<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1998
REGISTRATION NO. 333-43151
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CUMETRIX DATA SYSTEMS CORP.
(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. / /
------------------------
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 FEBRUARY 23, 1998
[LOGO]
2,300,000 SHARES
CUMETRIX DATA SYSTEMS CORP.
COMMON STOCK
--------------------
Cumetrix Data Systems Corp., a California corporation ("CUMETRIX" or the
"Company"), is hereby offering (the "Offering") 2,300,000 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 $4.50
and $5.50 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 has been 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 "CDSC."
-------------------
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 230,000 shares of
Common Stock at 165% 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 $802,000 payable by the Company
including the Underwriter's non-accountable expense allowance. Of the
Proceeds to the Company, $400,000 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 345,000 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>
[Graphic depicting schematically ACSA Solution and Distribution Services in the
center with four arrows pointing outward:
-- System Configuration Services is written on the arrow pointing to
System Integrators
-- Hardware configuration is written on the arrow pointing to Value
Added Resellers
-- Built to order process is written on the arrow pointing to Original
Equipment Manufacturers
-- Software configuration is written on the arrow pointing toward
Independent Software Vendors.]
[Photo of a hard drive]
[Caption: HIGH CAPACITY STORAGE The Company is a distributor of hard drives and
integrates hard drives as components into systems the Company assembles.]
[Graphic depicting three arrows in circular form around the caption, ACSA
Solution
- Customized End-user configuration requirement.
- Automated Mass Custom configuration
- Assembly]
[Caption: Using data gathered by manufacturers, Value Added Resellers and
Systems Integrators, the ACSA Center integrated assembly line will automatically
mass configure hardware and software to each end user's custom requirements.
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 165% 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. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products business and the system configuration business 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. See "Business--ACSA Growth Strategy--THE ACSA
SOLUTION." The Company has begun initial construction of the first of its ACSA
Solution production lines ("ACSA Centers") located at the Company's facility.
The Company's first ACSA Center is expected to be completed and the Company is
expected to commence offering the ACSA Solution by mid-1998. 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 net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to
3
<PAGE>
$49,267,491 for the first nine 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 3.3% and 3.1% of
net sales in the nine month period ending December 31, 1996 and the year ended
March 31, 1997, respectively, to 4.2% for the nine month period ending December
31, 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 January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. 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.................. 2,300,000 shares
Common Stock outstanding before the
Offering............................ 4,750,000 shares(1)
Common Stock outstanding after the
Offering............................ 7,050,000 shares(1)
Repayment of Bridge Notes and other indebtedness; construction
of first ACSA Center; marketing and sales for the ACSA
Solution; development of additional ACSA Centers; expansion of
Computer Products sales and marketing capability; and for
working capital and general corporate purposes. See "Use of
Proceeds."
Use of proceeds.......................
Proposed Nasdaq SmallCap Market
Symbol.............................. CDSC
</TABLE>
- --------------------------
(1) Does not include (i) 383,717 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 a weighted average exercise price of
$3.06 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)
116,283 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 NINE MONTHS ENDED
(INCEPTION) DECEMBER 31
TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................................................. $ 25,940,203 $17,175,071 $49,267,491
Cost of products...................................................... 25,139,001 16,604,294 47,192,956
-------------- ---------- ----------
Gross profit........................................................ 801,202 570,777 2,074,535
Selling, general and administrative expenses.......................... 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations................................................ 50,069 68,854 1,045,031
Interest expense...................................................... 9,334 4,500 13,908
Other income (expense), net........................................... (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes.............................. 34,864 64,364 1,041,846
Provision for income taxes............................................ 9,500 25,745 416,738
-------------- ---------- ----------
Net income.......................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................. $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------
AT MARCH 31, ACTUAL AS ADJUSTED(1)
1997 ----------- --------------
------------ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ 154,160 $ 232,529 $ 9,946,580
Total assets........................................................ 1,855,241 10,272,214 18,367,914
Total liabilities................................................... 1,579,877 8,622,542 7,267,342
Retained earnings................................................... 25,364 650,472 553,372(2)
Shareholders' equity................................................ 275,364 1,649,672 11,100,572
</TABLE>
- ------------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,300,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $5.00 per share after deducting commissions and estimated offering
expenses (estimated at $1,952,000); 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 Datatec Note,
respectively.
(2) As adjusted to reflect a non-recurring interest expense of $97,100 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."
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 19% 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."
CONTROL BY INSIDERS. Upon completion of the Offering, the executive
officers and directors will beneficially own approximately 62.75% 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."
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. Both James Ung and Max Toghraie are employed pursuant
to five year employment agreements. See "Management--Employment Agreements." 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."
DEPENDENCE UPON RELATIONSHIPS 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 and for the nine month period
ended December 31, 1997. For the nine months ended December 31, 1997, DSS
Technology Distribution Partners, Inc. ("DSS"), a master distributor of hard
drives to the Company, accounted for 58.3% of the Company's purchases. Certain
of
6
<PAGE>
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 "--Asian Market
Instability" and "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 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.
POSSIBLE ADDITIONAL FINANCING REQUIRED. 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
7
<PAGE>
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; RISK OF DECLINING PRODUCT MARGINS. The Company's gross profit
margins have increased from 3.3% to 4.2% in the nine months ending December 31,
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 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. Also, the purchase of ACSA Solution services
will often depend upon the successful coordination of marketing, system design
and installation efforts by the Company, end-user customers and others with
influence over the purchase decisions of the Company's customers such as
consultants, VARs and SIs. Purchase decisions will generally
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occur only after significant internal analysis by each customer and will be
subject to competition with other capital spending priorities of certain
customers. As a result, 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 Computer-Aided Software Integration, Inc. ("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-TM- 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 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--ACSA Growth Strategy" and
"Certain Transactions."
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--ACSA Growth Strategy."
MANAGEMENT OF GROWTH. The Company has grown rapidly since inception in
April 1996, with net sales reaching $25,940,203 in the Company's first fiscal
year and reaching $49,267,491 for the nine months ended December 31, 1997, and
employees increasing from 3 at inception to 23 at January 31, 1998.
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
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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 Carl L. Wood as Chief Financial Officer in February 1998 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.
RISK OF POTENTIAL JOINT VENTURES OR ACQUISITIONS. 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. A
portion of the net proceeds of this Offering may be used to fund such
acquisitions at the broad discretion of the Board of Directors. The Board of
Directors may consummate such acquisitions, if any, without permitting
shareholders to review or vote on such transactions, unless required under
applicable law. See "Use of Proceeds." and "Business--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 mid-1998. Any delay in
completion of the first ACSA 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 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--ACSA Growth Strategy."
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
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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--Vendor
Relationships and Procurement."
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 Datatec Systems Inc. ("Datatec"), formerly
known as Glasgal Communications, Inc., 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 Datatec is currently competing in the Company's markets, there can
be no assurance that Datatec 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" and "Certain
Transactions."
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
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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.
ASIAN MARKET INSTABILITY. Economies and financial markets in Asia have
recently experienced significant turmoil. A non-material portion of the
Company's revenues are derived from sales to businesses which primarily export
Computer Products to Asian customers, and certain of the Company's vendors are
based in Korea, Japan and other Asian countries. The recent turmoil in the Asian
financial markets has not had a material impact on the Company's sales orders or
the Company's ability to obtain products from its Asian vendors. However, the
financial instability in these regions may have an adverse impact on the
financial position of end-users in the region which could impact future orders
from the Company's customers and/or the ability of such end users to pay the
Company's customers, which could also impact the ability of such customers to
pay the Company. If the Company's customers who export into Asia are unable to
maintain export sales or current margins on such export sales, the Company's
sales and/or sales margins may be adversely affected. Additionally, if the
Company's vendors in these regions are unable to continue to supply the Company,
the Company may be adversely impacted.
FOREIGN TRADE REGULATION. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea, Japan 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."
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."
CONFLICTS OF INTERESTS. David Tobey, a director of the Company, is the
founder, President, Chief Executive Officer and a significant stockholder of
CASI and an employee of CASI's parent, Datatec. 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 Datatec will not compete directly with
the Company in the future. In addition, the
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terms of the CASI License do not restrict CASI's ability to license the software
to direct competitors of the Company. CASI and Datatec 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 Datatec and his obligations as a Director of the
Company. The license fee for the CASI Configurator software was $1.1 million, of
which $150,000 was advanced on the Company's behalf by an officer of CASI's
parent, Datatec and is evidenced by a promissory note (the "Datatec 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 Datatec 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 Datatec Note and the $700,000
principal amount of the CASI Note out of the proceeds of this Offering. The CASI
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
under the CASI Note to the purchase of the Company's Common Stock at a price of
$4.50 per share 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. See "Certain
Transactions."
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 $3.43
per share (69%) based on the net tangible book value of the Company at December
31, 1997 of $0.35 per share. 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."
REPAYMENT OF INDEBTEDNESS. Approximately thirteen (13%) percent, or an
aggregate of $1,200,000, of the net proceeds of the Offering has been allocated
for the repayment of the Bridge Notes, the CASI Note, and the Datatec Note, and
therefore will not be available for future operations. Approximately seven (7%)
percent, or $700,000, of such net proceeds will be paid to CASI in connection
with the repayment of the CASI Note. See "Use of Proceeds." David Tobey, a
director of the Company, is the founder, President, Chief Executive Officer and
a significant stockholder of CASI and an employee of CASI's parent, Datatec.
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 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. 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."
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
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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 7,050,000 shares of Common Stock outstanding. Of
those shares, the 2,300,000 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 Common Stock is quoted on The Nasdaq SmallCap
Market or The Nasdaq National Market and the average closing bid price of the
Common Stock equals or exceeds $10.00 per share (subject to customary
adjustments for stocksplits, combinations, consolidations and similar
transactions) for any 30 consecutive calendar days, and (ii) 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."
DELISTING FROM THE NASDAQ SMALLCAP MARKET; POTENTIAL PENNY STOCK
CLASSIFICATION. The Company has applied for quotation of the Common Stock on
The Nasdaq SmallCap Market. However, there can be no assurance that the Common
Stock will be approved for quotation on The Nasdaq SmallCap Market, or, if
approved, that a trading market for the Common Stock will develop, or if
developed, that it will be maintained. No assurance can be given that the
Company will be approved for initial inclusion or be able to satisfy the
criteria for continued quotation on The Nasdaq SmallCap Market following this
Offering. Failure to meet the maintenance criteria in the future may result in
the Common Stock not being eligible
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for quotation. If the Company were removed from The Nasdaq SmallCap Market,
trading, if any, in the Common Stock would thereafter have to be conducted in
the over-the-counter market in so-called "pink sheets" or, if then available,
the OTC Bulletin Board. As a result, holders of the Common Stock would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Common Stock.
In addition, if the Common Stock is approved for quotation and is
subsequently delisted from trading on Nasdaq and the trading price of the Common
Stock is less than $5.00 per share, trading in the Common Stock would also be
subject to the requirements of Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule,
broker/dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny stock
(generally, according to regulations adopted by the Securities Exchange
Commission (the "Commission"), any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per share, subject
to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock and the ability of purchasers in this Offering to
sell their securities in the secondary market. There can be no assurance that,
if approved for quotation, the Common Stock will not be delisted or treated as a
penny stock.
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. If the Company has shares listed on the New York Stock Exchange or the
American Stock Exchange, or designated for trading as national market securities
on The NASDAQ National Market System, cumulative voting rights of shareholders
will cease. Elimination of cumulative voting will have the effect of making it
more difficult for minority shareholders to obtain representation on the Board
of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation, as amended, (the "Articles") include a provision that eliminates
the personal liability of its directors to the Company for monetary damages for
breach of their fiduciary duties (subject to certain limitations) as a director
to the fullest extent permissible under California law. The Company's Articles
and Bylaws allow the Company to provide for indemnification of its Directors the
fullest extent permitted by law. The Bylaws 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 of
the Company. These agreements, together with the Company's Bylaws and Articles,
may require the Company, among other things, to indemnify these 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. The Company
intends to purchase and maintain directors' and officers' liability insurance.
As a result of the provisions in the Company's Articles and in the
indemnification agreements, it may be more difficult for shareholders to obtain
relief against a director for breaches of such director's fiduciary duty than if
these provisions were not included in the Company's Articles and Bylaws. See
"Management--Limitation of Liability and Indemnification Matters."
15
<PAGE>
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. Moreover, if the Underwriter sells the securities issuable upon exercise
of the Underwriter's Warrants, it may be required under the Exchange Act, as
amended, to temporarily suspend its market-making activities. No assurance can
be given that any market activities of the Underwriter, if commenced, will be
continued. See "Underwriting."
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.
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 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."
16
<PAGE>
RECENT BRIDGE FINANCING
On December 23, 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 were issued (the
"Bridge Warrants"). The investors in the Bridge Financing were brokerage
customers of the Underwriter, who acted as placement agent for the Bridge
Financing, but were not otherwise related to or affiliated with the Company or
the Underwriter. The Company repaid $250,000 of the principal amount of the CASI
Note and $50,000 of the Datatec 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 Datatec Note with the proceeds of this Offering. See "Use
of Proceeds."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of the 2,300,000 shares of
Common Stock offered by this Prospectus (at an assumed initial public offering
price of $5.00 per share), after deducting the estimated underwriting discounts
and offering expenses, are estimated to be approximately $9,548,000 ($11,048,750
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, Datatec Note and CASI Note........... $ 1,200,000 13%
Construction of first ACSA Center................................... 300,000 3
Sales and marketing of ACSA Solution for first ACSA Center.......... 1,000,000 10
Construction, sales and marketing of additional ACSA Centers........ 2,550,000 27
Expansion of Computer Products sales and marketing capability....... 2,700,000 28
Working capital..................................................... 1,798,000 19
------------ ---
------------ ---
Total........................................................... $ 9,548,000 100%
------------ ---
------------ ---
</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 February 28,
1998, or the closing of the Offering, whichever is sooner. David Tobey, a
director of the Company, is the President, Chief Executive Officer and a
significant stockholder of CASI and an employee of CASI's parent. The Datatec
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.
As of December 31, 1997 (excluding interest), the balance of the CASI Note was
$700,000, the balance of the Datatec Note was $100,000 and the aggregate balance
of the Bridge Notes was $400,000.
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 Datatec 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.
18
<PAGE>
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.
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1997 was $1,649,672, or $0.35 per share. 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.
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 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 2,300,000 shares of Common Stock offered hereby and the application of the
net proceeds therefrom, the as adjusted net tangible book value of the Common
Stock at December 31, 1997 would have been $11,100,572 or $1.57 per share. This
represents an immediate increase in pro forma net tangible book value of $1.22
per share of Common Stock to existing shareholders and an immediate dilution of
$3.43 (69%) 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........................................ $ 5.00
Net tangible book value per share as of December 31, 1997.................. $ 0.35
Increase in net tangible book value per share attributable to new
investors................................................................ $ 1.22
---------
As adjusted net tangible book value per share................................ $ 1.57
---------
Dilution per share to new investors.......................................... $ 3.43
---------
---------
</TABLE>
The following table summarizes, as of December 31, 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.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. 4,750,000 67.4% $ 1,150,000 9.1% $ 0.24
New investors..................... 2,300,000 32.6 11,500,000 90.9 5.00
---------- ----- ------------- ----- -----
Total......................... 7,050,000 100.0% $ 12,650,000 100.0% $ 1.79
---------- ----- ------------- ----- -----
---------- ----- ------------- ----- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At December 31, there were an aggregate of 452,717 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) 307,717
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.
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 31, 1997 (unaudited), and (ii) as adjusted to give effect to the
sale of the 2,300,000 shares of Common Stock offered by the Company hereby at
the assumed initial public offering price of $5.00 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 as adjusted
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 DECEMBER 31, 1997
(UNAUDITED)
---------------------------
AS
ACTUAL ADJUSTED(1)
------------ -------------
<S> <C> <C>
Debt.......................................................................... $ 1,213,448 $ 13,448
------------ -------------
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: (2)
Actual: 4,750,000
As adjusted: 7,050,000.................................................. 999,200 10,547,200
Retained earnings............................................................. 650,472 553,372(3)
------------ -------------
Total shareholders' equity.................................................... 1,649,672 11,100,572
------------ -------------
Total capitalization.......................................................... $ 2,863,120 $11,114,020
------------ -------------
------------ -------------
</TABLE>
- --------------------------
(1) As adjusted to reflect (i) the proceeds of the sale of 2,300,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $5.00 per share after deducting commissions and estimated offering
expenses (estimated at $1,952,000); 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 Datatec Note,
respectively.
(2) 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.
(3) As adjusted to reflect a non-recurring interest expense of $97,100 for the
unamortized portion of the original issue discount and deferred financing
costs related to the Bridge Financing.
20
<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 nine months ended December 31, 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 nine months ended
December 31, 1997 are not necessarily indicative of the results for the entire
year.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
APRIL 2, 1996 DECEMBER 31
(INCEPTION) TO ----------------------
MARCH 31, 1997 1996 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Nonaffiliates......................................................... $ 25,407,403 $16,838,795 $47,876,191
Affiliate(1).......................................................... 532,800 336,276 1,391,300
-------------- ---------- ----------
25,940,203 17,175,071 49,267,491
Cost of products:
Nonaffiliates......................................................... 24,615,411 16,270,620 45,878,548
Affiliate(1).......................................................... 523,590 333,674 1,314,408
-------------- ---------- ----------
25,139,001 16,604,294 47,192,956
Gross profit:
Nonaffiliates....................................................... 791,992 568,175 1,997,643
Affiliate(1)........................................................ 9,210 2,602 76,892
-------------- ---------- ----------
801,202 570,777 2,074,535
Selling, general and administrative expenses............................ 751,133 501,923 1,029,504
-------------- ---------- ----------
Income from operations.................................................. 50,069 68,854 1,045,031
Interest expense........................................................ 9,334 4,500 13,908
Other income (expense,) net............................................. (5,871) 10 10,723
-------------- ---------- ----------
Income before provision for income taxes................................ 34,864 64,364 1,041,846
Provision for income taxes.............................................. 9,500 25,745 416,738
-------------- ---------- ----------
Net income ........................................................... $ 25,364 $ 38,619 $ 625,108
-------------- ---------- ----------
-------------- ---------- ----------
Basic and diluted earnings per share.................................... $ 0.01 $ 0.01 $ 0.14
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------
AT MARCH 31, 1997 1996 1997
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................... $ 154,160 $ 221,402 $ 232,529
Total assets......................................................... 1,855,241 1,636,743 10,272,214
Total liabilities.................................................... 1,579,877 1,398,124 8,622,542
Retained earnings.................................................... 25,364 38,619 650,472
Shareholders' equity................................................. 275,364 238,619 1,649,672
</TABLE>
- ------------------------------
(1) Relates to 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."
21
<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 2,500
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 Datatec 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, and for the nine month periods ended December 31,
1996 and 1997. The Company has a limited history of operations.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997.
SALES. Sales are currently generated from the sale of components and
systems. Systems include ready-to-use computers that have been assembled and
have software already installed. Components sales consist of individual hardware
items. Net sales consists of gross sales (invoice price) less sales returns.
Sales are recognized upon product shipment. Net sales for the year ended March
31, 1997 were $25,940,203 (net of returns of $62,751) which consisted entirely
of components sales. Gross sales for the year ended March 31, 1997 were
$26,002,954. This revenue was achieved by growth of the Company's sales force
from
22
<PAGE>
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 ($323,649),
commissions ($77,411) rent expense ($49,096), bad debt expense ($50,329) and
other costs. 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.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996.
NET SALES. Gross sales for the nine months ended December 31, 1997 were
$49,617,539 compared to $17,193,211 for the Company's first nine months of
operations from inception through December 31, 1996. Net sales for the nine
months ended December 31, 1997 were $49,267,491 (net of returns of $350,048)
compared to $17,175,071 (net of returns of $18,140) for the nine months ended
December 31, 1996. This increase of approximately $32,092,420 in net sales is
attributable to growth of the Company's sales force from 4 to 8 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 $1.3 million to
$16.5 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 nine month period ending
December 31, 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
system sales of approximately $1,395,439 for the nine month period ended
December 31, 1997. Net sales to an affiliate represents sales at fair market
value made to Samax. For the nine month period ended December 31, 1997, the
Company had sales of approximately $1.39 million to Samax. At December 31, 1997,
the Company had approximately $146,500 included in trade receivables attributed
to Samax.
23
<PAGE>
COST OF PRODUCTS. Cost of products increased $30,588,662 from $16,604,294
to $47,192,956 for the nine months ended December 31, 1996 and 1997,
respectively. This increase is mainly attributable to the increase in net sales.
Cost of products represented 96.7% and 95.8% of net sales for the nine months
ended December 31, 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 nine months ended December 31, 1997 were
$2,074,535 compared to $570,777 in the nine month ended December 31, 1996. Gross
profits as a percentage of net sales were 4.2% for the nine months ended
December 31, 1997 compared to 3.3% for the nine months ended December 31, 1996.
This represents a 27% 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; Risk of Declining Product Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for nine months ended December 31, 1997 were $1,029,504
compared to $501,923 for the nine months ended December 31, 1996, the Company's
first nine months of operations.
The major components of selling, general and administrative expenses for the
periods include the following:
<TABLE>
<CAPTION>
12/31/96 12/31/97
---------- ------------
<S> <C> <C>
Payroll............................................................. $ 227,754 $ 506,676
Commissions......................................................... 52,681 168,726
Rent................................................................ 39,469 35,712
Write off of related party receivable............................... -- 100,000
Bad debt............................................................ 17,000 56,310
Other (under 5%).................................................... 165,019 162,080
---------- ------------
Total............................................................. $ 501,923 $ 1,029,504
---------- ------------
---------- ------------
</TABLE>
The increase of $527,581 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 $146,300 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 expenses
(excluding the Receivable Write-Off of $100,000) as a percentage of net sales
decreased by 34.5% from 2.9% for nine months ended December 31, 1996 to 1.9% for
nine months ended December 31, 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 all its fixed and variable cost
structure to achieve optimum operational performance. See "Certain Transactions"
and Note 7 to the Financial Statements.
24
<PAGE>
NET INCOME
Net income for the nine-month period ended December 31, 1996 was $38,619
compared to $625,108 for the nine-month period ended December 31, 1997. The
increase of $586,489 is mainly attributable to an increase of net sales of
$32,092,420 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
February 2, 1998, 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 short term capital needs for the next twelve (12) months. The Company
believes that if currently expected growth rates are achieved the Company may
require additional financing commencing in twelve to eighteen months from the
time of the Offering. The Company would seek to obtain additional funding
through additional vendor credit, expanded lines of credit and other sources.
Although the Company believes that it will be able to obtain sufficient
financing, no assurance can be given that such financing will be available. See
"Risk Factors--Possible Additional Financing Required."
On December 23, 1997, the Company completed the Bridge Financing consisting
of the sale of 20 units, each comprised of: (i) an unsecured promissory 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 Bridge Warrants of the Company, each 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 Bridge Warrants were issued. The Company repaid $250,000 of
the principal amount of the CASI Note and $50,000 of the Datatec 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 Datatec Note using 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 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.
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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. In
December 1996, the Company entered the system configuration business. The
Company intends to build upon vendor and customer relationships in the Computer
Products and system configuration business 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. See "--ACSA Growth Strategy--THE ACSA SOLUTION". The Company has
begun initial construction of the first of its ACSA Solution production lines
("ACSA Centers") located at the Company's facility. The Company's first ACSA
center is expected to be completed and the Company is expected to commence
offering the ACSA Solution by mid-1998. 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 net sales have grown from $17,175,071 for the period from
April 2, 1996 (inception) through December 31, 1996, and $25,940,203 for the
Company's first fiscal year ending March 31, 1997 to $49,267,491 for the first
nine 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 3.3% and 3.1% of net sales in the nine month period ending
December 31, 1996 and the year ended March 31, 1997, respectively, to 4.2% for
the nine month period ending December 31, 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
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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 January 6, 1998, the Company changed its name to
Cumetrix Data Systems Corp. 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 97.2% of net sales in
the fiscal year ended March 31, 1997 and the nine months ended December 31,
1997, respectively, from its Computer Product distribution and procurement
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The remainder of the Company's revenues in each period
were derived primarily from system assembly and sale. The Company's net sales
have grown from approximately $17,175,000, to approximately $49,267,500 for the
nine months ended December 31, 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 3.3% and 3.1% of net sales in the nine month period ended
December 31, 1996 and the fiscal year ended March 31, 1997, respectively, to
4.2% for the nine month period ended December 31, 1997 due to a
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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.
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 no customer accounted for more than 10% of net sales. During the nine
months ended December 31, 1997, Alpha Systems Inc. accounted for 10.9% of net
sales. During fiscal 1997, the Company had net sales of approximately $532,800
to Samax, a company owned by the mother of Mr. Max Toghraie. For the nine month
period ended December 31, 1997, the Company had sales of approximately $1.39
million to Samax. At December 31, 1997, the Company had approximately $146,500
in trade receivables attributed to Samax. During the three month period
commencing September 30, 1997 and ending December 31, 1997, the Company had no
sales to Samax. Although the Company is not currently making sales to Samax, if
the Company determines that resuming sales to Samax in the future would be in
the best interests of the Company, any such future transactions would be
negotiated on an arms-length basis and on terms and conditions at least as
favorable to the Company as those which would be obtained from competitors of
Samax. See "Certain Transactions." The cessation of business with Samax has not
had a material adverse effect on the Company's business, and the Company doesn't
believe that the loss of Alpha Systems, Inc. or any other individual customer
would have a material adverse effect on the Company's business.
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 December 31, 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 January 31, 1998, the Company employed eight 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 nine months ended December
31, 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 nine months ended December 31, 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,
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Alpha Computers, DTK Computer, Tech Data Computer, Merisel Incorporated and
Toshiba Corporation. For the nine months ended December 31, 1997, DSS, a master
distributor of hard drives to the Company, accounted for 58.3%, of the Company's
purchases. For the nine month period ended December 31, 1997, the Company had
purchases of approximately $598,000 from Samax. Although the Company is not
currently making purchases from Samax, if the Company determines that resuming
purchases from Samax in the future would be in the best interests of the
Company, any such future transactions would be negotiated on an arms-length
basis and on terms and conditions at least as favorable to the Company as those
which would be obtained from competitors of Samax. See "Certain Transactions."
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--Dependence Upon Relationships 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.
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. These arrangements with respect
to purchases of excess inventory from vendors are informal, are not subject to
any written agreements and may be discontinued by the Company at the Company's
discretion. See "Risk Factors--Availability of Components," "--Foreign Trade
Regulation," and "--Dependence Upon Relationships with Vendors."
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.
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The Company is leanly staffed and focuses on rapid inventory turns. The
Company's warehouse is 4,000 square feet and, as of December 31, 1997, employed
3 people. In the nine months ended December 31, 1997, the Company shipped $47.2
million of Computer Products, turning inventory at an annualized rate of
approximately 41 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 February 2,
1998, 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 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's first ACSA Center is
expected to be completed and the Company is expected to commence offering the
ACSA Solution by mid-1998.
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. In addition, recent economic and political
developments in Asia, may lead the Company to defer establishment of joint
ventures or partnerships with such potential partners. See "Risk Factors--Asian
Market Instability."
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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:
- VARs and SIs
VARs and SIs are the primary distribution channel for new PCs. An IDC
study cited in EDP Weekly on December 15, 1997 stated that the overall PC
market in the U.S. is expected to grow in 1998 by 17%, "outpacing the
worldwide rate of 13.5%." In addition, Computer Reseller News reported in
June of 1996 that the top ten domestic SIs generated revenues of over $40
billion dollars in 1995. VARs and SIs represent a major focus of the
Company's ongoing program in targeting potential configuration services
customers through its existing distribution and procurement operations.
- 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 and often provide these
services at a loss. The Company intends to offer these vendors a more
profitable, higher quality alternative.
- International Emerging Markets
ASIA/PACIFIC REGIONAL MARKETS. A recent IDC study found that almost 17
million systems were shipped in the Asia/Pacific Region in 1996, "which
allowed the region to substantially outpace worldwide PC market growth by
16%." A January 27, 1998 report in Newsbytes, citing an IDC study, found
that, although a slowdown occurred in Southeast Asia in 1997, "three of
the five largest regional markets, China, India and Australia, buoyed the
region's growth." China, for example, "chalked up a 43% year-on-year
growth rate in the fourth quarter." EDP Weekly reported on December 15,
1997, however, that IDC had reduced its sales forecast for PC demand in
1998 in the region from 12.93 million to 12.36 million units. Recent
economic and political developments in Asia, however, may slow or
eliminate this growth potential. See "Risk Factors--Asian Market
Instability."
LATIN AMERICAN MARKETS. A recent study by Software Publishers Association
found that unit sales in Latin America grew by 78% in 1996, with growth in
the fourth quarter exceeding 110%. 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. The strongest country in
both studies was Brazil, which accounted for approximately 35%-40% of all
unit sales.
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
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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, based on case studies published
by CASI, 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
- 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
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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 in mid-1998. See "Facilities," and "Risk Factors-- Construction of
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
compete favorably with respect to any of these factors, the Company's business
and operating results would be adversely affected.
CASI and/or Datatec 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 Datatec is currently competing in
the Company's markets, there can be no assurance that Datatec 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
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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 January 31, 1998, the Company had 23 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 began
to move its operations into its new premises on February 1, 1998. The Company
believes the increased space will more adequately meet the Company's 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 in mid-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--Construction of First ACSA Center."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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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
Carl L. Wood.......................................... 45 Chief Financial Officer
David Tobey........................................... 37 Director
Nancy Hundt........................................... 29 Director
Philip J. Alford...................................... 44 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 in April of 1996. 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.
Mr. Toghraie is a member of the Audit Committee of the Board of Directors.
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 in April of 1996. 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 in April of 1996. 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.
CARL L. WOOD, CHIEF FINANCIAL OFFICER. Mr. Wood has served as the Chief
Financial Officer since February 6, 1998. From September 1996 to June 1997, Mr.
Wood served as Corporate Controller and Director of Management Information
Systems at Murad, Inc. in El Segundo, California, a cosmetic retail business
specializing in high-end skin care products. From 1989 to September 1996, Mr.
Wood was Corporate Controller and Vice President, Finance, and subsequently the
Chief Financial Officer of 99 Cents Only Stores in Los Angeles, California, a
deep discount retailer of general merchandise, which is listed on the New York
Stock Exchange.
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 significant stockholder of CASI,
a subsidiary of Datatec Systems, Inc. (formerly known as Glasgal Communications,
Inc.), 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
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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 in April of 1996. 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 a consultant to the optical industry and has served over the last
five years as Chief Operating Officer of Academy Optical, Inc. Ms. Hundt is a
member of the Audit Committee of the Board of Directors.
PHILIP J. ALFORD, DIRECTOR. Mr. Alford has served as a director of the
Company since February, 1998. Mr. Alford is the co-founder and Chairman and
acting Chief Financial Officer of Verix Software, a position he has held since
July, 1997. Prior to joining Verix Software, a business software developer, Mr.
Alford was employed by Tekelec, a publicly traded company, from 1985 to December
1996, where he served primarily as its Chief Financial Officer and from 1994 to
1996 as its President, Chief Executive Officer and Director. Tekelec is a
supplier of diagnostic and switching systems to the communications industry.
After leaving Tekelec, Mr. Alford served as an independent management
consultant. Mr. Alford is a member of the Audit Committee of the Board of
Directors.
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. If, following consummation of the Offering the
Company's has shares listed on the New York Stock Exchange or the American Stock
Exchange or designated for trading as national market securities on The Nasdaq
National Market System, 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. If the Board
of Directors is divided into two classes, at each annual meeting of
shareholders, successors of the class of directors whose term expires at that
annual meeting would 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>
SUMMARY COMPENSATION TABLE
------------------------------------------------------------
ANNUAL COMPENSATION
FISCAL YEAR ---------------------------------------------
ENDED OTHER ANNUAL
NAME AND PRINCIPAL POSITION MARCH 31, SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------------------- ------------- --------- ----------- ---------------------
<S> <C> <C> <C> <C>
Tommy Tang(2), President........................................ 1997 $ 132,000 $ 0 $ 0
Sherry Haynes(3), Vice President-Operations..................... 1997 $ 70,000 $ 0 $ 0
</TABLE>
- --------------------------
(1) The named executive officers did not receive any annual compensation not
properly categorized as salary or bonus, including 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."
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BOARD COMMITTEES
AUDIT COMMITTEE. Mr. Toghraie, Ms. Hundt and Mr. Alford are members of the
Audit Committee of the Board of Directors. The Audit Committee's functions
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."
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 $40,000 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.
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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 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,
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(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.
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.
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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 Datatec Systems, Inc., formerly known as 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 Datatec
(the "Datatec 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 Datatec 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 Datatec Loan, the Company executed a promissory note
(the "Datatec Note") in favor of the officer of Datatec who made the Datatec
Loan. The Datatec 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 of the $100,000 due to be paid on
February 28, 1998. The Datatec 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, 1998 and fails to pay the
Datatec Note in full by that date, or, the Datatec Note is not paid in full on
or prior to February 28, 1998, in any event, the Datatec 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
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$20,000,000 or the 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 $804,300 from Samax, a company owned by the mother of
Mr. Max Toghraie. For the nine month period ended December 31, 1997, the Company
had sales of approximately $1.39 million to and purchases of approximately
$598,200 from Samax. At December 31, 1997, the Company had approximately
$146,500 and $0 included in trade receivables and accounts payable,
respectively, attributed to Samax. Although the Company is not currently making
purchases from or sales to Samax, if the Company determines that resuming
purchases from or sales to Samax in the future would be in the best interests of
the Company, any such future transactions would be negotiated on an arms-length
basis and on terms and conditions at least as favorable to the Company as those
which would be obtained from competitors of Samax.
The Company purchased 200,000 shares and 100,000 warrants in Evolutions,
Inc. ("Evolutions") for $100,000 which, at March 31, 1997, was personally
guaranteed by Max Toghraie. This guarantee was recorded as a receivable from a
director, 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.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of February 1, 1998, 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) .................................................................. 49,237 1.03% *
2062 Sapra St.
Thousand Oaks, CA 91362
James Ung and Mei Yang(3) ........................................................ 2,241,355 46.70% 31.57%
2010 E. Roundtree Court
Walnut, CA 91789
Nancy Hundt(4) ................................................................... 2,194,152 46.17% 31.11%
450 Belcaro
Agoura, CA 91301
Carl Wood(5) ..................................................................... 0 * *
1105 Harkness Lane
Redondo Beach, CA 90278
Philip Alford(6) ................................................................. 0 * *
746 West Adams Blvd Suite 109
Los Angeles, CA 90089
David Tobey(7) ................................................................... 5,994 * *
1545 Shadowtree Ct.
Colorado Springs, CO 80921
All Executive Officers and Directors as a group (7 persons)(8).................... 4,490,738 94.27% 62.75%
</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
February 1, 1998.
(3) Mr. Ung and Ms. Yang are married. Includes 38,533 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 February 1, 1998,
and 10,704 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 February 1, 1998, 1,096,059 shares owned by Mr. Ung, and
1,096,059 shares owned by Ms. Yang.
(4) Includes 2,034 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 February 1, 1998.
(5) Mr. Wood was granted options to purchase 40,000 shares of Common Stock under
the Stock Option Plan on February 6, 1998, exercisable at $4.50 per share,
none of which were exercisable within 60 days of February 1, 1998.
(6) Mr. Alford was granted options to purchase 36,000 shares under the Stock
Option Plan on February 2, 1998, exercisable at $4.50 per share, none of
which were exercisable within 60 days of February 1, 1998.
(7) 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
February 1, 1998.
(8) Includes an aggregate of 106,502 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 February 1, 1998.
43
<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 February 2, 1998, 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
On December 23, 1997, the Company completed the Bridge Financing, which
included the sale of an aggregate of 100,000 Bridge Warrants for the purchase of
one share of Common Stock per warrant at an exercise price of $3.00 per share.
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 price 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.
44
<PAGE>
REGISTRATION RIGHTS
The 300,000 shares of Common Stock issued in the Bridge Financing and the
100,000 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
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering the Company will have outstanding 7,050,000
shares of Common Stock (7,395,000 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 Common
Stock is quoted on The Nasdaq SmallCap Market or The Nasdaq National Market and
the average closing bid price of the Common Stock equals or exceeds $10.00 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.
45
<PAGE>
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 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 345,000 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 345,000 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 Common Stock is
quoted on The Nasdaq SmallCap Market or The Nasdaq National Market and the
average closing bid price of the Common Stock equals or exceeds $10.00 per share
(subject
46
<PAGE>
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 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 $23.00, five (5) year Underwriter's Warrants (the
"Underwriter's Warrants") to purchase 230,000 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 equal to 165% of the public offering price 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 exercise 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.
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.
47
<PAGE>
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 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 located at Seven World Trade Center, 13th Floor, New York, New York,
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661-2511.
The Securities and Exchange Commission also 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.
48
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of March 31, 1997 and December 31, 1997 (unaudited)...................................... F-3
Statements of operations for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 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 nine month period ended December 31, 1997 (unaudited)....................................... F-5
Statements of Cash Flows for the period from April 2, 1996 (inception) to March 31, 1997 and the nine month
periods ended December 31, 1996 and 1997 (unaudited)..................................................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cumetrix Data Systems Corp.:
We have audited the accompanying balance sheet of Cumetrix Data Systems
Corp. (a California corporation--formerly Data Net International, Inc.) as of
March 31, 1997, and the related statements of operations, 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 Data Systems Corp.
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 DATA SYSTEMS CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
MARCH 31, -------------
ASSETS 1997
----------- (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................................ $ 479,796 $ 2,962,821
Trade receivables, net of allowance for doubtful accounts of $2,000 at March 31,
1997 and $39,800 at December 31, 1997............................................. 853,090 3,081,217
Receivables from related party...................................................... 39,700 --
Inventories......................................................................... 331,559 2,723,275
Deferred taxes...................................................................... 12,000 53,788
Prepaid expenses.................................................................... 5,318 24,148
----------- -------------
Total current assets............................................................ 1,721,463 8,845,249
----------- -------------
FIXED ASSETS, net 32,278 38,115
----------- -------------
OTHER ASSETS:
Capitalized purchased software costs................................................ -- 1,100,000
Receivable from director............................................................ 100,000 --
Other............................................................................... 1,500 288,850
----------- -------------
Total Assets.................................................................... $ 1,855,241 $10,272,214
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $1,455,139 $6,713,957
Accrued expenses................................................... 87,274 279,924
Income taxes payable............................................... 21,500 415,213
Current portion of long-term debt.................................. 3,390 1,203,626
--------- -----------
Total current liabilities...................................... 1,567,303 8,612,720
--------- -----------
LONG-TERM DEBT, net of current portion............................... 12,574 9,822
--------- -----------
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 4,750,000
at December 31, 1997............................................. 250,000 999,200
Retained earnings.................................................. 25,364 650,472
--------- -----------
Total shareholders' equity..................................... 275,364 1,649,672
--------- -----------
Total liabilities and shareholders' equity..................... $1,855,241 1$0,272,214
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................................... $ 25,940,203 $ 17,175,071 $ 49,267,491
COST OF PRODUCTS................................................ 25,139,001 16,604,294 47,192,956
----------------- ------------- -------------
Gross profit................................................ 801,202 570,777 2,074,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................... 751,133 501,923 1,029,504
----------------- ------------- -------------
Income from operations...................................... 50,069 68,854 1,045,031
INTEREST EXPENSE................................................ 9,334 4,500 13,908
OTHER INCOME (EXPENSE), net..................................... (5,871) 10 10,723
----------------- ------------- -------------
Income before provision for income taxes.................... 34,864 64,364 1,041,846
PROVISION FOR INCOME TAXES...................................... 9,500 25,745 416,738
----------------- ------------- -------------
NET INCOME...................................................... $ 25,364 $ 38,619 $ 625,108
----------------- ------------- -------------
----------------- ------------- -------------
BASIC AND DILUTED EARNINGS PER SHARE............................ $ 0.01 $ 0.01 $ 0.14
----------------- ------------- -------------
----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
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, net of offering expenses of $150,800
(unaudited)............................................... 365,764 745,500 -- 745,500
Issuance of warrants in connection with Private Placement,
net of offering expenses of $1,300........................ -- 3,700 -- 3,700
Net income (unaudited)...................................... -- -- 625,108 625,108
---------- ---------- ---------- ------------
Balance, December 31, 1997 (unaudited)........................ 4,750,000 $ 999,200 $ 650,472 $ 1,649,672
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE-MONTH PERIODS ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ---------------------------
TO MARCH 31, 1997 1996 1997
----------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 25,364 $ 38,619 $ 625,108
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,634 5,528 2,847
Amortization of deferred financing costs.................. -- -- 12,100
Provision for doubtful accounts........................... 50,329 17,000 56,310
Loss on receivable from director.......................... -- -- 100,000
Changes in assets and liabilities:
Trade receivables......................................... (903,419) (790,284) (2,284,437)
Inventories............................................... (331,559) (313,700) (2,391,716)
Deferred taxes............................................ (12,000) (10,000) (41,788)
Prepaid expenses.......................................... (5,318) (5,318) (18,830)
Other..................................................... (1,500) (60,000) (129,250)
Accounts payable.......................................... 1,455,139 1,313,967 5,258,818
Accrued expenses.......................................... 87,274 31,647 22,450
Income taxes payable...................................... 21,500 35,745 393,713
----------------- ------------ -------------
Net cash provided by operating activities............... 392,444 263,204 1,605,325
----------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets....................................... (38,912) (36,192) (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 investing activities................... (178,612) (136,192) (118,984)
----------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings................................... 18,820 18,820 --
Payments on bank borrowings..................................... (2,856) (2,055) (2,516)
Proceeds from Notes............................................. -- -- 550,000
Payments on Notes............................................... -- -- (300,000)
Proceeds from stock issuance.................................... 250,000 200,000 749,200
----------------- ------------ -------------
Net cash provided by financing activities............... 265,964 216,765 996,684
----------------- ------------ -------------
NET INCREASE IN CASH.............................................. 479,796 343,777 2,483,025
CASH, beginning of period......................................... -- -- 479,796
----------------- ------------ -------------
CASH, end of period............................................... $ 479,796 $ 343,777 $ 2,962,821
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(INFORMATION AS OF DECEMBER 31, 1997 AND 1996 IS UNAUDITED)
1. LINE OF BUSINESS
Cumetrix Data Systems Corp., 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. DEFERRED OFFERING COSTS
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. Offering costs of $166,000 are
capitalized as of December 31, 1997 and included in other long-term assets.
F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
f. DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs
and amortized over the terms of the notes using the effective interest rate
method. In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. Debt issuance costs of $109,200, net amortization of $12,100, have
been capitalized as of December 31, 1997 and included in other long-term assets.
g. CAPITALIZED PURCHASED SOFTWARE COSTS
Capitalized purchased software costs represents the license fee paid to
Computer-Aided Software Integration, Inc. (CASI) for certain configuration
software (see Note 9). The Company will amortize these costs on a straight-line
basis over the estimated life of the configuration software (currently estimated
to be between 3-5 years) commencing at the date that the configuration software
is first placed into service.
h. 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 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>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash paid for interest........................................ $ 1,431 $ 4,500 $ 1,808
Cash paid for income taxes.................................... $ -- $ -- $ 13,000
</TABLE>
i. 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.
j. 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.
k. REVENUE RECOGNITION
Net sales are currently generated from the sales of components and systems.
Systems include ready-to-use computers that have been assembled and have
software already installed. Components sales consist of individual hardware
items.
Revenue is recorded at the time of shipment net of allowances for estimated
sales returns.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RISK FACTORS (CONTINUED)
l. UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The unaudited financial statements for the nine-month periods ended December
31, 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.
m. 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.
n. 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 was 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.
F-9
<PAGE>
o. INCOME PER COMMON SHARE
Income 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 provisions of SFAS No.128.
A summary of the shares used to compute earnings per share is as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
FOR THE PERIOD ENDED
FROM APRIL 2, DECEMBER 31,
1996 (INCEPTION) ----------------------
TO MARCH 31, 1997 1996 1997
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Weighted average common shares used to compute
basic earnings per share....................... 3,310,574 3,132,569 4,477,590
Effect of Dilutive Securities:
Stock options................................ -- -- 56,826
Warrants..................................... -- -- 21,568
----------------- ---------- ----------
Weighted average common shares used to compute
diluted earnings per share 3,310,574 3,132,569 4,555,984
----------------- ---------- ----------
----------------- ---------- ----------
</TABLE>
The adoption of SFAS No. 128 did not have any impact on basic or diluted
earnings per share for the periods from April 2, 1996 (inception) to March 31,
1997 or the nine-month period ended December 31, 1997.
p. RISK FACTORS
UNCERTAINTY OF COMMERCIALIZATION OF THE ACSA SOLUTION--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 the 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. 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.
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
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
F-10
<PAGE>
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
----------- DECEMBER 31,
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) (9,481)
----------- ------------
$ 32,278 $ 38,115
----------- ------------
----------- ------------
</TABLE>
4. INCOME TAXES
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
MARCH 31,
1997
------------ NINE-MONTH
PERIOD ENDED
DECEMBER 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal........................................................ $ 14,500 $ 389,747
State.......................................................... 7,000 68,779
Deferred:
Federal........................................................ (8,700) (35,520)
State.......................................................... (3,300) (6,268)
------------ -------------
Provision for income taxes....................................... $ 9,500 $ 416,738
------------ -------------
------------ -------------
</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
------------ DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Depreciation and amortization.................................... $ (434) $ (4,195)
Reserves......................................................... 2,408 32,623
Accrued liabilities.............................................. 4,006 5,299
Unicap........................................................... 6,020 20,061
------------ ------------
$ 12,000 $ 53,788
------------ ------------
------------ ------------
</TABLE>
F-11
<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>
NINE-MONTH
PERIODS ENDED
DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Federal income tax provision at the statutory rate........ $ 11,854 $ 21,884 $ 354,228
State taxes, net of federal benefit....................... 2,092 3,861 62,510
Other items, net.......................................... (4,446) -- --
----------- ---------- ----------
Provision for income taxes................................ $ 9,500 $ 25,745 $ 416,738
----------- ---------- ----------
----------- ---------- ----------
</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.
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>
F-12
<PAGE>
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 December 31, 1997, the
Company had a payable to Finova Capital Corporation of approximately $3,400,460
included in accounts payable.
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
RELATED PARTY TRANSACTIONS
For the nine-month period ended December 31, 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 December 31, 1997, the Company had
$146,500 and $0 included in trade receivables and accounts payable,
respectively, from this related party.
CONCENTRATION OF RISK
During the nine-month period ended December 31, 1997, one vendor accounted
for 58.3 percent of purchases. During the nine-month period ended December 31,
1997, one customer accounted for 10.9 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
Datatec Systems, Inc. (Datatec), formerly known as Glasgal Communications, Inc.
A director of the Company is also the founder, president, C.E.O., and a
principal shareholder of CASI. 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 Datatec (Datatec
Note) with interest at 10 percent. The Datatec Note provides
F-13
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
that the Company is obligated to pay $50,000 (amount paid prior to December 31,
1997) and $100,000 on or before 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 of the $100,000 due to be paid on
February 28, 1998. In the event that the Company completes an IPO prior to
February 28, 1998 and fails to pay the Datatec Note in full by that date, or,
the Datatec Note is not paid in full on or prior to February 28, 1998, in any
event, the Datatec 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 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. The CASI note is due
in installments of $250,000 (paid prior to December 31, 1997) and $700,000 due
on or before February 28, 1998, respectively. The aggregate principal balance on
these Notes of $800,000 is included in current portion of long-term debt in the
December 31, 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 155,902 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.
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, December 31, 1997........................................... 307,717 $ 2.70 $ 0.72 $ 830,836
--------- ----- ----- ----------
--------- ----- ----- ----------
</TABLE>
F-14
<PAGE>
9. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED) (CONTINUED)
Information about the Company's options outstanding at December 31, 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 9.50 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 December 31, 1997, options for 93,721 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>
NINE-MONTH PERIODS
ENDED
DECEMBER 31, 1997
-----------------------
AS REPORTED PRO FORMA
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net income..................................................................... $ 625,108 $ 582,672
Basic and diluted earnings per share........................................... $ 0.14 $ 0.13
</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 $740,000. 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 Datatec Note. In connection with the private placement the Placement Agent
and the Company's legal counsel received 35,000 warrants and 45,000 warrants,
respectively. The warrants are excercisable at $3.00 per share. The Placement
Agent Warrants will be cancelled prior to an initial public offering (IPO) in
the event the IPO occurs within 12 months.
F-15
<PAGE>
Back Inside Cover Page
[Graphic depicting schematically: File & Print Services, Client Server
Applications, Workstation Setup, and Connectivity Devices]
Caption: The ACSA solution will enable automated custom software and hardware
configuration of computers at the point of assembly to permit operation with
each individual end user's specific network and software applications including
file and print services, workstation applications and communication devices.
[Photo of motherboard]
[Caption: The Company assembles custom systems from individual components
such as 'motherboards.']
Collage of Products sold by the Company.
No Caption
<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........................ 17
Use of Proceeds................................ 18
Dividend Policy................................ 19
Dilution....................................... 19
Capitalization................................. 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 27
Management..................................... 36
Certain Transactions........................... 41
Principal Shareholders......................... 43
Description of Capital Stock................... 44
Shares Eligible for Future Sale................ 45
Underwriting................................... 46
Legal Matters.................................. 48
Experts........................................ 48
Additional Information......................... 48
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.
[LOGO]
2,300,000 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........................... $ 4,300.00
NASD filing fee................................................................ 1,535.00
Nasdaq Listing fee............................................................. 10,000.00
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
Underwriter's expenses......................................................... 345,000.00
Printing; stock certificates................................................... 100,000.00
Transfer agent and registrar fees.............................................. 2,500.00
Directors and Officers' Insurance.............................................. 50,000.00
Miscellaneous.................................................................. 38,665.00
-------------
Total...................................................................... $ 802,000.00
-------------
-------------
</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.
On November 26, 1997, the Company issued warrants to purchase 35,000 shares
of Common Stock to Joseph Stevens & Company, Inc. (the "Placement Agent
Warrants"). The Placement Agent's Warrants were sold for a nominal purchase
price of $3.50, or $.0001 per warrant, and are exercisable at $3.00 per share
commencing November 26, 1998. The Placement Agent's Warrants will be cancelled
prior to the Offering. In December 1997, the Company issued warrants to purchase
45,000 shares of common stock of the Company to Troop Meisinger Steuber &
Pasich, LLP. The warrants issued to Troop Meisinger Steuber and Pasich, LLP were
issued for nominal consideration of $45.00 and for legal services. These
warrants are exercisable for four years at an exercise price of $3.00 per share.
Each of Joseph Stevens & Company, Inc. and 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
II-2
<PAGE>
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 and
Rule 152 of Regulation D) as a transaction not involving any public offering.
On December 23, 1997, prior to the filing of the Registration Statement with
respect to the Offering, 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"). Prior to filing the Registration Statement with respect to
the Offering, the purchasers in the Bridge Financing had entered into binding
agreements for the purchase of the Units. The obligations of the purchasers were
not subject to any conditions within the control of the purchasers or any right
of renegotiation. Joseph Stevens & Company, 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 and Rule 152 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
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
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, as filed on December 22, 1997.(+)
3.2.1 Certificate of Amendment of the Articles of Incorporation, as filed on January 6, 1998.(+)
3.3 Amended and Restated Bylaws of Registrant.(+)
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 the Company.
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 for reference purposes October 28, 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 Warrant Agreement, dated December 23, 1997, between the Company and Troop Meisinger Steuber & Pasich,
LLP.(+)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its Opinion filed as Exhibit 5.1
herewith)(+)
27 Financial Data Schedule.(+)
99.1 Consent of Carl L. Wood.(+)
</TABLE>
- ------------------------
* To be filed by Amendment.
+ Previously filed.
++ Specified portions of this Exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for an order granting confidential treatment pursuant to Rule 406 of
the General Rules and Regulations under the Securities Act of 1933.
II-4
<PAGE>
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 Amendment No. 3 to 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 February
23, 1998.
<TABLE>
<S> <C> <C>
CUMETRIX DATA SYSTEMS CORP.
By: /s/ MAX TOGHRAIE
-----------------------------------------
Max Toghraie
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Carl Wood 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 Amendment No. 3 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, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MAX TOGHRAIE
- ------------------------------ Chief Executive Officer February 23, 1998
Max Toghraie and Director
/s/ JAMES UNG
- ------------------------------ President and Director February 23, 1998
James Ung
/s/ MEI YANG
- ------------------------------ Secretary, Treasurer February 23, 1998
Mei Yang and Director
Chief Financial Officer
/s/ CARL WOOD and
- ------------------------------ Principal Accounting February 23, 1998
Carl Wood Officer
*
- ------------------------------ Director February 23, 1998
Nancy Hundt
*
- ------------------------------ Director February 23, 1998
David Tobey
*
- ------------------------------ Director February 23, 1998
Philip J. Alford
*By: /s/ MAX TOGHRAIE
-------------------------
Max Toghraie February 23, 1998
ATTORNEY-IN-FACT
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<S> <C> <C>
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, as filed on December 22, 1997.(+)
3.2.1 Certificate of Amendment to Articles of Incorporation, as filed on January 6, 1998(+)
3.3 Amended and Restated Bylaws of Registrant.(+)
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 the
Company.
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 for reference purposes October 28, 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 Warrant Agreement, dated December 23, 1997, between the Company and Troop Meisinger Steuber &
Pasich, LLP.(+)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its Opinion filed as Exhibit 5.1
herewith).(+)
27 Financial Data Schedule.(+)
99.1 Consent of Carl L. Wood.(+)
</TABLE>
- ------------------------
* To be filed by Amendment.
+ Previously filed.
++ Specified portions of this Exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for an order granting confidential treatment pursuant to Rule 406 of
the General Rules and Regulations under the Securities Act of 1933.
<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.
1
<PAGE>
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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<PAGE>
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.
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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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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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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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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 /s/ [LANDLORD]
-------------------------------
"Sublessor" (Corporate Seal)
Executed at DataNet International,
---------------------- a California Corporation.
on
-------------------------------
address
--------------------------
- --------------------------------- By /s/ JEFF TOGHRAIE
-------------------------------
By
-------------------------------
"Master Lessor" (Corporate Seal)
Executed at
---------------------- -------------------------------
on -------------------------------
------------------------------- -------------------------------
address -------------------------------
-------------------------- "Guarantors"
- ---------------------------------
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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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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>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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. Caci By: /s/ James Ung
--------------------- ---------------------
Name: James M. Caci 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. Caci
---------------------------------
Name: James M. Caci
Title: CFO
Address: 20C Commerce 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 C
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
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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.
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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:
---------------------------------
Name: Max Toghraie
Title: Chief Executive Officer
By: RALPH GLASGAL
Signed:
--------------------------------
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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.
13
<PAGE>
CASI: RESELLER:
COMPUTER-AIDED SOFTWARE DATANET INTERNATIONAL, INC.
INTEGRATION, INC., a Delaware a California corporation
corporation
By: /s/ James M. Caci By: /s/ James Ung
Name: James M. Caci 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
14
<PAGE>
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
15
<PAGE>
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>
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>
[EXHIBIT A]
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>
[EXHIBIT B]
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>
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
(DO NOT USE THIS FORM MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only
October 28, 1997 is made by and between Fortune Dynamic, Inc., a California
Corporation ("LESSOR") and Data Net International, Inc., a California
Corporation (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 957 Lawson Street, located in the County of Los Angeles, State of
California, and generally described as (describe briefly the nature of the
property and, if applicable, the "PROJECT," if the property is located within a
Project) A free-standing concrete tilt-up building with approximately 21,900
s.f. of space.
1.3 TERM: Three (3) years and 0 months ("ORIGINAL TERM") commencing
February 1, 1998 ("COMMENCEMENT DATE") and ending January 31, 2001 ("EXPIRATION
DATE"). (See also Paragraph 3).
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also
Paragraphs 3,2 and 3.3)
1.5 BASE RENT: $11,169 per month ("BASE RENT"), payable on the First day
of each month commencing February 1998.
1.6 BASE RENT PAID UPON EXECUTION: $11,169.00 as Base Rent for the period
February 1998.
1.7 SECURITY DEPOSIT: $11,169.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: General office use, warehousing and distribution of
computer related products. (See also Paragraph 6).
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." The annual "BASE
PREMIUM" is $_____________. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
[X] DAUM Commercial Real Estate Services represents Lessor exclusively
("LESSOR'S BROKER");
[X] The Seeley Co. represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] _______________________________ represents both Lessor and Lessee ("DUAL
AGENCY").
<PAGE>
PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (See also Paragraph 37).
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 52 and Exhibits A (site plan), Exh. B
(hazardous material & ADA), all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises broom clean and free
of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("START DATE"), and warrants that the existing electrical,
plumbing, fire sprinkler, lighting, healing, ventilating and air conditioning
systems ("HVAC"), loading doors, if any, and all other such elements of the
building, in the Premises, other than those constructed by Lessee, shall be
in good operating condition on said date and that the surface and structural
elements of the roof, bearing walls and foundation of any buildings on the
Premises (the "BUILDING") shall be free of material defects. If a
non-compliance with said warranty exists as of the Start Date, Lessor shall,
except as otherwise provided in this Lease, promptly after receipt of written
notice from Lessee setting forth with specificity the nature and extent of
such non-compliance, rectify same at Lessor's expense. If, after the Start
Date, Lessee does not give Lessor written notice of any non-compliance with
this warranty within (i) six (6) months as to the HVAC systems or (ii) thirty
(30) days as to the remaining systems and other elements of the Building,
correction of such non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense, except for the roof, foundations, and bearing
walls which are handled as provided in paragraph 7.
2.3 COMPLIANCE. Lessor warrants that the Improvements on the Premises
comply with all applicable laws, covenants or restrictions of record,
building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in
effect on the Start Date. Said warranty does not apply to the use to which
Lessee will put the Premises or to any Alterations or Utility Installations
(as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee
is responsible for determining whether or not the zoning is appropriate for
Lessee's intended use, and acknowledges that past uses of the Premises may no
longer be allowed. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six
(6) months following the Start Date, correction of that non-compliance shall
2
<PAGE>
be the obligation of Lessee at Lessee's sole cost and expense. If the
Applicable Requirements are hereafter changed (as opposed to being in
existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so
as to require during the term of this Lease the construction of an addition
to or an alteration of the Building, the remediation of any Hazardous
Substance, or the reinforcement or other physical modification of the
Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost
of such work as follows:
Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall
be fully responsible for the cost thereof, provided, however that if such
Capital Expenditure is required during the last two (2) years of this Lease
and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead
terminate this Lease unless Lessor notifies Lessee. In writing, within ten
(10) days after receipt of Lessee's termination notice that Lessor has
elected to pay the difference between the actual cost thereof and the amount
equal to six (6) months' Base Rent. If Lessee elects termination, Lessee
shall immediately cease the use of the Premises which requires such Capital
Expenditure and deliver to Lessor written notice specifying a termination
date at least ninety (90) days thereafter. Such termination date shall,
however, in no event be earlier than the last day that Lessee could legally
utilize the Premises without commencing such Capital Expenditure.
If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation
to pay for such costs pursuant to the provisions of Paragraph 7.1(c);
provided, however, that if such Capital Expenditure is required during the
last two years of this Lease or if Lessor reasonably determines that it is
not economically feasible to pay its share thereof, Lessor shall have the
option to terminate this Lease upon ninety (90) days prior written notice to
Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after
receipt of Lessor's termination notice that Lessee will pay for such Capital
Expenditure. If Lessor does not elect to terminate, and fails to tender its
share of any such Capital Expenditure, Lessee may advance such funds and
deduct same, with Interest, from Rent until Lessor's share of such costs have
been fully paid. If Lessee is unable to finance Lessor's share, or if the
balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee shall have
the right to terminate this Lease upon thirty (30) days written notice to
Lessor.
Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered
by Lessee as a result of an actual or proposed change in use, change in
intensity of use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's intended use;
(b)
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Lessee has made such investigation as it deems necessary with reference to
such matters and assumes all responsibility therefor as the same relate to
its occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor
any Broker has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease. In addition,
Lessor acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises; and (b) it is Lessor's sole responsibility to
investigate the financial capability and/or suitability of all proposed
tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease shall, however, be in effect during such period. Any such early
possession shall not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date, if, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within
sixty (60) days after the Commencement Date, Lessee may, at its option, by
notice in writing within ten (10) days after the end of such sixty (60) day
period, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder. If such written notice is not received by
Lessor within said ten (10) day period, Lessee's right to cancel shall
terminate. Except as otherwise provided, if possession is not tendered to
Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts or omissions of
Lessee. If possession of the Premises is not delivered within four (4)
months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending
delivery of such evidence, Lessee shall be required to perform all of its
obligations under this Lease from and after the Start Date, including the
payment of Rent, notwithstanding Lessor's election to withhold possession
pending receipt of such evidence of
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insurance. Further, if Lessee is required to perform any other conditions
prior to or concurrent with the Start Date, the Start Date shall occur but
Lessor may elect to withhold possession until such conditions are satisfied.
4 RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be
rent ("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day on
which it is due. Rent for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less
than the amount then due shall not be a waiver of Lessor's rights to the
balance of such Rent, regardless of Lessor's endorsement of any check so
stating.
5 SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage
which Lessor may suffer or incur by reason thereof. If Lessor uses or
applies all or any portion of said Security Deposit, Lessee shall within ten
(10) days after written request therefor deposit monies with Lessor
sufficient to restore said Security Deposit to the full amount required by
this Lease. If the Base Rent increases during the term of this Lease,
Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor so that the total amount of the Security Deposit shall at all
times bear the same proportion to the Increased Base Rent as the initial
Security Deposit bore to the Initial Base Rent. Should the Agreed Use be
amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase
the Security Deposit to the extent necessary, in Lessor's reasonable
judgment, to account for any increased wear and tear that the Premises may
suffer as a result thereof. If a change in control of Lessee occurs during
this Lease and following such change the financial condition of Lessee is, in
Lessor's reasonable judgment, significantly reduced, Lessee shall deposit
such additional monies with Lessor as shall be sufficient to cause the
Security Deposit to be at a commercially reasonable level based on said
change in financial condition. Lessor shall not be required to keep the
Security Deposit separate from its general accounts. Within fourteen (14)
days after the expiration or termination of this Lease, if Lessor elects to
apply the Security Deposit only to unpaid Rent, and otherwise within thirty
(30) days after the Premises have been vacated pursuant to Paragraph 7.2(c)
below, Lessor shall return that portion of the Security Deposit not used or
applied by Lessor. No part of the Security Deposit shall be considered to be
held in trust, to bear interest or to be prepayment for any monies to be paid
by Lessee under this Lease.
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6 USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for
no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably withhold or delay its consent to
any written request for modification of the Agreed Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or the mechanical or electrical systems therein, or is not significantly more
burdensome to the Premises. If Lessor elects to withhold consent, Lessor
shall within five (5) business days after such request give written
notification of same, which notice shall include an explanation of Lessor's
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety
or welfare, the environment or the Premises, (ii) regulated or monitored by
any governmental authority, or (iii) a basis for potential liability of
Lessor to any governmental agency or third party under any applicable statute
or common law theory. Hazardous Substances shall include, but not be limited
to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. Lessee shall not engage in any activity in
or on the Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely compliance (at
Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of
a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority, and/or (iii) the presence at the Premises of a
Hazardous Substance with respect to which any Applicable Requirements
requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may use any
ordinary and customary materials reasonably required to be used in the normal
course of the Agreed Use, so long as such use is in compliance with all
Applicable Requirements, is not a Reportable Use, and does not expose the
Premises or neighboring property to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may
condition its consent to any Reportable Use upon receiving such additional
assurances as Lessor reasonably deems necessary to protect itself, the
public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of
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such fact to Lessor, and provide Lessor with a copy of any report, notice,
claim or other documentation which it has concerning the presence of such
Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease,
by or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any
harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee, or any third party (provided, however,
that Lessee shall have no liability under this Lease with respect to
underground migration of any Hazardous Substance under the Premises from
adjacent properties). Lessee's obligations shall include, but not be limited
to, the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. No termination, cancellation or
release agreement entered into by Lessor and Lessee shall release Lessee from
its obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from and against any and all environmental damages,
including the cost of remediation, which existed as a result of Hazardous
Substances on the Premises prior to the Start Date or which are caused by the
gross negligence or willful misconduct of Lessor, its agents or employees.
Lessor's obligations as and when required by the Applicable Requirements,
shall include, but not be limited to, the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration
or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures
required by governmental entities having jurisdiction with respect to the
existence of Hazardous Substances on the Premises prior to the Start Date,
unless such remediation measure is required as a result of Lessee's use
(including alterations) of the Premises, in which event Lessee shall be
responsible for such payment. Lessee shall cooperate fully in any such
activities at the request of Lessor, including allowing Lessor and Lessor's
agents to have reasonable access to the Premises at reasonable times in order
to carry out Lessor's investigative and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee
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shall make the investigation and remediation thereof required by the
Applicable Requirements and this Lease shall continue in full force and
effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph
13), Lessor may, at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) the estimated cost to remediate
such condition exceeds twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater, give written notice to Lessee, within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition, of Lessor's desire to terminate this Lease as
of the date sixty (60) days following the date of such notice. In the event
Lessor elects to give a termination notice, Lessee may, within ten (10) days
thereafter give written notice to Lessor of Lessee's commitment to pay the
amount by which the costs of the remediation of such Hazardous Substance
Condition exceeds an amount equal to twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater. Lessee shall provide with said funds
or satisfactory assurance thereof within thirty (30) days following such
commitment. In such event, this Lease shall continue in full force and
effect, and Lessor shall proceed to make such remediation as soon as
reasonably possible after the required funds are available. If Lessee does
not give such notice and provide the required funds of assurance thereof
within the time provided, this Lease shall terminate as of the date specified
in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of Lessor's engineers
and/or consultants which relate in any manner to the Premises, without regard
to whether said requirements are now in effort or become effective after the
Start Date. Lessee shall, within ten (10) days after receipt of Lessor's
written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. LESSOR AND LESSOR'S "LENDER" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a contamination is found to exist or be imminent, or the
inspection is requested or ordered by a governmental authority. In such
case, Lessee shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to the
violation or contamination.
7 MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
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(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's
Obligations), 9 (Damage and Destruction), and 14 (Condemnation), Lessee
shall, at Lessee's sole expense, keep the Premises, Utility Installations,
and Alterations in good order, condition and repair (whether or not the
portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, but not
limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), ceilings, floors, windows, doors, skylights, landscaping,
driveways, parking lots, fences, signs, sidewalks and parkways located in,
on, or adjacent to the Premises. Lessee is also responsible for keeping the
roof and roof drainage clean and free of debris. Lessor shall keep the
surface and structural elements of the roof, foundations, and bearing walls
in good repair (see paragraph 7.2). Lessee, in keeping the Premises in good
order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements thereon or
a part thereof in good order, condition and state of repair. Lessee shall,
during the term of this Lease, keep the exterior appearance of the Building
in a first-class condition (including, e.g., graffiti removal) consistent
with the exterior appearance of other similar facilities of comparable age
and size in the vicinity, including, when necessary, the exterior repainting
of the building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements ("BASIC ELEMENTS"),
if any, if and when installed on the Premises: (i) HVAC equipment, (ii)
boiler, and pressure vessels, (iii) fire extinguishing systems, including
fire alarm an/or smoke detector, (iv) landscaping and irrigation systems, (v)
driveways and parking lots, (vi) clarifiers, and, (vii) basic utility feed to
the perimeter of the Building, (viii) any other equipment, if reasonably
required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of
replacing such Basic Elements, then such Basic Elements shall be replaced by
Lessor, and the cost thereof shall be prorated between the Parties and Lessee
shall only be obligated to pay each month during the remainder of the term of
this Lease, on the date on which Base Rent is due, an amount equal to the
product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of
months of the useful life of such replacement as such useful life is
specified pursuant to Federal income tax regulations or guidelines for
depreciation thereof (including interest on the unamortized balance as is
then commercially reasonable in the judgment of Lessor's accountants), with
Lessee reserving the right to prepay its obligation at any time.
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7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
8 (Damage or Destruction) and 14 (Condemnation), it is intended by the
Parties hereto that Lessor have no obligation, in any manner whatsoever, to
repair and maintain the Premises, or the equipment therein, all of which
obligations are intended to be that of the Lessee, except for the surface and
structural elements of the roof, foundations and bearing walls, the repair of
which shall be the responsibility of Lessor upon receipt of written notice
that such a repair is necessary. It is the intention of the Parties that the
terms of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises, and they expressly waive the benefit
of any statute now or hereafter in effect to the extent it is inconsistent
with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems and
signs, communication systems, lighting fixtures, HVAC equipment, plumbing,
and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean
Lessee's machinery and equipment that can be removed without doing material
damage to the Premises. The term "ALTERATIONS" shall mean any modification
of the improvements, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make any Alterations or Utility Installations to the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises
(excluding the roof)without such consent but upon notice to Lessor, as long
as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative
cost thereof during this Lease as extended does not exceed $50,000 in the
aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon Lessees" (1) acquiring al applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (ii) furnishing
Lessor with copies of both the permits and the plans and specifications prior
to commencement of the work, and (iii) compliance with all conditions of said
permits and other Applicable Requirements in a prompt and expeditious manner.
Any Alterations or Utility Installations shall be performed in a workmanlike
manner with good and sufficient materials. Lessee shall promptly upon
completion furnish Lessor with as-built plans and specifications. For work
which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation and/or upon Lessee's posting
an additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or material was furnished or alleged to have been furnished to or for
Lessee at or for use on the
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Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest thereon. Lessee
shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have
the right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof. If Lessor shall require, Lessee
shall furnish a surety bond in an amount equal to one and one-half times the
amount of such contested lien, claim or demand, indemnifying Lessor against
liability for the same. If Lessor elects to participate in any such action,
Lessee shall pay Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered
a part of the Premises. Lessor may, at any time, elect in writing to be the
owner of all or any specific part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration
or termination of this Lease, become the property of Lessor and be
surrendered by Lessee with Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee
Owned Alterations or Utility Installations be removed by the expiration or
termination of this Lease. Lessor may require the removal at any time of all
or any part of any Lessee Owned Alterations or Utility Installations made
without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and
in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement or
remediation of any soil, material or groundwater contaminated by Lessee.
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee. The failure by Lessee to timely vacate the Premises pursuant to this
Paragraph 7.4(c) without the express written consent of Lessor shall
constitute a holdover under the provisions of Paragraph 26 below.
8 INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
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(a) Lessee shall pay to Lessor any insurance cost increase
("INSURANCE COST INCREASE") occurring during the term of this Lease.
"Insurance Cost Increase" is defined as any increase in the actual cost of
the insurance required under Paragraph 8.2(b), 8.3(a) and 8.3(b) ("REQUIRED
INSURANCE"), over and above the Base Premium as hereinafter defined
calculated on an annual basis. "Insurance Cost Increase" shall include but
not be limited to increases resulting from the nature of Lessee's occupancy,
any act or omission or Lessee, requirements of the holder of mortgage or deed
of trust covering the Premises, increased valuation of the Premises,
increased valuation of the Premises and/or a premium rate increase. The
parties are encourage to fill the Base Premium in Paragraph 1.9 with a
reasonable premium for the Required Insurance based on the Agreed Use of the
Premises. If the parties fail to insert a dollar amount in Paragraph 1.9,
then the Based Premium shall be the lowest annual premium reasonably
obtainable for the Required Insurance as of the commencement of the Original
Term for the Agreed Use of the Premises. If the parties fail to insert a
dollar amount in Paragraph 1.9, then the Base Premium shall be the lowest
annual premium reasonably obtainable for the Required Insurance as of the
commencement of the Original Term for the Agreed Use of the Premises. In no
event, however, shall Lessee be responsible for any portion of the increase
in the premium cost attributable to liability insurance carried by Lessor
under Paragraph 8.1(b) in excess of $2,000,000 per occurrence.
(b) Lessee shall pay any such insurance Cost Increase to lessor
within thirty (30) days after receipt by Lessee of a copy of the premium
statement or other reasonable evidence of the amount due. If the insurance
policies maintained hereunder cover other property besides the Premises,
Lessor shall also deliver to Lessee a statement of the amount of such
Insurance Cost Increase attributable only to the Premises showing in
reasonable detail the manner in which such amount was computed. Premiums for
policy periods commencing prior to, or extending beyond the term of this
Lease, shall be prorated to correspond to the term of this Lease.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury and property damage based upon or arising
out of the ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto. Such insurances, shall be an occurrence basis
providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION
ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire.
The Policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance shall
not, however, limit he liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance carried by Lessee shall be primary to
and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
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(b) CERTIFIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor, any ground Lessor, and to any Lender(s) insuring loss or
damages to the Premises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by any Lenders, but no event more than the
commercially reasonable and available insurable value thereof. If Lessor is
the Insuring Party, however, Lessee Owned Alterations and Utility
Installations, Trade Fixtures, and Lessee's personal property shall be
insured by lessee under Paragraph 8.4 rather than by Lessor. If the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks by direct physical loss or damage (except the perils
of flood and/or earthquake unless required by a Lender or included in the
Base Premium), including coverage for debris removal and the increment of any
Applicable Requirements requiring the upgrading, demolition, reconstruction
or replacement of any portion of the Premises as the result of a covered
loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index fro All Urban Consumers for the city
nearest to where the Premises are located.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor, with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said Insurance shall contain an agreed valuation provision in
lieu of any coincidence clause, and the amount of coverage shall be adjusted
annually to reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to
the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee
Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost converge with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property, Trade Fixtures and Lessee Owned
Alterations and
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Utility Installations. Lessee shall provide Lessor with written evidence
that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or Indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable
to prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits of forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business sin the state where
the Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current
issue of "Best's Insurance Guide", or such other rating as may be required by
a Lender. Lessee shall not do or permit to be done anything which
invalidates the required insurance policies. Lessee shall, prior to the
Start Date, deliver to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of the required
insurance. No such policy shall be cancelable or subject to modification
except after thirty (30) days prior written notice to Lessor. Less shall, at
least thirty (30) days prior to the expiration of such policies, furnish
Lessor with evidence of renewals or "insurance binders" evidencing renewal
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such
policies shall be for a term of at least one year, or the length of the
remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loess of
or damage to its property arising out of or incident to the perils required
to be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property
damage insurance carriers waive any right to subrogation that such companies
may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, liens, judgments, penalties, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with,
the use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the foregoing
matters. Lessee shall upon notice defend the same at Lender's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with
Lessee n such defense. Lessor need not have first paid any such claim in
order to be defended or indemnified.
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8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage obstruction or other defects of pipes, fire sprinklers,
wire, appliances, plumbing, HVAC or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premise or upon the portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9 DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations,
Utility Installations and Trade Fixtures, which can reasonably be repaired in
six (6) months or less from the date of the damage or destruction. Lessor
shall notify Lessee in writing within thirty (30) days from the date of the
damage or destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six
(6) months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty (30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements,
and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's
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election, make the repair of any damage or destruction the total cost to
repair of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for
that purpose. Notwithstanding the foregoing, if the required insurance was
not in force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in proceeds
as and when required to complete said repairs. In the event, however, such
shortage was due to the fact that, by reason of the unique nature of the
improvements, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possibly and this Lease shall remain in full force and effect. If such funds
or assurance are not received, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect; or (ii) have this Lease terminate thirty (30) days thereafter.
Lessee shall not be entitled to reimbursement of any funds contributed by
lessee to repair any such damage or destruction. Premises Partial Damage due
to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding
that there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's Expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or I) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by lessor of knowledge of the occurrence of
such damage. Such termination shall be effective sixty (60) days following
the date of such notice. In the event Lessor elects to terminate this Lease,
Lessee shall have the right within ten (10) days after receipt of the
termination notice to give written notice to Lessor of Lessee's commitment to
pay for the repair of such damage without reimbursement from Lessor. Lessee
shall provide Lessor with said funds or satisfactory assurance thereof within
thirty (30) days after making such commitment. In such event this Lease shall
continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible after the required funds are
available. If Lessee doe snot make the required commitment, this Lease shall
terminate as of the date specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by
the gross negligence or willful misconduct of Lessee, Lessor shall have the
right to recover Lessor's damages from Lessee, except as provided in
Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether
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or not an Insured Loss, Lessor may terminate this Lease effective sixty (60)
days following the date of occurrence of such damage by giving a written
termination notice to Lessee within thirty (30) days after the date of
occurrence of such damage. Notwithstanding the foregoing, if Lessee at that
time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option
and (b) providing Lessor with any shortage in insurance proceeds (or adequate
insurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon
which such option expires. If Lessee duly exercises such option during such
period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in insurance proceeds. Lessor shall, at Lessor's
commercially reasonable expense, repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee
fails to exercise such option and provide such funds or assurance during such
period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by lessee for
the period required for the repair, remediation or restoration of such damage
shall be abated in proportion to this degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value Insurance. All other obligations of Lessee hereunder shall be
performed by Lessee, and Lessor shall have no liability for any such damage,
destruction, remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue. Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee
gives such notice and such repair or restoration is not commenced within
thirty (30) days thereafter, this Lease shall terminate as of the date
specific din said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect.
"Commence" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by
Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be,
used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this
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Lease and hereby waive the provisions of any present or future statute to the
extent inconsistent herewith.
10 REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other
than inheritance, personal income or estate taxes); Improvement bond; and/or
license fee imposed upon or levied against any legal or equitable interest of
Lessor in the Premises, Lessor's right to other income therefrom, and/or
Lessor's business of leasing, by any authority having the direct or indirect
power to tax and where the funds are generated with reference to the Building
address and where the proceeds so generated are to be applied by the city,
county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by
reason of events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes
applicable to the Premises provided, however, that Lessee shall pay to Lessor
the amount, if any, by which Real Property Taxes applicable to the Premises
increase over the fiscal tax year during which the Commencement Date occurs
("TAX INCREASE"). Subject to Paragraph 10.2(b), payment of any such Tax
Increase shall be made by Lessee to Lessor within thirty (30) days after
receipt of Lessor's written statement setting forth the amount due and the
computation thereof. If any such taxes shall cover any period of time period
to or after the expiration or termination of this Lease, Lessee's share of
such taxes shall be prorated to cover only that portion of the tax bill
applicable to the period that this Lease is in effect.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the currently Real
Property Taxes, and require that the Tax Increase be paid in advance to the
Lessor by Lessee, either: (i) in a lump sum amount equal to the amount due,
at least twenty (20) days prior to the applicable delinquency date; or (ii)
monthly in advance with the payment of the Base Rent. If Lessor elects to
require payment monthly in advance, the monthly payment shall be an amount
equal to the amount of the estimated installment of the Tax Increase divided
by the number of months remaining before the month in which said installment
becomes delinquent. When the actual amount of the applicable Tax Increase is
known, the amount of such equal monthly advance payments shall be adjusted as
required to provide the funds needed to pay the applicable Tax Increase. If
the amount collected by Lessor is insufficient to pay the Tax Increase when
due, Lessee shall pay Lessor, upon demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with the other moneys of Lessor and shall not
bear interest. In the event of a Breach by Lessee in the performance of its
obligations under this Lease, then any balance of funds paid to Lessor under
the provisions of this Paragraph may at the option of Lessor, be treated as
an additional Security Deposit.
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(c) ADDITIONAL IMPROVEMENTS. Notwithstanding anything to the
contrary in this Paragraph 10.2, Lessee shall pay to Lessor upon demand
therefor the entirety of any increase in Real Property Taxes assessed by
reason of Alternations or Utility Installations placed upon the Premises by
Lessee or at Lessee's request.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Tax Increase for
all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets for such other information
as may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alternations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee. When possible, Lessee shall cause such property to be
assessed and billed separately from the real property of Lessor. If any of
Lessee's said property shall be assessed with Lessor's real property, Lessee
shall pay Lessor the taxes attributable to Lessee's property within ten (10)
days after receipt of a written statement.
11 UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and service supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12 ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of twenty-five percent
(25%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable
Breach without the necessity
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of any notice and grace period. If Lessor elects to treat such unapproved
assignment or subletting as a noncurable Breach, Lessor may either (i)
terminate this Lease, or (ii) upon thirty (30) days written notice, increase
the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then
in effect. Further, in the event of such Breach and rental adjustment, (i)
the purchase price of any option to purchase the Premises held by Lessee
shall be subject to similar adjustment to one hundred ten percent (110%) of
the price previously in effect, and (ii) all fixed and non-fixed rental
adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damaged and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) after the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligation from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of Rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for Lessee's default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the even of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational reasonability and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $1,000 or
ten percent (10%) of the currently monthly Base Rent applicable to the portion
of the Premises which is the subject of the proposed assignment or sublease,
whichever is greater, as consideration for Lessor's considering and processing
said request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to confirm and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
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12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any party of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein;
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligation to such sublease. Lessee hereby irrevocably,
authorized and directs any such sublease, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublease shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exits, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease; provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublease shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13 DEFAULT BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants conditions or rules under
this Lease. A "BREACH is defined as the occurrence of one or more of the
following Default, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, and/or Security
deposit or where the coverage of the property insurance described in Paragraph
8.3 is jeopardized as a result thereof, or without providing reasonable
assurances to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security
Deposit required to be made by Lessee hereunder whether to Lessor or to a third
party, when due, to provide reasonable evidence of insurance or surety bond, or
to fulfill any obligation under this Lese which endangers or threatens life or
property, where such failure continues for a period of three (3) business days
following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an
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unauthorized assignment or subletting, (iv) a tenancy Statement,, (v) a
requested subordination, (vi) evidence concerning any guaranty and/or
Guarantor, (vii) any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information with Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, condition or
provision of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commenced such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events; (i) the making of
any general arrangement or assignment or ht benefit of creditors; (ii) becoming
a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto
(unless, in the case of a petition filed against Lessee, the same is dismissed
within sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
subparagraph (e) is contrary to any applicable law, such provision shall be of
no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed; (i) the death of a Guarantor; (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee's failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantors that existed at the time of
execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of any
emergency, without notice). Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach;
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(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
term of and exceeds the amount of such rent loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of and of the amount
by which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rent loss that the Lessee provides could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the premises, expenses of reletting, including necessary
renovation alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of the
amount referred to in provision (iii) of the immediately preceding sentence
shall be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of the District within which the Premises are located at the time
of award plus one percent (1%). Effort by Lessor to mitigate damaged caused by
Lessee's Breach of this Lease shall not waive Lessor's right or recover damages
under Paragraph 12. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to recover
in such proceeding any unpaid Rent and damages as are recoverable therein, or
Lessor may reserve the right to recover all or any party thereof in a separate
suit. If a notice and grace period required under Paragraph 13.1 was not
previously given, a notice to pay rent or quit, or to perform or quit given to
Lessee under the unlawful detainer statue shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of the
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue this Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws
of the judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE: Any agreement for free or abated rent or other
charges, or for the giving or playing by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of
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this Lease by Lessee, any such Inducement Provision shall automatically be
deemed deleted from this Lease and of no further force or effect, and any
rent, other charge, bonus, inducement or consideration theretofore abated,
given or paid by Lessor under such an Inducement Provision shall be
immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall
not be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES: Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and the late charges which may be imposed upon Lessor by any Lender.
Accordingly, if any Rent shall not be received by Lessor within five (5)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten
percent (10%) of each such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs
Lessor will incur by reason of such late payment. Acceptance of such late
charge by Lessor shall in no event constitute a waiver of Lessee's Default or
Breach with respect to such overdue amount, nor prevent the exercise of any
of the other rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding any provision of
this Lease to the contrary, Base Rent shall, at Lessor's option, become due
and payable quarterly in advance.
13.5 INTEREST: Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such
as Base Rent) or within thirty (30) days following the date on which it was
due for non-scheduled payment, shall bear interest from the date when due, as
to scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to
the prime rate reported in the Wall Street Journal as published closest prior
to the date when due plus 4%, but shall not exceed the maximum rate allowed
by laws. Interest is payable in additions to the potential late charge
provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR:
(a) NOTICE OF BREACH: Lessor shall not be deemed in breach of this
Lease unless Lessor falls within a reasonable time to perform any obligation
required to be performed by Lessor. For purposes of this Paragraph, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and any Lender whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligations is such that more than thirty (30) days are
reasonably required for its performance, then Lessor shall not be in breach if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR: In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said written notice,
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or if having commenced said cure they do not diligently pursue it to
completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent an amount equal to the greater of one month's Base Rent or
the Security Deposit, and to pay an excess of such expense under protest,
reserving Lessee's right to reimbursement form Lessor. Lessee shall document
the cost of said cure and supply said documentation to Lessor.
14 CONDEMNATION: If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the
part taken as of the ate the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building
portion of the premises, or more than twenty-five percent (25%) of the land
area portion of the premises not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (1) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in proportion to the reduction in
utility of the Premises caused by such Condemnation. Condemnation awards
and/or payments shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold, the value of
the part taken, or for severance damages; provided, however, that Lessee
shall be entitled to any compensation for Lessee's relocation expenses, loss
of business goodwill and/or Trade Fixtures, without regard to whether or not
this Lease is terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by Lessee, for
purposes of Condemnation only, shall be considered the property of the Lessee
and Lessee shall be entitled to any and all compensation which is payable
therefor. In the event that this Lease is not terminated by reason of the
Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15 BROKER'S FEE:
15.1 ADDITIONAL COMMISSION: In addition to the payments owed pursuant to
Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option; (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located with the same Project, if any, within which the Premises is located; (c)
if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease; or (d) if Base rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS: Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor
and Lessee of such failure and if Lessor fails to pay such amounts within ten
(10) days after said notice, Lessee shall pay said monies to its Broker and
offset such amounts against Rent.
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In addition, Lessee's Broker shall be deemed to be a third party beneficiary
of any commission agreement entered into by and/or between Lessor and
Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS: Lessee and
Lessor each represent and warrant to the other that it has had no dealing with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the Indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16 ESTOPPEL CERTIFICATES:
(a) Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requested
Party.
(b) if the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party; (ii) there are no uncured defaults in the Requesting Party's performance;
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance, Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17 DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event
of a transfer of Lessor's title or interest in the Premises or this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor. Except as provided in Paragraph 15,
upon such transfer or assignment and delivery of the Security Deposit, as
aforesaid, the prior Lessor shall be relieved of all liability with respect to
the obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in this
Lease to be performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined.
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Notwithstanding the above, and subject to the provisions of Paragraph 20
below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to
Hazardous Substances as outlined in Paragraph 6 above.
18 SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19 DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20 LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute
personal obligations of Lessor, the individual partners of Lessor or its or
their individual partners, directors, officers or shareholders, and Lessee
shall look to the Premises, and to no other assets of Lessor, for the
satisfaction of any liability of Lessor with respect to this Lease, and shall
not seek recourse against the individual partners of Lessor, or its or their
individual partners, directors, officers or shareholders, or any of their
personal assets for such satisfaction.
21 TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
22 NO PRIOR OF OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party. The liability
(including court costs and attorneys' fees), of any Broker with respect to
negotiation, execution, delivery or performance by either Lessor or Lessee
under this Lease or any amendment or modification hereto shall be limited to
an amount up to the fee received by such Broker pursuant to this Lease;
provided, however, that the foregoing limitation on each Broker's liability
shall not be applicable to any gross negligence or willful misconduct of such
Broker.
23 NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing
of notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for notice. A
copy of all notices to Lessor shall be
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concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
If sent by regular mail the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantee next day delivery shall be deemed given twenty-four (24) hours
after delivery of the same to the Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed
delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday
or legal holiday, it shall be deemed received on the next business day.
24 WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. The acceptance of Rent by Lessor shall not be a waiver of any
Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor
on account of moneys or damages due Lessor, notwithstanding any qualifying
statements or conditions made by Lessor in connection therewith, which such
statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit
of such payment.
25 RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26 NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this
Lease. In the event that Lessee holds over, then the Base Rent shall be
increased to one hundred fifty percent (150%) of the Base Rent applicable
during the month immediately preceding the expiration or termination.
Nothing contained herein shall be construed as consent by Lessor to any
holding over by Lessee.
27 CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28 COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the
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plural and vice versa. This Lease shall not be construed as if prepared by
one of the parties, but rather according to its fair meaning as a whole, as
if both parties had prepared it.
29 BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30 SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "Security Device"), now
or hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices (in this Lease
together referred to as "Lessor's Lender") shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior
to the lien of its Security Device by giving written notice thereof to Lessee
whereupon this Lease and such Options shall be deemed prior to such Security
Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3 Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (ii) be subject to any offsets
or defenses which lessee might have against any prior lessor; or (iii) be
bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which
Non-Disturbance Agreement provides that Lessee's possession of the Premises,
and this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorneys to the
record owner of the Premises. Further, within sixty (60) days after the
execution of this Lease, Lessor shall use its commercially reasonable efforts
to obtain a Non-Disturbance Agreement from the holder of any pre-existing
Security Device which is secured by the Premises. In the event that Lessor
is unable to provide the Non-Disturbance Agreement within said sixty (60)
days, then Lessee may, at Lessee's option, directly contact Lessor's lender
and attempt to negotiate for the execution and delivery of a Non-Disturbance
Agreement.
31 ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined)in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
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whether or not such action or proceeding is pursued to decision or judgment.
The term, "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case
may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In
addition, Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in the preparation and service of notices of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32 LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for he purposes of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any
ordinary "For Sale" signs and Lessor may during the last six (6) months of
the term hereof place on the Premises any ordinary "For Lease" signs. Lessee
may at any time place on or about the Premises any ordinary "For Sublease"
sign.
33 AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor
shall not be obligated to exercise any standard of reasonableness in
determining whether to permit an auction.
34 SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35 TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, that Lessor may elect to continue any one
or all existing subtenancies. Lessor's failure within ten (10) days
following any such event to elect to the contrary by written notice to the
holder of any such lesser interest, shall constitute Lessor's election to
have such event constitute the termination of such interest.
36 CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees)incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall
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not preclude the imposition by Lessor at the time of consent of such further
or other conditions as are then reasonable with reference to the particular
matter for which consent is being given. In the event that either party
disagrees with any determination made by the other hereunder and reasonably
requests the reasons for such determination, the determining party shall
furnish its reasons in writing and in reasonable detail within ten (10)
business days following such request.
37 GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Tenancy Statement, or 9d)
written confirmation that the guaranty is still in effect.
38 QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39 OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option; (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured; (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given
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Lessee); (iii) during the time Lessee is in Breach of this Lease; or (iv) in
the event that Lessee has been given three (3) or more notices of separate
Default, whether or not the Defaults are cured, during the twelve (12) month
period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
40 MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the case and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, an that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
41 SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42 RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary; and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43 PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44 AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its
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behalf. Each party shall, within thirty (30) days after request, deliver to
the other party satisfactory evidence of such authority.
45 CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46 OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all parties Hereto.
47 AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48 Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49 Mediation and Arbitration of Disputes. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease __ is __ is not attached to this Lease.
49.1 Tenant Improvements. Lessor, at Lessor's sole cost and expense shall
complete the following tenant improvements prior to the lease commencement:
1. Steam/chemically clean the carpets in the existing office area.
2. Replace the carpets in the lunchroom.
3. Repaint the walls in the existing office area.
4. Replace all broken or stained ceiling tiles.
5. Sanitize the restrooms.
LESSOR AND LESSEE HAVE CAREFULLY RE4AD AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT , AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE, BUT NOT BE LIMITED TO THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
- -------
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Industry Executed at: Industry
on: 12/5/97 on: 12/3/97
By LESSOR: By LESSEE:
Fortune Dynamic, Inc. Data Net International, Inc.
A California Corporation A California Corporation
By: \s\ Carol Lee By: \s\ James Ung
Name Printed: Carol Lee Name Printed: James Ung
Title: President Title: President
By: \s\ Alice Wang By:
By: Alice Wang By:
Title: Vice President Title:
Address: Rowland St., Industry, CA 91748 Address: 1304 John Reed Ct.,
Industry, CA 91745
Telephone: ( ) ___________________ Telephone: ( ) ___________________
Facsimile: ( ) ___________________ Facsimile: ( ) ___________________
Federal ID No. ___________________ Federal ID No. ___________________
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RENT ADJUSTMENT(S)
STANDARD LEASE ADDENDUM
DATED: October 28, 1997
BY AND BETWEEN (LESSOR): Fortune Dynamic, Inc.
(LESSEE) Data Net International, Inc.
ADDRESS OF PREMISES: 957 Lawson Street, Industry, CA 91748
Paragraph 50
A. RENT ADJUSTMENTS
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
B. Upon the establishment of each New Market Rental Value:
1) the new MRV will become the new "Base Rent" for the purpose
of calculating any further Adjustments, and
2) the first month of each Market Rental value term shall
become the new "Base Month" for the purpose of calculating any further
Adjustments.
___ III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The Base Rent shall be increased to the following amounts on the dates set forth
below:
On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be:
February 1, 1999 $11,388
February 1, 2000 $11,607
B. NOTICE:
Unless specified otherwise herein, notice of any such adjustments, other
than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the
Lease.
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for
each adjustment specified above in accordance with paragraph 5 of the Lease.
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Initials: ___ Initials: _____
___ _____
RENT ADJUSTMENT(S)
Page 2 of 2
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OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
DATED: October 28, 1997
BY AND BETWEEN (LESSOR): Fortune Dynamic, Inc.
(LESSEE) Data Net International, Inc.
ADDRESS OF PREMISES: 957 Lawson Street, Industry, CA 91748
Paragraph 51
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this Lease
for one additional 36 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least six and not more than nine months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one)only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provisions relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be calculated as
follows, using the method(s) indicated below:
X II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
- ---
(a) On (Fill in MRV Adjustment Date(s): February 1, 2001 the monthly rent
payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be
adjusted to the "Market Rental value" of the property as follows:
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1) Four months prior to the Market Rental Value (MRV) Adjustment
Date(s) described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. If agreement cannot be reached, then:
i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next 30
days. Any associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select and
pay the appraiser or broker of their choice to establish a MRV within the
next 30 days. If, for any reason, either one of the appraisals is not
completed within the next 30 days, as stipulated, then the appraisal that is
completed at that time shall automatically become the new MRV. If both
appraisals are completed and the two appraisers/brokers cannot agree on a
reasonable average MRV then they shall immediately select a third mutually
acceptable appraiser/broker to establish a third MRV within the next 30 days.
The average of the two appraisals closest in value shall then become the new
MRV. The costs of the third appraisal will be split equally between the
parties.
2) In any event, the new MRV shall not be less than the rent
payable for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as
described in paragraph A11:
1) the monthly rental sum so calculated for each term as
specified in paragraph AII (a) will become the new "Base Rent" for the purpose
of calculating any further Cost of Living Adjustments as specified in paragraph
AII (a) above and
2) the first month of each Market Rental Value term as
specified in paragraph A1 (a) shall become the new "Base Month" for the purpose
of calculating any further Cost of Living Adjustments as specified in paragraph
A1(b).
B. NOTICE: Unless specified otherwise herein, notice of any escalations
other than Fixed Rental Adjustments shall be made as specified in paragraph 23
of the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached Lease.
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DAUM HAZARDOUS SUBSTANCES
COMMERCIAL REAL ESTATE SERVICES &
AMERICAN DISABILITIES ACT
Notice to owners, Buyers and Tenants Regarding
HAZARDOUS SUBSTANCES AND UNDERGROUND STORAGE TANKS
Comprehensive Federal, state and local regulations have recently been enacted
to control the use, storage, handling, clean-up, removal and disposal of
hazardous and toxic wastes and substances. Extensive legislation has also
been adopted with regard to underground storage tanks. As real estate
licensees, we are not experts in the area of hazardous substances and we
encourage you to consult with your legal counsel with respect to your rights
and liabilities with regard to hazardous substances laws and regulations and
to obtain technical advice with regard to the use, storage, handling,
clean-up, removal or disposal of hazardous substances from professionals,
such as a civil engineer, geologist or other persons with experience in these
matters to advise you concerning the property. We also encourage you to
review the past uses of the property, which may provide information as to the
likelihood of the existence of hazardous substances or storage tanks on the
property.
DAUM Commercial Real Estate Services will disclose any knowledge it actually
possesses with respect to the existence of hazardous substances or
underground storage tanks on the property. DAUM Commercial Real Estate
Services has not made nay investigations or obtained reports regarding the
property, unless so indicated in a separate document signed by DAUM
Commercial Real Estate Services. DAUM Commercial Real Estate Services makes
no representation or warranty regarding the existence or nonexistence of
hazardous substances or underground storage tanks on the property.
With regard to the sale of real property, recently enacted California Health
and Safety Code Section 25359.7 provides that any owner of non-residential
real property who knows, or has reasonable cause to believe, that any release
of hazardous substances has come to be located on or beneath real property,
shall, prior to the sale or real property, give written notice of that
condition to the buyer of the real property. Failure of the owner to provide
written notice when required shall subject the owner to actual damages and
other remedies provided by the law. In addition, where the owner has actual
knowledge of the presence of any hazardous substance and knowingly and
willfully fails to provide written notice to the buyer, the owner is liable
for a civil penalty not to exceed $5,000 for each separate violation.
With regard to leases of real property, Section 25359.7 of the California
Health and Safety Code provides that any lessee of real property who knows,
or has reasonable cause to believe, that any release of hazardous substances
has come to be located on or beneath the real property shall, upon discovery
by the lessee of the presence or suspected presence of a hazardous substance
release, give notice of that condition to the owner of the real property.
failure of the lessee to provide written notice as required to the owner
shall make the lease voidable at the discretion of the owner. The Health and
Safety Code provides that if the lessee has actual knowledge of the presence
of any hazardous substance release and knowingly or willfully fails to
provide written
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notice as required to the owner, the lessee is liable for a civil penalty not
to exceed $5,000 for each violation.
As used in this notice, the term "hazardous substances" is used in the
broadest sense and includes all hazardous and toxic materials, substances, or
waste as defined by applicable Federal, state and local laws and regulations
and includes, but is not limited to petroleum products, paints and solvents,
PCBs, asbestos, pesticides and other substances. Hazardous substances may be
found on any type of real property, improved or unimproved, occupied or
vacant.
NOTICE TO OWNERS, BUYERS AND TENANTS REGARDING THE "AMERICANS WITH
DISABILITIES ACT"
Legislation known as the "Americans with Disabilities Act" ("ADA") was
recently adopted and may affect The Property and/or its intended use. As
real estate licensees, we are not experts in the legal or technical aspects
of ADA as it may pertain to you. We encourage you to consult your legal
counsel, architect and/or other professionals with appropriate experience
with regard to your rights or obligations for compliance with ADA.
DAUM Commercial Real Estate Services makes no representation or warranty
regarding the compliance or non-compliance of The Property under ADA.
By /s/ CAROL LEE
Fortune Dynamic, Inc. Dated:
By /s/ JAMES UNG
Data Net International, Inc. Dated: 12/3/1997
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ADDENDUM TO LEASE
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
FORM - 1997
Lessor: FORTUNE DYNAMIC, INC., A CALIFORNIA CORPORATION
Lessee: DATA NET INTERNATIONAL, INC., A CALIFORNIA CORPORATION
Date of Lease: October 28, 1997
The following modifications and additions are hereby made to the aforesaid
Lease:
(a) PARAGRAPH 1.8: Notwithstanding anything to the contrary contained in
Paragraph 1.8, the agreed use shall be general office use,
warehousing, manufacturing and distribution of computer-related
products.
(b) SECTION 3.3: On the fourth line, the language "within sixty (60) days
after the" is hereby deleted and replaced with the word "by". In
addition, on the fifth line, the language "after the end of such sixty
(60) day period." is hereby deleted.
(c) PARAGRAPH 6.2(d): On the third line, after the words "third party"
the following language is hereby inserted: "under Lessee's control".
(d) PARAGRAPH 7.3(b): Notwithstanding anything to the contrary contained
in paragraph 7.3(b), Landlord hereby grants consent and acknowledges
that Lessee shall be installing an electronic security system and the
electrical system currently serving the building will be modified by
Lessee to accommodate Lessee's use.
(e) PARAGRAPH 8.4(b) is hereby deleted.
(f) PARAGRAPH 10.2: Notwithstanding anything to the contrary contained in
Paragraph 10.2, "Real Property Taxes" shall not include any corporate
franchise tax, business license tax, real estate transfer tax or
documentary transfer tax, capital gains or corporate income tax, and
"Tax Increase" shall not include any increase in "Real Property Taxes"
caused by any transfer by Lessor of the Premises or corporate
reorganization of Lessor.
(g) PARAGRAPH 12: The provisions of Paragraph 12 shall not apply to any
assignment or sublease to an "Affiliate" of Lessee. For purposes of
this Lease, the term "Affiliate" shall mean any person or entity for
which Lessee has direct (or through intermediary subsidiaries
controlled by Lessee) voting control.
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(h) PARAGRAPH 12.1(b): This Subparagraph has been deleted in its entirety
and the following language is inserted in its place and stead:
"Provided that the resulting entity has a net worth of not less than
one hundred fifty percent (150%) of the net worth of Lessee as of the
date of this Lease, a change in the control of Lessee shall not
constitute an assignment requiring Lessor's consent."
"LESSOR"
FORTUNE DYNAMIC, INC.,
A CALIFORNIA CORPORATION
By /s/ CAROL LEE
--------------------------------------
Carol Lee, President
"LESSEE"
DATA NET INTERNATIONAL, INC.,
A CALIFORNIA CORPORATION
By /s/ JAMES UNG
--------------------------------------
James Ung, President
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CUMETRIX DATA SYSTEMS CORP.:
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
February 23, 1998
