to you, whether or not then payable, together with an attorney's fee of
15% of all sums then owed and/or for the recovery of any or all of the
Inventory in our possession. Wherever this provision is prohibited,
unenforceable or unlawful, it is deemed stricken from this Agreement.
17. Any law, custom or usage to the contrary notwithstanding, you shall
have the right at all times to enforce the covenants and provisions of this
Agreement in strict accordance with the terms hereof, n notwithstanding any
conduct or custom on your part in refraining from so doing at any time or
times. Your failure at any time to invoice your rights under the covenants
and provisions of this Agreement strictly in accordance with the same shall
not be construed as having created a custom in any way or manner contrary to
the specific terms and provisions of this Agreement or as having in any way
or manner modified altered or waived the same. Time is of the essence in our
performance hereunder and under all other agreements with you. All of your
remedies are cumulative and not alternative, and can be exercised in any
order and in any manner, separately or simultaneously, and from time to time
until all liabilities and obligations to you are satisfied in full.
18. This Agreement may be assigned by you, but we may not assign this
Agreement without your prior written consent. If you assign this Agreement,
you shall have no further obligation hereunder. All of your rights hereunder
shall inure to the benefit of your successors and assigns and all our
obligations shall bind our successors and assigns. If there be more than one
party obligated to you under this Agreement, their obligations hereunder
shall be joint and several, and the terms "we" "us" or "our" as used herein
shall refer to them jointly and severally.
19. We authorize and empower you or your employees, agents or
representatives, on our behalf, and in our name, to complete and supply any
omission or blank spaces in this Agreement and in any documents or financing
statements executed by us and including amendments and continuations thereof
under the Code; to execute and/or have acknowledged any form of security
instruments, notes, drafts and documents; and to make any requisite
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affidavits which may be necessary or required by you, and/or which you may
desire to evidence or secure advances made by you pursuant to the terms of
this Agreement. All of the foregoing may be executed in such form and
substance as you in your sole discretion may deem necessary or proper, and
this power of attorney, being coupled with an interest, is irrevocable.
20. Our officers, by execution hereof, warrant and represent to you that
we are a duly formed corporation and are qualified to do business in the
state(s) in which our place(s) of business is (are) located; and, at a Board
of Directors meeting duly convened, our officer(s) were properly authorized
to execute and deliver this Agreement and all other documents whether
hereunder or otherwise; that the execution and delivery of this Agreement
does not contravene the Articles of Incorporation, By-Laws, or any agreement,
document or instrument to which we are a party or by the terms of which we
are bound.
21. Any provision or part thereof in this Agreement found upon judicial
interpretation or construction to be prohibited by law shall be ineffective
to the extent of such prohibition, without invalidating the remaining
provisions hereof. All words used shall be understood and construed to be of
such gender or number as the circumstances may reasonably require.
22. THIS AGREEMENT SHALL BE DEEMED EFFECTIVE WHEN ACCEPTED AND EXECUTED
BY YOU IN THE COMMONWEALTH OF PENNSYLVANIA. THIS AGREEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA.
23. AS AN INDEPENDENT COVENANT, WE IRREVOCABLY CONSENT TO THE
JURISDICTION OF THE COURTS OF COMMON PLEAS OF PHILADELPHIA, PENNSYLVANIA
AND/OR THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA IN ANY AND ALL ACTIONS BETWEEN US WHETHER UNDER THIS AGREEMENT
OR OTHERWISE AND TO THE SERVICE OF PROCESS THEREIN BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, AT THE ADDRESS AS SET FORTH HEREIN OR ON YOUR RECORDS, AND
IRREVOCABLY WAIVE JURY TRIAL AND THE RIGHT THERETO IN ANY AND ALL ACTIONS
BETWEEN US, WHETHER UNDER THIS AGREEMENT OR OTHERWISE.
WE HEREBY ACKNOWLEDGE THAT WE HAVE READ AND UNDERSTAND ALL OF THE
TERMS AND PROVISIONS OF THIS AGREEMENT.
Intending to be legally bound, signed and delivered on June 3rd,
1997:
DATA NET INTERNATIONAL, INC.
- ----------------------------
(Corporate Name)
By: /S/
-------------------------
President
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Attest: /S/
--------------------
Secretary
(CORPORATE SEAL)
APPROVED AND ACCEPTED
IN KING OF PRUSSIA, PENNSYLVANIA
FINOVA CAPITAL CORPORATION
(Secured party)
BY:__________________________________
DATE:________________________________
9
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INDIVIDUAL GUARANTY
TO: FINOVA CAPITAL CORPORATION
1060 FIRST AVENUE
SUITE 100
KING OF PRUSSIA, PA 19406
1. IDENTIFICATION. This Guaranty is made by each of the undersigned,
jointly and severally if more than one, in your favor, in order to induce you
to enter into one or more notes, loan agreements and/or security agreements
(herein, the "Agreements") with Data Net International, Inc. (herein, the
"Debtor") or to otherwise extend or continue financial accommodations in
favor of the debtor or to acquire obligations or indebtedness owing by the
Debtor.
2. GUARANTY OBLIGATION.
a. We unconditionally guarantee to you and undertake the
obligations of a surety with respect to the following described obligations
and liabilities of the Debtor (herein, the "Debtor's Liabilities"):
i. the prompt payment in full of any and all now existing or
hereafter arising indebtedness or obligations of the Debtor to you of every
kind or nature, whether acquired by you by negotiation, assignment or
otherwise, and whether direct or indirect, absolute or contingent, matured or
unmatured, or otherwise, and including without limitation all advances and
other loans now or at any time hereafter made by you to the Debtor under or
secured by the Agreements, or otherwise. WITHOUT LIMITATION, THE FOREGOING
GUARANTY SHALL EXTEND TO ANY OBLIGATIONS WHICH THE DEBTOR MAY INCUR TO YOU
UNDER ANY AGREEMENT OR BY REASON OF ANY OTHER FINANCIAL ACCOMMODATION BETWEEN
YOU AND THE DEBTOR MADE AFTER THE DATE HEREOF WHETHER OR NOT PRESENTLY
CONTEMPLATED. WE ACKNOWLEDGE THAT IT IS OUR RESPONSIBILITY TO OBTAIN FORM
TIME TO TIME DIRECTLY FROM THE DEBTOR SUCH INFORMATION AS WE MAY REQUIRE
CONCERNING THE OBLIGATIONS AND INDEBTEDNESS GUARANTEED HEREBY, WHICH
RESPONSIBILITY IS REASONABLE IN LIGHT OF OUR RELATIONSHIP WITH THE DEBTOR; and
ii. the prompt, full and faithful performance and discharge by the
Debtor of each and every term, condition, agreement, representation, warranty
and provision on the part of the Debtor contained in any of the Agreements or
in any modification, amendment or substitution thereof or in any other
document or instrument evidencing or securing any obligation or indebtedness
of the Debtor to you.
b. We shall, on your demand, reimburse you for all expenses,
collection charges, court costs and attorneys' fees incurred by you in
endeavoring to collect Debtor's Liabilities, and to enforce, protect or
defend any of your rights and remedies against us and/or the Debtor or
against any other person or entity primarily or secondarily liable for the
obligations and indebtedness guaranteed hereby (herein, an "Obligor"), or
against or with respect to any
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property, real or personal now or hereafter granted to or obtained by you as
security for Debtor's Liabilities or for our liabilities and obligations to
you hereunder or for those of any Obligor (herein, "Secured Property"),
together with interest thereon until reimbursed at a rate equal to five (5)
percent above the rate of interest payable on the debtor's Liabilities
guaranteed hereby (or the highest rate permitted by law) of the amount due by
us to you.
3. LIABILITY ABSOLUTE; WAIVERS.
a. We shall pay all of the foregoing amounts and perform all of
the foregoing terms, covenants and conditions notwithstanding that any part
or all of the Agreements or other documents or instruments evidencing the
Debtor's Liabilities, or any financial accommodation for or transaction with
the Debtor, shall be invalid, void, voidable or otherwise unenforceable, in
whole or in part, as against the Debtor, any property of the Debtor, or any
of the Debtor's creditors, including a trustee in bankruptcy of Debtor or
Debtor as a debtor-in-possession, including without limitation by reason of
any theory or provision of law or equity, statutory or otherwise, relating to
consideration, or the lack thereof, or to any alleged fraudulent,
preferential or other improper transfer or conveyance, and including further,
without limitation, by reason of failure by any person, including yourself,
to file any document or take nay other action to make any of your rights
against the Debtor, any other Obligor or any property, pursuant to the
Agreements or otherwise, enforceable in accordance with their respective
terms.
b. You shall have the right from time to time, and at any time,
without notice to or consent from us, and without affecting, impairing or
discharging, in wh ole or in part, our obligations to you hereunder, to enter
into agreements with the Debtor or any other Obligor to modify, change or
supplement, in any respect whatsoever, any evidence of indebtedness, or any
agreement or transaction between you and the debtor or between you and any
other Obligor, or any portion or provision of any thereof; to grant
extensions of time and other indulgences of any kind to the Debtor or other
Obligor; to compromise, release, substitute, exercise, enforce, or fail or
refuse to exercise or enforce any claims, rights or remedies of any kind
which you may have, at any time, against the Debtor or any other Obligor, or
any portion thereof, or with respect to any Secured Property; and to release,
substitute or surrender and to enforce, collect or liquidate any security of
any kind held by you at any time, and all of the foregoing whether done
negligently, willfully or otherwise.
c. Our obligations to you shall not be affected, impaired or
discharged, in whole or in part, by reason of your failure to obtain, in the
first instance, rights against any person or entity, including without
limitation, the Debtor, or in with respect to any property, or to protect,
perfect, continue or maintain any such rights.
d. We waive notice of acceptance hereof and all notices and
demands of any kind to which we may otherwise be entitled including, without
limitation, all demands of payment and notice of nonpayment, protest and
dishonor, to us or to the Debtor, or to the makers or endorsers of any notes
or other instruments for which we are or may be liable hereunder and further
waive notice of any adverse change in the Debtor's financial condition, the
value of any Secured Property, or any other fact which might materially
increase our risk to you hereunder.
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e. We waive any right to require you to, prior to proceeding
against us hereunder; (i) proceed against Debtor and/or any other Obligor;
(ii) proceed against or exhaust any Secured Property; or (iii) pursue any
other remedy which you may have.
4. PRIMARY NATURE OF OBLIGATIONS; NO SET-OFF.
Our liability to you hereunder is primary, absolute, unconditional,
continuing, direct and independent of the obligations of the Debtor. Nothing
shall discharge or satisfy our liability hereunder except the full
performance and payment of all of the Debtor's Liabilities. In the event
that all of Debtor's Liabilities shall have at any time been paid and
performed in full, this Guaranty and our obligations hereunder shall
nevertheless remain in full force and effect and be operative with respect to
Debtor's Liabilities incurred or arising at any time to times thereafter. We
shall have no right of subrogation, reimbursement or indemnity whatsoever and
no right of recourse to or with respect to the Debtor and/or any property of
the Debtor, unless and until all of Debtor's Liabilities have been paid and
performed in full. Our liability to you hereunder shall not be subject to
set-off, counterclaim, crossclaim or defense arising out of or by virtue of
any claim or right which we may at any time have against the Debtor or other
Obligor, or which we may at any time have against you in connection with this
or any other transaction with or acquired by you.
5. CONTINUING NATURE OF GUARANTY.
Our obligations under this Guaranty shall be continuing. This
instrument shall continue in full force and effect until our obligations to
you are terminated by the actual receipt by you of written notice from us of
such termination. Such termination shall be applicable only to such of
Debtor's Liabilities as have their inception thereafter. Specifically,
without limitation, we shall, after and notwithstanding such termination,
remain obligated to you under the terms hereof for: ;(i) all of Debtor's
Liabilities incurred prior to your actual receipt of such notice of
termination, including interest or other finance charges at any time
theretofore accrued or thereafter accruing or payable thereon, (ii) all of
your costs and expenses, including attorneys' fees, at any time incurred in
connection with your enforcement and collection of Debtor's Liabilities
incurred prior to your actual receipt of such notice of termination, (iii)
Debtor's Liabilities incurred subsequent to your actual receipt of such
notice of termination pursuant to any perceived or actual commitment made on
your part prior to such notice of termination, arising out of any course of
dealing or other perceived or actual legal or other requirement obligating or
committing you to make advances, loans or other financial accommodations
giving rise to such Debtor's Liabilities, and (iv) advances at any time made
by you to protect your interests under or in connection with Debtor's
Liabilities incurred prior to your actual receipt of such notice or
termination. We acknowledge that, upon such termination, you will have
absolutely no further obligation to consider any further request for loans or
other extensions of credit or financial accommodations for the Debtor.
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6. SECURITY FOR GUARANTY.
All sums at any time to our credit and any of our present and future
property at any time in your possession shall be deemed held by you as
security for any and all of our obligations to you hereunder.
7. SUBORDINATION.
Any and all present and future indebtedness and obligation of the
Debtor to us are hereby agreed to be postponed in your favor. Upon written
notice given by you to us, which you may give at any time whether or not the
Debtor is in default to you, we will refrain form accepting any payments on
account of such indebtedness tendered by the Debtor or any other Obligor
thereon, or realized form any security therefor, and any amounts received
by us in violation of the foregoing shall be held by us upon an express trust
for your benefit and turned over to you upon demand. Until such notice, we
will accept only such payments which are in the nature of regularly scheduled
payments made pursuant to periodic reductions required by; the terms of the
documents evidencing such indebtedness, and shall not accept any prepayment
thereof, whether on default, on demand under any demand instrument, or
otherwise. We represent to you that all such indebtedness owing to us is,
and agree that it shall remain, and any future indebtedness shall be
unsecured.
8. NO WAIVER.
No failure, omission or deal on your part in exercising any rights
hereunder or under the Agreements or with respect to Debtor's Liabilities,
either against the Debtor or any other Obligor, or any Secured Property,
shall operate as a waiver of such rights or shall, in any manner, prejudice
your rights against us hereunder or otherwise.
9. CUMULATIVE REMEDIES.
All of your rights and remedies under the Agreements, this Guaranty
and under any other document or instrument evidencing or securing Debtor's
Liabilities are separate and cumulative and may be pursued separately,
successively or concurrently, are non-exclusive and the exercise of any one
or more of them shall in no way limit or prejudice any other legal or
equitable right, remedy or recourse to which you may be entitled. This
Guaranty shall be deemed to be in addition to, and not in lieu of, any prior
suretyship or guaranty delivered by us to you, and any surety or guaranty at
any time hereafter delivered by us to you shall be deemed to be in addition
to, and not in lieu of this Guaranty.
10. APPLICATION OF FUNDS.
Any payment made by us hereunder, or by the Debtor or any other
Obligor, and any proceeds realized by you from any Secured Property, may be
applied by you to any of Debtor's Liabilities in any order which you may
determine, notwithstanding any designation by us, the Debtor or other Obligor
to the contrary. To the extent that the Debtor has at any time any
liabilities or obligations to you for which we are not obligated to you under
the terms of this
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Guaranty, any payments received by you from the Debtor or any other Obligor,
or proceeds realized by you from any security, and regardless of any
designation by any person or entity to the contrary, may be applied by you to
such other liabilities and obligations prior to your applying any amounts to
Debtor's Liabilities for which we are obligated to you hereunder.
11. MODIFICATIONS.
No provision hereof shall be modified or limited, except by a
written agreement expressly referring hereto and to the provision so modified
or limited, and signed by us and you.
12. MERGER.
This writing is intended as a final, complete and exclusive
expression of our agreement with you relative to the subject matter hereof.
No course of prior dealing between you and us, no usage of the trade, and no
parole or extrinsic evidence of any nature, shall be used or be relevant to
supplement or explain or modify any term used in this Guaranty.
13. SEVERABILITY.
In case any one or more of the provisions contained in this Guaranty
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions hereof, and this Guaranty shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
14. NOTICES.
We agree that any notice or demand upon us shall be deemed to be
sufficiently given or served if it is in writing and is personally served, or
in lieu of personal service is mailed by first class certified mail, postage
prepaid, addressed to us at the address set forth below. Any notice or
demand so mailed shall be deemed received on the date of actual receipt or
the first business day following mailing, whichever first occurs.
15. JUDGEMENT INTEREST.
Any judgment entered against us hereunder shall, to the extent
permitted by applicable law, bear interest at the highest rate applicable to
the Debtor's Liabilities guaranteed hereby.
16. GOVERNING LAW.
THIS INSTRUMENT SHALL FOR ALL PURPOSES BE GOVERNED BY AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. WE CONSENT TO
THE JURISDICTION OF THE FEDERAL DISTRICT COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA OR ANY STATE COURT LOCATED IN PHILADELPHIA COUNTY, PENNSYLVANIA
WITH RESPECT TO ANY LEGAL ACTION COMMENCED HEREUNDER. NOTHING CONTAINED
HEREIN IS
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INTENDED TO PRECLUDE YOU FROM COMMENCING ANY ACTION HEREUNDER IN ANY COURT
HAVING JURISDICTION THEREOF.
17. WAIVER OF JURY TRIAL.
AS AN INDEPENDENT COVENANT, WE IRREVOCABLY WAIVE JURY TRIAL AND THE RIGHT
THERETO IN ANY AND ALL ACTIONS BETWEEN US, WHETHER UNDER THIS AGREEMENT OR
OTHERWISE.
18. SUCCESSORS AND ASSIGNS.
This Guaranty shall inure to the benefit of your successors and assigns
and shall be binding on our heirs, personal representatives, successors and
assigns.
19. GENDER; JOINT AND SEVERAL LIABILITY.
If there be more than one person or entity signing this Guaranty, each of
us will be jointly and severally obligated to you hereunder, and the terms
"we", "us" or "our" as used herein shall refer to each of us jointly and
severally. If less than all persons or entities who were intended to sign
this Guaranty do so, the same shall nevertheless be binding upon those who do
sign.
IN WITNESS WHEREOF, we have duly executed this Guaranty this 3rd day of
June 1997.
WITNESS:
/s/ /s/ James Ung
- ---------------------------------- -------------------------------------
(Signature)
/s/ James Ung
- ---------------------------------- -------------------------------------
(Print Name)
- ---------------------------------- -------------------------------------
(Home Address)
WITNESS:
/s/ /s/
- ---------------------------------- -------------------------------------
(Signature)
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- ---------------------------------- -------------------------------------
(Print Name)
- ---------------------------------- -------------------------------------
(Home Address)
WITNESS:
- ---------------------------------- -------------------------------------
(Signature)
- ---------------------------------- -------------------------------------
(Print Name)
- ---------------------------------- -------------------------------------
(Home Address)
7
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EXHIBIT 10.14
DATANET INTERNATIONAL, INC.
AMENDED AND RESTATED 1997 STOCK PLAN
1. PURPOSE OF THE PLAN.
The purpose of this Amended and Restated 1997 Stock Plan (the "Plan") is to
provide incentives and rewards to selected eligible directors, officers,
employees and consultants of Data Net International, Inc. (the "Company") or its
subsidiaries in order to assist the Company and its subsidiaries in attracting,
retaining and motivating those persons by providing for or increasing the
proprietary interests of those persons in the Company, and by associating their
interests in the Company with those of the Company's shareholders.
2. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), or a committee of the Board (the "Committee") whose members shall
serve at the pleasure of the Board. If administration is delegated to the
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan as may be
adopted from time to time by the Board.
The Board shall have all the powers vested in it by the terms of the Plan,
including exclusive authority (i) to select from among eligible directors,
officers, employees and consultants, those persons to be granted "Awards" (as
defined below) under the Plan; (ii) to determine the type, size and terms of
individual Awards (which need not be identical) to be made to each person
selected; (iii) to determine the time when Awards will be granted and to
establish objectives and conditions (including, without limitation, vesting and
performance conditions), if any, for earning Awards; (iv) to amend the terms or
conditions of any outstanding Award, subject to applicable legal restrictions
and to the consent of the other party to such Award; (v) to determine the
duration and purpose of leaves of absences which may be granted to holders of
Awards without constituting termination of their employment for purposes of
their Awards; (vi) to authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of the Plan; and (vii) to make
any and all other determinations which it determines to be necessary or
advisable in the administration of the Plan. The Board shall have full power
and authority to administer and interpret the Plan and to adopt, amend and
revoke such rules, regulations, agreements, guidelines and instruments for the
administration of the Plan and for the conduct of its business as the Board
deems necessary or advisable. The Board's interpretation of the Plan, and all
actions taken and determinations made by the Board pursuant to the powers vested
in it hereunder, shall be conclusive and binding on all parties concerned,
including the Company, its shareholders, any participants in the Plan and any
other employee of the Company or any of its subsidiaries.
<PAGE>
3. PERSONS ELIGIBLE UNDER THE PLAN.
Any person who is a director, officer, employee or consultant of the
Company, or any of its subsidiaries (a "Participant"), shall be eligible to be
considered for the grant of Awards under the Plan.
4. AWARDS.
(a) COMMON STOCK AND DERIVATIVE SECURITY AWARDS. Awards authorized under
the Plan shall consist of any type of arrangement with a Participant that is not
inconsistent with the provisions of the Plan and that, by its terms, involves or
might involve or be made with reference to the issuance of (i) shares of the
Common Stock, no par value, of the Company (the "Common Stock") or (ii) a
"derivative security" (as that term is defined in Rule 16a-1(c) of the Rules and
Regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, as the same may be amended from time to time)
with an exercise or conversion price related to the Common Stock or with a value
derived from the value of the Common Stock.
(b) TYPES OF AWARDS. Awards are not restricted to any specified form or
structure and may include, but need not be limited to, sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options, stock
purchase warrants, other rights to acquire stock or securities convertible into
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, or any other type of Award
which the Board shall determine is consistent with the objectives and
limitations of the Plan. An Award may consist of one such security or benefit,
or two or more of them in tandem or in the alternative.
(c) CONSIDERATION. Common Stock may be issued pursuant to an Award for
any lawful consideration as determined by the Board, including, without
limitation, a cash payment, services rendered, or the cancellation of
indebtedness.
(d) GUIDELINES. The Board may adopt, amend or revoke from time to time
written policies implementing the Plan. Such policies may include, but need not
be limited to, the type, size and term of Awards to be made to participants and
the conditions for payment of such Awards.
(e) TERMS AND CONDITIONS. Subject to the provisions of the Plan, the
Board, in its sole and absolute discretion, shall determine all of the terms and
conditions of each Award granted pursuant to the Plan, which terms and
conditions may include, among other things:
(i)any provision necessary for such Award to qualify as an incentive
stock option under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") (an "Incentive Stock Option");
(ii)a provision permitting the recipient of such Award to pay the
purchase price of the Common Stock or other property issuable pursuant to
such Award, or to pay such
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recipient's tax withholding obligation with respect to such issuance, in
whole or in part, by delivering previously owned shares of capital stock of
the Company (including "pyramiding") or other property, or by reducing the
number of shares of Common Stock or the amount of other property otherwise
issuable pursuant to such Award; or
(iii)a provision conditioning or accelerating the receipt of benefits
pursuant to the Award, or terminating the Award, either automatically or in
the discretion of the Board, upon the occurrence of specified events,
including, without limitation, a change of control of the Company, an
acquisition of a specified percentage of the voting power of the Company,
the dissolution or liquidation of the Company, a sale of substantially all
of the property and assets of the Company or an event of the type described
in Section 7 of the Plan.
(f) SUSPENSION OR TERMINATION OF AWARDS. If the Company believes that a
Participant has committed an act of misconduct as described below, the Company
may suspend the Participant's rights under any then outstanding Award pending a
determination by the Board. If the Board determines that a Participant has
committed an act of embezzlement, fraud, nonpayment of any obligation owed to
the Company or any subsidiary, breach of fiduciary duty or deliberate disregard
of the Company's rules resulting in loss, damage or injury to the Company, or if
a Participant makes an unauthorized disclosure of trade secret or confidential
information of the Company, engages in any conduct constituting unfair
competition, or induces any customer of the Company to breach a contract with
the Company, neither the Participant nor his or her estate shall be entitled to
exercise any rights whatsoever with respect to such Award. In making such
determination, the Board shall act fairly and shall give the Participant a
reasonable opportunity to appear and present evidence on his or her behalf to
the Board.
(g) MAXIMUM GRANT OF AWARDS TO ANY PARTICIPANT. No Participant shall
receive Awards representing more than 40% of the aggregate number of shares of
Common Stock that may be issued pursuant to all Awards under the Plan as set
forth in Section 5 hereof.
5. SHARES OF COMMON STOCK SUBJECT TO THE PLAN.
The aggregate number of shares of Common Stock that may be issued or
issuable pursuant to all Awards under the Plan (including Awards in the form of
Incentive Stock Options and Non-Statutory Stock Options) shall not exceed an
aggregate of 500,000 shares of Common Stock, subject to adjustment as provided
in Section 7 of the Plan. Shares of Common Stock subject to the Plan may
consist, in whole or in part, of authorized and unissued shares or treasury
shares. Any shares of Common Stock subject to an Award which for any reason
expires or is terminated unexercised as to such shares shall again be available
for issuance under the Plan. For purposes of this Section 5, the aggregate
number of shares of Common Stock that may be issued at any time pursuant to
Awards granted under the Plan shall be reduced by:(i) the number of shares of
Common Stock previously issued pursuant to Awards granted under the Plan, other
than shares of Common Stock subsequently reacquired by the Company pursuant to
the terms and conditions of such Awards and with respect to which the holder
thereof received no benefits of ownership, such as dividends; and (ii) the
number of shares of Common Stock which were otherwise issuable
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pursuant to Awards granted under this Plan but which were withheld by the
Company as payment of the purchase price of the Common Stock issued pursuant to
such Awards or as payment of the recipient's tax withholding obligation with
respect to such issuance.
6. PAYMENT OF AWARDS.
The Board shall determine the extent to which Awards shall be payable in
cash, shares of Common Stock or any combination thereof. The Board may, upon
request of a Participant, determine that all or a portion of a payment to that
Participant under the Plan, whether it is to be made in cash, shares of Common
Stock or a combination thereof, shall be deferred. Deferrals shall be for such
periods and upon such terms as the Board may determine in its sole discretion.
7. DILUTION AND OTHER ADJUSTMENT.
In the event of any change in the outstanding shares of the Common Stock or
other securities then subject to the Plan by reason of any stock split, reverse
stock split, stock dividend, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, or if the
outstanding securities of the class then subject to the Plan are exchanged for
or converted into cash, property or a different kind of securities, or if cash,
property or securities are distributed in respect of such outstanding securities
as a class (other than cash dividends), then the Board may, but it shall not be
required to, make such equitable adjustments to the Plan and the Awards
thereunder (including, without limitation, appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Incentive Stock Options and
other Awards theretofore granted under the Plan, (ii) the maximum number and
type of shares or other securities that may be issued pursuant to Incentive
Stock Options and other Awards thereafter granted under the Plan; and (iii) the
maximum number of securities with respect to which Awards may thereafter be
granted to any Participant in any fiscal year) as the Board in its sole
discretion determines appropriate, including any adjustments in the maximum
number of shares referred to in Section 5 of the Plan. Such adjustments shall
be conclusive and binding for all purposes of the Plan.
8. MISCELLANEOUS PROVISIONS.
(a) DEFINITIONS. As used herein, "subsidiary" means any future
corporation which would be a "subsidiary corporation," as that term is defined
in Section 424(f) of the Code, of the Company; and the term "or" means "and/or."
(b) CONDITIONS ON ISSUANCE. Securities shall not be issued pursuant to
Awards unless the grant and issuance thereof shall comply with all relevant
provisions of law and the requirements of any securities exchange or quotation
system upon which any securities of the Company are listed, and shall be further
subject to approval of counsel for the Company with respect to such compliance.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is determined by Company counsel to be necessary
to
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<PAGE>
the lawful issuance and sale of any security or Award, shall relieve the Company
of any liability in respect of the nonissuance or sale of such securities as to
which requisite authority shall not have been obtained.
(c) RIGHTS AS SHAREHOLDER. A participant under the Plan shall have no
rights as a holder of Common Stock with respect to Awards hereunder, unless and
until certificates for shares of such stock are issued to the participant.
(d) ASSIGNMENT OR TRANSFER. Subject to the discretion of the Board, and
except with respect to Incentive Stock Options which are not transferable except
by will or the laws of descent and distribution, Awards under the Plan or any
rights or interests therein shall be assignable or transferable.
(e) AGREEMENTS. All Awards granted under the Plan shall be evidenced by
written agreements in such form and containing such terms and conditions (not
inconsistent with the Plan) as the Board shall from time to time adopt.
(f) WITHHOLDING TAXES. The Company shall have the right to deduct from
all Awards hereunder paid in cash any federal, state, local or foreign taxes
required by law to be withheld with respect to such awards and, with respect to
awards paid in stock, to require the payment (through withholding from the
participant's salary or otherwise) of any such taxes. The obligation of the
Company to make delivery of Awards in cash or Common Stock shall be subject to
the restrictions imposed by any and all governmental authorities.
(g) NO RIGHTS TO AWARD. No Participant or other person shall have any
right to be granted an Award under the Plan. Neither the Plan nor any action
taken hereunder shall be construed as giving any Participant any right to be
retained in the employ of the Company or any of its subsidiaries or shall
interfere with or restrict in any way the rights of the Company or any of its
subsidiaries, which are hereby reserved, to discharge a Participant at any time
for any reason whatsoever, with or without good cause.
(h) COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and not charged to any Award nor to any
Participant receiving an Award.
(i) FUNDING OF PLAN. The Plan shall be unfunded. The Company shall not
be required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Award under the Plan.
9. AMENDMENTS AND TERMINATION.
(a)AMENDMENTS. The Board may at any time terminate or from time to time
amend the Plan in whole or in part, but no such action shall adversely affect
any rights or obligations with respect to any Awards theretofore made under the
Plan. However, with the consent of the Participant affected, the Board may
amend outstanding agreements evidencing Awards under the Plan in a manner not
inconsistent with the terms of the Plan.
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<PAGE>
(b)SHAREHOLDER APPROVAL. To the extent that Section 422 of the Code, other
applicable law, or the rules, regulations, procedures or listing agreement of
any national securities exchange or quotation system, requires that any
amendment of the Plan be approved by the shareholders of the Company, no such
amendment shall be effective unless and until it is approved by the shareholders
in such a manner and to such a degree as is required.
(c)TERMINATION. Unless the Plan shall theretofore have been terminated as
above provided, the Plan (but not the awards theretofore granted under the Plan)
shall terminate on and no awards shall be granted after July 1, 2007.
10. EFFECTIVE DATE.
The Plan, as amended, is effective on July 1, 1997, the date on which it
was adopted by the Board of Directors of the Company and the holders of the
majority of the Common Stock of the Company.
11. GOVERNING LAW.
The Plan and any agreements entered into thereunder shall be construed and
governed by the laws of the State of California applicable to contracts made
within, and to be performed wholly within, such state, without regard to the
application of conflict of laws rules thereof.
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OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Data Net International, Inc., a California
corporation (the "COMPANY"), has granted to the person named below ("OPTIONEE")
a non-statutory stock option (the "OPTION") to purchase shares of the Company's
Common Stock (the "SHARES") under its 1997 Stock Plan and upon the terms and
conditions as follows:
Name of Optionee:
-------------------------------------
Address of Optionee:
-------------------------------------
-------------------------------------
-------------------------------------
Number of Shares:
-------------------------------------
Option Exercise Price: $ per share
---------
Date of Grant:
--------------
Option Expiration Date:
--------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
One quarter (1/4) of the options shall vest on July 1, 1998. The remaining
three quarters (3/4) shall vest on the first day of each calendar month for
thirty five (35) months thereafter in 35 equal installments of one-thirty sixth
(1/36) of the remaining shares rounded down to the nearest whole share, and all
remaining shares shall vest on July 1, 2001.
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-statutory Stock Option) (the "OPTION AGREEMENT") which is
attached to this Option Certificate (the "CERTIFICATE") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the Option
Agreement, NOT by this summary. The Company strongly suggests that you
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
<PAGE>
Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without
cause. See Section 5(d) of the Option Agreement.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company. If your employment ends due to death or permanent disability, the
Option terminates six months after the date of death or disability, and is
exercisable during such six-month period as to the portion of the Option
which had vested prior to the date of death or disability. In all other
cases, the Option terminates 30 days after the date of termination of
employment, and is exercisable during such time period as to the portion of
the Option which had vested prior to the date of termination of employment;
PROVIDED, HOWEVER, if you are terminated "for cause," the Option will
terminate 5 days after the date of termination of your employment and is
exercisable during such time period as to the portion of the Option which had
vested prior to the date of termination of employment. See Section 5 of the
Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold,
transferred, assigned or otherwise disposed of to any other person, except on
your death. See Section 15(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Section 4 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any
of your Shares without the prior written consent of the Company or its
underwriters for a period of up to 180 days after the effective date of the
offering. See Section 6(a) of the Option Agreement.
ADJUSTMENTS UPON RECAPITALIZATION: The Option contains provisions which
affect your rights in the event of stock splits, stock dividends, mergers and
other major corporate reorganizations. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to options or stock which may
otherwise have been promised to you. See Section 8 of the Option Agreement.
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<PAGE>
WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
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<PAGE>
AGREEMENT
Data Net International, Inc., a California corporation, and Optionee each
hereby agrees to be bound by all of the terms and conditions of the Stock Option
Agreement (Non-Statutory Stock Option) which is attached hereto as Annex I and
incorporated herein by this reference as if set forth in full in this document.
DATED:
----------------------
DATA NET INTERNATIONAL, INC.
By:
------------------------------------
Its:
-----------------------------------
OPTIONEE
---------------------------------------
Name:
---------------------------------------
(Please print your name exactly as you wish it
to appear on any stock certificates issued to you
upon exercise of the Option)
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<PAGE>
ANNEX I
STOCK OPTION AGREEMENT
(NON-STATUTORY STOCK OPTION)
This STOCK OPTION AGREEMENT (this "OPTION AGREEMENT") is made and entered
into as of the execution date of the Option Certificate to which it is attached
(the "CERTIFICATE") by and between Data Net International, Inc., a California
corporation (the "COMPANY"), and the person named in the Certificate
("OPTIONEE").
Pursuant to the Data Net International, Inc. Amended and Restated 1997
Stock Plan (the "PLAN"), the Board of Directors of the Company (the "BOARD")
has authorized the grant to Optionee of a non-statutory stock option to
purchase shares of the Company's Common Stock, no par value (the "COMMON
STOCK"), upon the terms and subject to the conditions set forth in this
Option Agreement and in the Plan.
The Company and Optionee agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to Optionee the right and option (the
"OPTION"), upon the terms and subject to the conditions set forth in this
Option Agreement and the Plan, to purchase all or any portion of that number
of shares of the Common Stock (the "SHARES") set forth in the Certificate at
the Option exercise price set forth in the Certificate (the "EXERCISE PRICE").
2. TERM OF OPTION.
The Option shall terminate and expire on the Option Expiration Date
set forth in the Certificate (the "EXPIRATION DATE"), unless sooner
terminated as provided herein. In no event shall the Option be exercisable
after the expiration of ten years from the date it was granted.
3. EXERCISE PERIOD.
(a) Subject to the provisions of Sections 3(b), 5 and 7(b) of this
Option Agreement, the Option shall become exercisable (in whole or in part)
upon and after the dates set forth under the caption "Exercise Schedule" in
the Certificate. The installments shall be cumulative; i.e., the Option may
be exercised, as to any or all Shares covered by an installment, at any time
or times after the installment first becomes exercisable and until the Option
Expiration Date or the termination of the Option.
<PAGE>
(b) Notwithstanding anything to the contrary contained in this
Option Agreement, the Option may not be exercised, in whole or in part,
unless and until any then-applicable requirements of all federal, state and
local laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Company and its counsel.
4. EXERCISE OF OPTION.
There is no obligation to exercise the Option, in whole or in part.
The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(a) written notice of exercise in form and substance identical to
Exhibit "A" attached to this Option Agreement stating the number of Shares
then being purchased (the "PURCHASED SHARES");
(b) payment of the Exercise Price of the Purchased Shares, either
(1) in cash, or (2) with the consent of the Board (which may be withheld in
its absolute discretion), by (i) delivery to the Company of other shares of
Common Stock with an aggregate Fair Market Value equal to the total Exercise
Price of the Purchased Shares, (ii) according to a deferred payment or other
arrangement (which may include without limiting the generality of the
foregoing, the use of other shares of Common Stock) with the person to whom
the Option is granted or to whom the Option is transferred pursuant to the
terms of this Option Agreement, or (iii) in any other form of legal
consideration that may be acceptable to the Board; and
(c) if requested by the Company, a letter of investment intent in
such form and containing such provisions as the Company may require.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be payable at the minimum rate of
interest necessary to avoid the imputation of interest, under the applicable
provision of the Internal Revenue Code of 1986, as amended (the "CODE"), and
Treasury Regulations.
Following receipt of the notice and payment referred to above, the
Company shall issue and deliver to Optionee a stock certificate or stock
certificates evidencing the Purchased Shares; PROVIDED, HOWEVER, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Optionee, in cash or by check, the Fair
Market Value of any fraction or fractions of a share exercised by Optionee.
"FAIR MARKET VALUE" shall be determined as follows: (1) if the Common Stock
is listed on any established stock exchange or a national market system,
including without limitation the Nasdaq National Market, the Fair Market
Value of a share of Common Stock shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
system or exchange (or the exchange with the greatest volume of trading in
the Common Stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable; (2) if the Common Stock is quoted on the Nasdaq
System (but not on the Nasdaq
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<PAGE>
National Market) or is regularly quoted by a recognized securities dealer but
selling prices are not reported, the Fair Market Value of a share of Common
Stock shall be the mean between the bid and asked prices for the Common Stock
on the last market trading day prior to the day of determination, as reported
in the Wall Street Journal or such other source as the Board deems reliable;
and (3) in the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
5. TERMINATION OF SERVICES.
(a) If Optionee shall cease to be an officer, director, consultant
or employee of the Company or any "Affiliate" of the Company (as that term is
defined in Rule 501(b) of the Rules and Regulations under the Securities Act
of 1933, as amended (the "1933 ACT")) for any reason other than death or
permanent disability (a "TERMINATING EVENT"), Optionee shall have the right,
subject to the provisions of Section 5(c) below, to exercise the Option at
any time following such Terminating Event until the earlier to occur of (1)
30 days following the date of such Terminating Event and (2) the Expiration
Date. The Option may be exercised following a Terminating Event only to the
extent exercisable as of the date of the Terminating Event. To the extent
unexercised at the end of the period referred to above, the Option shall
terminate. The Board, in its sole and absolute discretion, shall determine
whether or not authorized leaves of absence shall constitute termination of
employment for purposes of this Option Agreement.
(b) If, by reason of death or disability (a "SPECIAL TERMINATING
EVENT"), Optionee shall cease to be an officer, director, consultant or
employee of the Company or any Affiliate, then Optionee, Optionee's executors
or administrators or any person or persons acquiring the Option directly from
Optionee by bequest or inheritance, shall have the right to exercise the
Option at any time following such Special Terminating Event until the earlier
to occur of (1) six months following the date of such Special Terminating
Event and (2) the Expiration Date. The Option may be exercised following a
Special Terminating Event only to the extent exercisable at the date of the
Special Terminating Event. To the extent unexercised at the end of the
period referred to above, the Option shall terminate. For purposes of this
Option Agreement, "disability" shall mean total and permanent disability as
defined in Section 22(e)(3) of the Code. Optionee shall not be considered
permanently disabled unless he furnishes proof of such disability in such
form and manner, and at such times, as the Board may from time to time
require.
(c) If Optionee's employment shall be terminated "for cause" by the
Company or any Affiliate, Optionee shall have the right to exercise the
Option at any time following such Terminating Event until the earlier to
occur of (1) 5 days following the date of such Terminating Event and (2) the
Expiration Date. For purposes of this Option Agreement, "for cause" shall
mean:
(1) with respect to employees of the Company or any Affiliate
the following to the extent it results in substantial harm to the Company or
any Affiliate or could reasonably be expected to result in substantial harm
to the Company or any Affiliate:
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<PAGE>
(i) the willful failure or refusal by Optionee to perform
his duties to the Company or any Affiliate; or
(ii) Optionee's willful disobedience of any orders or
directives of the Board of Directors of the Company or any Affiliate or any
officers thereof acting under the authority thereof or Optionee's deliberate
interference with the compliance by other employees of the Company or any
Affiliate with any such orders or directives; or
(iii) the willful failure or refusal of Optionee to abide
by or comply with the written policies, standard procedures or regulations of
the Company or any Affiliate; or
(iv) any willful or continued act or course of conduct by
Optionee which the Board in good faith determines might reasonably be
expected to have a material detrimental effect on the Company or any
Affiliate or their respective business, operations, affairs or financial
position; or
(v) the committing by the Optionee of any fraud, theft,
embezzlement or other dishonest act against the Company or any Affiliate; or
(vi) the determination by the Board, in good faith and in
the exercise of reasonable discretion, that Optionee is not competent to
perform his duties of employment; and
(2) with respect to consultants, any material breach of their
consulting agreement with the Company or any Affiliate.
(d) Nothing in the Plan, the Certificate or this Option Agreement
shall confer upon Optionee any right to continue in the service and/or employ
of the Company or any Affiliate or shall affect the right of the Company or
any Affiliate to terminate the relationship or employment of Optionee, with
or without cause.
6. RESTRICTIONS ON PURCHASED SHARES.
(a) MARKET STAND-OFF.
(1) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Company's initial public
offering, Optionee shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or
transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to any Purchased Shares without the prior written
consent of the Company or its underwriters, for such period of time from and
after the effective date of such registration statement as may be requested
by the Company or such underwriters; PROVIDED, HOWEVER, that in no event
shall such period exceed 180 days. This Section 6(a)(1) shall only remain in
effect for the two-year period
4
<PAGE>
immediately following the effective date of the Company's initial public
offering and shall thereafter terminate and cease to be in force or effect.
Optionee agrees to execute and deliver to the Company such further documents
or instruments as the Company reasonably determines to be necessary or
appropriate to effect the provisions of this Section 6(a).
(2) In the event of any stock dividend, stock split,
recapitalization or other transaction resulting in an adjustment under
Section 7 hereof, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect to
or in exchange for the Purchased Shares shall be immediately subject to the
provisions of this Section 6(a), to the same extent the Purchased Share are
at such time covered by such provisions.
(3) In order to enforce the provisions of Section 6(a), the
Company may impose stop-transfer instructions with respect to the Purchased
Shares until the end of the applicable stand-off period.
(b) SECURITIES LAW RESTRICTIONS. In the event that the issuance of
the Purchased Shares shall not be registered under the 1933 Act, none of the
Purchased Shares shall be sold, transferred, assigned, pledged, hypothecated
or otherwise disposed of ("TRANSFERRED") (with or without consideration), and
the Company shall not be required to register any such sale, transfer,
assignment, pledge, hypothecation or other disposition ("TRANSFER") and the
Company may instruct its transfer agent not to register any such Transfer,
unless and until one of the following events shall have occurred:
(1) The Purchased Shares are Transferred pursuant to and in
conformity with (i) an effective registration statement filed with the
Securities and Exchange Commission (the "COMMISSION") pursuant to the 1933
Act, and (ii) the qualification and/or registration requirements under any
applicable securities laws of any state of the United States; or
(2) Optionee has, prior to the Transfer of such Purchased
Shares, and if requested by the Company, provided all relevant information to
the Company's counsel so that upon the Company's request, the Company's
counsel is able to, and actually prepares and delivers to the Company a
written opinion that the proposed Transfer (i) is exempt from registration
under the 1933 Act as then in effect, and the Rules and Regulations of the
Commission thereunder, and (ii) is exempt from qualification and/or
registration under any applicable state securities laws. The Company shall
bear all reasonable costs of preparing such opinion.
(c) NONCOMPLYING TRANSFERS INVALID. Any attempted Transfer which
is not in full compliance with this Section 6 shall be null and void AB INITIO,
and of no force or effect.
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<PAGE>
7. ADJUSTMENTS UPON RECAPITALIZATION.
(a) Subject to the provisions of Section 7(b), if any change is
made in the Common Stock, without receipt of consideration by the Company or
its shareholders (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or other transaction not involving
the receipt of consideration by the Company or its shareholders), the Option
will be appropriately adjusted in the class(es) and number of shares and
price per share of stock subject to the Option. Such adjustments shall be
made by the Board, the determination of which shall be final, binding and
conclusive. The conversion of any convertible securities of the Company
shall not be treated as a change "without the receipt of consideration by the
Company or its shareholders."
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the "surviving corporation" (as defined below);
or (3) a merger in which the Company is the surviving corporation but the
shares of the Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then, at the sole discretion of the Board and
to the extent permitted by applicable law, the Option shall (i) terminate
upon such event and may be exercised prior thereto to the extent the Option
is then exercisable or (ii) continue in full force and effect and, if
applicable, the surviving corporation or an Affiliate of such surviving
corporation shall assume the Option and/or shall substitute a similar option
or award in place of the Option.
(c) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board, and
its determination shall be final, binding and conclusive.
(d) The provisions of this Section 7 are intended to be exclusive,
and Optionee shall have no other rights upon the occurrence of any of the
events described in this Section 7.
(e) The grant of the Option shall not affect in any way the right
or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure, or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets.
(f) The determination as to which party is a "surviving
corporation" in a merger or consolidation shall be made on the basis of the
relative equity interests of the shareholders in the corporation existing
after the merger or consolidation, as follows: If following any merger or
consolidation the holders of outstanding voting securities of the Company
prior to the merger or consolidation own equity securities possessing more
than 50% of the voting power of the corporation existing after the merger or
consolidation, then for purposes of the Option
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<PAGE>
Agreement, the Company shall be the surviving corporation. In all other
cases, the Company shall not be the surviving corporation.
8. WAIVER OF RIGHTS TO PURCHASE STOCK.
By signing this Option Agreement, Optionee acknowledges and agrees
that neither the Company nor any other person or entity is under any
obligation to sell or transfer to Optionee any option or equity security of
the Company, other than the Shares subject to the Option and any other right
or option to purchase Common Stock which was previously granted in writing to
Optionee by the Board. By signing this Option Agreement, Optionee
specifically waives all rights which he or she may have had prior to the date
of this Option Agreement to receive any option or equity security of the
Company.
9. INVESTMENT INTENT.
Optionee represents and agrees that if he or she exercises the
Option in whole or in part, and if at the time of such exercise the Plan
and/or the Purchased Shares have not been registered under the 1933 Act, he
or she will acquire the Shares upon such exercise for the purpose of
investment and not with a view to the distribution of such Shares, and that
upon each exercise of the Option he or she will furnish to the Company a
written statement to such effect.
10. LEGEND ON STOCK CERTIFICATES.
Optionee agrees that all certificates representing the Purchased
Shares will be subject to such stock transfer orders and other restrictions
(if any) as the Company may deem advisable under the rules, regulations and
other requirements of the Commission, any stock exchange upon which the
Common Stock is then listed and any applicable federal or state securities
laws, and the Company may cause a legend or legends to be put on such
certificates to make appropriate reference to such restrictions.
11. NO RIGHTS AS SHAREHOLDER.
Except as provided in Section 7 of this Option Agreement, Optionee
shall have no rights as a shareholder with respect to the Shares until the
date of the issuance to Optionee of a stock certificate or stock certificates
evidencing such Shares. Except as may be provided in Section 7 of this
Option Agreement, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.
12. MODIFICATION.
Subject to the terms and conditions and within the limitations of the
Plan, the Board (excluding the Optionee) may modify, extend or renew the Option
or accept the surrender of, and
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<PAGE>
authorize the grant of a new option in substitution for, the Option (to
the extent not previously exercised). No modification of the Option shall be
made which, without the consent of Optionee, would alter or impair any rights
of the Optionee under the Option.
13. WITHHOLDING.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of any Option that the
Optionee agree to remit, at the time of such delivery or at such later date
as the Company may determine, an amount sufficient to satisfy all federal,
state and local withholding tax requirements relating thereto, and Optionee
agrees to take such other action required by the Company to satisfy such
withholding requirements.
(b) With the consent of the Board (excluding the Optionee), and in
accordance with any rules and procedures from time to time adopted by the
Board, Optionee may elect to satisfy his or her obligations under Section
13(a) above by (1) directing the Company to withhold a portion of the Shares
otherwise deliverable (or to tender back to the Company a portion of the
Shares issued where the Optionee (a "SECTION 16(B) RECIPIENT") is required to
report the ownership of the Shares pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, and has not made an election
under Section 83(b) of the Code (a "WITHHOLDING RIGHT")); or (2) tendering
other shares of the Common Stock of the Company which are already owned by
Optionee which in all cases have a Fair Market Value (as determined in
accordance with the provisions of Section 4 hereof) on the date as of which
the amount of tax to be withheld is determined (the "TAX DATE") equal to the
amount of taxes to be paid by such method.
(c) To exercise a Withholding Right, the Optionee must follow the
election procedures set forth below, together with such additional procedures
and conditions set forth in this Option Agreement or otherwise adopted by the
Board:
(1) the Optionee must deliver to the Company a written notice
of election (the "ELECTION") and specify whether all or a stated percentage
of the applicable taxes will be paid in accordance with Section 13(b) above
and whether the amount so paid shall be made in accordance with the "flat"
withholding rates for supplemental wages or as determined in accordance with
Optionee's form W-4 (or comparable state or local form);
(2) unless disapproved by the Board (excluding the Optionee)
as provided in subsection (3) below, the Election once made will be
irrevocable;
(3) no Election is valid unless the Board (excluding the
Optionee) has the right and power, in its sole discretion, with or without
cause or reason therefor, to consent to the Election, to refuse to consent to
the Election, or to disapprove the Election; and if the Board has not
consented to the Election on or prior to the Tax Date, the Election will be
deemed approved; and
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(4) if the Optionee on the date of delivery of the Election to
the Company is a Section 16(b) Recipient, the following additional provisions
will apply:
(i) the Election cannot be made during the six calendar
month period commencing with the date of grant of the Withholding Right (even
if the Option to which such Withholding Right relates has been granted prior
to such date); and
(ii) the Election (and the exercise of the related Option)
must be made either during the period beginning on the third business day
following the date of release for publication of the quarterly or annual
summary statements of sales and earnings of the Company and ending on the
12th business day following such date or at least six calendar months or more
prior to the Tax Date.
14. CHARACTER OF OPTION.
The Option is not intended to qualify as an "incentive stock option"
as that term is defined in Section 422 of the Code.
15. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Optionee shall promptly take all actions and
execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Option
Agreement.
(b) NOTICES. All notices, requests, demands and other communications
under this Option Agreement shall be in writing and shall be given to the
parties hereto as follows:
(1) If to the Company, to:
Data Net International, Inc.
1304 John Reed Court
City of Industry, CA 91745
(2) If to Optionee, to the address set
forth on the Certificate,
or at such other address or addresses as may have been furnished by such
either party in writing to the other party hereto. Any such notice, request,
demand or other communication shall be effective (i) if given by mail, 72
hours after such communication is deposited in the mail by first-class
certified mail, return receipt requested, postage prepaid, addressed as
aforesaid, or (ii) if given by any other means, when delivered at the address
specified in this subsection (b).
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(c) TRANSFER OF RIGHTS UNDER THIS OPTION AGREEMENT. The Company
may at any time transfer and assign its rights and delegate its obligations
under this Option Agreement to any other person, corporation, firm or entity,
including its officers, directors and stockholders, with or without
consideration.
(d) OPTION NON-TRANSFERABLE. Optionee may not Transfer the Option
except by will or the laws of descent and distribution, and the Option may be
exercised during the lifetime of Optionee only by Optionee or by his or her
guardian or legal representative in the case of a disability, and upon
Optionee's death only by his or her Estate or by any person who acquired the
Option by bequest or inheritance or by reason of the death of Optionee.
(e) SUCCESSORS AND ASSIGNS. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, assigns, heirs and personal
representatives.
(f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE, EXCEPT TO THE
EXTENT PREEMPTED BY FEDERAL LAW, WHICH SHALL TO THAT EXTENT GOVERN.
(g) INCORPORATION OF PLAN BY REFERENCE. This Option is granted
pursuant to the terms of the Plan, the terms of which are incorporated herein
by reference, and it is intended that this Option Agreement shall be
interpreted in a manner to comply therewith. Any provision of this Option
Agreement inconsistent with the Plan shall be superseded and governed by the
Plan.
(h) A COMMITTEE. As provided in the Plan, the Board may delegate
administration of the Plan and this Option Agreement to a committee (the
"COMMITTEE"). If administration is delegated to a Committee, the Committee
shall have, in connection with the this Option Agreement, the powers
theretofore possessed by the Board (and references in this Option Agreement
to the Board shall thereafter be to the Committee).
(i) MISCELLANEOUS. Titles and captions contained in this Option
Agreement are inserted for convenience of reference only and do not
constitute a part of this Option Agreement for any other purpose. Except as
specifically provided herein, neither this Option Agreement nor any right
pursuant hereto or interest herein shall be assignable by any of the parties
hereto without the prior written consent of the other party hereto.
THE SIGNATURE PAGE TO THIS OPTION AGREEMENT CONSISTS OF THE LAST PAGE
OF THE CERTIFICATE.
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Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
To: Data Net International, Inc.
The undersigned, the holder of the enclosed Stock Option Agreement
(Non-Statutory Stock Option), hereby irrevocably elects to exercise the
purchase rights represented by the Option and to purchase thereunder _______*
shares of Common Stock of Data Net International, Inc. (the "COMPANY"), and
herewith encloses payment of $__________ and/or _________ shares of the
Company's Common Stock in full payment of the purchase price of such shares
being purchased.
Dated:
---------------------------------
---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Option)
---------------------------------------
(Please Print Name)
---------------------------------------
(Address)
* Insert here the number of Shares called for on the face of the Option
(or, in the case of a partial exercise, the number of Shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the adjustment
provisions of the Option, may be deliverable upon exercise.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CUMETRIX, Inc.:
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 23, 1997
