<PAGE>
As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HEADWAY TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
Delaware 3572 94-3259145
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
678 South Hillview Drive
Milpitas, California 95035
(408) 934-5300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Thomas A. Surran
Chief Financial Officer
Headway Technologies, Inc.
678 South Hillview Drive
Milpitas, California 95035
(408) 934-5300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Jeffrey D. Saper, Esq. Gavin B. Grover, Esq.
Kurt J. Berney, Esq. Susan Hamilton MacCormac, Esq.
Anton Commissaris, Esq. Matthew Burns, Esq.
Ava M. Hahn, Esq. Charles C. Kim, Esq.
Wilson Sonsini Goodrich & Rosati Morrison & Foerster LLP
Professional Corporation 425 Market Street
650 Page Mill Road San Francisco, CA 94105
Palo Alto, CA 94304 (415) 268-7000
(650) 493-9300
</TABLE>
----------------
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 on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 145 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, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee(2)
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value..... $34,500,000 $9,591
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</TABLE>
- --------------------------------------------------------------------------------
(1) Includes up to shares of common stock which may be purchased by
the Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee.
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and we are not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
Shares
Headway Technologies, Inc.
Common Stock
This is an initial public offering of common stock by Headway Technologies,
Inc. We are selling shares of common stock. The estimated initial public
offering price is between $ and $ per share.
------------
We intend to list our shares of common stock on the Nasdaq National Market
under the symbol "HWTI."
------------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Initial public offering price.................................... $ $
Underwriting discounts and commissions........................... $ $
Proceeds to Headway Technologies, Inc., before expenses.......... $ $
</TABLE>
We have granted the underwriters an option for a period of 30 days to
purchase up to shares of common stock.
------------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Hambrecht & Quist
Banc of America Securities LLC
, 1999
<PAGE>
[PLACE HOLDER FOR ARTWORK]
Photograph Photograph
of of
Disk Drive Disk Drive
Photograph Photograph
of of
Recording Head CD Sem
Photograph Photograph
of of
Recording Head Operators in
Final Inspection
Photograph Photograph
of of
Wafer Operator at
Prober
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 7
Forward-Looking Statements............................................ 18
How We Intend to Use the Proceeds from this Offering.................. 19
Dividend Policy....................................................... 19
Capitalization........................................................ 20
Dilution.............................................................. 21
Selected Consolidated Financial Data.................................. 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 24
Business.............................................................. 34
Management............................................................ 43
Related Party Transactions............................................ 51
Principal Stockholders................................................ 53
Description of Capital Stock.......................................... 55
Shares Eligible for Future Sale....................................... 57
Underwriting.......................................................... 59
Legal Matters......................................................... 60
Experts............................................................... 61
Where You Can Find Additional Information............................. 61
Index to Consolidated Financial Statements............................ F-1
</TABLE>
----------------
All brand names and trademarks appearing in this prospectus are the property
of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including "Risk Factors" and our consolidated
financial statements and related notes before making an investment decision.
Headway Technologies, Inc.
We are a leading provider of recording head products to the computer hard
disk drive industry. Our volume sales have included recording head sales to
Seagate Technologies, Inc. for use in its industry leading server disk drives,
Toshiba Corporation for use in its mobile disk drives and SAE Magnetics, Ltd.
for incorporation into Maxtor Corporation's desktop disk drives.
Our Opportunity
The demand for data storage is rapidly increasing and hard disk drives are
the primary means of data storage for most computer systems. To meet the
growing demand for data storage and retrieval, disk drive manufacturers must
continue to offer hard disk drives with greater capacity at lower prices.
Recording heads are a key component of hard disk drives and a primary
determinant of hard disk drive performance and storage capacity. To date, the
rate of technology advancement in recording heads has provided the ability to
annually double storage capacity at a constant cost. To effectively compete in
this environment, a recording head manufacturer must have an in-depth
understanding of the fundamental physics and magnetic properties of data
storage and have the ability to develop manufacturing processes capable of
producing state of the art recording heads.
Our Approach and Strategy
We develop products designed to provide our customers with significant
performance advantages and faster time-to-volume production. Our team includes
a number of storage industry pioneers who are expert in the underlying
sciences, technologies and manufacturing processes required for the design and
production of increasingly advanced recording heads. Our team's depth and
expertise recently enabled us to transition to the latest recording head
technology in approximately nine months. Key components of our strategy
include:
. providing targeted solutions to the server, mobile and desktop segments
of the hard disk drive industry;
. leveraging our extensive experience in the server and mobile segments to
address the largest segment of the disk drive market--the desktop
segment;
. outsourcing the lower margin, labor and equipment intensive back-end
manufacturing processes and focusing our research and development efforts
on the higher value-added wafer design and production processes; and
. forging strong collaborative relationships with leading disk drive
manufacturers and other disk drive component manufacturers to develop
compatible products which can be effectively incorporated into leading-
edge disk drives.
We were incorporated in Delaware in December 1996. Our consolidated
subsidiary, Headway Technologies, Inc. (California), was incorporated in
California in April 1994. Our principal executive offices are located at 678
South Hillview Drive, Milpitas, California 95035, and our telephone number at
that address is (408) 934-5300.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by us........................ shares
Common stock to be outstanding after this
offering......................................... shares
Use of proceeds................................... . repayment of
approximately $12.4
million in notes
payable;
.capital expenditures; and
. general corporate
purposes, including
working capital.
Nasdaq National Market Symbol..................... HWTI
</TABLE>
----------------
The number of outstanding shares after this offering is based on the number
of shares outstanding at July 3, 1999. The number of outstanding shares
excludes:
. 5,304,953 shares of common stock issuable upon the exercise of
outstanding options as of July 3, 1999 at an average exercise price of
$1.15 per share;
. 56,161 shares of common stock issuable upon the exercise of options
granted, net of cancellations, between July 3, 1999 and August 19, 1999
at an average exercise price of $4.50 per share; and
. 1,029,946 shares of common stock issuable upon the exercise of options
granted on August 19, 1999 at an exercise price of $5.00 per share.
As of August 19, 1999, we reserved 3,456,903 shares of common stock for
future issuance under our stock option plan, director option plan and employee
stock purchase plan.
----------------
Unless otherwise noted, all information in this prospectus assumes:
. the public offering price is $ per share;
. the underwriters will not exercise their option to purchase additional
shares of our common stock to cover over-allotments;
. the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering; and
. the amendment of our Amended and Restated Certificate of Incorporation to
increase our authorized common stock from 25,000,000 to 75,000,000 and to
authorize 5,000,000 shares of undesignated preferred stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with our consolidated financial statements and their related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. We have prepared this information
using our consolidated financial statements. For a discussion of the
computation of pro forma diluted net income per share, you should review Note 1
to our consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which we consider necessary for a fair presentation of the financial position
and the results of operations for these periods. The adjusted consolidated
balance sheet data summarized below reflects the sale of shares of common
stock offered by us in this offering, at an assumed initial public offering
price of $ per share, after deducting the estimated underwriting discount and
estimated offering expenses, and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
Period from
April 4, 1994 Years Ended Six Months Ended
(inception) ---------------------------------------------- ----------------
to January 1, Dec. 28, Jan. 2, June 27, July 3,
1995 Dec. 31, 1995 Dec. 29, 1996 1997 1999 1998 1999
------------- ------------- ------------- -------- -------- -------- -------
(predecessor) (predecessor) (predecessor) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenue......... $ 556 $19,801 $26,792 $ 54,369 $179,419 $92,600 $72,786
Gross (loss) profit... (608) 1,957 4,176 13,147 42,418 23,543 21,858
Operating (loss)
income............... (5,876) (7,118) (4,308) (18,338) 10,342 8,429 2,398
Net (loss) income..... (5,838) (7,018) (4,967) (19,404) 6,735 6,123 620
Pro forma diluted net
income per share..... $ 0.33 $ 0.30 $ 0.03
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
July 3, 1999
-----------------
Actual Adjusted
------- --------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $22,083 $
Working capital (deficit)................................... (4,697)
Total assets................................................ 90,328
Current portion of notes payable and capital leases......... 24,871
Notes payable and capital leases, less current portion...... 23,529
Stockholders' equity........................................ 25,990
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
Our operating results are likely to fluctuate significantly
Factors likely to cause quarterly fluctuations in our revenues and operating
results include:
.market acceptance of our new products, particularly products based on our
giant magneto-resistive, or GMR, technology;
.increased production and engineering costs associated with the
introduction of new products;
.delayed product introductions;
.order cancellations, modifications or quantity adjustments, or
rescheduling of orders by customers;
.manufacturing capacity constraints;
.changing product manufacturing yields;
.decreased demand for our products;
.changes in product pricing by us or our competitors;
.timing of product announcements and product transitions by us, our
customers or our competitors;
. increased operating costs or unit costs associated with an increase in
production capacity or under-utilization of capacity;
.our inability to qualify for customer programs;
. changes in product mix, especially because wafers and head gimbal
assemblies, or HGAs, have different revenue and gross margin
contributions;
.disruptions in our operations or the operations of our subcontractors; and
.increased material costs and material or equipment unavailability.
We generally sell our products pursuant to purchase orders. These purchase
orders are subject to cancellation, modification, quantity reduction or
rescheduling by our customers on short notice and without significant
penalties. Therefore, our backlog as of any particular date is not indicative
of sales for any future period. These changes made by our customers in the
past have caused, and in the future could cause, our total revenue to fall
below expected levels. Net income, if any, and gross profit may be
disproportionately affected by a reduction in total revenue as a substantial
portion of our costs are fixed and do not vary with revenues. Additionally,
changes to products or cancellations of orders could result in under-
utilization of production capacity.
Future revenue, expenses and operating results are likely to vary
significantly between quarters. As a result, quarter-to-quarter comparisons of
operating results are not necessarily meaningful or indicative of future
performance. It is likely that in some future quarters our operating results
will be below the expectations of public market analysts or investors, which
would cause the market price of our common stock to fall.
We are dependent on the widespread adoption of our GMR products
Our long-term success depends on the broad market adoption of our products,
particularly our recently introduced GMR products. Prior to 1999, almost all
of our revenues have been generated through the sale of our DSMR products. We
do not expect sales of our DSMR products to be significant after the first half
7
<PAGE>
of 2000. Our GMR recording heads may not meet the requirements of our
customers and may not be broadly adopted by the market. Broad market adoption
depends on the performance relative to price for our products. We recently
began volume shipments of our GMR recording heads to a single customer. If our
GMR product line is not broadly adopted by the hard disk drive industry, our
business would be materially harmed.
Substantially all of our revenue is derived from a limited number of products
At any one time, we typically supply products in volume to a limited number
of disk drive manufacturers to be included in a limited number of disk drive
products. These disk drive products have short life cycles. Due to the rapid
technological change and constant development of new disk drive products, it is
common for our relative mix of customers and products to change quickly from
one quarter to the next. Therefore, it is essential we consistently introduce
new products in a timely manner that are designed into customers' disk drive
products.
We are dependent on a limited number of customers
The loss of any customer, a significant decrease in orders from one or more
customers, the failure to qualify for a new program with an existing customer
or the failure of program volumes to achieve expectations could materially harm
our business. We sell our products to leading manufacturers in each of the
server, mobile and desktop segments of the disk drive market. During 1998 and
the six months ended July 3, 1999, Seagate and Toshiba each represented more
than ten percent of our total revenue and combined represented 94.1% of our
total revenue in fiscal 1998 and 94.4% of our total revenue in the six months
ended July 3, 1999. We expect our dependence on a limited number of customers
to continue given the limited number of disk drive manufacturers who require an
independent source of recording heads.
In addition, the disk drive industry has experienced significant
consolidation in the recent past. Any further consolidation could
significantly reduce the number of our actual or potential customers. If any
of our customers experience a change of ownership, particularly to a company
with its own recording head capabilities, that customer might stop purchasing
our products.
We may incur significant inventory related charges
Our manufacturing processes are complex and involve a long cycle time. As a
result, our inventory is subject to a number of risks, some of which are beyond
our control, and we may incur inventory related charges due to, among other
factors:
.our inability to obtain necessary product qualifications;
.the cyclical nature of, and rapid technological change in, the hard disk
drive industry;
.changes to product specifications or manufacturing processes;
. our dependence on a few customers and the limited number of product
programs for each customer;
. the magnitude of the inventory commitments we must make to qualify our
products with our customers and to support our customers' time to market
needs; and
. our limited remedies in the event of program cancellations, changes in
specifications or reductions in demand.
We may be unable to mitigate or avoid these risks in which case we could incur
significant losses from reduction in the value of inventory, missed customer
shipments and damage to customer relationships.
8
<PAGE>
The disk drive component industry is subject to rapid change and potential
obsolescence
The recording head industry has been characterized by rapid technological
development and short product life cycles. Product life cycles typically range
from six to 12 months. As a result, we must continually anticipate product
transitions and develop new products to meet the demand for increased storage
capacity. We may be unable to anticipate technological advances in disk drives
and develop products incorporating these advances in a timely manner or compete
effectively against our competitors' new products.
We must also anticipate and address the obsolescence of existing technologies
and the emergence of new technologies. Some industry participants have
suggested that advances in recording and storage devices strictly reliant on
magnetic principles are subject to technological limitations. In addition,
other companies are developing alternative data storage technologies which may
reduce the demand for our products or make our products obsolete. These
alternative data storage technologies include solid-state flash memory, digital
versatile disks, or DVDs, holographic memory and optically-assisted magneto
disk drives.
As a component supplier to the hard disk drive industry, we are directly
impacted by its business cycles and trends
The hard disk drive industry is highly cyclical and historically has
experienced periods of increased demand and rapid growth followed by oversupply
and reduced production levels. This results in significantly reduced demand
and average selling prices for recording heads. The effect of these cycles on
component suppliers has been magnified by the practice of hard disk drive
manufacturers ordering components, including recording heads, in excess of
their needs during periods of rapid growth. This practice increases the
severity of the drop in the demand for components during periods of reduced
growth or contraction. In addition, the disk drive industry continues to
experience a significant and prolonged decline in average selling prices. As a
result, component suppliers are facing extreme pressure to lower their prices.
To lower their costs, disk drive manufacturers have taken advantage of
increasing areal densities to reduce the total number of recording heads in
their drives. This has reduced the demand for recording heads.
In recent years, the disk drive industry has experienced significant unit
growth and we have expanded our capacity. This growth in the hard disk drive
industry may not continue, the level of demand for our products may decline and
future demand for our products may not be sufficient to utilize our capacity.
The market for recording heads is intensely competitive and we expect increased
competition
The market for our products is highly competitive, and we expect to
experience increased competition in the future. Substantially all of our
principal competitors have significantly greater financial, marketing and other
resources than we do. We compete with other independent recording head
suppliers, such as ALPS, Applied Magnetics, Read-Rite, TDK and its wholly-owned
subsidiary SAE, and Yamaha. In addition, we compete with the captive recording
head manufacturing operations of disk drive companies. Captive producers who
produce some or all of their recording heads for internal use include Fujitsu,
Hitachi, IBM and Seagate.
Other potential competitors or competitive threats which could harm our
business include:
. captive recording head manufacturers that, similar to IBM, may seek to
market their recording head products to other disk drive manufacturers;
. captive recording head manufacturers, such as Seagate, who to date have
elected to purchase a portion of their recording heads from third-party
suppliers, but may cease to do so in the future; and
. non-vertically integrated disk drive manufacturers who may seek to
acquire or develop their own recording head production capabilities.
9
<PAGE>
In addition, the announcement or implementation of any of the following by
our competitors could materially harm our business:
.changes in pricing;
.product introductions;
.increases in production capacity; and
.changes in product mix and technological innovation.
We have experienced pricing pressures in the past and will likely experience
increased price competition in the future. Pricing pressures have included,
and may continue to include, demands for discounts, long-term supply
commitments and extended payment terms. In addition, other recording head
manufacturers, in light of their significant fixed costs, may be inclined to
sell products with little or no gross profit in order to cover a portion of
their fixed costs. Any increase in price competition could materially harm our
business.
Our manufacturing processes, including subcontracted processes, involve
numerous complex operations
Minor deviations or disruptions in our manufacturing processes could cause
substantial manufacturing yield losses, increased cycle time, increased product
returns, loss of work-in-process inventory and, in some cases, suspension of
production. During our plant expansion in 1998, we experienced a significant
increase in cycle time, due, in part, to the relocation of equipment. The
complexity of the manufacturing processes is susceptible to manufacturing
defects, which may result in a loss of work-in-process, product returns or
missed customer shipment dates. A significant percentage of potential defects
can only be detected at the end of the manufacturing processes which can range
from four to eight weeks. In addition, the complex manufacturing processes
requires continual maintenance of equipment. Should some portion of our
production or testing equipment become unavailable for a significant period of
time, our business could be materially harmed.
Small variations in manufacturing yields and productivity can significantly
impact operating results
Manufacturing yields tend to be lower in the early stages of product life
cycles and increase as the product matures and manufacturing volumes increase.
Our pricing reflects this assumption of improving manufacturing yields. As a
result, material variances between projected and actual manufacturing yields
have a direct effect on our profitability. Forecasting manufacturing yields
accurately becomes increasingly more difficult as manufacturing processes
increase in complexity. Making matters more difficult is the compression of
product life cycles requiring us to bring new products on line faster and for
shorter periods, while maintaining acceptable manufacturing yields and
quality. These compressed product life cycles often eliminate the lengthy
periods of high volume manufacturing conducive to higher manufacturing yields
and declining unit costs.
Our lengthy sales cycle makes it difficult for us to predict if or when a sale
will occur
Qualifying recording head products for incorporation into a new disk drive
product requires us to work extensively with the customer and the customer's
other suppliers to meet product specifications. Customers often require a
significant number of product presentations and demonstrations, as well as
substantial interaction with our senior management, before making a purchasing
decision. Accordingly, our products typically have a lengthy sales cycle,
which can range from three to 18 months, during which we may expend
10
<PAGE>
substantial financial resources and management, engineering and sales time and
effort with no assurance that future product sales will result.
We need to maintain high capacity utilization to achieve our profit targets
The term "capacity utilization" means the actual number of wafers we are
manufacturing in relation to the total number of wafers we have the capacity to
process. Because a large percentage of our operating costs are fixed,
operating below capacity has a significant negative effect on our
profitability. Some of the factors affecting our capacity utilization rates
are overall industry conditions, operating efficiencies, the level of customer
orders, mechanical failures, disruption of operations due to expansion of
operations or relocation of equipment, fire or natural disaster.
Hard disk drive manufacturers may not incorporate our products in new disk
drive products
Component suppliers must demonstrate to their customers an ability to deliver
the specified product significantly in advance of volume production. This
qualification process is lengthy and costly for the disk drive manufacturer.
Therefore, if a component supplier fails in the pre-production qualification
process, it will generally be unable to participate in the program, resulting
in lost revenue opportunities, creating the potential for under-utilization of
manufacturing capacity and making it more difficult for the supplier to
participate in subsequent customer programs. In some instances, a component
supplier may be allowed to qualify in a program after production volumes have
commenced. The revenues and margins associated with participation later in
programs, however, tend to be lower.
Our success is dependent on the success and strategic decisions of our
customers
In 1996, Hewlett-Packard Co., or HP, at the time our largest shareholder and
primary customer, accounting for substantially all of our product sales, made a
strategic decision to exit the disk drive business. This departure had a
severe and adverse effect on our operating results. Some hard disk drive
manufacturers enter into arrangements with component suppliers to supply
technology and products for future disk drives. If these arrangements include
recording head technologies that compete with our products, they may make it
more difficult for us to maintain our relationships with existing customers or
to attract new customers. For example, in June 1998, Western Digital
Corporation and IBM established a strategic relationship whereby IBM agreed to
provide GMR disk drive technology and designs to Western Digital for
incorporation into desktop disk drive programs. In exchange, Western Digital
agreed to purchase a significant percentage of its material requirements,
including recording heads, from IBM.
Parties who license our technology may compete against us
We sell products to customers who also manufacture, directly or indirectly,
products for their own use. For example, Seagate, a significant customer, is
one of the world's largest manufacturers of recording heads. In addition, we
have in the past licensed, and in the future may license, our technology to
entities who use the licensed technology to satisfy their own or third-party
product demand. For example, we have licensed our DSMR wafer production
technology to Seagate. We expect that Seagate will continue to use the
licensed DSMR technology to manufacture a significant portion of its future
DSMR wafer demand.
In July 1999, we entered into a patent license agreement and a technology
transfer agreement with IBM under which, among other things, we licensed to IBM
all existing and future patents that are filed by us through December 31, 2002
for the life of the patents. These agreements may allow IBM to compete more
effectively against us. Increased production of recording heads by third
parties pursuant to a technology license from us could materially harm our
business.
11
<PAGE>
To achieve significant revenue growth, we must become a significant supplier to
the desktop market
Our development efforts and volume sales have historically been focused on
the server and mobile markets. These markets tend to be less price competitive
than the desktop market, but they also typically have smaller program volumes.
The desktop market is characterized by large program volumes, rapid product
transitions, severe price competition and a lower emphasis on technological
differentiation. We have limited experience providing recording head products
to the desktop market and cannot be sure that we will be able to significantly
penetrate this market.
We rely on a limited number of subcontract manufacturers to build our slider
and HGA products
We currently subcontract, and expect to continue to subcontract, all of our
slider and HGA manufacturing to a limited number of offshore manufacturers,
except for limited volumes for prototype and research and development.
Currently, our primary subcontractor is SAE, a wholly-owned subsidiary of TDK
who performs these services in China. Pursuant to an agreement with us, SAE
has agreed to manufacture sliders and HGAs through the year 2002. SAE also
provides similar subcontract services to some of our competition, including
ALPS and IBM. If SAE ceases to provide subcontracting services or elects not
to dedicate available capacity to us when faced with either increased demand or
limited production capacity, we would then be required to secure an alternative
subcontract manufacturer. Assuming additional capacity is available from other
qualified subcontract manufacturers on commercially acceptable terms, the
process of qualifying these subcontractors with our customers could be lengthy
and could create delays in product shipments. An inability to secure
subcontract manufacturing on acceptable terms on a timely basis, or at all,
would adversely impact our ability to sell products, which in turn could
materially harm our business.
Some of the key components in our products and the equipment used in our
manufacturing processes come from single or limited sources of supply
Components necessary for the manufacture of our products are frequently
obtained from a single supplier or a limited group of preferred suppliers. We
do not maintain any long-term agreements with any of our component suppliers.
In the future, these single or limited source suppliers may be unable to meet
our requirements on a timely basis or on acceptable terms. A shortage of any
key component could materially harm our business. If a component supplier
raises its prices, we may be unable to obtain substitute components at
acceptable costs and we may not be able to pass these increased costs along to
our customers.
In addition, our component suppliers must be qualified with our customers.
Depending on the supplier, this qualification process may be complex and time
consuming. Because the purchase of key components may involve long lead times,
if there is an unanticipated increase in demand for our products or a supplier
is unable to meet our orders, we could be unable to manufacture some of our
products in a quantity sufficient to meet demand. Several pieces of equipment
used in the manufacture of our products can only be obtained from sole or
limited source suppliers. Replacing this equipment or acquiring new equipment
in connection with any plant expansion would involve long lead times. This
equipment may not be delivered, installed and operational in a timely manner.
We depend on key personnel who may not remain with us in the future
Our success depends to a significant extent upon a limited number of our
senior management and other key employees. The loss of one or more senior
managers or key employees could materially harm our business. We do not
maintain any key-man life insurance policies on any of our key personnel and do
not have employment agreements with any of our executive officers. In
addition, we believe our future success will depend, in part, on our ability to
attract and retain highly skilled technical and managerial personnel.
Competition for these personnel is intense in the technology industry,
particularly in Silicon Valley, where
12
<PAGE>
our facilities are located. Moreover, there are a limited number of
individuals with appropriate recording head industry experience, making the
competition for these individuals even more intense. We may not be successful
in attracting and retaining such personnel, and the failure to do so could
materially harm our business.
We may be unable to protect our proprietary technology
Although we attempt to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we may not be able to
protect our technology adequately and competitors may be able to develop
similar technology independently. We have 11 issued patents in the United
States and have 31 additional United States patent applications pending. We
may not be able to obtain patents on all aspects of our technology relating to
our recording head technology. Any patents issued to us may not be
sufficiently broad to protect our technology. The status of computer-related
patents involves complex legal and factual questions and the breadth of claims
allowed is uncertain. Accordingly, patent applications filed by us may not
result in patents being issued. Further, our existing patents, and any patents
which may be issued to us in the future, may not afford protection against
competitors with similar technology. Patents issued to us may be infringed
upon or designed around by others and others may possess or obtain patents that
we would need to license or design around. Further, we have only limited
patent rights outside the U.S. and the laws of certain foreign countries may
not protect our intellectual property rights to the same extent as do the laws
of the U.S.
In the past, we have been notified that we may be infringing patents owned by
others. We may receive additional infringement claims in the future. If it
appears necessary or desirable, we may seek licenses under patents which we are
allegedly infringing. If existing or future patents containing broad claims
are upheld by the courts, the holders of these patents might be in a position
to require companies, including us, to obtain licenses. Licenses which might
be required for us to avoid infringement of these patents may not be available
on reasonable terms, if at all, and we may not be able to avoid infringement of
these patents. The failure to obtain a key patent license from a third party
could cause us to incur substantial liabilities and to suspend the manufacture
of the products utilizing the patented invention.
Litigation may be necessary to enforce our patents, copyrights or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or claims for indemnification resulting from
infringement claims by third parties. This litigation, regardless of the
outcome, could result in substantial costs and diversion of resources and could
materially harm our business.
We rely on a single manufacturing facility
Our Milpitas, California facility, which currently accounts for, and is
expected to account for, all of our wafer fabrication capacity, is located near
major earthquake faults. Disruption of operations for any reason, including
power failures, work stoppages or natural disasters such as fires, floods or
earthquakes would cause delays in, or an interruption of, production and
shipment of products, which would materially harm our business.
It is difficult and expensive for us to plan an expansion of our manufacturing
capacity
We must anticipate demand for our products and the path of new technologies
so that we will have sufficient production capacity to meet our customers'
requirements. Accurate capacity planning is complicated by the pace of
technological change, unpredictable demand variations, fluctuating
manufacturing yields and long lead times associated with the acquisition of
plant and equipment. These planning difficulties are exacerbated by the
lengthy sales cycle for our products. Our underestimation or overestimation of
our capacity requirements, or inability to successfully and timely develop and
implement the proper technologies, would materially harm our business.
13
<PAGE>
We will need additional capital to stay competitive
The manufacturing of recording heads is capital intensive. In 1998, we
deployed $66.0 million in equipment and facilities, including $31.4 million of
operating leases. We believe we will need significant additional financial
resources over the next several years for capital expenditures and working
capital in order to remain competitive. The advancement of recording head
technology is tightly coupled with the introduction of new manufacturing
processes. The capital equipment required to deploy these new processes is
expensive. In addition, our customers prefer suppliers which can provide a
substantial portion of their volume requirements. Therefore, in order to be
considered an acceptable supplier, we must be able to quickly purchase new
capital equipment required by new manufacturing processes and to expand our
manufacturing capacity in order to meet customers' requirements and remain
competitive.
To meet anticipated future capital requirements, including capital
expenditures, we may need additional sources of capital. Additional funds may
not be available to us or, if available, these funds may not be available to us
upon terms and conditions acceptable to us. If we are unable to obtain
sufficient capital, we would need to curtail our operating and capital
expenditures, which would harm our business. The failure of actual demand for
our products to meet anticipated demand could result in under-utilization of
our capacity which, in turn, could materially harm our business.
Our international operations expose us to additional risks
Our product sales to foreign corporations and their U.S. subsidiaries
represented 73.0% and 51.0% of total revenue in 1998 and the six months ended
July 3, 1999, respectively. Our subcontract manufacturing occurs offshore.
International sales and manufacturing are subject to a number of risks,
including:
.changes in foreign government regulations and standards;
.export license requirements;
.tariffs, taxes and other trade barriers;
.fluctuations in currency exchange rates;
.difficulty in collecting accounts receivable;
.loss in shipment; and
.difficulties of enforcing contracts and judgments against third parties.
Although international sales and cost commitments are typically denominated
in U.S. dollars, fluctuations in currency exchange rates could cause our
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country. In
particular, several Asian countries have experienced significant economic
downturns and significant declines in the value of their currencies relative to
the U.S. dollar. Further, payment cycles for international customers may be
longer than those for our U.S. customers. We are also subject to geopolitical
risks, such as political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships, in connection
with international operations. We are unable to predict what effect, if any,
these factors will have on our ability to maintain or increase our product
sales or to manufacture products in these markets, or what economic effects
these factors will have upon general economic conditions, the disk drive
industry, our customers or our operations.
We may be unable to properly manage our growth
In the last 12 months, we have added significant manufacturing capacity.
This growth has resulted in new and increased responsibilities for management
personnel and continues to place a significant strain upon our management,
operating and financial resources. This offering and our status as a public
company are expected to place additional demands on our management team. Our
executive officers have limited or
14
<PAGE>
no experience in serving as executive officers of a public company. Our
ability to manage our expanded operations effectively will require us to
improve all aspects of our operations, including our operational and financial
systems, and to train, motivate and manage our employees.
Subsequent to the offering, we may replace our current financial and
accounting software with an enterprise resource planning software system, or
ERP system. This system is complex, time consuming to install and require
extensive training of personnel. Our inability to effectively implement this
ERP system may materially harm our business.
To manage our operations, we must continuously evaluate the adequacy of our
management structure and our existing procedures, including our financial and
internal controls. Management may not adequately anticipate all of the
changing demands that growth may impose on our procedures and structure. Our
inability to adequately anticipate and respond to such changing demands could
materially harm our business.
Our manufacturing processes use hazardous chemicals which subject us to
government environmental regulations
The operation of our Milpitas manufacturing facility requires that we comply
with a number of environmental regulations and that we have the necessary
environmental, fire, waste neutralization, air abatement, building and use
permits. We must comply with a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
our wafer manufacturing processes. For the past several months, we have been
in negotiations with the San Francisco Bay Area Air Quality Management
District, or the BAAQMD, regarding certain alleged permit limitations
infractions resulting from the use of two volatile organic compounds in our
manufacturing processes. We have actively pursued a settlement of this matter
and have been working in a cooperative manner with the BAAQMD. Counsel for us
and the BAAQMD are currently negotiating a Stipulated Settlement Agreement and
Conditional Order for Abatement under the terms of which, if approved, we would
agree to pay a $12,500 fine to BAAQMD and install approximately $1.0 million of
air abatement devices over a pre-determined time period. The terms of the
agreement also are subject to the approval of the BAAQMD Hearing Board and
there can be no assurance that approval will be granted or that the final
settlement will be the same. Our inability to reach an agreement with the
BAAQMD, to obtain or comply with this settlement agreement or our inability to
materially comply with applicable environmental regulations and to obtain
required permits on a timely basis could subject us to potential liabilities or
result in the suspension of production. Some of our permits require annual
renewals, which we may not be able to obtain. Environmental regulations could
also restrict our ability to expand our facilities or could require us to
acquire costly equipment or incur other significant expense to comply with
these regulations. In addition, certain of our permits require the purchase
and installation of additional capital equipment for waste neutralization and
air abatement in the event our production volumes substantially change. In
connection with our plant expansion completed in 1998, we were required to,
among other things, replace several pieces of manufacturing equipment and
significantly upgrade our waste water treatment system.
Our inability and the inability of our key suppliers and customers to be Year
2000 compliant could materially harm our business
The "Year 2000" issue causes many computer systems and software products to
incorrectly recognize date information starting on January 1, 2000. We rely on
systems and applications in operating and monitoring all major aspects of our
business, including financial systems, customer services, infrastructure,
embedded computer chips, networks and telecommunications equipment. We are in
the process of upgrading our software to address the "Year 2000" issue. We
currently estimate that the costs associated with making our internal systems
and business operations "Year 2000" compliant, and the consequences of
incomplete or untimely resolution of making our systems and operations
compliant, will not materially harm our business. We also directly and
indirectly exchange data with customers, suppliers, creditors, financial
organizations and governmental entities. Therefore, even if our internal
systems are not materially affected
15
<PAGE>
by the "Year 2000" issue, we could be affected through disruptions in the
operation of the enterprises with which we interact. This impact may result in
disruption of our business and may materially harm our business.
Substantial sales of our common stock could adversely affect our stock price
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock. The
introduction of a large number of shares of our common stock into a market in
which our common stock price is already volatile, could drive down our common
stock price. In addition, the sale of these shares could impair our ability to
raise capital through the sale of additional equity securities. Based on
shares outstanding as of July 3, 1999, upon completion of this offering, we
will have shares of common stock outstanding, or shares if the
underwriters' over-allotment option is exercised in full. Our directors,
executive officers and current stockholders have executed lock-up agreements
that limit their ability to sell shares of our common stock. These
stockholders have agreed, subject to limited exceptions, not to sell or
otherwise dispose of any shares of our common stock for a period of at least
180 days after the date of this prospectus without the prior written approval
of Hambrecht & Quist LLC. When these lock-up agreements expire, these shares
and the shares of common stock underlying any options held by these individuals
will become eligible for sale, in some cases pursuant only to the volume,
manner of sale and notice requirements of Rule 144.
Our stock price may be volatile
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. The market for technology stocks has been extremely
volatile. The following factors could cause the market price of our common
stock to fluctuate significantly from the price paid by investors in this
offering:
. variations in our quarterly operating results;
. announcements by us or our competitors of significant contracts, new
products or purchase orders, or strategic arrangements;
. conditions and trends in the disk drive and recording head industries;
. adoption of new accounting standards affecting the disk drive component
industry;
. changes in financial estimates by securities analysts; and
. fluctuations in stock market prices and volumes.
Control by existing stockholders may limit your ability to influence the
outcome of director elections and certain transactions
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own approximately
% of our outstanding common stock ( % if the underwriters' over-allotment
option is exercised in full). These stockholders, if acting together, would be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
16
<PAGE>
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company
Provisions in our bylaws and in our certificate of incorporation, both as
amended and restated upon the closing of this offering, may have the effect of
delaying or preventing a change of control or changes in management of our
company. These provisions include the:
. establishment of a classified board of directors;
. stipulation that a special meeting of stockholders may only be called by
stockholders owning at least 50% in the aggregate of our outstanding
shares;
. ability of our board of directors to issue preferred stock without
stockholder approval; and
. right of our board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law. These provisions prohibit a stockholder who owns 15%
or more of our outstanding voting stock from consummating a merger or
combination with us unless this stockholder receives board approval for the
transaction or unless 66 2/3% of the outstanding shares of our voting stock not
owned by this stockholder approve the merger or combination.
Investors will experience immediate dilution
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after this offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately $
in the book value per share of our common stock from the price you pay for our
common stock. This calculation assumes that you purchased our common stock for
$ per share.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, which may include statements about our:
. business strategy;
. estimates for the growth of the disk drive market;
. plans for entering the desktop segment of the disk drive market;
. plans for the introduction of new products;
. anticipated sources of funds, including the net proceeds from this
offering, to fund our operations for the 12 months following the date of
this prospectus; and
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. In addition, this prospectus
includes statistical data about the disk drive market that comes from
information published by sources including Trend Focus and International Data
Corporation. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of reasons, including
those discussed under "Risk Factors" and elsewhere in this prospectus.
18
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
We estimate that we will receive net proceeds of $ from the sale of
the shares of common stock in this offering. This estimate of net
proceeds assumes an initial public offering price of $ per share, after
deducting the estimated underwriting discounts and commissions and offering
expenses.
While we cannot predict with certainty how the proceeds of this offering will
be used, we currently intend to use a portion of the net proceeds to repay the
following notes payable:
.$7.4 million note payable to Western Digital due June 30, 2000 which bears
interest at 8.50%;
.$3.6 million note payable to Maxtor due June 30, 2000 which bears interest
at 7.50%; and
.$1.4 million note payable to Komag due February 15, 2001 which bears
interest at 7.00%.
We intend to use the remainder of the proceeds of this offering to make
capital expenditures related to infrastructure and capacity expansion and for
general corporate purposes, including working capital. Although we are not
currently engaged in any active negotiations and have no commitments or
agreements with respect to any acquisition, we might in the future use a
portion of the remaining proceeds to pay for acquisitions. Prior to using the
net proceeds, we will invest the net proceeds of this offering in short-term,
investment grade, interest-bearing investments or accounts.
The amounts we actually spend for these purposes may vary significantly and
will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described under "Risk Factors."
Therefore, we will have broad discretion in the way we use the net proceeds.
DIVIDEND POLICY
We have not declared or paid cash dividends on shares of our common stock or
other securities. We intend to retain any future earnings for future growth
and do not anticipate paying any cash dividends in the foreseeable future. Our
debt obligations currently limit the payment of dividends.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of July 3, 1999.
The pro forma information reflects the filing of an amendment to our amended
and restated certificate of incorporation to provide for authorized capital
stock of 75,000,000 shares of common stock and 5,000,000 shares of undesignated
preferred stock, and the conversion of all outstanding shares of preferred
stock into 15,764,535 shares of common stock on the closing of this offering.
The pro forma as adjusted information reflects the sale of the shares of
common stock offered hereby and application of the net proceeds at an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses.
The outstanding share information excludes:
. 5,305,401 shares of common stock issuable upon the exercise of
outstanding options as of July 3, 1999 at an average exercise price of
$1.15 per share;
. 56,161 shares of common stock issuable, net of cancellations, upon the
exercise of options granted between July 3, 1999 and August 19, 1999 at
an average exercise price of $4.50 per share;
. 1,029,946 shares of common stock issuable upon the exercise of options
granted on August 19, 1999 at an exercise price of $5 per share; and
We reserved 3,456,903 shares of common stock for future issuance under our
stock option plan, director option plan and employee stock purchase plan as of
August 19, 1999.
The information below is qualified by, and should be read in conjunction
with, our consolidated financial statements and the notes to those consolidated
financial statements appearing at the end of this prospectus.
<TABLE>
<CAPTION>
As of July 3, 1999
--------------------------------
Pro forma
Actual Pro forma as adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Current portion of notes payable and capital
leases........................................ $ 24,871 $ 24,871 $
======== ======== =======
Notes payable and capital leases, less current
portion....................................... $ 23,529 $ 23,529 $23,529
Stockholders' equity:
Series A convertible preferred stock, $.001
par value; 15,764,535 shares authorized,
issued and outstanding, actual; 5,000,000
shares authorized, pro forma and pro forma
as adjusted; no shares issued and
outstanding, pro forma and pro forma as
adjusted.................................... 37,122 -- --
Common Stock, $.001 par value; 75,000,000
authorized; 1,213,144 shares issued and
outstanding, actual; 75,000,000 authorized,
pro forma and pro forma as adjusted;
16,977,679 shares issued and outstanding,
pro forma; shares issued and outstanding,
pro forma as adjusted....................... 589 37,711
Deferred compensation........................ (197) (197)
Accumulated deficit.......................... (11,524) (11,524)
-------- -------- -------
Total stockholders' equity................. 25,990 25,990
-------- -------- -------
Total capitalization..................... $ 49,519 $ 49,519 $
======== ======== =======
</TABLE>
20
<PAGE>
DILUTION
As of July 3, 1999, our pro forma net tangible book value, after giving
effect to the conversion of all shares of preferred stock outstanding as of
July 3, 1999 into common stock on the closing of this offering, was
$15,821,000, or approximately $0.93 per share. Pro forma net tangible book
value per share represents the amount of total actual tangible assets less
total actual liabilities, divided by the 16,977,679 shares of common stock
outstanding after giving effect to the conversion of the preferred stock
outstanding as of July 3, 1999 into common stock. After giving effect to the
sale of the shares of common stock we are offering and deducting the
underwriting discount and commissions and estimated offering expenses, our
adjusted pro forma net tangible book value as of July 3, 1999 would have been
$ , or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $
Pro forma net tangible book value per share as of July 3,
1999...................................................... $0.93
Increase per share attributable to new investors...........
-----
As adjusted pro forma net tangible book value per share after
this offering...............................................
-------
Dilution per share to new investors.......................... $
=======
</TABLE>
The following table sets forth on a pro forma basis, as of July 3, 1999, the
difference between the number of shares of common stock purchased, the total
consideration paid and the average price per share paid by the existing
stockholders and the new investors purchasing shares of common stock in this
offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 16,977,679 $37,998,000 $2.24
New investors .........
---------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The number of outstanding shares in the foregoing discussion and table
excludes:
. 5,305,401 shares of common stock issuable upon the exercise of
outstanding options as of July 3, 1999 at an average exercise price of
$1.15 per share;
. 56,161 shares of common stock issuable, net of cancellations, upon the
exercise of options granted between July 3, 1999 and August 19, 1999 at
an average exercise price of $4.50 per share; and
. 1,029,946 shares of common stock issuable upon the exercise of options
granted on August 19, 1999 at an exercise price of $5 per share.
We reserved 3,456,460 shares of common stock for future issuance under our
stock option plan, director option plan and employee stock purchase plan as of
August 19, 1999.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and their related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. We have prepared this information
using our consolidated financial statements for the period from April 4, 1994
(inception) to January 1, 1995, the years ended December 31, 1995, December 29,
1996, December 28, 1997 and January 2, 1999 and the six-month periods ended
June 27, 1998 and July 3, 1999. Our consolidated financial statements for the
three years in the period ended January 2, 1999 have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this
prospectus. Our consolidated financial statements for the period from April 4,
1994 (inception) to January 1, 1995 and the year ended December 31, 1995 have
been audited by Ernst & Young LLP, independent auditors, and are not included
in this prospectus. Our consolidated financial statements for the six-month
periods ended June 27, 1998 and July 3, 1999 have not been audited and are
included elsewhere in this prospectus. For a discussion of the computation of
pro forma net income per common share, you should review Note 1 to our
consolidated financial statements. Our unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which we consider necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the six
months ended July 3, 1999 are not necessarily indicative of the results that
may be expected for the entire year ending January 1, 2000.
<TABLE>
<CAPTION>
Period from
April 4, 1994 Years Ended Six Months Ended
(inception) ---------------------------------------------- -----------------
to Jan. 1, Dec. 28, Jan. 2, June 27, July 3,
1995 Dec. 31, 1995 Dec. 29, 1996 1997 1999 1998 1999
------------- ------------- ------------- -------- -------- -------- -------
(predecessor) (predecessor) (predecessor) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Product sales, net..... $ 556 $ 99 $ 4,421 $ 52,369 $177,669 $91,850 $70,693
Product sales to
related parties, net.. -- 15,702 20,871 -- -- -- --
Technology transfers
and royalties......... -- 4,000 1,500 2,000 1,750 750 2,093
------- ------- ------- -------- -------- ------- -------
Total revenue......... 556 19,801 26,792 54,369 179,419 92,600 72,786
Cost of sales.......... 1,164 17,844 22,616 41,222 137,001 69,057 50,928
------- ------- ------- -------- -------- ------- -------
Gross (loss) profit... (608) 1,957 4,176 13,147 42,418 23,543 21,858
Operating expenses:
Research and
development........... 4,627 6,269 5,066 20,287 25,458 11,611 16,780
Selling, general and
administrative........ 641 2,806 3,418 5,198 6,618 3,503 2,680
Acquired in-process
technology............ -- -- -- 6,000 -- -- --
------- ------- ------- -------- -------- ------- -------
Total operating
expenses............. 5,268 9,075 8,484 31,485 32,076 15,114 19,460
------- ------- ------- -------- -------- ------- -------
Operating (loss)
income................ (5,876) (7,118) (4,308) (18,338) 10,342 8,429 2,398
Interest income
(expense), net........ 38 100 (659) (1,066) (2,438) (904) (1,572)
------- ------- ------- -------- -------- ------- -------
(Loss) income before
income taxes and
extraordinary item.... (5,838) (7,018) (4,967) (19,404) 7,904 7,525 826
Provision for income
taxes................. -- -- -- -- 1,475 1,402 206
------- ------- ------- -------- -------- ------- -------
(Loss) income before
extraordinary item.... (5,838) (7,018) (4,967) (19,404) 6,429 6,123 620
Extraordinary item, net
of income taxes....... -- -- -- -- 306 -- --
------- ------- ------- -------- -------- ------- -------
Net (loss) income...... $(5,838) $(7,018) $(4,967) $(19,404) $ 6,735 $ 6,123 $ 620
======= ======= ======= ======== ======== ======= =======
Pro forma basic net
income per share...... $ 0.42 $ 0.39 $ 0.04
======== ======= =======
Pro forma diluted net
income per share...... $ 0.33 $ 0.30 $ 0.03
======== ======= =======
Shares used in
computing pro forma
basic net income per
share................. 16,093 15,754 16,677
======== ======= =======
Shares used in
computing pro forma
diluted net income per
share................. 20,573 20,276 20,717
======== ======= =======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Dec. 28, Jan. 2, July 3,
Jan. 1, 1995 Dec. 31, 1995 Dec. 29, 1996 1997 1999 1999
------------- ------------- ------------- -------- ------- -----------
(predecessor) (predecessor) (predecessor) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents........... $12,113 $ 7,264 $ 6,770 $22,574 $24,350 $22,083
Working capital
(deficit)............. 11,083 8,253 3,636 10,114 (1,721) (4,697)
Total assets........... 19,644 33,763 32,615 65,973 89,766 90,328
Current portion of
notes payable and
capital leases........ -- 1,767 3,056 14,545 16,678 24,871
Notes payable and
capital leases, less
current portion....... -- 7,858 10,483 22,344 22,879 23,529
Stockholders' equity... 17,950 20,936 15,974 15,534 25,214 25,990
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with our consolidated
financial statements and the related notes appearing at the end of this
prospectus. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
"Risk Factors," "Business" and elsewhere in this prospectus.
Overview
We are a leading supplier of recording head products to the computer hard
disk drive industry. We were founded in 1994 and initially focused exclusively
on high performance recording head technologies for hard disk drives in the
server market. We expanded our focus to develop recording head products for
the mobile market and subsequently the desktop market. Our products have been
successfully integrated into Seagate's industry leading 10,000 rpm Cheetah
server disk drives, Toshiba's high-performance mobile disk drives and Maxtor's
desktop disk drives.
Our first customer and largest initial investor was HP who accounted for
substantially all of our product sales through 1996. In July 1996, HP
announced it was exiting the disk drive industry and would be selling its
equity interest in us. As a result, we recapitalized in January 1997. In
connection with the recapitalization, the original investor group, including
HP, sold their interest in us to a new investor group. The recapitalization
was accounted for under the purchase method of accounting, with the $23.2
million purchase price, including $1.2 million of transaction related fees,
exceeding our net book value by $7.7 million. This excess was allocated, based
on fair value, $6.0 million to in-process technology, $700,000 to developed
technology, $910,000 to assembled workforce and $100,000 to goodwill. We
expensed the $6.0 million assigned to in-process technology during the three
months ended March 30, 1997. We are amortizing the developed technology,
assembled workforce and goodwill over periods ranging from one to three years.
Amortization of assembled workforce and goodwill is included in research and
development expense and amortization of developed technology is included in
cost of sales.
We sell wafers, sliders and HGAs to our customers. Each wafer contains up to
22,000 potential recording heads and these are sold to customers who have the
capacity to convert our wafers into completed recording heads. We provide
sliders and HGAs for customers who do not have access to an established back-
end production operation and thus do not have the capacity to convert our
wafers into completed recording heads. Multiple HGAs are typically assembled
into a head stack assembly, or an HSA, before integration into a hard disk
drive. We currently do not sell HSAs. We have historically had a limited
number of customers and expect this to continue to be the case. Our sales are
generally made pursuant to individual purchase orders with revenue from product
sales recognized upon shipment. These purchase orders are subject to
cancellation, modification, quantity reduction or rescheduling without
significant penalties.
We have licensed our DSMR technology to Seagate in exchange for technology
transfer fees, royalty payments and minimum purchase commitments. Through July
3, 1999, we received $9.3 million from technology transfer fees and $2.1
million in royalties. We have recognized the technology transfer fees as
revenue upon the achievement of stipulated milestones and recognized royalties
based on Seagate sales as reported by Seagate to us. We will not receive any
additional technology transfer fees in the future under these agreements. We
expect Seagate to decrease production of DSMR recording head products over the
next 12 months. Therefore, we do not expect the royalty payments or purchase
obligations to continue to be significant after the first half of fiscal year
2000. We cannot assure you that we will enter into any similar type of
agreements with Seagate or any other party in the future.
24
<PAGE>
Cost of sales consists primarily of wafer fabrication expenses,
subcontracting expenses and licensee fees. Wafer fabrication expenses include
employee related expenses for direct labor as well as manufacturing indirect
labor, quality assurance, equipment and facility maintenance and manufacturing
engineering support. Wafer fabrication expenses also include the cost of parts
and services required for the maintenance of the equipment, equipment rental,
equipment depreciation, material costs, both direct and indirect, and a
significant portion of our facility expenses. Subcontracting expense is
typically based on the number of sliders or HGAs shipped by the subcontractor
and includes the cost of any material purchased from third parties such as
suspensions. Subcontracting prices are determined in part by subcontracting
yields, with lower yields resulting in higher subcontracting prices. Licensee
fees include the amortization of licenses we have previously purchased from
third parties.
We produce our wafers in our own fabrication facility located in Milpitas.
The operation of a wafer fabrication facility is highly capital intensive and
involves large fixed costs. For the purpose of providing prototype products
for internal use and early product samples to our customers, we have limited
slider and HGA operations in our Milpitas facility. The majority of the costs
associated with these operations are classified as research and development
expenses. Currently, we subcontract almost all of our slider and HGA
production to third parties. Slider and HGA fabrication are similarly capital
intensive but also require substantially more labor during the manufacturing
and test processes. We have primarily used SAE, a Hong Kong based subsidiary
of TDK, for our slider and HGA subcontracting requirements.
We hold a 49.5% interest in MRST, a Hong Kong joint venture with SFI
Investment Limited. SFI also has ownership interests in other subcontracting
operations. MRST was formed to provide subcontracting services to us. MRST
currently is providing us subcontracting services by further subcontracting
work to other third parties. MRST intends to develop internal slider assembly
capacity to meet a portion of our slider requirements and to continue to
subcontract the balance of our slider requirements. We will record our
allocable share of MRST's financial results under the equity method of
accounting.
Gross profit on wafer sales is primarily determined by the level of wafer
output in relation to the large and relatively fixed costs associated with
operating a wafer fabrication facility. Wafers typically are priced and sold
based on the number of potential recording heads, or candidates, contained in
them. Sliders and HGA gross profits reflect the cost of the candidate as well
as the subcontracting costs and, in the case of HGAs, the costs of the
suspensions used. Candidate selling prices are substantially lower than slider
and HGA selling prices but generate a larger gross margin. Recently, the hard
disk drive industry has been under severe price pressure and has responded in
part by placing similar pressure on component suppliers such as ourselves. In
addition, our competitors may be willing to sell products at low or negative
gross margins to partially offset the fixed costs associated with their
operations. Our quarterly revenues and gross profits may change due to many
factors, including:
. average unit selling prices;
. product mix;
. the level of unit sales in relation to fixed costs and capacity;
. manufacturing yields; and
. material costs.
Research and development expense includes salaries and related costs of
employees engaged in research, design and development activities and fees paid
to consultants and outside service providers. Other important elements are the
cost of prototype wafers, sliders and HGAs produced for research and
development purposes and a portion of our facility expenses. We believe that
continued investment in research and development is critical to our strategic
objectives. As a result, we expect these expenses to increase in absolute
dollars in the future.
25
<PAGE>
Selling, general and administrative expense consists primarily of employee
related expenses for executive, finance, information systems and human resource
personnel, professional fees, other corporate expenses and a portion of our
facility expenses. We expect selling, general and administrative expenses to
increase in absolute dollars as we increase personnel and incur additional
costs related to our operation as a public company.
In connection with the grant of certain stock options to employees during
1997 and the first three months of 1998, we recorded deferred compensation of
$331,000, representing the difference between the deemed fair value of the
common stock underlying the options and the exercise price of certain options
at the date of grant. This amount is presented as a reduction of stockholders'
equity and amortized ratably over the vesting period of the applicable
options. Amortization of deferred compensation recorded in 1998 and in the
first six months of 1999 was $81,461 and $41,482, respectively. We currently
expect to record amortization of deferred compensation related to these option
grants of approximately $21,000 per quarter through the last quarter of 2001.
We operate on a 52 or 53 week fiscal year with quarterly results based on
fiscal quarters of thirteen or fourteen weeks in duration ending on the last
Saturday of each quarter. The fiscal years ended December 29, 1996 and
December 28, 1997 each contained 52 weeks consisting of four thirteen week
quarters. The fiscal year ended January 2, 1999 contained 53 weeks consisting
of three thirteen week quarters and one fourteen week quarter which was the
quarter ended October 3, 1998.
Results of Operations
The following table sets forth the results of our operations as a percentage
of total revenue for the periods indicated. Our historical operating results
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------------- ----------------
Dec. 28, Jan. 2, June 27, July 3,
Dec. 29, 1996 1997 1999 1998 1999
------------- -------- ------- -------- -------
(predecessor)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales, net.......... 16.5 % 96.3 % 99.0% 99.2% 97.1%
Product sales to related
parties, net............... 77.9 -- -- -- --
Technology transfers and
royalties.................. 5.6 3.7 1.0 0.8 2.9
----- ----- ----- ----- -----
Total revenue.............. 100.0 100.0 100.0 100.0 100.0
Cost of sales................ 84.4 75.8 76.3 74.6 70.0
Gross margin................. 15.6 24.2 23.7 25.4 30.0
Operating expenses:
Research and development.... 18.9 37.3 14.2 12.5 23.0
Selling, general and
administrative............. 12.7 9.6 3.7 3.8 3.7
Acquired in-process
technology................. -- 11.0 -- -- --
----- ----- ----- ----- -----
Total operating expenses... 31.6 57.9 17.9 16.3 26.7
Operating (loss) income...... (16.0) (33.7) 5.8 9.1 3.3
Interest income (expense),
net......................... (2.5) (2.0) (1.4) (1.0) (2.2)
----- ----- ----- ----- -----
Loss (income) before income
taxes and extraordinary
item........................ (18.5) (35.7) 4.4 8.1 1.1
Provision for income taxes... -- -- 0.8 1.5 0.3
----- ----- ----- ----- -----
(Loss) income before
extraordinary item.......... (18.5) (35.7) 3.6 6.6 0.8
Extraordinary item, net of
income taxes................ -- -- 0.2 -- --
----- ----- ----- ----- -----
Net (loss) income............ (18.5)% (35.7)% 3.8% 6.6% 0.8%
===== ===== ===== ===== =====
</TABLE>
26
<PAGE>
Comparison of Six Months Ended July 3, 1999 and June 27, 1998
Total Revenue. Total revenue decreased 21.4% to $72.8 million for the first
six months of 1999, from $92.6 million for the same period in 1998. During the
first six months of 1999, Seagate and Toshiba each represented more than
ten percent of our total revenue and combined represented 94.4% of our total
revenue as compared to 90.6% during the first six months of 1998. A
substantial portion of the decrease in total revenue related to lower HGA unit
sales to Toshiba. During the first six months of 1999, HGA and slider sales
represented 53.0% of product sales as compared to 72.5% during the first six
months of 1998. HGAs and sliders have higher average selling prices,
reflecting the additional processing and materials required. The decrease in
total revenue was partially offset by an increase in wafer sales and an
increase in technology transfers and royalty revenue.
Cost of Sales; Gross Profit. Gross profit decreased to $21.9 million in the
first six months of 1999 from $23.5 million in the comparable period of 1998.
Gross margin increased to 30.0% during the first six months of 1999 from 25.4%
during the first six months of 1998. Gross margin improved because of a shift
in product mix. Specifically, during the first six months of 1999, wafers,
which typically have a higher gross margin, represented a larger portion of
total revenue. In addition, an increase in revenue from technology transfer
fees and royalties during the first six months of 1999 helped increase gross
margin.
Research and Development Expense. Research and development expense increased
44.8% to $16.8 million in the first six months of 1999, representing 23.0% of
total revenue, from $11.6 million and 12.5% of total revenue for the same
period in 1998. This increase resulted primarily from an increase in research
and development head count and the increased volume of prototype activities,
especially related to the development of our GMR products.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 22.9% to $2.7 million in the first six months
of 1999, representing 3.7% of total revenue, from $3.5 million and 3.8% of
total revenue for the same period in 1998. This decrease reflects professional
fees incurred during the first six months of 1998 for an uncompleted
financing. In addition, selling, general and administrative expense was
reduced during the first six months of 1999 to reflect the receipt of $497,691
in payments on debt which had previously been expensed as unrecoverable.
Interest Income (Expense), net. Interest expense net of interest income
increased 77.8% to $1.6 million in the first six months of 1999, representing
2.2% of total revenue, from $0.9 million and 1.0% of total revenue for the same
period in 1998. Interest expense increased significantly as we incurred debt
to finance our capacity expansion.
Provision for Income Taxes. We recorded a $0.2 million provision for income
taxes for the first six months of 1999 compared to a $1.4 million provision for
the same period in 1998. The provision for income taxes for the first six
months of 1999 was based on a projected annual effective tax rate of 25.0%.
The projected 1999 annual effective tax rate is less than the federal statutory
rate primarily due to the anticipated realization of tax net operating loss and
tax credit carryforwards. A portion of our loss carryforwards may be subject
to annual utilization limitations imposed by the "change in ownership"
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. See Note 9 to our consolidated financial statements.
Comparison of Years Ended January 2, 1999 and December 28, 1997
Total Revenue. Total revenue increased 229.8% to $179.4 million in 1998 from
$54.4 million in 1997 as the result of successful qualifications into customer
programs, increased production capacity and increased volume sales of HGAs and
sliders. During 1998, Seagate and Toshiba each represented more than
ten percent of our total revenue and combined represented 94.1% of our total
revenue as compared to 85.5% during 1997. During 1998, our three largest
customers were purchasing production volume units for the entire year whereas
during 1997, customers and programs were being added during the year.
27
<PAGE>
Cost of Sales; Gross Profit. Gross profit increased to $42.4 million in 1998
from $13.1 million in 1997, while gross margins remained relatively constant.
Gross profit increased primarily as a result of increased product sales.
Research and Development Expense. Research and development expense increased
25.6% to $25.5 million in 1998, representing 14.2% of total revenue, from $20.3
million and 37.3% of total revenue in 1997. The increase in research and
development expense was primarily the result of increased activities related to
new product qualifications.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 26.9% to $6.6 million in 1998, representing
3.7% of total revenue, from $5.2 million and 9.6% of total revenue in 1997.
This increase was primarily a result of professional fees incurred during the
first six months of 1998 for an uncompleted financing.
Acquired In-process Technology. We accounted for our January 1997
recapitalization under the purchase method of accounting, as substantially all
of the stockholders after the recapitalization were new stockholders. Of the
total purchase price of approximately $23.2 million, including transaction
costs, we allocated approximately $6.0 million to the purchase of in-process
technology.
We generally determined the values assigned to the in-process and developed
technologies through established valuation techniques in the information
storage industry using the income approach. To determine the value of in-
process and developed technologies, we considered, among other factors: the
nature of each project; the classification into developed or in-process
technology; the state of development of each project; the relative importance
of each project to our success; the time and cost needed to complete each
project; expected income; and associated risks which included the inherent
difficulties and uncertainties in completing the projects. We also considered
the inherent risks related to the viability of, and potential changes to,
future target markets.
At the date of acquisition, the technologies acquired were estimated to be
approximately 75% complete, had not reached technological feasibility and had
no alternative future uses. The estimate of percentage completion was based on
the development effort that had occurred as of the recapitalization date
relative to the total effort to complete the technology acquired. This
estimate was substantially consistent with actual results. We estimated
revenues, cost of revenues and operating expenses using the income approach.
These estimates were substantially consistent with subsequent actual operating
results.
We used the above estimates in the valuation of these technology and
discounted the expected future cash flows from the acquired technologies to
their present values. The rates used to discount the future cash flows to
their present value were based on our weighted average cost of capital and
considered risks related to the characteristics and applications of each
technology acquired, existing and future markets and assessments of the life
cycle of the technology. Discount rates of 20.0% and 27.5% were used for
valuing the developed and in-process technologies, respectively, and are
intended to be commensurate with our maturity and the uncertainties in the
estimates described above. The present values determined are considered to be
the fair values of the technologies acquired.
The estimates we used in valuing in-process technology were based on
assumptions we believe to be reasonable, but which are inherently uncertain and
unpredictable. Our assumptions may be incomplete or inaccurate, and we cannot
assure you that unanticipated events and circumstances will not occur.
Accordingly, actual results may vary from projected results.
Interest Income (Expense), net. Interest expense net of interest income
increased 118.2% to $2.4 million in 1998, representing 1.4% of total revenue,
from $1.1 million and 2.0% of total revenue in 1997. Interest expense
increased significantly as we incurred debt to finance our capacity expansion.
Provision for Income Taxes. We recorded a $1.5 million provision for income
taxes in 1998 at an effective rate of 18.7%. No federal income tax expense was
recorded in 1997 due to an operating loss. The 18.7% effective tax rate used
to record the 1998 provision for income taxes was less than the statutory rate
28
<PAGE>
primarily due to the realization of tax net operating loss carryforwards. At
January 2, 1999, we had net deferred tax assets of $11.8 million relating
principally to tax net operating loss carryforwards, research credit
carryforwards and temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Realization of deferred tax assets is dependent on future
earnings, if any, the timing and amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax assets as of
January 2, 1999 and December 28, 1997, has been established to reflect these
uncertainties. See Note 9 of our consolidated financial statements.
Comparison of Years Ended December 28, 1997 and December 29, 1996
Total Revenue. Total revenue increased 103.0% to $54.4 million in 1997 from
$26.8 million in 1996 due to successful qualifications into customer programs,
increased production capacity and commencement of volume sales of HGAs and
sliders. During 1997, Seagate and Toshiba each represented more than
ten percent of our total revenue and combined represented 85.5% of our total
revenue as compared to 98.8% during 1996. During 1996, product sales to HP
represented 77.9% of total revenue, the majority of which occurred during the
first half of the year prior to HP's exit from the disk drive industry.
During 1997, we commenced volume sales of HGAs and sliders. Sales of HGAs
and sliders accounted for 32.7% of product sales in 1997 compared to 1.0% of
product sales in 1996. Product sales of sliders and HGAs prior to 1997
primarily consisted of sales of sample units to potential customers.
Substantially all HGA sales in 1997 were to Toshiba for use in their mobile
disk drive products.
Cost of Sales; Gross Profit. Gross profit increased to $13.1 million in 1997,
from $4.2 million in 1996. Gross margin increased to 24.2% in 1997, from 15.6%
in 1996. This increase resulted primarily from a higher utilization of plant
capacity. Also during 1997, we amortized $642,000 of intangible assets
relating to the recapitalization.
Research and Development Expense. Research and development expense increased
298.0% to $20.3 million in 1997, representing 37.3% of total revenue, from $5.1
million and 18.9% of total revenue in 1996. Subsequent to our
recapitalization, we expanded our research and development activities including
the hiring of additional personnel and increasing wafer, slider and HGA
prototyping activities. This increase in research and development expense also
reflects a $1.3 million charge in 1997 relating to the write-off of certain
leasehold improvements resulting from our decision to consolidate our research
and development facilities. Also during 1997, we amortized $448,000 of
intangible assets relating to the recapitalization. During the second half of
1996, we significantly reduced research and development expense in response to
the decision of HP, our primary customer, to exit the disk drive market.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 52.9% to $5.2 million in 1997, representing
9.6% of total revenue, from $3.4 million and 12.7% of total revenue in 1996.
This increase reflects significant infrastructure growth in 1997 following our
cost reduction program implemented in the second half of 1996.
Interest Income (Expense), net. Interest expense net of interest income
increased 57.1% to $1.1 million in 1997, representing 2.0% of total revenue,
from $0.7 million and 2.5% of total revenue in 1996. Interest expense increased
significantly as our average debt balance increased to finance our capacity
expansion.
Provision for Income Taxes. Due to operating losses incurred since inception,
we did not record a provision for income taxes in 1996 or 1997. At December
28, 1997, we had net deferred tax assets of $13.5 million relating principally
to tax net operating loss carryforwards, research credit carryforwards and
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, a valuation allowance,
in an amount equal to the net deferred tax assets as of December 28, 1997 and
December 29, 1996, has been established to reflect these uncertainties. See
Note 9 of our consolidated financial statements.
29
<PAGE>
Quarterly Results of Operations
The following tables set forth our operating results for each of the six most
recent quarters expressed in dollars and as a percentage of total revenue. The
information for each of these quarters is unaudited and, in our opinion, this
information has been prepared on the same basis as our audited consolidated
financial statements included in this prospectus and includes all necessary
accruals, consisting only of normal recurring adjustments, we consider
necessary for fair presentation in accordance with generally accepted
accounting principles. This information should be read in conjunction with our
consolidated financial statements and their related notes included in this
prospectus. Our operating results for any three-month period are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
Mar. 28, Jun. 27, Oct. 3, Jan. 2, Apr. 3, Jul. 3,
1998 1998 1998 1999 1999 1999
-------- -------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, net..... $37,954 $53,895 $45,714 $40,106 $36,205 $34,488
Technology transfers
and royalties......... -- 750 -- 1,000 -- 2,093
------- ------- ------- ------- ------- -------
Total revenue......... 37,954 54,645 45,714 41,106 36,205 36,581
Cost of sales........... 27,345 41,712 36,360 31,584 26,063 24,865
------- ------- ------- ------- ------- -------
Gross profit........... 10,609 12,933 9,354 9,522 10,142 11,716
Operating expenses:
Research and
development........... 4,952 6,659 6,944 6,903 7,591 9,189
Selling, general and
administrative........ 1,570 1,932 1,822 1,294 1,312 1,368
------- ------- ------- ------- ------- -------
Total operating
expenses............. 6,522 8,591 8,766 8,197 8,903 10,557
Operating income........ 4,087 4,342 588 1,325 1,239 1,159
Interest expense, net... (408) (495) (648) (887) (845) (727)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary item..... 3,679 3,847 (60) 438 394 432
Provision (benefit) for
income taxes........... 685 717 (9) 82 98 108
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item..... 2,994 3,130 (51) 356 296 324
Extraordinary item, net
of income taxes ....... -- -- 306 -- -- --
------- ------- ------- ------- ------- -------
Net income.............. $ 2,994 $ 3,130 $ 255 $ 356 $ 296 $ 324
======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
------------------------------------------------------
Mar. 28, Jun. 27, Oct. 3, Jan. 2, Apr. 3, Jul. 3,
1998 1998 1998 1999 1999 1999
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, net..... 100.0% 98.6% 100.0% 97.6% 100.0% 94.3%
Technology transfers
and royalties......... -- 1.4 -- 2.4 -- 5.7
------- ------- ------- ------- ------- -------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales........... 72.0 76.3 79.5 76.8 72.0 68.0
------- ------- ------- ------- ------- -------
Gross margin........... 28.0 23.7 20.5 23.2 28.0 32.0
Operating expenses:
Research and
development........... 13.1 12.3 15.2 16.8 21.0 25.1
Selling, general and
administrative........ 4.1 3.5 4.0 3.1 3.6 3.7
------- ------- ------- ------- ------- -------
Total operating
expenses............. 17.2 15.8 19.2 19.9 24.6 28.8
Operating income........ 10.8 7.9 1.3 3.3 3.4 3.2
Interest expense, net... (1.1) (0.9) (1.4) (2.2) (2.3) (2.0)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary item..... 9.7 7.0 (0.1) 1.1 1.1 1.2
Provision (benefit) for
income taxes........... 1.8 1.3 0.0 0.2 0.3 0.3
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary item..... 7.9 5.7 (0.1) 0.9 0.8 0.9
Extraordinary item, net
of income taxes........ -- -- 0.7 -- -- --
------- ------- ------- ------- ------- -------
Net income.............. 7.9% 5.7% 0.6% 0.9% 0.8% 0.9%
======= ======= ======= ======= ======= =======
</TABLE>
30
<PAGE>
Total Revenue. Following our recapitalization in January 1997 and through the
quarter ended June 27, 1998, total revenue increased in each quarter as we
successfully qualified into new customer programs and increased production
capacity to supply these new programs. Initial revenue growth occurred as a
result of an increase in wafer sales followed by the commencement of volume HGA
sales during the quarter ended September 28, 1997. Starting in the quarter
ended October 3, 1998 and continuing through the quarter ended April 3, 1999,
total revenue declined as a result of a reduction in HGA sales. HGA sales fell
during this period as our primary HGA customer, Toshiba, began to transition
away from our DSMR recording head products to GMR recording heads on an
improved suspension. The reduction of HGA sales was partially offset during
this period by an increase in wafer sales. During the quarter ended July 3,
1999, product sales continued to decline, but total revenue increased due to
the commencement of royalties from Seagate.
Cost of Sales; Gross Profit. Gross profit fluctuated from quarter to quarter
as a result of factors such as fluctuations in revenue levels, product mix,
expenses associated with the increase of plant capacity and timing of
technology transfer fees and royalty revenue. During the three quarters ended
October 3, 1998, gross margin declined in part due to the higher concentration
of HGA sales and the lower gross margin associated with these sales. During
the quarter ended January 2, 1999, gross margin rose slightly in spite of a
decline in total revenue as we took steps to reduce costs, including a
reduction in head count. We also received a technology transfer fee which
contributed to the increase in gross margin. During the quarters ended
April 3, 1999 and July 3, 1999, engineering activities consumed a larger
portion of total wafer production costs. This reduced cost of sales and
improved gross profit. During the quarter ended July 3, 1999, gross margin
increased in part due to the commencement of royalty payments from Seagate.
Research and Development Expense. Research and development expense has
trended upwards in support of additional customer programs and the development
of new technologies since our recapitalization. We currently operate a
prototype slider and HGA operation, primarily for the purpose of providing
rapid feedback for technology development in addition to the production of
wafers for the purpose of research and development. During the quarters ended
June 27, 1998 and October 3, 1998, we substantially increased our research and
development head count as well as increasing our prototype activities. During
the quarter ended January 2, 1999, our research and development expense
decreased slightly due to a reduction in head count, which was substantially
offset by an increase in prototype activities. During the quarters ended April
3, 1999 and July 3, 1999, research and development expense increased as a
result of an increase in head count as well as increased prototype activities
related to the introduction of our GMR products.
Selling, General and Administrative Expense. During the quarters ended June
27, 1998 and October 3, 1998, selling, general and administrative expense
increased as a result of increased professional fees incurred during the first
six months of 1998 for an uncompleted financing. During the quarter ended
January 2, 1999, selling, general and administrative expense declined as a
result of a reduction in head count. During the quarter ended April 3, 1999,
selling, general and administrative expense increased slightly in part as a
result of severance expense for one of our former officers, which was partially
offset by receipt of $400,000 in partial payment of a debt previously expensed
as unrecoverable. During the quarter ended July 3, 1999, selling, general and
administrative expense increased as a result of increased head count that was
partially offset by receipt of an additional $97,691 as payment of the balance
of a debt previously expensed as unrecoverable.
Liquidity and Capital Resources
We have historically financed operations through a combination of private
equity, private debt and equipment financings. As part of our
recapitalization, we received net proceeds of $34.4 million from the issuance
of our Series A preferred stock and received aggregate loan commitments from
certain industry lenders, including Western Digital and Maxtor, of up to $18.0
million of which $11.0 million was funded at, or shortly following, the closing
of the recapitalization and $7.0 million was subsequently funded. We used
$23.2 million of these amounts to purchase all outstanding equity of the
predecessor company. During
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1998, we renegotiated the terms of two of the three promissory notes that were
then outstanding. Under the renegotiated terms, these two notes are scheduled
to be fully repaid by June 30, 2000. Both of these notes can be made payable,
by the lender, upon the closing of this offering. As of July 3, 1999, the
outstanding balances under these two notes were in aggregate $11.0 million,
which we expect to repay with a portion of the net proceeds of this offering.
In connection with the recapitalization, HP and Asahi Komag agreed to leave in
place guarantees of equipment notes payable with terms of up to five years in
exchange for our agreement to reimburse them for any payments made under the
guarantees. The reimbursement obligation to HP and Asahi Komag is secured by
equipment owned by us. During 1997, we purchased capital equipment from Komag
related to a facility being subleased from them. The equipment was purchased
with a note which becomes immediately payable upon the closing of this
offering. As of July 3, 1999, the outstanding balance under this note was $1.4
million, which we expect to repay with a portion of the net proceeds of this
offering.
Our operating activities provided net cash of $23.5 million in 1998 and $9.6
million during the first six months of 1999. Cash generated during both
periods reflects net income plus depreciation and amortization. Cash provided
by operations during 1998 also reflects a relative increase in accounts payable
primarily relating to increased volume with subcontractors.
Cash used in investing activities during 1998 and the six months ended July
3, 1999 was $41.4 million and $2.5 million, respectively. Investing activities
consist primarily of the purchase of capital equipment and leasehold
improvements. During 1998, we made substantial investments in capital
equipment in order to increase production capacity. We expect to continue to
make investments in capital equipment to increase capacity and to provide the
capability for new technologies. We currently plan to spend between
approximately $15.0 million and $20.0 million during 1999 on capital
expenditures. As of July 3, 1999, we had outstanding noncancellable capital
commitments of $10.2 million.
Our financing activities provided net cash of $19.7 million in 1998 and used
net cash of $9.4 million in the six months ended July 3, 1999. During 1998, we
utilized our credit line to provide $7.5 million of cash. We also issued 1.1
million shares of our Series A preferred stock in exchange for $2.7 million of
cash. During 1998, we received $19.9 million of net cash from the financing of
equipment purchases through the issuance of notes payable and sales lease back
transactions, less $10.6 million of repayment on outstanding notes payable and
capital leases. During the six months ended July 3, 1999, we used cash to
reduce our credit line by $4.5 million and we used $5.0 million for the
repayment of outstanding notes payable and capital leases.
Our principal source of liquidity at July 3, 1999 was cash and cash
equivalents of $22.1 million and balances available under a $15.0 million
credit facility with Silicon Valley Bank under which $3.0 million was
outstanding as of July 3, 1999. The availability of borrowings under the
credit facility is determined from time to time by our cash and accounts
receivable balances, with borrowings also subject to quarterly profitability
and satisfaction of certain non-financial covenants. The credit facility is
secured by substantially all of our assets, excluding intellectual property and
equipment financed through notes and capital leases. The borrowings on the
credit facility bear interest at a rate equal to the bank's prime lending rate
plus one quarter, which was 8.25% as of July 3, 1999. The credit facility
expires in August 2000.
As of July 3, 1999, we had a working capital deficit of $4.7 million. Upon
the completion of this offering we expect working capital to be positive.
We believe the proceeds from this offering, cash balances, funds available
under our credit facility, expected equipment financings and any cash generated
from operations will provide adequate cash to fund our operations for at least
the next 12 months. Our future capital requirements, however, will depend on
many factors. To meet anticipated future capital requirements, we may need
sources of capital in addition to the proceeds from this offering. There is no
assurance that additional funds will be available to us or that,
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if available, these additional funds will be obtained upon terms and conditions
acceptable to us. If we are unable to obtain sufficient capital, we will need
to curtail our operating and capital expenditures, which could materially harm
our business.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept a two digit value as representing the year. Starting on January 1,
2000, it will be necessary to use a four digit value to distinguish dates from
the twentieth and twenty-first centuries. As a result, many companies'
computer systems and software will need to be upgraded in order to be "Year
2000" compliant. We could be impacted by the "Year 2000" issue through our
internal systems, including our information technology infrastructure as well
as our manufacturing equipment. We could also be impacted due to the effect
upon our suppliers and customers. We believe our products are not affected by
"Year 2000" issues because they do not include embedded logic nor do they store
data internally.
Our information technology systems include computers, network infrastructure,
telecommunications equipment, manufacturing software, accounting software,
payroll service software and internally developed application specific
software. In early 1999, we hired an external consultant to provide a high
level review of the compliance of these systems. We are in the process of
upgrading our software to address the "Year 2000" issue and repair or replace
any computers which are not compliant. We believe our network infrastructure
and telecommunications equipment is "Year 2000" compliant, although final
testing and verification still needs to occur. Because a large portion of our
software is obtained from our vendors on a non-custom basis, we believe that
upgrades for our commercial programs will be available. We currently estimate
the costs associated with making our internal systems "Year 2000" compliant,
and the consequences of incomplete or untimely resolution of making our systems
and operations compliant, will not materially harm our business.
A significant portion of our manufacturing and test equipment either include
embedded logic or store data internally, or both. A large number of these
systems are directly connected to our network to provide data used in the
determination of whether products meet manufacturing specifications. The
majority of these systems use software proprietary to the equipment. We have
begun contacting the equipment manufacturers to assess each systems'
compliance. Based on the responses we receive, we will either repair, replace
or remove non-compliant equipment from our operations if the failure to do so
would materially harm our business.
We also rely, directly and indirectly, on the external systems of our
customers, suppliers, subcontractors, creditors, financial organizations and
governmental entities, both domestic and international, for accurate exchange
of data. Even if our internal systems are not materially affected by the "Year
2000" issue, we could be affected through disruptions in the operation of the
enterprises with which we interact.
The costs associated with assessment and remediation have not been material
to date. We do not expect the cost of future assessment, remediation and
testing to exceed $1.0 million. We expect to complete our review of "Year
2000" readiness by early in the fourth quarter of 1999. We are in the process
of developing contingency plans for continuing operations in the event
problems, both identified and unidentified, should occur.
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BUSINESS
Overview
We are a leading provider of recording head products to the computer hard
disk drive industry. We sell our recording head products to the server,
desktop and mobile segments of the disk drive industry. Our volume sales have
included sales to Seagate for use in its industry leading 10,000 rpm Cheetah
server disk drives, to SAE for incorporation into Maxtor's desktop disk drives
and to Toshiba for use in its mobile disk drives. By outsourcing the lower
margin aspects of our manufacturing processes, we significantly reduce our
fixed costs and are able to focus on wafer design for innovative recording head
products.
Industry Background
Growth of Digital Information
The last decade has seen an explosion in the volume of business critical
digital data being captured and stored in business environments. This is a
result of the tremendous growth in strategic software applications, such as
enterprise resource planning, decision support, data mining and sales force
automation systems. At the same time, the growth of the Internet has
significantly expanded the opportunity for online transaction processing,
including automated reservation systems, inventory tracking systems, electronic
trading and electronic commerce. All of these business applications involve
significant amounts of digital data that is stored on servers and desktops.
Digital information is also becoming a larger part of individuals' lives away
from the office. Due to the use of complex multimedia data types, such as 3-D
images, audio and full motion video content, and the widespread availability of
these data types over the Internet, the data accessed and used daily by
individuals has greatly increased storage requirements. For example, a three
minute MP3 audio file requires approximately 500 times the hard drive storage
space required for one page of text. Moreover, the ongoing transition from
analog appliances to digital devices, such as digital video recorders, is
expected to further increase data storage needs in the home.
As businesses and individuals increasingly depend on digital information, the
need to store and retrieve data both efficiently and reliably dramatically
increases. According to International Data Corporation, or IDC, an independent
industry research company, from 1994 to 2002, shipments of direct access
storage capacity, which excludes tape and optical storage, are expected to
increase more than a hundredfold.
Disk Drive Market
Hard disk drives are the primary means for direct access storage of digital
information. The hard disk drive industry is commonly divided into three
distinct market segments: server, desktop and mobile.
Server. Server disk drives typically function as an inter-connected group of
disk drives which collectively contain a repository of information to be
accessed by multiple parties. The disk drives for servers are designed to
handle large amounts of information quickly and reliably. Factors driving
growth in the demand for servers and server storage capacity include:
. adoption by businesses of enterprise-wide, operational applications;
. implementation of corporate e-mail and scheduling software;
. introduction and adoption by businesses of decision support and other
applications that enable the use of operational data as a strategic tool;
. the expansion of the Internet and intranets; and
. increasingly complex operating systems.
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According to IDC, the server disk drive market is expected to grow from $6.8
billion in 1998 to $19.9 billion in 2003, reflecting projected unit growth from
14.1 million units in 1998 to 28.9 million units in 2003.
Desktop. The desktop disk drive market includes disk drives sold to
manufacturers of personal computers, or PCs, and computer workstations. Disk
drives designed into desktop computers must comply with industry standards and
be delivered in high volumes at low prices per unit. While PCs are used in
both business and home environments, workstations are almost exclusively used
in the business, scientific and educational environments. Desktop hard disk
drives typically store data and programs for:
. personal productivity applications such as word-processing and
spreadsheets;
. interfaces to corporate applications;
. digitized photographs, videos and music;
. entertainment and educational applications;
. data retrieved from servers, including the Internet; and
. increasingly complex operating systems.
These applications require increasingly greater storage capacity and have
sharply increased the demand for high capacity disk drives. Growth in the
desktop disk drive market closely mirrors the growth in the demand for PCs and
computer workstations. According to IDC, the desktop disk drive market is
expected to grow from $15.2 billion in 1998 to $18.6 billion in 2003,
reflecting projected unit growth from 111.7 million units in 1998 to 205.9
million units in 2003.
Mobile. The mobile disk drive market includes disk drives sold to
manufacturers for use in notebook and sub-notebook computers as well as in
specialty applications. Mobile disk drives must be physically small and light
weight, consume limited amounts of power and be capable of performing in
demanding environments. Similar to desktop disk drives, these drives store
much of the same information relating to corporate applications, personal
productivity, digitized information, entertainment and educational
applications, but require more technologically advanced disk drive components.
According to IDC, the mobile disk drive market is expected to grow from $3.4
billion in 1998 to $4.2 billion in 2003, reflecting projected unit growth from
17.9 million units in 1998 to 33.4 million units in 2003.
Disk Drive Technology
The basic elements of the disk drive have remained essentially the same since
hard disk drives were introduced in 1956. The principal components of a hard
disk drive are disks, or "media," recording heads, a spindle/motor assembly, an
actuator and electronics. Each disk drive typically contains from one to ten
disks that are attached to a spindle/motor assembly. As the disks rotate, the
actuator positions the recording heads over the disks to read and write data.
The process of writing data involves magnetically orienting microscopically
small sections of the disk surface in alternating directions. Data is arranged
into concentric circles, or "tracks," on the surface of the media. During the
data read-back process, the recording head precisely senses the location of
transitions between these areas of differing magnetic orientation.
Sophisticated codes embedded in the disk drive electronics are used to
translate the relative location of these transitions into digital data
recognizable by the computer's operating system.
A hard disk drive can contain multiple recording heads and disks, with disk
sizes often varying between disk drives. A common unit of measure used to
describe storage capacity of disk drives, known as "areal density," represents
the amount of information in one square inch of disk space.
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Recording Head Technology
In the quest for higher areal densities, substantial advances have been made
in recording head technology. Early recording heads consisted of a simple
ferrite core onto which a copper wire coil was wrapped. The physical
limitations of the initial wrapped wire designs were overcome through the use
of photolithography processes, similar to those used in semiconductor
manufacturing, to pattern the coil onto a ceramic substrate. This concept
produced recording heads known as "thin film" inductive recording heads which
were commercially introduced in the late 1980s. The improvements of the
semiconductor-like processes enabled these types of heads to achieve areal
densities beyond 1.0 billion bits per square inch. Thin film inductive
recording heads, however, are limited by their sensitivity to disk speed and
signal frequency limitations. Because of these limitations, thin film
inductive recording heads gave way to magneto-resistive, or MR, recording
heads.
Magneto-resistive recording heads were commercially introduced in the mid-
1990s and represented a fundamental shift in technology. According to Trend
Focus, the market for recording heads is expected to grow from $6.5 billion in
1998 to $8.5 billion in 2002. In 1998, magneto-resistive heads, including GMR
heads, represented over 90% of the revenues for all recording heads consumed by
the hard disk drive industry.
A magneto-resistive recording head utilizes a separate read and write element
in contrast to previous recording heads which used a single element for both
functions. By separating the functionality of the two elements, each can be
optimized for its task. The write element of a magneto-resistive recording
head is based on the same inductive principles as a thin film inductive
recording head. The read element, however, is fundamentally different from the
inductive write technology. The read element of an magneto-resistive recording
head is based on a physical phenomenon known as the "magneto-resistive effect,"
which describes how certain metals' electrical resistance change when exposed
to a magnetic field. To accomplish the reading of data, an electrical current
is passed through the magneto-resistive read element of the head by the
electronics. As the head flies over the disk, the magnetic field emanating
from the recorded bits changes the resistance of the read element. This change
in resistance is monitored precisely by the disk drive electronics and is used
to decode the information stored on the disk. The increased signal sensitivity
of magneto-resistive technology allows greater areal density.
The design and fabrication of magneto-resistive recording heads is complex
and requires detailed knowledge of materials, manufacturing processes and
device technology. The current generation of recording heads, GMR, is
beginning to exploit the fundamental physics of materials in order to increase
their areal density capabilities. GMR's complex structure of multiple layers
of ultra-thin films provides significantly higher signal sensitivity than
conventional magneto-resistive heads. The ability to continue to provide
recording heads capable of advancing areal densities will increasingly depend
on the recording head manufacturer's ability to understand the fundamental
physics and magnetic properties of materials and the ability to develop
manufacturing processes capable of producing them.
Challenges Faced by the Disk Drive Industry
Disk drive manufacturers face significant competition and a demanding
marketplace characterized by a constant requirement for next generation
products with increased capacity at a lower cost. To remain competitive, drive
manufacturers must rapidly introduce products with increasingly complex
component technology. We estimate that between 1993 and 1998 the average
storage capacity per drive increased from 343 megabytes to 5,170 megabytes (5.2
gigabytes), while at the same time, the average cost per megabyte of storage
fell from $0.80 to $0.04. Disk drive manufacturers that fail to remain on the
computer industry's storage capacity/cost curve experience significantly
reduced margins and market share.
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The ability to source components that will enable industry-leading areal
densities in large part defines a disk drive manufacturer's competitive
ability. With each technology transition, opportunities are created for disk
drive manufacturers and their suppliers to capture or lose market share. Disk
drive design time can be substantial, ranging from three to 18 months. When
the manufacturer selects suppliers for new designs, it is taking a substantial
risk the chosen suppliers will be able to provide leading-edge technologies in
volume and on time. Consequently, suppliers with a proven ability to provide
leading-edge components in a predictable manner are valuable to disk drive
manufacturers.
Our Approach and Strategy
We use our broad and fundamental understanding of recording head technology
to develop products that we believe provide our customers with significant
performance advantages and faster time to volume production. This in turn
allows our customers to market their products more quickly to capture the
higher margins attendant with being an early supplier of advanced disk drives.
Since inception, we have been dedicated exclusively to the development of
magneto-resistive recording heads. Our research and development organization
includes a number of industry pioneers who have significant expertise in the
underlying sciences, technologies and manufacturing processes required for the
design and production of increasingly advanced recording heads. The depth and
expertise of our research and development organization recently enabled us to
transition to GMR head technology in approximately nine months. By outsourcing
back-end manufacturing processes, we significantly reduce our capital
expenditures and are able to focus our resources on wafer design for innovative
recording head products. The key elements of our strategy include the
following:
Introduce Innovative Recording Head Products. We intend to gain market share
with leading disk drive manufacturers by offering them value-added products
designed to meet their technological, volume production and timing
requirements. Our broad and fundamental understanding of recording head
technology allows us to deliver a range of solutions to disk drive
manufacturers in each of the industry's market segments. We have developed,
and are continuing to develop, a range of recording head products designed to
enable our customers to deliver leading-edge products. As areal densities
continue to grow, we believe only recording head component suppliers with an
excellent knowledge of recording head fundamentals will be able to provide
leading-edge products on a predictable and timely basis. We intend to continue
to focus on the fundamentals of recording head technology and to develop our
expertise in magnetic modeling, device development, device application and
integration, as well as process development.
Outsource Back-End Manufacturing. We intend to continue to outsource our
lower margin, labor intensive back-end manufacturing processes, such as slider
processing and head gimbal assembly and testing. We believe our business
model, which couples our recording head wafers with the existing high-quality,
high-capacity back-end production capabilities of customers and subcontract
manufacturers, represents the most efficient use of our capital and engineering
resources. This business model enables us to focus our research and
development efforts on the higher value-added wafer design and production
processes while significantly reducing our fixed costs. We believe this model
also makes it easier for us to increase or decrease our output in response to
changes in customer demand and enabled us to remain profitable even while
increasing capacity during the recent volatility in the disk drive market.
Provide Targeted Solutions to Market Segments. We are targeting our recording
head products to the server, desktop and mobile segments of the disk drive
market. Our range of magneto-resistive products can be utilized in each disk
drive market segment and can be optimized for specific applications.
Specifically, we believe that our experience in the performance-oriented high
data rate server and high areal density mobile market segments, coupled with
our recent expansion in wafer manufacturing capacity, has positioned us to
address the largest market segment--desktop disk drives. This segment
represented less than ten percent of our sales in 1998. In addition, given the
different growth rates and cycles of the three market segments, participation
in all segments of the disk drive market may minimize our exposure to adverse
developments in any single market segment.
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Focus on Collaborative Relationships with Industry Participants. We work
closely with Seagate, SAE and other disk drive component manufacturers to
develop compatible products which can be effectively incorporated into leading-
edge disk drives. We believe that close technical collaboration with our
customers and their other suppliers during the design phase enables us to
participate in establishing technological and design requirements for new
products, facilitates integration of our products, improves our ability to
reach cost effective high volume manufacturing rapidly and enhances the
likelihood that we will become a primary supplier.
Products
We sell our products in the form of wafers, sliders and HGAs. We are
currently shipping production volumes of these products with areal densities up
to 6.0 billion bits per square inch and are in the early stages of volume
production of products with areal densities up to 10.0 billion bits per square
inch. In addition, we are providing samples and technology demonstration units
with areal densities up to 14.0 billion bits per square inch.
GMR. GMR is our newest product line. Our GMR recording heads employ a
complex multi-layer read element resulting in significantly greater signal
sensitivity than provided by conventional magneto-resistive heads. The
increased sensitivity makes it possible to detect smaller recorded bits and to
read these bits at a higher data rate. We believe our understanding and
experience in the manufacturing of the ultra-thin films used in our earlier
recording heads has provided us with a significant advantage in our continued
development of GMR recording heads. We are currently shipping early production
volume of our GMR products to the desktop and mobile market. We are also
providing samples of GMR products with areal densities in excess of 14.0
billion bits per square inch.
DSMR. The majority of our sales to date have come from our DSMR products.
DSMR heads utilize two magneto-resistive read elements resulting in an
amplified signal more impervious to sources of signal noise in the storage
system. Because of the significant performance advantages DSMR heads have over
standard magneto-resistive products, they have successfully penetrated the high
performance, high data rate server and high areal density mobile disk drive
markets, both of which emphasize performance over compliance with industry
standards. DSMR heads, however, are not well suited for the desktop market
because they are incompatible with the industry standard magneto-resistive
products.
In early 1999, the disk drive industry began its transition to GMR
technology. We expect that most of our future revenue will come from the sale
of GMR products.
Technology
The data storage industry depends primarily upon the principles embodied in
the field of magnetics to store and subsequently retrieve the vast amount of
information used by the computing industry. Magnetic recording employs the use
of "hard" magnetic materials to store information. Hard magnetic materials are
materials that require strong magnetic fields to orient the direction of
magnetization within the materials. These materials, once oriented,
permanently retain this magnetic orientation until they are reoriented by
another strong magnetic field.
Early magnetic recording heads employed the principle of induction to read
and write data on magnetic disks. The principle of induction defines a
relationship between magnetism and electricity. When a magnetic material is
wrapped with a coil of an electric conductor, such as copper, magnetic fields
are produced when an electric current is passed through the copper conductor.
Conversely, when the magnetic material passes by a magnetic field, an electric
current is induced in the copper conductor. This inductive process is used to
create the strong magnetic fields that orient the hard magnetic materials on
the surface of the recording disk. The reverse of this inductive process was
also used for many years to read back the information stored on the surface of
the disk. As areal densities approached 1.0 billion bits per square inch, the
inherent conflict of designing an element for both reading and writing
increased.
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Magneto-resistive technology derives its name from a class of materials which
change resistance in the presence of a magnetic field. Magneto-resistive
recording heads utilize an inductive write head based on the same inductive
principles of earlier technologies combined with a magneto-resistive element to
provide the read function. These magneto-resistive elements are designed and
fabricated to provide many times the signal sensitivity or reading efficiency
of the inductive read head technology. The inherent conflict of designing an
element for both reading and writing is eliminated by enabling each element to
be optimized for its unique purpose.
GMR is an advanced application of magneto-resistive technology. By employing
multiple layers of ultra thin films, GMR heads are able to provide
significantly higher signal sensitivity than conventional recording heads. The
most common type of GMR is a spin valve sensor. In its simplest form, the spin
valve consists of four film layers, a magnetic sensing layer, a non-magnetic
metal spacer layer, a magnetic pinned layer and an exchange layer. The
magnetic orientation of the pinned layer is fixed and held in place by the
adjacent exchange layer, while the magnetic orientation of the sensing layer
changes in response to the magnetic field from the disk. The level of
electrical resistance of this multi-layer thin film sensor depends on the
relative magnetic orientation of the sensor and pinned layer, yielding low
resistance when they are in parallel state and high resistance at anti-parallel
state. GMR recording heads provide significantly stronger signals than
conventional magneto-resistive recording heads, enabling higher areal
densities.
Customers
We sell our products to leading manufacturers in each of the server, mobile
and desktop segments of the disk drive market. During 1998 and the six months
ended July 3, 1999, Seagate and Toshiba each represented more than ten percent
of our total revenue and combined represented 94.1% of our total revenue in
fiscal 1998 and 94.4% of our total revenue in the six months ended July 3,
1999. We have also had volume sales of wafers to SAE for resale to Maxtor.
The following are examples of customer programs by market segment.
Server Market: Seagate Cheetah Programs. We worked with Seagate to produce a
recording head capable of being integrated into a server disk drive with a
rotational speed of 10,000 revolutions per minute, or rpm. Previously, no disk
drive manufacturer had commercially produced a 10,000 rpm drive, in part, due
to the unavailability of a commercial recording head suitable for such a
product. We supplied Seagate with a wafer level slider to produce a DSMR head
capable of handling the data transmission rate necessary for a 10,000 rpm
drive. This DSMR head was then incorporated into Seagate's industry leading
Cheetah family of disk drive products. We are currently supplying product for
the third generation disk drive in the Cheetah family.
Mobile Market: Toshiba Programs. Toshiba was seeking a supplier capable of
developing a low mass, high areal density recording head mounted to an advanced
wireless suspension less sensitive to signal noise common in the mobile
environment. Our DSMR products were selected, in part, due to the combination
of their high areal density performance and the improved immunity to noise.
The performance of our DSMR recording heads allowed us to become a leading
supplier to Toshiba.
Desktop Market: Maxtor. With our recently expanded manufacturing capacity, we
are actively targeting the desktop disk drive market. We are currently
providing volume shipments of our GMR products for use in Maxtor's desktop disk
drives and are providing early stage samples of our GMR products to Seagate and
Western Digital for use in desktop disk drives.
Our Manufacturing Processes
The production of recording heads involves the design and manufacture of
wafers, the processing of wafers into individual sliders, the assembly of
sliders into HGAs, the testing of HGAs and the assembly of
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multiple HGAs into head stack assemblies, or HSAs. Our customers purchase
wafers, sliders and HGAs incorporating our recording heads. We do not
currently assemble or sell HSAs.
Wafer Fabrication
We design and manufacture recording head wafers using fabrication processes
similar to the semiconductor wafer fabrication process, but we use a ceramic
wafer instead of a silicon wafer. These processes include photolithography,
vacuum deposition, wet chemical etching, plasma etching and precision
electroplating technologies. Each 4.5 inch square wafer contains from 15 to 22
thousand potential recording heads.
Since our incorporation, we have periodically expanded our wafer fabrication
facility. In 1998, we completed a significant plant expansion increasing our
manufacturing facility from approximately 30,000 square feet to approximately
100,000 square feet and more than doubling our wafer manufacturing capacity.
Our facilities are capable of further expansion. We continuously strive to
develop new manufacturing processes, improve manufacturing yields and achieve
timely delivery of new prototype products for customer qualification.
Slider Fabrication
In the slider fabrication processes, completed wafers are sliced into rows
containing up to 45 candidates per row. The slider fabrication processes
involve high precision shaping technologies utilized to define the slider's or
the head's aerodynamic properties. Precise aerodynamic properties allow the
recording head to "fly" at approximately one to two micro-inches above the disk
surface. The slider rows are subsequently cut into individual sliders and
tested for defects. Our slider capacity is limited and only supports our
technology development and production of limited prototype volumes. We
subcontract volume production of sliders to third parties.
Head Gimbal Assembly and Testing
In the conversion of a slider to an HGA, the slider is attached to a
stainless steel suspension. During this process, the electrical connections
are made to electrical contacts on the recording head. The recording head is
then put through tests simulating the environment of a disk drive so that the
performance of the recording head can be measured. The attributes measured
include signal strength, stability and error rate. These measurements are
compared to the specifications of the customer before shipment. We subcontract
volume assembly and testing of HGAs to third parties.
We have limited head gimbal assembly and testing capacity sufficient to
support technology development and limited prototype volumes. Our internal
slider and HGA prototype activities facilitate information feedback to the
wafer design and fabrication operations as well as supplying customers with low
volume prototype sample units. These activities serve to enhance quality,
improve wafer yields and reduce development cycle times.
Subcontract Manufacturers
SAE. We utilize subcontract manufacturers for volume production of sliders
and HGAs. Currently, our primary subcontract manufacturer is SAE. In May
1999, we entered into an agreement with SAE and its parent TDK under which:
. SAE committed to allocate slider and HGA capacity to us or our designee
sufficient to manufacture five million HGAs per month;
. we agreed to consign wafers to SAE sufficient to manufacture up to five
million HGAs per month, with SAE having the right to purchase the
resulting HGAs; and
. SAE agreed to assist MRST in establishing its own slider manufacturing
capacity.
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The initial term of this agreement is three years with an automatic one year
renewal on its anniversary date. Either party, however, may terminate the
agreement if it notifies the other party prior to the end of the initial period
or on the anniversary date thereof that it does not wish to extend the
agreement on the next anniversary of the agreement.
MRST. We have invested in MRST, a Hong Kong based joint venture with SFI.
SFI is a Hong Kong based holding company with holdings in the recording head
business among other investments. MRST was created to build and operate on a
limited basis a subcontract manufacturing operation in China. In our agreement
with SAE, SAE has agreed to provide MRST assistance in establishing its
manufacturing capabilities to achieve the output of one million sliders per
month. SAE has the exclusive right to utilize MRST's manufacturing capacity
for three years.
To date, the work we have subcontracted to MRST has been further
subcontracted to SAE. Our investment in MRST has been minimal and MRST has not
established its own slider manufacturing capacity. We currently own 49.5% of
MRST and have an option to acquire another ten percent of MRST from SFI at fair
market value on the purchase date. This option expires on January 1, 2008.
Marketing and Sales
We rely on our application engineers, in conjunction with our materials team,
as our primary sales and marketing force. We have structured our sales
approach to treat the different business units of disk drive companies as
separate customers. Disk drive manufacturers typically have separate teams
focused on the server, desktop and mobile segments of the disk drive market.
Each of these teams may have its own management and engineering personnel,
design facilities, manufacturing locations and technological requirements. By
focusing on the individual groups, we hope to better evaluate, coordinate and
respond with value-added products to meet the unique technological requirements
and other needs of each business segment. This approach is intended to deepen
customer relationships and to increase the likelihood of our products being
designed into a particular group's disk drive products.
Research and Development
Our business is centered around a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or
discipline. As of July 3, 1999, 53 of our research and development engineers
held Doctorate degrees. These engineers are involved in advancing our core
recording head technologies. Research and development expense for the first
six months of 1999 was approximately $16.8 million, and for the fiscal years of
1998, 1997 and 1996 was approximately $25.5 million, $20.3 million and $5.1
million, respectively.
Our research and development efforts are targeted at the enhancement of our
existing recording head products, development of new recording head products
and the evolution and improvement of the processes used to manufacture our
recording head products.
Competition
We compete with other independent recording head suppliers such as ALPS,
Applied Magnetics, Read-Rite, TDK, and its wholly-owned subsidiary SAE, and
Yamaha. In addition, we compete with the captive recording head manufacturing
operations of disk drive companies. Captive producers who produce some or all
of their recording heads for internal use include Fujitsu, Hitachi, IBM and
Seagate.
Some of our competitors have become particularly aggressive in the
development and marketing of recording heads. For example, IBM, a recognized
leader in magneto-resistive technology, has captured significant market share
in the non-captive recording head market. IBM did so by broadly advancing, and
making available to competing disk drive manufacturers, its recording head
products, in direct competition with us.
41
<PAGE>
Intellectual Property and Proprietary Rights
In April 1998, we entered into a technology license and purchase agreement
with Seagate. Under this agreement:
. we licensed our DSMR technology to Seagate;
. we received technology transfer fees upon the achievement of milestones;
. Seagate agreed to purchase minimum volumes based on their requirements;
and
. Seagate agreed to pay us a royalty based on HGAs shipped from wafers
produced by Seagate utilizing our DSMR technology.
Seagate has used, and we expect Seagate will continue to use through the
first half of fiscal year 2000, the licensed DSMR technology to manufacture a
significant portion of its DSMR wafer demand. However, we do not expect
related royalty payments or purchase obligations to continue to be significant
after the first half of fiscal year 2000.
In July 1999, we entered into a patent license agreement and a technology
transfer agreement with IBM. Under these agreements, among other things:
. we licensed to IBM for the life of the patents all of our existing and
future patents that are filed by us prior to January 1, 2003;
. IBM has agreed to license to us for the life of the patents 11 IBM
patents issued prior to January 1, 2003; and
. we agreed to transfer to IBM know-how related to two write-head related
manufacturing processes.
Backlog
Our sales are generally made pursuant to short-term purchase orders rather
than long-term contracts. In addition, we believe it is common practice for
disk drive manufacturers to place orders in excess of their requirements and to
change or cancel outstanding purchase orders in response to rapidly shifting
business conditions. Accordingly, we do not believe our backlog is an accurate
measure of total revenue or operating results for any future period.
Employees
As of July 3, 1999, we had 628 employees including 425 in operations, 174 in
research and development and 29 in general and administrative, all of whom are
located in California. Our employees are not represented by any collective
bargaining agreement, and we have never experienced a work stoppage. We
believe our employee relations are good.
Facilities
We lease premises in three locations in Milpitas, California under three
leases which expire in 2000, 2004 and 2007 covering approximately 165,000 total
square feet. One of the leased facilities is subleased to SAE. We believe our
existing facilities are adequate to meet our needs for the immediate future and
that future growth can be accomplished by leasing additional or alternative
space on commercially reasonable terms.
Legal Proceedings
As of the date of this prospectus, we are not a party to any material legal
proceeding.
42
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors as of July 3, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Mike Chang, Ph.D. ............. 55 Director
Kochan Ju, Ph.D. .............. 51 Vice President of Technology and Director
Vice President of Operations and
David Begin.................... 52 Marketing
William Bennett................ 53 Vice President of Human Resources
Mao-Min Chen, Ph.D. ........... 49 Vice President of Wafer Process
Thomas Surran.................. 36 Chief Financial Officer
Po-Kang Wang, Ph.D. ........... 45 Vice President of Engineering
Ta-Lin Hsu, Ph.D.(1)........... 56 Chairman of the Board
Tu Chen, Ph.D. (1)............. 64 Vice Chairman of the Board
Irwin Federman(2).............. 63 Director
Heinrich Sussner, Ph.D.(2)..... 50 Director
David Tsang.................... 57 Director
</TABLE>
- -------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mike Chang has served as our President and Chief Executive Officer and as a
member of the board of directors since July 1997. Prior to joining us, from
December 1994 to June 1997, Dr. Chang served as Senior Vice President of
Engineering at SAE Magnetics, Ltd. and served on its board of directors from
April 1996 to June 1997. From August 1989 to November 1994, Dr. Chang served
as Vice President of Disk Drive Research and Development at Conner Peripherals,
Inc., a disk drive company. Dr. Chang holds a B.S. in Electrical Engineering
from National Taiwan University and a Ph.D. in Electrical Engineering from the
University of Notre Dame.
Kochan Ju has served as our Vice President of Technology and as a member of
the board of directors since 1994. Prior to joining us, from September 1992 to
July 1994, Dr. Ju served as Vice President, Technology at Dastek, Inc., a thin
film head manufacturer. Dr. Ju has a number of issued and pending patents in
the area of recording heads. Dr. Ju holds a B.S. in Engineering Science from
Cheng Kung University, an M.S. in Physics from National Taiwan University, an
M.S. in Applied Mathematics from SUNY at Stony Brook and a Ph.D. in Electrical
Engineering from the California Institute of Technology.
David Begin has served as our Vice President of Operations since December
1997. Additionally, Mr. Begin began serving as our Vice President of Marketing
in May 1999. Prior to joining us, from January 1994 to November 1994, Mr.
Begin served as President and Chief Executive Officer at Cambrian Instruments,
a test equipment manufacturer. From January 1992 to December 1993, Mr. Begin
was Chief Operating Officer at Akashic Memories, a thin film media
manufacturer. Mr. Begin also held various management positions at IBM,
including management of recording head manufacturing and thin film media
operations. Mr. Begin received his B.S. in Chemical Engineering from
Northeastern University.
William Bennett has served as our Vice President of Human Resources since
August 1997. From July 1996 to July 1997, Mr. Bennett worked as a private
consultant for other technology companies. Mr. Bennett served as Vice
President of Human Resources at Cirrus Logic, Inc., a semiconductor company,
from June 1989 to July 1996. Previously, Mr. Bennett was Vice President of
Human Resources at System Industries, Inc. and Monolithic Memories, Inc. Mr.
Bennett received his A.A.S. in Industrial Relations from Brooklyn College.
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<PAGE>
Mao-Min Chen has served as our Vice President of Wafer Process since our
inception in July 1994. Prior to joining us, Dr. Chen was Director of Process
Technologies at Dastek, Inc., a thin film head manufacturer, from July 1993 to
July 1994. Dr. Chen has a number of issued and pending patents in recording
head technology. Dr. Chen holds a B.S. in Nuclear Engineering from National
Tsing-Hua University and a Ph.D. in Materials Science from the University of
Minnesota.
Thomas Surran joined us in July 1994 as our Director of Finance and became
our Chief Financial Officer in September 1994. From June 1991 to June 1994,
Mr. Surran served in various financial management positions including Director
of Finance and Controller with Everex Systems, Inc., a personal computer
manufacturer. Prior to joining Everex Systems, Inc., Mr. Surran held various
positions at Sorrento Associates, Inc., a venture capital firm, and Heller
Financial, Inc. Mr. Surran received his B.S. from Xavier University and his
M.B.A. from the University of Chicago.
Po-Kang Wang has served as our Vice President of Engineering since October
1997. From April 1995 to October 1997, Dr. Wang served as Vice President,
Advanced Head Design at SAE Magnetics, Ltd. From March 1993 to April 1995, Dr.
Wang served as the Executive Director of Channel Integration at Conner
Peripherals, Inc., a disk drive company. Dr. Wang has a number of issued and
pending patents in the area of recording head technology. Dr. Wang holds a
B.S. in Physics from National Taiwan University, an M.S. in Physics from Tsing-
Hua University and a Ph.D. in Physics from the University of Illinois.
Ta-Lin Hsu has served as our Chairman of the board of directors since
February 1997. Dr. Hsu joined Hambrecht & Quist in 1985 as a General Partner
and became the Managing Director of H&Q Asia Pacific in July 1987. Dr. Hsu
became President of H&Q Asia Pacific in 1990 and its Chairman in 1993. Dr. Hsu
holds a B.S. in Physics from National Taiwan University, an M.S. in
Electrophysics from Polytechnic Institute of Brooklyn and a Ph.D. in Electrical
Engineering from the University of California, Berkeley.
Tu Chen currently serves as our Vice Chairman of the board and served as
Chairman of the board from 1994 to 1996. Dr. Chen is a co-founder of Komag, a
thin film media manufacturer, and served as the Chairman of its board of
directors from its inception in 1983 until August 1999. Previously, Dr. Chen
was a research scientist at Xerox Corporation's Palo Alto Research Center and
Northrop Corp. Dr. Chen also serves as a director of several private
companies. Dr. Chen received his B.S. from Cheng-Kung University and his M.S.
and Ph.D. from the University of Minnesota.
Irwin Federman has been a member of our board of directors since February
1997. Since April 1990, Mr. Federman has been a general partner of U.S.
Venture Partners, a venture capital investment firm. Mr. Federman also serves
on the board of directors of Checkpoint Software Technologies, Ltd., Komag,
Incorporated, SanDisk Corporation, MMC Networks, Inc. and Western Digital
Corporation. Mr. Federman holds a B.S. in Economics from Brooklyn College and
an honorary Doctorate of Engineering Science from Santa Clara University.
Heinrich Sussner has been a member of our board of directors since February
1997. Dr. Sussner has served as Senior Managing Director with H&Q Asia Pacific
since July 1998. From October 1996 to June 1998, Dr. Sussner served as Chief
Technical Officer at Phase Metrics, Inc. From 1980 to 1996, Dr. Sussner held
several technical and management positions with IBM, including serving as
Director of IBM's Almaden Research Facility for data storage technology and as
Executive Consultant for technology investments in Europe.
David Tsang has been a member of our board of directors since April 1998.
Mr. Tsang is the founder of Oak Technology, Inc., a semiconductor company, and
has served as its President from inception in July 1987 until January 1998, as
a director of Oak Technology since October 1987 and as Chairman of its board
since January 1991. Mr. Tsang is also a director of Quality Semiconductor,
Inc. and ASE Test, Ltd. Mr. Tsang holds a B.S. in Electrical Engineering from
Brigham Young University and an M.S. in Electrical Engineering from Santa Clara
University.
44
<PAGE>
Our directors have been divided into three classes: Class I, Class II and
Class III. Members of each class hold office for staggered three-year terms.
At each annual stockholder meeting, stockholders will elect a successor for
each director whose term expires at the meeting. Newly elected directors will
then hold office until the third annual meeting of stockholders following their
election and until their respective successors have been duly elected and
qualified or until their earlier resignation or removal. Officers serve at the
discretion of the board of directors and are appointed annually. There are no
family relationships between any of our directors or executive officers.
Board Committees
Audit Committee. The audit committee of the board of directors consists of
Mr. Irwin Federman and Dr. Heinrich Sussner. The audit committee aids
management in the establishment and supervision of our financial controls,
evaluates the scope of the annual audit, reviews audit results, consults with
management and our independent auditors prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of our financial affairs.
Compensation Committee. The compensation committee of the board of directors
consists of Dr. Tu Chen and Dr. Ta-Lin Hsu. The compensation committee is
responsible for determining salaries, incentives and other forms of
compensation for directors, officers and other employees and administers
various incentive compensation and benefit plans.
Director Compensation and Other Arrangements
Directors do not currently receive cash compensation for their service as
directors. Non-employee directors are eligible to participate in our Director
Option Plan and 1997 Stock Option Plan. Effective upon completion of this
offering, non-employee directors will receive, in addition to actual expenses
incurred, an annual retainer of $12,000, $1,000 for each board of directors
meeting attended, and $750 for attending committee meetings if no board of
directors meeting is held on that date. Effective upon consummation of this
offering, each non-employee director will receive the first annual grant of
12,500 options under our Director Option Plan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the compensation
committee of the board of directors or on the compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Employment Contracts and Change of Control Arrangements
We do not currently have any employment contract in effect with our executive
officers. Accordingly, the employment of any of our executive officers may be
terminated at any time at the discretion of the board of directors.
45
<PAGE>
Executive Compensation
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during the fiscal year ended January 2, 1999. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
ten percent of the total salary and bonus reported for these officers.
Officer Promissory Note. In December 1997, we loaned $400,000 to David Begin,
Vice President of Operations and Marketing, as a hiring incentive. In
connection with the loan, Mr. Begin executed a promissory note that bears
interest at 5.93% per annum, compounded semiannually, and is due and payable on
the earlier of (a) January 1, 2001, (b) ten days following his voluntary
termination of employment with us, or (c) ten days following his termination of
employment by us for cause. We also entered into a debt forgiveness agreement
which forgives Mr. Begin's obligation to pay principal and accrued interest to
us pursuant to the note, in $100,000 increments plus accrued interest per year
if he is employed by us on January 1, 1998, January 1, 1999, January 1, 2000
and January 1, 2001. Mr. Begin's obligation will also be forgiven upon a sale
or transfer by merger, sale of stock or otherwise of a majority of our
outstanding voting securities, provided that Mr. Begin is employed by us at the
time of the event.
Summary Compensation Table
<TABLE>
<CAPTION>
1998 Annual
Compensation(1)
--------------- All Other 1998
Name and Principal Positions Salary Bonus Compensation
- ---------------------------- -------- ------ --------------
<S> <C> <C> <C>
Mike Chang....................................... $264,472 -- --
President and Chief Executive Officer
David Begin(2)................................... 172,817 -- 100,000
Vice President of Operations and Marketing
Kochan Ju........................................ 214,277 50,657 --
Vice President of Technology
Mao-Min Chen..................................... 200,221 41,457 --
Vice President of Wafer Process
Po-Kang Wang..................................... 200,215 5,757 --
Vice President of Engineering
</TABLE>
- --------
(1) Includes salary or bonus earned in the fiscal year of 1997 but paid in the
fiscal year of 1998.
(2) Other 1998 compensation includes partial forgiveness of debt.
46
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information in summary form concerning stock
options awarded to the executive officers named in the summary compensation
table during the year ended January 2, 1999. All such options were awarded
under our 1997 Stock Option Plan.
<TABLE>
<CAPTION>
Individual Grants(1)
---------------------------------------------
Potential
Realized Value
at Assumed
Annual Rates of
Number of % of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term(4)
Options Employees in Price Per Expiration ----------------
Name Granted 1998(2) Share(3) Date 5% 10%
- ---- ---------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Mike Chang...... 0 -- -- -- -- --
David Begin..... 40,000 1.57% $2.25 12/01/08 $56,600 $143,435
Kochan Ju....... 0 -- -- -- -- --
Mao-Min Chen.... 0 -- -- -- -- --
Po-Kang Wang.... 0 -- -- -- -- --
</TABLE>
- --------
(1) All options granted during the fiscal year were granted under our 1997
Stock Option Plan. Each option becomes exercisable upon grant and vests
according to a vesting schedule, subject to the employee's continued
employment with us.
(2) In fiscal 1998, we granted employees and consultants options to purchase an
aggregate of 2,548,905 shares of our common stock.
(3) The exercise price per share of options granted represented the fair market
value of the underlying shares of common stock on the dates the respective
options were granted as determined by our board of directors.
(4) We are including the gains or "option spreads" that would exist for the
options we granted to our named executive officer. We calculate these
gains by assuming an annual compounded stock price appreciation of five
percent and ten percent, respectively, from the date of the option grant
until the termination date of the option. These option spreads are not
estimates or projections of our future common stock price.
Aggregated Options Exercised in Last
Fiscal Year and Fiscal Year-End Option Values
The following table contains information in summary form concerning the
exercise of stock options by the executive officers named in the summary
compensation table during the fiscal year ended January 2, 1999 and stock
options held as of January 2, 1999 by these executive officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year End Fiscal Year End(1)
Acquired Value ----------------------------- -------------------------
Name on Exercise Realized Exercisable (2) Unexercisable Exercisable Unexercisable
- ---- ----------- -------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mike Chang.............. -- -- 489,141 -- $533,164 --
David Begin............. -- -- 200,000 -- 40,000 --
Kochan Ju............... 10,000 $ 59,000 481,064 -- 944,767 --
Mao-Min Chen............ 91,842 207,237 389,222 -- 747,306 --
Po-Kang Wang............ -- -- 300,000 -- 327,000 --
</TABLE>
- --------
(1) Represents the difference between the fair market value of $2.25 per share
as of January 2, 1999 and the exercise price of such options.
(2) All options described herein are subject to early exercise provisions as
set forth in each optionee's respective stock option agreement. Certain
exercisable options may be partially or completely unvested according to
the vesting schedules contained in each such stock option agreement.
47
<PAGE>
Employee Benefit Plans
1997 Stock Option Plan
Our 1997 Stock Option Plan became effective in February 1997. In August
1999, our board of directors amended and restated the option plan reserving a
total of 10,159,107 shares of common stock for issuance under the option plan,
plus an annual increase to be added each year on the date of the annual
stockholders meeting equal to the lesser of (a) four percent of the outstanding
shares on such date, (b) 1,500,000 shares or (c) an amount determined by our
board of directors. In August 1999, our stockholders approved this amendment.
As of July 3, 1999, 1,211,144 shares of common stock had been issued upon the
exercise of options granted under the option plan. The number of options
outstanding under the option plan includes:
. 5,304,953 shares of common stock issuable upon the exercise of
outstanding options as of July 3, 1999 at an average exercise price of
$1.15 per share;
. 56,161 shares of common stock issuable, net of cancellations, upon the
exercise of options granted between July 3, 1999 and August 19, 1999 at
an average exercise price of $4.50 per share; and
. 1,029,946 shares of common stock issuable upon the exercise of options
granted on August 19, 1999 at an exercise price of $5 per share.
Our 1997 Stock Option Plan provides for grants of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), non-employee directors and consultants. The purpose of the option
plan is to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive to employees and
consultants to promote the success of our business. The option plan may be
administered by the board of directors or a committee of the board of
directors. The board of directors or the committee determines the optionees
and the terms of options granted, including the exercise price, number of
shares subject to the option and the exercisability thereof. Options granted
under the option plan are generally not transferable by the optionee. Options
granted under the option plan must generally be exercised within three months
of the end of optionee's status as an employee or consultant, within six months
after such optionee's termination by disability or within 12 months after such
optionee's termination by death or permanent disability, but in no event later
than the expiration of the option's term. The exercise price of an option is
determined by the board or committee administering the Plan. However, the
exercise price of incentive stock options cannot be less than 100% of the fair
market value of common stock on the date of grant. With respect to any
participant who owns stock possessing more than ten percent of the voting power
of all classes of our stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the maximum term of the incentive stock option must not exceed five years. The
term of all other options granted under the option plan may not exceed ten
years.
The standard forms of Immediately Exercisable Incentive Stock Option
Agreement and Immediately Exercisable Nonstatutory Stock Option Agreement
contain provisions for the early exercise of unvested stock options. Such
option agreements contain provisions for the repurchase of unvested shares by
us with 60 days written notice to an optionee under certain circumstances
described in these agreements.
In the event of a change in control, including a merger into another
corporation, a sale of substantially all of our assets or our liquidation or
dissolution, the option plan allows each outstanding option to be assumed or an
equivalent option substituted by the successor corporation. In the event the
successor corporation refuses to assume or substitute for the outstanding
options, each outstanding option will be fully vested and exercisable for a
period of ten days prior to the date of the change of control, including shares
as to which it would not otherwise be vested. If the option is not assumed or
substituted or exercised prior to the date of the change of control, such
outstanding option shall terminate and cease to be outstanding as of the
effective date of the change of control. Unless terminated sooner, the option
plan will terminate 10 years from its effective date. The board of directors
has authority to amend or terminate the option plan, provided that no such
action may impair the rights of the holder of any outstanding options without
the written consent of such holder.
48
<PAGE>
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by the board of directors
in August 1999 and approved by the stockholders in August 1999 and will be
effective upon consummation of the initial public offering. A total of
750,000 shares of common stock has been authorized for issuance under the
purchase plan, plus an annual increase to be added on January 1 of each year
equal to the number of shares needed to restore the maximum number of shares of
common stock that may be available for grant under the purchase plan to 750,000
shares.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains consecutive, overlapping
twenty-four-month offering periods. Each offering period consists of four
purchase periods, each approximately six months in length. The offering
periods generally start on the first trading day on or after February 1 and
August 1 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before January 31, 2002.
Employees are eligible to participate in the purchase plan if they are
customarily employed by us or any participating subsidiary for at least 20
hours per week and more than five months in any calendar year. However, any
employee who (a) immediately after grant owns stock possessing five percent or
more of the total combined voting power or value of all classes of our capital
stock or (b) whose rights to purchase stock under all of our employee stock
purchase plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year may not be granted an option to purchase stock under the purchase
plan.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed ten percent of an employee's
compensation. Compensation is defined to include the participant's base
straight time gross earnings, commissions, overtime and shift premiums, but
excludes bonuses. The price of stock purchased under the purchase plan is
equal to 85% of the fair market value of the common stock at the beginning of
each offering period or the last day of the purchase period, whichever is
lower. The maximum number of shares a participant may purchase during a single
purchase period is 5,000 shares.
Rights granted under the purchase plan are not transferable by a participant
other than by will, the laws of descent and distribution or as otherwise
provided under the purchase plan. The purchase plan provides that, in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, each outstanding option shall be assumed or substituted for
by the successor corporation. If the successor corporation refuses to assume
or substitute for the outstanding options, the offering period then in progress
will be shortened and a new exercise date will be set with the new exercise
date occurring before the proposed sale or merger. The purchase plan will
terminate ten years from its effective date. The board of directors has the
authority to amend or terminate the purchase plan, except that generally no
such action may adversely affect any outstanding rights to purchase stock under
the purchase plan. The board of directors has discretion to amend the purchase
plan in the event that the operation of the purchase plan would result in
unfavorable financial accounting consequences.
Director Option Plan
Our 1999 Director Option Plan was adopted by the board of directors in August
1999 and approved by the stockholders in August 1999. A total of 150,000
shares of common stock has been reserved for issuance under the director plan,
plus an annual increase to be added each year on the day after the date of the
annual stockholder meeting equal to the lesser of (a) the number of shares
needed to restore the maximum number of shares available for grant to 150,000
shares or (b) an amount determined by the board of directors. The outside
directors are eligible to participate in the director plan, which provides for
the grant of nonstatutory stock options pursuant to an automatic,
nondiscretionary grant mechanism. The director plan provides that each outside
director, except for employee directors who become outside directors, shall be
granted a nonstatutory stock option to purchase 50,000 shares of common stock
on the date that the
49
<PAGE>
person first becomes an outside director. Thereafter, each outside director
shall be automatically granted an option to purchase 12,500 shares of common
stock each year on the date of the annual stockholder meeting provided that the
director has served on the board for at least the preceding six months. The
director plan provides that the initial option shall become vested as to 25% of
the shares subject to the option on the first anniversary of its date of grant,
with monthly vesting thereafter. Each subsequent option shall become vested in
equal monthly installments over a one year period beginning after all
previously granted options have fully vested. The exercise price per share of
all options granted under the director plan shall be equal to the fair market
value of a share of our common stock on the date of grant. Options granted to
outside directors under the director plan have a ten year term, but will expire
unless exercised within three months following the termination of an outside
director's status as a director for any reason other than death or disability
or within 12 months following the termination of an outside director's status
as a director due to death or disability. In the event of a merger or sale of
substantially all of our assets, all outstanding options may be assumed or
substituted by the successor corporation, or if they are not assumed or
substituted, they shall become fully vested and exercisable for a period of 30
days from the date the board notifies the optionee of the option's full
vesting, after which period the option shall terminate. Assumed options become
fully vested and exercisable if the director ceases his or her status with us
or any successor company other than, by a voluntary resignation. Generally, no
option granted under the director plan is transferable by the optionee other
than by will or the laws of descent and distribution. If not terminated
earlier, the director plan will have a term of ten years.
Limitation of Liability and Indemnification Matters
Our Amended and Restated Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law. Under Delaware law, a director's liability to a company or its
stockholders may not be limited with respect to (a) any breach of his duty of
loyalty to the company or its stockholders, (b) acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law, (c)
unlawful payments or dividends or unlawful stock repurchases or redemptions or
(d) transactions from which the director derived an improper personal benefit.
Our bylaws provide that we shall indemnify our officers and directors and may
indemnify our employees and agents in certain circumstances. We have also
entered into agreements to indemnify our directors and executive officers, in
addition to the indemnification provided for in our bylaws. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and executive officers. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions, regardless of whether Delaware law
would permit indemnification. In addition, we maintain directors' and
officers' liability insurance.
There is no pending litigation or proceeding involving any of our directors,
officers, employees or agents where indemnification will be required or
permitted. We are not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.
50
<PAGE>
RELATED PARTY TRANSACTIONS
The Recapitalization. In January 1997, Headway Technologies, Inc.
(California), a wholly-owned subsidiary of Headway Technologies, Inc., was
acquired in a recapitalization by an investor group led by H&Q Asia Pacific.
In addition to the related transactions described below, the recapitalization
was effected through the following series of transactions:
. the investor group formed and capitalized a new Delaware corporation,
Headway Technologies, Inc. (which at that time was called Headway
Holdings, Inc.);
. we formed a wholly-owned subsidiary which was merged with and into
Headway California, with Headway California becoming our wholly-owned
subsidiary; and
. all outstanding shares of capital stock of Headway California were
converted into the right to receive cash in an aggregate amount of $22.0
million. Of the $22.0 million in aggregate proceeds distributed to former
Headway California shareholders, the four largest shareholders HP, Komag,
Inc., Asahi Komag Co., Ltd., and Asahi Glass America, Inc. collectively
received $21.9 million, representing approximately 73.0% of their total
$30.0 million cash investment.
The recapitalization was funded by:
. the purchase by the investor group of approximately $35.0 million of
Series A preferred stock at a per share price of $2.39; and
. aggregate loan commitments by certain industry lenders, including Western
Digital and Maxtor of approximately $18.0 million of which $11.0 million
was funded at or shortly following closing. As of July 3, 1999, $13.4
million was owed to the industry lenders. All of the loan commitments by
the industry lenders are unsecured and bear interest at annual rates
ranging from 5.0% to 8.5%, compounded monthly. Amounts repaid to the
industry lenders under such commitments are in part determined by product
purchases.
In connection with the recapitalization, HP and Asahi Komag guaranteed to
certain third-party creditors our performance under certain equipment leasing
obligations of Headway California, which equals an aggregate amount of $13.5
million. In consideration of each guarantor's agreement to permit the guaranty
to remain in effect, we entered into an agreement with the guarantors in which
we agreed to reimburse the guarantors for any payments made by them pursuant to
the guaranties and to secure a portion of such reimbursement obligation with
certain equipment owned by us.
We entered into an agreement amending the Master Technology License Agreement
between HP, Komag, Asahi Komag and Headway California. Under the amended
license agreement, HP, Komag and Asahi Komag granted exclusive licenses to us
with respect to certain technology used by us. In turn, we granted the
licensees a nonexclusive license to manufacture, using our technology, certain
products outside the scope of our core business including technology previously
licensed to us by the licensees on an exclusive basis, that was in the
licensees' possession prior to the recapitalization or for which we had
obtained or applied for a patent prior to the recapitalization. Under this
license, (a) HP was granted the right to manufacture heads for tape drives and
floppy disk drives that are manufactured by or for HP, provided that HP shall
have first offered us the opportunity to manufacture such heads for HP, and (b)
Komag and Asahi Komag were granted the right to use our technology to
manufacture certain media products such as storage disks.
51
<PAGE>
Series A Preferred Stock and Warrants. In connection with the
recapitalization, we issued to Hambrecht & Quist LLC a warrant to purchase
389,918 shares of our common stock at a purchase price of $0.10 per share. The
purchasers of Series A preferred stock in the recapitalization included, among
others, the following officers, directors and holders of more than five percent
of our voting securities:
<TABLE>
<CAPTION>
Shares of
Preferred Stock(1)
------------------
<S> <C>
Ta-Lin Hsu(2)................................................ 9,607,428
Irwin Federman(3)............................................ 1,670,857
Western Digital (Tuas-Singapore) pte Ltd. ................... 2,924,000
Maxtor Corporation........................................... 417,715
</TABLE>
- --------
(1) The purchasers of these securities are entitled to registration rights.
See "Description of Capital Stock--Registration Rights."
(2) Represents 6,683,429 shares held by Asia Pacific Growth Fund II, L.P. of
which H&Q Asia Pacific II, L.L.C. is its General Partner, 1,670,857 shares
held by China Dynamic Growth Fund, L.P. of which H&Q Asia Pacific, Ltd. is
its General Partner, 626,571 shares held by H&Q Philippines Ventures II,
Inc. of which Hambrecht & Quist LLC owns a minority equity interest and H&Q
Asia Pacific, Ltd. owns shares and participates in management and 626,571
shares held by HanTech Venture Capital Corporation of which Hambrecht &
Quist LLC owns a minority equity interest and H&Q Asia Pacific, Ltd. owns
shares and participates in management. Dr. Hsu is Chairman, President and
Managing Director of H&Q Asia Pacific.
(3) Represents collectively 1,503,771 shares held by U.S. Venture Partners V,
L.P. of which Presidio Management Group V, L.L.C. is its General Partner,
83,543 shares held by USVP V International, L.P. of which Presidio
Management Group V, L.L.C. is its General Partner, 46,784 held by 2180
Associates Fund V of which Presidio Management Group V, L.L.C. is its
General Partner and 36,759 shares held by U.S. Venture Partners V Ent.,
L.P. Mr. Federman is a Managing Member of Presidio Management Group, V,
L.L.C., and is the general partner of each of U.S. Venture Partners V,
L.P., USVP V International, L.P., 2180 Associates Fund V, L.P. and USVP V
Entrepreneurs Partners, L.P.
On March 11, 1998, we sold 1,144,535 shares of our Series A preferred stock
at a price of $2.39 per share in a private placement transaction, including
sales to certain members of the investor group who participated in the January
1997 recapitalization. The purchasers of the preferred stock included, among
others, the following officers, directors and holders of more than five percent
of our voting securities:
<TABLE>
<CAPTION>
Shares of
Preferred Stock(1)
------------------
<S> <C>
Heinrich Sussner............................................. 62,657
Tu Chen...................................................... 62,657
Irwin Federman(2)............................................ 208,857
Western Digital (Tuas-Singapore) pte Ltd..................... 281,956
</TABLE>
- --------
(1) The purchasers of these securities are entitled to registration rights.
(2) Represents collectively 187,971 shares held by U.S. Venture Partners V,
L.P. of which Presidio Management Group V, L.L.C. is its General Partner,
10,443 shares held by USVP V International, L.P. of which Presidio
Management Group V, L.L.C. is its General Partner, 4,595 shares held by
USVP V Entrepreneur International, L.P. of which Presidio Management Group
V, L.L.C. is its General Partner and 5,848 held by 2180 Associates Fund V
of which Presidio Management Group V, L.L.C. is its General Partner. Mr.
Federman is a Managing Member of Presidio Management Group, V, L.L.C., and
is the general partner of each of U.S. Venture Partners V, L.P., USVP V
International, L.P., 2180 Associates Fund V, L.P. and USVP V Entrepreneurs
Partners, L.P.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of July 3, 1999, and as adjusted to reflect the sale of the shares of common
stock in this offering, by:
. each person or entity known by us to own beneficially more than five
percent of our common stock;
. our chief executive officer and each of the executive officers named in
the summary compensation table and each of our directors; and
. all of our executive officers and directors as a group.
The address of all the beneficial owners, unless otherwise noted, is 678 South
Hillview Drive, Milpitas, California 95035.
The beneficial ownership is calculated based on 16,977,679 shares of our
common stock outstanding as of July 3, 1999 and shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting and investment power with respect to securities. Unless otherwise
indicated, each person or entity named in the table has sole voting and
investment power with respect to all shares of capital stock listed as owned by
such person. Shares issuable upon the exercise of options that are currently
exercisable or become exercisable within 60 days of July 3, 1999 are considered
outstanding for the purpose of calculating the percentage ownership of the
person holding the options but are not deemed outstanding for computing the
percentage ownership of any other person. All of the options and warrants held
by the beneficial owners in the table below will be immediately exercisable and
vested upon consummation of this offering.
The number of shares includes 15,764,535 shares of common stock issuable upon
conversion of our Series A convertible preferred stock upon consummation of
this offering.
<TABLE>
<CAPTION>
Percentage of
Shares Outstanding
----------------------
Number of Shares Before this After this
Name and Address Beneficially Owned Offering Offering
- ---------------- ------------------ ----------- ----------
<S> <C> <C> <C>
Ta-Lin Hsu(1)..................... 9,634,428 56.7%
H&Q Asia Pacific
One Bush Street
San Francisco, CA 94104
Western Digital (Tuas Singapore)
pte Ltd.......................... 3,205,956 18.9
8105 Irvine Center Drive
Irvine, CA 92718
Irwin Federman(2)................. 1,904,714 11.2
US Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Mao-Min Chen(3)................... 491,064 2.9
Kochan Ju(4)...................... 491,064 2.9
Mike Chang(5)..................... 489,141 2.9
Po-Kang Wang...................... 300,000 1.8
David Begin....................... 200,000 1.2
Heinrich Sussner(6)............... 112,657 * *
Tu Chen(7)........................ 112,657 * *
David Tsang....................... 50,000 * *
Executive officers and directors
as a group (10 persons)(8)....... 13,783,725 81.2
</TABLE>
- ---------------------
*Represents less than 1% of our outstanding common stock.
53
<PAGE>
(1) Includes 25,000 shares subject to options exercisable within 60 days of
July 3, 1999. Represents 6,685,429 shares held by Asia Pacific Growth Fund
II, L.P. of which H&Q Asia Pacific II, L.L.C. is its General Partner,
1,670,857 shares held by China Dynamic Growth Fund, L.P. of which H&Q Asia
Pacific, Ltd. is its general partner, 626,571 shares held by H&Q
Philippines Ventures II, Inc. of which Hambrecht & Quest LLC owns a
minority equity interest and H&Q Asia Pacific, Ltd. owns shares and
participates in management and 626,571 shares held by HanTech Venture
Capital Corporation of which Hambrecht & Quist LLC owns a minority equity
interest and H&Q Asia Pacific, Ltd. owns shares and participates in
management. Dr. Hsu is Chairman, President and Managing Director of H&Q
Asia Pacific.
(2) Includes 25,000 shares subject to options exercisable within 60 days of
July 3, 1999. Represents ownership by the following entities of which
Presidio Management Group V, L.L.C. is the General Partner: 46,784 shares
held by 2180 Associates Fund V; 1,503,771 shares held by U.S. Venture
Partners, L.P.; 36,759 shares held by U.S. Venture Partners V Enterprises,
L.P.; and 83,543 shares held by USVP V International, L.P. Mr. Federman
is a Director of the Company and a Managing Member of Presidio Management
Group, V, L.L.C., and is the General Partner of each of U.S. Venture
Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P.
and USVP V Entrepreneurs Partners, L.P.
(3) Includes 389,222 shares subject to options exercisable within 60 days of
July 3, 1999. Dr. Chen is Vice President of Wafer Process.
(4) Includes 481,064 shares subject to options exercisable within 60 days of
July 3, 1999. Dr. Ju is a Director and Vice President of Technology.
(5) Includes 489,141 shares subject to options exercisable within 60 days of
July 3, 1999. Dr. Chang is a Director, President and Chief Executive
Officer.
(6) Includes 50,000 shares subject to options exercisable within 60 days of
July 3, 1999. Dr. Sussner is a Director.
(7) Includes 50,000 shares subject to options exercisable within 60 days of
July 3, 1999. Dr. Chen is a Director.
(8) Includes 2,059,427 shares subject to options exercisable within 60 days of
July 3, 1999 held by our executive officers and directors.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue 75,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value.
The following summary of certain provisions of our capital stock describes
all material provisions of, but is not complete and is subject to, our Amended
and Restated Certificate of Incorporation and our bylaws that are included as
exhibits to the registration statement of which this prospectus forms a part
and by the provisions of applicable law. Our Amended and Restated Certificate
of Incorporation and bylaws contain certain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of our
board of directors and that may have the effect of delaying, deferring or
preventing a future takeover or change in control unless such takeover or
change in control is approved by our board of directors.
Common Stock
As of July 3, 1999, there were 16,977,679 shares of common stock outstanding
held of record by approximately 148 stockholders.
The issued and outstanding shares of common stock are, and the shares of
common stock being offered by us will be, upon payment therefor, validly
issued, fully paid and nonassessable. Subject to the prior rights of the
holders of any preferred stock, the holders of outstanding shares of common
stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the board of directors may from
time to time determine. The shares of common stock are neither redeemable nor
convertible and the holders thereof have no preemptive or subscription rights
to purchase any of our securities. Upon our liquidation, dissolution or
winding up, the holders of our common stock are entitled to share ratably in
all of our assets that are legally available for distribution, after payment of
all debts and other liabilities and subject to the prior rights of any holders
of any preferred stock then outstanding. Each outstanding share of our common
stock is entitled to one vote on all matters submitted to a vote of
stockholders and has cumulative voting rights with respect to the election of
directors.
Warrants
As of July 3, 1999, there were outstanding warrants to purchase (a) an
aggregate of 389,918 shares of our common stock at an exercise price of $0.10
per share, which expires on February 4, 2002, and (b) an aggregate of 179,816
shares of common stock at an exercise price of $2.39 per share, which expires
on March 31, 2003. The first warrant will be automatically deemed exercised in
full immediately prior to (a) the time the warrant would otherwise expire or
(b) a sale of the company.
Preferred Stock
Effective upon the closing of this offering, we will be authorized to issue
5,000,000 shares of undesignated preferred stock. The board of directors has
the authority to issue preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by our stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible recapitalizations
and other corporate purposes, could have the effect of delaying, deferring or
preventing our change in control without further action by the stockholders and
may adversely affect the market price of our common stock and the voting and
other rights of the holders of common stock. We have no current plans to issue
any shares of preferred stock.
Certain Provisions of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 prohibits a publicly held Delaware corporation from engaging in a
business combination with an interested stockholder
55
<PAGE>
for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless: (a) prior to such date, the
board of directors of the corporation approves either the business combination
or the transaction that resulted in the stockholder becoming an interested
stockholder; (b) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, excluding certain shares held by
employee directors and employee stock plans; or (c) on or after the
consummation date the business combination is approved by the board of
directors and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include: (a) any merger or
consolidation involving the corporation and the interested stockholder; (b) any
sale, transfer, pledge or other disposition of ten percent or more of the
assets of the corporation involving the interested stockholder; (c) subject to
certain exceptions, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested stockholder;
(d) any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (e) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Registration Rights
As of July 3, 1999, holders of 15,764,535 shares of our common stock, and
their permitted transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of our
Registration Rights Agreement dated as of February 4, 1997, as amended, the
holders will be entitled to certain rights with respect to the registrable
securities. Under the Registration Rights Agreement, if at any time after this
offering we propose to register any of our common stock under the Securities
Act, the holders of registrable securities are entitled to notice of such
registration and to include their registrable securities therein; provided,
among other conditions, that the underwriters have the right to limit the
number of shares included in any such registration. Beginning six months after
the closing of the offering, the holders of at least 30.0% of the registrable
securities have the right to require us, on not more than two occasions, to
file a registration statement under the Securities Act in order to register all
or any part of their registrable securities, provided that the aggregate
offering price exceeds $10.0 million. We may, in certain circumstances, defer
such registration and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, the holders of at least 20.0% of the registrable securities may
require us to register all or any portion of their registrable securities on
Form S-3, when that form becomes available to us, subject to certain conditions
and limitations. Generally, we have agreed to bear all expenses incurred in
connection with these registrations. We have also agreed to indemnify the
holders of registration rights.
The registration rights terminate upon the earlier of the seventh anniversary
date of this offering or the time when the registrable securities may be sold
within two successive quarters under Rule 144.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company and its telephone number is (212) 936-5100.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and
our ability to raise equity capital in the future on terms favorable to us.
After the offering, shares of our common stock will be outstanding,
assuming that the underwriters do not exercise the over-allotment option. Of
these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining shares of common stock held
by existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 under the Securities Act, which rules are
summarized below.
The following table shows approximately when the 16,977,679 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
<TABLE>
<CAPTION>
Eligibility of
Restricted Shares for
Sale in the Public
Market
---------------------
<S> <C>
At effective date....... 0
180 days after the
effective date.........
After 180 days post
effective date.........
</TABLE>
Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 must also comply with the manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
57
<PAGE>
complying with some of the restrictions, including the holding period,
contained in Rule 144. All of the options issued under our 1997 Stock Option
Plan will become immediately vested and exercisable upon consummation of this
offering and will be able to be resold after the 90-day period, subject to
lock-up agreements.
Lock-Up Agreements
All officers and directors and some of the holders of common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants
or other rights to purchase common stock for a period of 180 days after the
date of this prospectus without the prior written consent of Hambrecht & Quist
LLC.
Registration Rights
Upon completion of this offering, the holders of 15,764,535 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. After registration, these shares will
become freely tradable without restriction under the Securities Act. Any sale
of securities by these shareholders could have a material adverse effect on the
trading price of our common stock.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC
and Banc of America Securities LLC, have severally agreed to purchase from us
the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Name Shares
- ---- ---------
<S> <C>
Hambrecht & Quist LLC.................................................
Banc of America Securities LLC........................................
----
Total...............................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The nature of the underwriters' obligation is such that they are
committed to purchase all shares of common stock offered hereby if any shares
are purchased.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
Underwriting Discounts and Commissions Payable by Us
<TABLE>
<CAPTION>
With Without
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $ per share to certain other dealers. After
the initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have informed us
that the underwriters do not intend to confirm discretionary sales of more than
five percent of the shares of common stock offered in this offering.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional shares
of common stock at the initial public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that
the underwriters exercise this option, each of the underwriters will have a
firm commitment to purchase approximately the same percentage thereof which the
number of shares of common stock to be purchased by it shown in the above table
bears to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell shares to the underwriters to the
extent the option is exercised. The underwriters may exercise this option only
to cover over-allotments made in connection with the sale of shares of common
stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
59
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect thereof.
Our shareholders, including executive officers and directors, and optionees
who will own in the aggregate 16,977,679 shares of common stock after the
offering, have agreed not to, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of common stock,
options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock owned by them
during the 180-day period following the date of this prospectus. We have
agreed that we will not, without the prior written consent of Hambrecht & Quist
LLC, offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock during the 180-day period following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof, and may grant additional options
under our stock option plans, provided that, without the prior written consent
of Hambrecht & Quist LLC, the additional options shall not be exercisable
during that period.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for our common stock will be
determined by negotiation among us and the representatives of the
underwriters. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, our
revenues and earnings, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and our
prospects, the present state of our business operations, our management and
other factors deemed relevant.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with this offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with this offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. This stabilizing, if commenced, may be
discontinued at any time.
Ta-Lin Hsu, the chairman of the board of directors, is affiliated with
Hambrecht & Quist LLC, a representative and a principal underwriter of this
offering. In addition, as more fully set forth in "Related Party
Transactions," Hambrecht & Quist LLC holds a warrant to purchase 389,918 shares
of our common stock, and funds affiliated with Hambrecht & Quist LLC hold an
aggregate of 9,607,428 shares of our Series A preferred stock.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Morrison & Foerster LLP, San Francisco, California. As of the
date of this prospectus, members and trusts of Wilson Sonsini Goodrich &
Rosati, P.C. beneficially own an aggregate of 31,327 shares of our Series A
preferred stock.
60
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 28, 1997 and January 2, 1999, and for each of
the three years in the period ended January 2, 1999 (which, for the year ended
December 29, 1996 relates to the financial statements of the predecessor
Company), as set forth in their report. We've included our consolidated
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. This prospectus, filed as part of the
registration statement, does not contain all of the information set forth in
the registration statement and its exhibits and schedules, portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and the common stock, we refer you to the
registration statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of
such contract, agreement or document filed as an exhibit to the registration
statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the registration
statement and its exhibits and schedules without charge at the public reference
facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois, 60661. You may obtain information on the public reference
facilities by calling the SEC at 1-800-SEC-0330. You may also inspect these
reports and other information without charge at a Web site maintained by the
SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the informational
requirements of the Exchange Act and, in accordance therewith, file reports,
proxy statements and other information with the SEC. You will be able to
inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC and at the SEC's regional
offices at the addresses noted above. You also will be able to obtain copies
of this material from the Public Reference Section of the SEC as described
above, or inspect them without charge at the SEC's Web site. We have applied
for quotation of our common stock on the Nasdaq National Market. If we receive
approval for quotation on the Nasdaq National Market, then you will be able to
inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
61
<PAGE>
HEADWAY TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Headway Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Headway
Technologies, Inc. as of December 28, 1997 and January 2, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended January 2, 1999 (which, for the
year ended December 29, 1996, relates to the financial statements of the
predecessor Company). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Headway Technologies, Inc. at December 28, 1997 and January 2, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
February 26, 1999,
except for paragraph 1 of Note 11, as to which the date is
April 26, 1999
F-2
<PAGE>
HEADWAY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 28, January 2, July 3, Equity at
1997 1999 1999 July 3, 1999
------------ ---------- -------- -------------
(unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..... $ 22,574 $ 24,350 $ 22,083
Accounts receivable, net of
allowances of $530, $530 and
$130 at December 28, 1997,
January 2 and July 3, 1999... 10,225 8,498 8,250
Inventories................... 5,082 4,627 5,100
Prepaid expenses.............. 275 2,280 509
Other current assets.......... 53 197 170
-------- -------- --------
Total current assets........ 38,209 39,952 36,112
Property and equipment:
Machinery and equipment....... 35,831 55,766 58,051
Leasehold improvements........ 7,328 21,610 21,703
-------- -------- --------
43,159 77,376 79,754
Less accumulated depreciation
and amortization............. (16,521) (28,209) (36,237)
-------- -------- --------
Net property and equipment.... 26,638 49,167 43,517
Intangible assets, net of
accumulated amortization of
$1,284, $1,891, and $1,976 at
December 28, 1997, January 2,
1999, and July 3, 1999....... 726 119 10,169
Other assets.................. 400 528 530
-------- -------- --------
Total assets................ $ 65,973 $ 89,766 $ 90,328
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Borrowings under line of
credit....................... $ -- $ 7,500 $ 3,000
Accounts payable.............. 6,203 11,852 7,422
Accrued compensation and
related expenses............. 2,140 2,118 2,386
Other accrued liabilities..... 2,207 3,525 3,130
Advance from customer......... 3,000 -- --
Current portion of capital
leases....................... 179 1,586 1,678
Current portion of notes
payable...................... 14,366 15,092 23,193
-------- -------- --------
Total current liabilities... 28,095 41,673 40,809
Capital leases, less current
portion...................... 358 5,482 4,619
Notes payable, less current
portion...................... 21,986 17,397 18,910
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred
stock; $0.001 par value;
14,620,000, 15,764,535 and
15,764,535 shares authorized,
issued and outstanding at
December 28, 1997, January 2,
1999, and July 3, 1999,
respectively; 5,000,000
shares authorized, none
issued and outstanding pro
forma at July 3, 1999;
aggregate liquidation
preference of $34,942,
$37,677, and $37,677 at
December 28, 1997, January 2,
1999, and July 3, 1999,
respectively................. 34,382 37,122 37,122 $ --
Common stock; $0.001 par
value; 25,000,000 shares
authorized; 137,428, 698,096,
and 1,213,144 shares issued
and outstanding at December
28, 1997, January 2, 1999,
and July 3, 1999,
respectively; 75,000,000
authorized, 16,977,679 shares
issued and outstanding pro
forma at July 3, 1999........ 350 474 589 37,711
Deferred compensation......... (319) (238) (197) (197)
Accumulated deficit........... (18,879) (12,144) (11,524) (11,524)
-------- -------- -------- --------
Total stockholders' equity.. 15,534 25,214 25,990 $ 25,990
-------- -------- -------- ========
Total liabilities and
stockholders' equity....... $ 65,973 $ 89,766 $ 90,328
======== ======== ========
</TABLE>
See Accompanying Notes
F-3
<PAGE>
HEADWAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------------------- -----------------
December 29, December 28, January 2, June 27, July 3,
1996 1997 1999 1998 1999
------------- ------------ ---------- -------- -------
(predecessor) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales, net.... $ 4,421 $ 52,369 $177,669 $91,850 $70,693
Product sales to
related parties,
net.................. 20,871 -- -- -- --
Technology transfers
and royalties........ 1,500 2,000 1,750 750 2,093
---------- -------- -------- ------- -------
Total revenue........ 26,792 54,369 179,419 92,600 72,786
Cost of sales........... 22,616 41,222 137,001 69,057 50,928
---------- -------- -------- ------- -------
Gross profit............ 4,176 13,147 42,418 23,543 21,858
Operating expenses:
Research and
development.......... 5,066 20,287 25,458 11,611 16,780
Selling, general and
administrative....... 3,418 5,198 6,618 3,503 2,680
Acquired in-process
technology........... -- 6,000 -- -- --
---------- -------- -------- ------- -------
Total operating
expenses............ 8,484 31,485 32,076 15,114 19,460
Operating (loss)
income................. (4,308) (18,338) 10,342 8,429 2,398
Other income (expense):
Interest income....... 406 953 875 495 381
Interest expense...... (1,065) (2,019) (3,313) (1,399) (1,953)
---------- -------- -------- ------- -------
(659) (1,066) (2,438) (904) (1,572)
(Loss) income before
income taxes and
extraordinary item..... (4,967) (19,404) 7,904 7,525 826
Provision for income
taxes.................. -- -- 1,475 1,402 206
---------- -------- -------- ------- -------
(Loss) income before
extraordinary item..... (4,967) (19,404) 6,429 6,123 620
Extraordinary item--gain
related to early
retirement of debt, net
of income taxes of
$67.................... -- -- 306 -- --
---------- -------- -------- ------- -------
Net (loss) income....... $ (4,967) $(19,404) $ 6,735 $ 6,123 $ 620
========== ======== ======== ======= =======
(Loss) income per share
before extraordinary
item(1):
Basic................. $(2,483.50) $(441.00) $ 11.80 $ 14.31 $ 0.68
========== ======== ======== ======= =======
Diluted............... $(2,438.50) $(441.00) $ 0.31 $ 0.30 $ 0.03
========== ======== ======== ======= =======
Pro forma--basic...... $ 0.40 $ 0.39 $ 0.04
======== ======= =======
Pro forma--diluted.... $ 0.31 $ 0.30 $ 0.03
======== ======= =======
Net (loss) income(1):
Basic................. $(2,483.50) $(441.00) $ 12.36 $ 14.31 $ 0.68
========== ======== ======== ======= =======
Diluted............... $(2,438.50) $(441.00) $ 0.33 $ 0.30 $ 0.03
========== ======== ======== ======= =======
Pro forma--basic...... $ 0.42 $ 0.39 $ 0.04
======== ======= =======
Pro forma--diluted.... $ 0.33 $ 0.30 $ 0.03
======== ======= =======
Shares used in computing
per share
information(1):
Basic................. 2 44 545 428 913
========== ======== ======== ======= =======
Diluted............... 2 44 20,573 20,276 20,717
========== ======== ======== ======= =======
Pro forma--basic...... 16,093 15,754 16,677
======== ======= =======
Pro forma--diluted.... 20,573 20,276 20,717
======== ======= =======
</TABLE>
- --------
(1) Loss per share before extraordinary item and net loss per share for 1996
were calculated assuming common shares issued in connection with the
January 1997 Recapitalization (see Note 1) were outstanding for the entire
year.
See Accompanying Notes
F-4
<PAGE>
HEADWAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A
Redeemable Class 1 Series A
Convertible Convertible Convertible Notes
Preferred Stock Stock Common Stock Preferred Stock Common Stock Receivable
---------------- --------------- -------------- ---------------- ------------- From Deferred
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Officers Compensation
------ -------- ------ ------- ------ ------ ------- -------- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995
(predecessor).... 3,000 $ 29,985 1,200 $ 3,498 3,584 $ 359 -- $ -- -- $ -- $ (50) $ --
Issuance of
common stock in
connection with
option plans.... -- -- -- -- 31 3 -- -- -- -- -- --
Repurchase of
common stock and
related payment
on note
receivable...... -- -- -- -- (29) (3) -- -- -- -- 6 --
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------ ----- ------- -------- ----- ---- ----- ------
Balance at
December 29, 1996
(predecessor).... 3,000 29,985 1,200 3,498 3,586 359 -- -- -- -- (44) --
Liquidation of
predecessor
Series A
redeemable
convertible
preferred,
common and Class
1 convertible
stock........... (3,000) (29,985) (1,200) (3,498) (3,586) (359) -- -- -- -- 44 --
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $618... -- -- -- -- -- -- 14,620 34,382 -- -- -- --
Issuance of
common stock in
connection with
option plans.... -- -- -- -- -- -- -- -- 137 19 -- --
Deferred
compensation
related to
grants of common
stock options... -- -- -- -- -- -- -- -- -- 331 -- (331)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- -- -- 12
Net loss and
comprehensive
net loss of
predecessor
company for the
period from
December 30,
1996 through
January 23,
1997, the date
of
recapitalization.. -- -- -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive
net loss for the
period from
January 24, 1997
through December
28, 1997........ -- -- -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------ ----- ------- -------- ----- ---- ----- ------
Balance at
December 28,
1997............. -- -- -- -- -- -- 14,620 34,382 137 350 -- (319)
Issuance of
Series A
convertible
preferred
stock........... -- -- -- -- -- -- 1,145 2,740 -- -- -- --
Issuance of
common stock in
connection with
option plans.... -- -- -- -- -- -- -- -- 561 124 -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- -- -- 81
Net income and
comprehensive
net income...... -- -- -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------ ----- ------- -------- ----- ---- ----- ------
Balance at
January 2, 1999.. -- -- -- -- -- -- 15,765 37,122 698 474 -- (238)
Issuance of
common stock in
connection with
option plans
(unaudited)..... -- -- -- -- -- -- -- -- 515 115 -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- 41
Net income and
comprehensive
net income
(unaudited)..... -- -- -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------ ----- ------- -------- ----- ---- ----- ------
Balance at July
3, 1999
(unaudited)...... -- $ -- -- $ -- -- $ -- 15,765 $ 37,122 1,213 $589 $ -- $ (197)
====== ======== ====== ======= ====== ===== ======= ======== ===== ==== ===== ======
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
Balance at
December 31, 1995
(predecessor).... $(12,856) $ 20,936
Issuance of
common stock in
connection with
option plans.... -- 3
Repurchase of
common stock and
related payment
on note
receivable...... -- 3
Net loss and
comprehensive
net loss........ (4,967) (4,967)
----------- -------------
Balance at
December 29, 1996
(predecessor).... (17,823) 15,975
Liquidation of
predecessor
Series A
redeemable
convertible
preferred,
common and Class
1 convertible
stock........... 18,348 (15,450)
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs of $618... -- 34,382
Issuance of
common stock in
connection with
option plans.... -- 19
Deferred
compensation
related to
grants of common
stock options... -- --
Amortization of
deferred
compensation.... -- 12
Net loss and
comprehensive
net loss of
predecessor
company for the
period from
December 30,
1996 through
January 23,
1997, the date
of
recapitalization.. (525) (525)
Net loss and
comprehensive
net loss for the
period from
January 24, 1997
through December
28, 1997........ (18,879) (18,879)
----------- -------------
Balance at
December 28,
1997............. (18,879) 15,534
Issuance of
Series A
convertible
preferred
stock........... -- 2,740
Issuance of
common stock in
connection with
option plans.... -- 124
Amortization of
deferred
compensation.... -- 81
Net income and
comprehensive
net income...... 6,735 6,735
----------- -------------
Balance at
January 2, 1999.. (12,144) 25,214
Issuance of
common stock in
connection with
option plans
(unaudited)..... -- 115
Amortization of
deferred
compensation
(unaudited)..... -- 41
Net income and
comprehensive
net income
(unaudited)..... 620 620
----------- -------------
Balance at July
3, 1999
(unaudited)...... $(11,524) $ 25,990
=========== =============
</TABLE>
See Accompanying Notes
F-5
<PAGE>
HEADWAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------------------- -----------------
December 29, December 28, January 2, June 27, July 3,
1996 1997 1999 1998 1999
------------- ------------ ---------- -------- -------
(predecessor) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss of predecessor
company for the year
ended December 29,
1996, and for the
period from December
30, 1996 through
January 23, 1997, the
date of
recapitalization,
respectively.......... $(4,967) $ (525) $ -- $ -- $ --
Net (loss) income for
the period from
January 24, 1997
through December 28,
1997, for the year
ended January 2, 1999,
the six months ended
June 27, 1998, and
July 3, 1999,
respectively.......... -- (18,879) 6,735 6,123 620
Adjustments to
reconcile net (loss)
income to net cash
provided by (used in)
operating activities:
Amortization of
deferred
compensation......... -- 12 81 39 41
Depreciation and
amortization......... 6,322 9,088 12,311 5,142 8,286
Loss (gain) on write-
down and disposal of
machinery and
equipment............ 41 1,260 (85) (76) (115)
Accrued interest on
notes payable and
capital leases....... -- 632 913 460 531
Acquired in-process
technology........... -- 6,000 -- -- --
Forgiveness of notes
receivable from
employee............. -- -- 200 150 50
Forfeiture of
equipment deposits... 76 -- -- -- --
Gain on early
retirement of debt... -- -- (373) -- --
Changes in operating
assets and
liabilities:
Accounts receivable... 2,897 (8,725) 1,727 (6,304) 248
Inventories........... 46 (3,847) 455 (1,395) (473)
Prepaid expenses...... (4) (6) (2,005) (720) 1,544
Other current assets.. -- (34) (144) (198) 27
Other long-term
assets............... -- (400) (270) (149) 12
Accounts payable...... (232) 4,266 5,649 8,359 (4,430)
Accrued compensation
and related
expenses............. 104 1,230 (22) 513 268
Other accrued
liabilities.......... 27 1,953 1,318 5,617 3,024
Advance from
customer............. -- 3,000 (3,000) (3,000) --
------- -------- -------- -------- -------
Net cash provided by
(used in) operating
activities............. 4,310 (4,975) 23,490 14,561 9,633
------- -------- -------- -------- -------
Investing activities
Purchases of property
and equipment......... (8,766) (19,508) (41,568) (30,768) (2,762)
Proceeds from sales of
machinery and
equipment............. 42 -- 162 91 326
Investment in joint
venture............... -- -- -- -- (64)
------- -------- -------- -------- -------
Net cash used in
investing activities... (8,724) (19,508) (41,406) (30,677) (2,500)
------- -------- -------- -------- -------
</TABLE>
See Accompanying Notes
F-6
<PAGE>
HEADWAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
(in thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------------------- -----------------
December 29, December 28, January 2, June 27, July 3,
1996 1997 1999 1998 1999
------------- ------------ ---------- -------- -------
(predecessor) (unaudited)
<S> <C> <C> <C> <C> <C>
Financing activities
Borrowings under line
of credit............. -- -- 7,500 -- --
Proceeds from capital
leases................ -- 537 1,808 -- --
Proceeds from notes
payable............... 6,406 24,626 5,618 5,292 --
Repayment of borrowings
under line of credit.. -- -- -- -- (4,500)
Repayment of capital
leases................ -- -- (595) (94) (771)
Repayment of notes
payable............... (2,492) (4,362) (10,021) (3,280) (4,244)
Repayments of notes
receivable from
officers.............. 3 44 -- -- --
Proceeds from issuance
of convertible
preferred stock, net
of issuance costs..... -- 34,382 2,740 2,740 --
Proceeds from issuance
of common stock....... 3 19 124 82 115
Proceeds from sale-
leaseback
transactions.......... -- 8,244 12,518 6,186 --
Payments to retire
shares of predecessor
company............... -- (22,049) -- -- --
Transaction costs of
recapitalization...... -- (1,154) -- -- --
------- -------- -------- ------- -------
Net cash provided by
(used in) financing
activities............. 3,920 40,287 19,692 10,926 (9,400)
------- -------- -------- ------- -------
Net change in cash and
cash equivalents....... (494) 15,804 1,776 (5,190) (2,267)
Cash and cash
equivalents at
beginning of period.... 7,264 6,770 22,574 22,574 24,350
------- -------- -------- ------- -------
Cash and cash
equivalents at end of
period................. $ 6,770 $ 22,574 $ 24,350 $17,384 $22,083
======= ======== ======== ======= =======
Supplemental
disclosures:
Cash paid during the
period for interest.... $ 1,036 $ 1,326 $ 2,379 $ 956 $ 1,445
======= ======== ======== ======= =======
Cash paid during the
period for income
taxes.................. $ -- $ -- $ 1,608 $ 310 $ 464
======= ======== ======== ======= =======
Issuance of notes
payable for equipment.. $ -- $ 1,918 $ 5,318 $ -- $ --
======= ======== ======== ======= =======
Recognition of deferred
compensation........... $ -- $ 331 $ -- $ -- $ --
======= ======== ======== ======= =======
Issuance of notes
payable for
technologies and
licenses (including
issuance of notes
payable in connection
with previously accrued
liabilities)........... $ -- $ -- $ -- $ -- $13,327
======= ======== ======== ======= =======
</TABLE>
See Accompanying Notes
F-7
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of July 3, 1999 and for the six months ended
June 27, 1998 and July 3, 1999 is unaudited)
1. The Company and Summary of Significant Accounting Policies
The Company
The accompanying consolidated financial statements include the accounts of
Headway Technologies, Inc. (a Delaware corporation) and its wholly-owned
subsidiaries (the "Company"). The Company designs, manufactures and sells
recording head products to the computer hard disk drive industry.
On January 23, 1997, the shareholders of Headway Technologies, Inc. (the
"Predecessor Company") approved a recapitalization of the Company (the
"Recapitalization"). Substantially all of the shareholders in the Predecessor
Company were not stockholders in the Company after the Recapitalization and
accordingly, the Recapitalization has been accounted for under the purchase
method of accounting as of the closing date. Effective with the
Recapitalization, the Predecessor Company became a wholly-owned subsidiary of
the Company. There are no other operating activities of the Company. All of
the Predecessor Company's outstanding and unexercised stock options were
canceled at the date of the Recapitalization.
The 1996 financial statements include the accounts of the Predecessor Company
and the 1997 and 1998 consolidated financial statements include the accounts of
the Company. All intercompany transactions have been eliminated in
consolidation. The results of operations of the Predecessor Company for the
period from December 30, 1996 through the date of the Recapitalization, net
revenues of $855,000 and a net loss of approximately $525,000, are included in
the 1997 consolidated statement of operations of the Company.
The purchase price totaled approximately $23.2 million, including
transaction-related costs amounting to approximately $1.2 million and a cash
payment to the Predecessor Company's shareholders of approximately $22.0
million. The purchase price, including transaction costs, was allocated to the
assets and liabilities of the Predecessor Company based on their relative fair
values.
The Company allocated the purchase price as follows (in thousands):
<TABLE>
<CAPTION>
Allocation of
Description Purchase Price
----------- --------------
<S> <C>
Predecessor Company net tangible assets..................... $15,493
In-process technology....................................... 6,000
Assembled workforce......................................... 910
Developed technology........................................ 700
Goodwill.................................................... 100
-------
$23,203
=======
</TABLE>
Values assigned to in-process and developed technology were generally
determined through established valuation techniques in the information storage
industry using the income approach. To determine the value of in-process and
developed technologies, the Company considered, among other factors, the nature
of each project; the classification into developed or in-process technology;
the state of development of each project; the relative importance of each
project to the Company's success; the time and cost needed to complete each
project; expected income; and associated risks which included the inherent
difficulties and uncertainties in completing the projects. The Company also
considered the inherent risks related to the viability of, and potential
changes to, future target markets.
F-8
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To determine the value of the in-process and developed technology, the
expected future cash flows of each technology project were discounted to their
present value. The rates utilized to discount the future cash flows to their
present value were based on the Company's weighted-average cost of capital and
considered risks related to the characteristics and applications of each
product/technology, existing and future markets, and assessments of the life
cycle stage of the product/technology. The sum of these present values is
considered to be the fair value of each subject project. Discount rates of 20%
and 27.5% were used for valuing the developed and in-process technologies,
respectively, and are intended to be commensurate with the Company's corporate
maturity and the uncertainties in the economic estimates described above.
Based on the analysis, the Company capitalized $700,000 of existing
technologies that had reached technological feasibility as developed
technology. The in-process technologies had no alternative future use, and as
such the $6,000,000 value attributed to the in-process technologies was charged
to operations in the year ended December 28, 1997.
Values assigned to assembled work force were generally determined through
established valuation techniques in the information storage industry using the
cost approach with consideration to number of employees, acquisition costs, and
tax consequences. Based on the analysis, the assembled work force was assigned
a value of $910,000 which was capitalized.
The developed technology, assembled workforce and goodwill are being
amortized over periods of one to three years. The amortization of assembled
workforce and goodwill is included in research and development expense. The
amortization of developed technology is included in cost of sales. Accumulated
amortization of assembled workforce, developed technology and goodwill totaled
$872,000, $700,000 and $64,000, respectively, at January 2, 1999 ($910,000,
$700,000, and $81,000 at July 3, 1999, respectively).
The estimates used by the Company in valuing in-process technologies were
based on assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from projected results. Any such variance may result in a material adverse
effect on the financial condition and results of operations of the Company.
The Predecessor Company was founded and financed by Hewlett Packard Co.
("HP"), Komag, Inc. ("Komag"), Asahi Glass America, Inc. ("Asahi Glass"), and
Asahi Komag Co., Ltd. ("AKCL"). Prior to 1997, the Company sold wafer products
primarily to HP and transferred technology rights to a third party.
Dependence on Limited Suppliers
Certain components necessary for the manufacture of the Company's products
are obtained from a single supplier or a limited group of preferred suppliers.
The Company does not maintain any long-term agreements with any of its
component suppliers. There can be no assurance these single or limited source
suppliers will be able to meet the Company's requirements on a timely basis or
on acceptable terms. If a component supplier raises its prices, there can be
no assurance the Company will be able to obtain substitute suppliers at
acceptable costs or be able to pass these increased costs along to its
customers. In addition, the Company's component suppliers must be qualified
with the Company's customers and, depending on the supplier, the qualification
process for a replacement supplier may be lengthy.
Fiscal Period
The Company operates on a 52- or 53-week fiscal year. The fiscal years ended
December 29, 1996 and December 28, 1997 each contain 52 weeks. The fiscal year
ended January 2, 1999 contains 53 weeks.
F-9
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates, and such differences
could be material to the financial statements.
Interim Financial Information
The interim financial information as of July 3, 1999 and for the six month
periods ended June 27, 1998 and July 3, 1999 is unaudited but includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its consolidated financial
position at that date and its consolidated results of operations and cash flows
for those periods. Operating results for the six months ended July 3, 1999 are
not necessarily indicative of results that may be expected for any future
periods.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with insignificant interest
rate risk and maturities of three months or less at their acquisition date and
are stated at amounts that approximate fair value, based on quoted market
prices. Cash equivalents consist principally of investments in money market
accounts with financial institutions. The fair value of these investments
approximates their cost.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis (which approximates actual cost on a first-
in, first-out basis).
Property and Equipment
Purchased property and equipment is recorded at cost. Property and equipment
acquired in connection with the Recapitalization was recorded at the net book
value of the Predecessor Company which approximated its fair value. Property
and equipment is being depreciated on the straight-line method over estimated
useful lives ranging from three to five years. Leasehold improvements are
amortized over the shorter of the term of the lease or their estimated useful
lives.
Intangible Assets
Intangible assets consist primarily of patent licenses acquired from third
parties and are being amortized on a straight line basis from the dates of
acquisition, generally over eight years. In addition, intangibles assets,
which resulted from the Recapitalization (see Note 1), include developed
technologies, assembled workforce and goodwill which are being amortized on a
straight line basis over periods of one to three years.
Revenue Recognition
Revenue from product sales is recognized upon shipment. Technology transfer
fees are recognized as revenue upon the achievement of stipulated milestones
and recognized royalties based on Seagate sales as reported by Seagate to us.
F-10
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk
The Company sells products primarily to customers located in the United
States and Asia. The Company performs ongoing credit evaluations and generally
does not require collateral. Sales to a foreign corporation in China and its
U.S. subsidiaries represented 0%, 11%, 6%, and 5% of the Company's total
revenue in 1996, 1997, 1998, and six months ended July 3, 1999, respectively.
Sales to a foreign corporation in Japan and its U.S. subsidiaries represented
1%, 28%, 67% and 46% of the Company's total revenue in 1996, 1997, 1998 and the
six months ended July 3, 1999, respectively. As of December 28, 1997, January
2, 1999 and July 3, 1999, accounts receivable from these foreign corporations
represented 71%, 67% and 77% of the total accounts receivable, respectively.
Two customers represented 78% and 21% of the Company's total revenue in 1996,
three customers accounted for 11%, 28% and 57% of the Company's total revenue
in 1997, two customers accounted for 27% and 67% of the Company's total revenue
in 1998 and two customers accounted for 49% and 46% of the Company's total
revenue for the six months ended July 3, 1999. Accounts receivable from three
customers represented 94% of the total accounts receivable at December 28, 1997
and two customers represented 97% and 94% of the total accounts receivable at
January 2, 1999 and July 3, 1999, respectively.
Our long-term success depends on the broad market adoption of the Company's
products, particularly the Company's recently introduced GMR products. To
date, almost all of the Company's revenues have been generated through the sale
of our DSMR products. The Company does not expect sales of our DSMR products
to be significant after the first half of 2000.
Research and Development
Research and development costs are expensed as incurred.
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of
Financial Accounting Standards Board Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
prescribes the accounting for the impairment of long-lived assets, such as
property, plant and equipment and intangible assets, as well as the accounting
for long-lived assets that are held for disposal.
During 1997, the Company recorded a charge of $1,253,000 relating to the
write-off of certain leasehold improvements resulting from the decision to
coordinate research and development facilities into existing space. This
amount was included in research and development expenses in the consolidated
statement of operations for 1997.
Stock-Based Compensation
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and in 1996 adopted the disclosure-only alternative described in Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation ("FAS 123") and provides pro forma disclosures of net income
(loss) per share as if the fair value method prescribed by FAS 123 had been
applied in measuring employee compensation expense.
F-11
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes ("FAS 109"),
which requires the use of the liability method in accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rules and laws that are expected
to be in effect when the differences are expected to reverse.
Net (Loss) Income Per Share
The Company adopted Financial Accounting Standards Board Statement No. 128,
Earnings Per Share ("FAS 128") during the year ended December 27, 1997. FAS 128
replaced the calculation of primary and fully diluted net income (loss) per
share with basic and diluted net income (loss) per share. In accordance with
FAS 128, basic net income (loss) per share excludes dilutive potential common
stock and is calculated as net income (loss) divided by the weighted-average
number of common shares outstanding. Diluted net income (loss) per share is
computed using the weighted-average number of common shares outstanding and
dilutive potential common stock outstanding during the period. Dilutive
potential common stock from stock options and warrants (using the treasury
stock method) and the conversion of preferred shares (using the if-converted
method) are excluded from the calculation of net loss per share in 1996 and
1997 as their effect was antidilutive.
Unaudited pro forma basic net income per share for the year ended January 2,
1999 and for the six months ended June 27, 1998 and July 3, 1999 have been
calculated based on net income applicable to common shares and assuming
conversion of preferred shares upon the completion of the Company's initial
public offering, using the if-converted method.
Net loss per share for the year ended December 29, 1996 was calculated
assuming the 2,000 common shares issued in connection with the Recapitalization
in 1997 were outstanding for the entire year (Recapitalization--see Note 1).
The basic and diluted net loss per share under the Predecessor Company's
capital structure for the year ended December 29, 1996 was $(1.39).
F-12
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The calculation of basic, diluted, pro forma basic and pro forma diluted net
income (loss) per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------------------ ----------------
December 29, December 28, January 2, June 27, July 3,
1996 1997 1999 1998 1999
------------ ------------ ---------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
(Loss) income before
extraordinary item.. $ (4,967) $(19,404) $ 6,429 $ 6,123 $ 620
Extraordinary item... -- -- 306 -- --
---------- -------- ------- ------- -------
Net (loss) income...... $ (4,967) $(19,404) $ 6,735 $ 6,123 $ 620
========== ======== ======= ======= =======
Historical:
Denominator:
Denominator for
basic net (loss)
income per share:
Weighted-average
shares
outstanding...... 2 44 545 428 913
Effect of dilutive
securities:
Employee stock
options............. -- -- 4,024 4,073 3,615
Warrants............. -- -- 456 449 424
Convertible preferred
stock............... -- -- 15,548 15,326 15,765
---------- -------- ------- ------- -------
Dilutive potential
common shares......... -- -- 20,028 19,848 19,804
---------- -------- ------- ------- -------
Denominator for diluted
net (loss) income per
share................. 2 44 20,573 20,276 20,717
========== ======== ======= ======= =======
Basic net (loss) income
per share before
extraordinary item.... $(2,483.50) $(441.00) $ 11.80 $ 14.31 $ 0.68
Extraordinary item per
share, net of income
taxes................. -- -- 0.56 -- --
---------- -------- ------- ------- -------
Basic net (loss) income
per share............. $(2,483.50) $(441.00) $ 12.36 $ 14.31 $ 0.68
========== ======== ======= ======= =======
Diluted net (loss)
income per share
before extraordinary
item.................. $(2,483.50) $(441.00) $ 0.31 $ 0.30 $ 0.03
Extraordinary item per
share, net of income
taxes................. -- -- 0.02 -- --
---------- -------- ------- ------- -------
Diluted net (loss)
income per share...... $(2,483.50) $(441.00) $ 0.33 $ 0.30 $ 0.03
========== ======== ======= ======= =======
Pro forma:
Denominator:
Shares used in
computing pro forma
basic net income
per share.......... 16,093 15,754 16,677
======= ======= =======
Shares used in
computing pro forma
diluted net income
per share.......... 20,573 20,276 20,717
======= ======= =======
Pro forma basic net
income before
extraordinary item per
share................. $ 0.40 $ 0.39 $ 0.04
Pro forma extraordinary
item per share, net of
income taxes.......... $ 0.02 $ -- $ --
------- ------- -------
Pro forma basic net
income per share...... $ 0.42 $ 0.39 $ 0.04
======= ======= =======
Pro forma diluted net
income before
extraordinary item per
share................. $ 0.31 $ 0.30 $ 0.03
Pro forma extraordinary
item per share, net of
income taxes.......... $ 0.02 $ -- $ --
------- ------- -------
Pro forma diluted net
income per share...... $ 0.33 $ 0.30 $ 0.03
======= ======= =======
</TABLE>
F-13
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
Effective December 30, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting of Comprehensive Income ("FAS
130"). FAS 130 requires the reporting of comprehensive income and its
components, and requires foreign currency translation adjustments and
unrealized gains or losses on available-for-sale investments to be included in
other comprehensive income. The Company does not have any material components
of other comprehensive income.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("FAS
131"), was issued. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. Under FAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. FAS 131 is effective for
financial statements for periods beginning after December 15, 1997, and
restatement of comparative information for earlier years is required. Based
upon the criteria of FAS 131, the Company has a single operating segment, which
provides recording heads to the computer hard disk drive industry. Geographic
information for revenues is provided in Note 1 to the consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board Statement No. 133
("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, was
issued. FAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing accounting
standards. FAS 133 requires that all derivatives be recognized in the balance
sheet at their fair market value, and the corresponding derivative gains or
losses be either reported in the statement of operations or as a deferred item
depending on the type of hedge relationship that exists with respect to such
derivative. The Company currently does not hold any derivative instruments
that will be affected by the adoption of FAS 133.
Reclassification
Certain 1998, 1997, and 1996 amounts have been reclassified to conform with
July 3, 1999 unaudited presentation.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 28, January 2, July 3,
1997 1999 1999
------------ ---------- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials............................ $1,771 $1,800 $1,865
Work-in-process.......................... 3,311 2,827 3,235
------ ------ ------
$5,082 $4,627 $5,100
====== ====== ======
</TABLE>
F-14
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Related-Party Transactions
Sales to HP comprised 78% of total revenues for 1996. There were no accounts
receivable from HP at December 31, 1996. The Company made purchases from HP
totaling $131,000 for 1996. HP was not a related party in either 1997 or
1998. The Company made purchases totaling $2.6 million for the six months
ended July 3, 1999 from an entity in which the Company acquired an
approximately 50% interest in January 1999 (see Note 12).
The Company leased one of its facilities from Komag under a noncancelable
operating lease during 1996. The 1996 rent expense under this lease was
$268,000. The lease agreement also required the Company to reimburse Komag for
the cost of utilities and other facility services; such amounts totaled
$708,000 for 1996. Komag was not a related party in either 1997 or 1998.
The Company also reimbursed Komag and AKCL for other expenses that totaled
$105,000 for 1996. Such expenses consisted primarily of payroll costs incurred
by Komag, AKCL and their subsidiaries on behalf of the Company. ACKL was not a
related party in either 1997 or 1998.
The Company paid $66,000 of fees during 1996 to AKCL and HP for guarantees of
notes payable to a financial institution.
The Company issued notes payable to two stockholders during 1997. The
current interest rates on these notes are 7.5% and 8.5%. The balance
outstanding under these notes was $11.2 million, $11.3 million, and $11.0
million at December 28, 1997, January 2, 1999, and July 3, 1999, respectively.
The Company paid $1.4 million for investment banking services to an affiliate
of a stockholder of the Company in connection with the Recapitalization.
4. Technology Transfers and Royalties
The Company transferred technology to a third-party and received
nonrefundable payments totaling $1.5 million, $2.0 million, and $1.75 million
in 1996, 1997, and 1998, respectively. All amounts were recorded as revenue.
During the first six months of 1999, the Company earned royalty revenue of
$2.1 million from this third party from sales of products incorporating the
technology.
5. Revolving Line of Credit
In December 1997, the Company entered into a $10 million revolving line of
credit agreement with a bank which was renewed in August 1998. The amount of
the line of credit was increased to $15 million from $10 million and expires on
August 31, 1999. There were no amounts outstanding under the line of credit at
December 28, 1997. As of January 2, 1999 and July 3, 1999, the outstanding
balance under the line of credit was $7.5 million and $3.0 million,
respectively. Borrowings under the line of credit bear interest at either the
bank's prime rate or the bank's prime rate plus 0.25%, depending on the
borrowing base utilized by the Company. At January 2, 1999, the Company's
borrowing base was $15 million and the interest rate was 8.00% ($15 million and
8.25%, respectively, at July 3, 1999). The line of credit is secured by
substantially all of the Company's assets excluding intellectual property and
contains certain financial and nonfinancial covenants.
F-15
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Notes Payable
Notes payable, which, except for notes payable to customers, are
collateralized by substantially all of the assets of the Company, consist of
the following (in thousands):
<TABLE>
<CAPTION>
December 28, January 2, July 3,
1997 1999 1999
------------ ---------- -----------
(unaudited)
<S> <C> <C> <C>
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $92 through July
2000, interest rate of 7.59%............. $ 2,583 $ 1,643 $ 1,145
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $57 through
October 2000, interest rate of 7.39%..... 1,740 1,167 864
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $53 through
October 2000, interest rate of 7.38%..... 1,631 1,094 810
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $50 through
January 2001, interest rate of 6.92%..... 1,675 1,170 904
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $78 through June
2001, interest rate of 7.91%............. 2,854 2,117 1,727
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $193 through
December 2000 and terminal payment of
$1,074 due on February 2001, interest
rate of 13.62%........................... 6,325 4,805 3,962
Promissory note payable to Komag, due upon
the earlier of completion of a qualified
initial public offering of the Company's
common stock or the earlier of February
2001 or termination of the Company's
sublease agreement, interest rate of
7.00%.................................... 1,380 1,380 1,380
Promissory notes payable to shareholders
and various customers due in quarterly
installments beginning September 1998 or
accelerated based on qualified product
sales by the Company to these customers
through June 2000, interest rate of
5.00%.................................... 18,164 -- --
Promissory note payable to a shareholder
due in quarterly installments beginning
October 1998 or accelerated based on
qualified product sales by the Company to
the customer through June 2000 or due at
the option of the holder upon the
completion of a qualified initial public
offering of the Company's common stock,
interest rate of 8.50%................... -- 7,445 7,444
Promissory note payable to a shareholder
due in quarterly installments beginning
October 1998 through June 2000 or due at
the option of the holder upon the
completion of a qualified initial public
offering of the Company's common stock,
interest rate of 7.50%................... -- 3,924 3,569
Promissory note payable to customer due in
quarterly installments beginning October
1998 through June 2000, interest rate of
5.00%.................................... -- 2,635 2,388
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $65 through June
2002 and terminal payment of $255 due in
July 2002, interest rate of 13.425%...... -- 2,311 2,072
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $69 through June
2002 and terminal payment of $274 due in
July 2002, interest rate of 13.312%...... -- 2,489 2,232
Promissory note payable to a financial
institution due in monthly principal and
interest installments of $8 through
September 2002 and terminal payment of
$33 due in October 2002, interest rate of
13.04%................................... -- 309 279
Promissory note payable to third parties
due in annual installments beginning in
July 1999 through December 2002, interest
rate of 7.50%............................ -- -- 13,327
------- ------- -------
36,352 32,489 42,103
Less amounts due within one year.......... 14,366 15,092 23,193
------- ------- -------
$21,986 $17,397 $18,910
======= ======= =======
</TABLE>
F-16
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Payments on notes payable are due as follows (in thousands):
<TABLE>
<CAPTION>
January 2, July 3,
1999 1999
---------- -----------
(unaudited)
<S> <C> <C>
1999 (remaining six months at July 3, 1999)......... $15,092 $13,080
2000................................................ 13,061 15,260
2001................................................ 2,976 6,176
2002................................................ 1,360 10,060
------- -------
Total............................................. $32,489 $44,576
======= =======
</TABLE>
Promissory notes payable to shareholders are subordinate to all other notes
payable, capital leases and the revolving line of credit.
The Company renegotiated the terms of two of the four promissory notes
payable to customers during 1998. The repayment terms of one of the
renegotiated notes is based on quarterly payments as compared to the prior
agreements, which also provided for repayments based upon product sales to the
customer; the other is based only on quarterly payments.
In July 1988, the Company recognized an extraordinary gain of $306,000, net
of income taxes of $67,000, as a result of the early retirement of $3.1 million
of an outstanding promissory note payable to a customer.
The fair value of the Company's fixed-rate notes payable is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The fair value at
July 3, 1999 was estimated to be $41.1 million using an incremental borrowing
rate of 10.5%.
During 1996, 1997 and 1998, a portion of the promissory notes payable to
financial institutions was guaranteed by AKCL and HP. During 1997, the Company
signed a reimbursement agreement under which, if AKCL or HP incurred any
expenses under the guarantees, the Company would reimburse AKCL and HP. The
proceeds from the promissory notes payable were used to purchase manufacturing
equipment which is pledged as collateral under the agreements.
Certain of the Company's debt obligations limit the payment of dividends.
F-17
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies
Lease Obligations
The Company enters into various noncancelable operating and capital leases
for its facilities and sale and leaseback transactions to finance purchases of
property and equipment. The future minimum lease commitments having terms in
excess of one year as of January 2, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
1999...................................................... $12,337 $ 2,336
2000...................................................... 12,009 2,320
2001...................................................... 11,991 2,134
2002...................................................... 7,873 2,069
2003...................................................... 3,794 --
------- -------
Total minimum lease payments.............................. $48,004 8,859
=======
Less amounts representing interest........................ (1,791)
-------
Present value of minimum capital lease obligations........ 7,068
Less current portion...................................... (1,586)
-------
Noncurrent portion........................................ $ 5,482
=======
</TABLE>
Machinery and equipment include amounts from assets acquired under capital
leases of $537,000 at December 28, 1997, $7,664,000 at January 2, 1999, and
July 3, 1999. Accumulated amortization of these assets was $15,000, $654,000,
and $1,179,000 at December 28, 1997, January 2, 1999, and July 3, 1999,
respectively.
Rent expense was $453,000, $1,100,000, $7,788,000, and $6,492,000 in 1996,
1997, 1998, and the six months ended July 3, 1999, respectively.
At July 3, 1999, the Company had outstanding commitments to purchase
machinery and equipment totaling approximately $9.4 million. Subsequent to
July 3, 1999, the Company entered into commitments to purchase additional
machinery and equipment totaling approximately $0.8 million.
Future minimum rentals have not been reduced by minimum sublease rentals of
$401,000 due in the future under noncancellable subleases. The Company
subleases office space to a vendor. Rental income under this sublease was
$128,000 and $192,000 for 1998 and the six months ended 1999, respectively.
8. Stockholders' Equity
Common Stock
Common stock has been issued to current and former employees as a result of
the exercise of option agreements. The common shares are generally subject to
certain restrictions, including the right of first refusal by the Company for
the sale or transfer of these shares to an outside party. As part of the
Recapitalization, the Predecessor Company repurchased all outstanding common
shares.
F-18
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Class 1 Convertible Stock and Series A Redeemable Convertible Preferred Stock
Under terms of the Predecessor Company's Series A Redeemable Convertible
Preferred Stock, HP and AKCL purchased 1,500,000 shares each of Series A
Redeemable Convertible Preferred Stock at $10 per share. The purchase of these
shares was contingent upon achieving certain technical and product performance
milestones. As of December 31, 1995, the Company had achieved the milestones,
and a total of 3,000,000 shares of Series A Redeemable Convertible Preferred
Stock was issued. HP and AKCL also agreed to loan the Company up to a total of
$15 million each to fund the Company's operations. No such loans were made in
1996 or in 1997. However, in lieu of providing loans to the Company, HP and
AKCL agreed to guarantee certain third-party loans made to the Company.
In September 1994, Komag and AKCL were issued 1,200,000 shares of Class 1
Convertible Stock. The holders of Class 1 Convertible Stock had limited voting
rights. The holders of Series A Redeemable Convertible Preferred Stock (on an
as-if-converted basis) had the same voting rights as holders of common stock.
Holders of Class 1 Convertible Stock and Series A Redeemable Convertible
Preferred Stock were entitled to receive annual preferential dividends at the
rate of $1.00 per share, as declared by the Board of Directors, prior to the
payment of dividends to holders of the common stock. Such dividends were
noncumulative. No dividends had been declared as of the date of the
Recapitalization.
Class 1 Convertible Stock was not redeemable. Series A Redeemable
Convertible Preferred Stock was redeemable upon the request of a majority of
stockholders after September 2000. The redemption price for Series A
Redeemable Convertible Preferred Stock was $10.00 per share, plus any declared
but unpaid dividends.
In connection with the Recapitalization, the aforementioned Common Stock,
Class 1 Convertible Stock and Series A Redeemable Convertible Preferred Stock
were canceled. Each holder of Common and Class 1 Convertible Stock of the
Predecessor Company received cash proceeds of $0.10 per share, and each holder
of Series A Redeemable Convertible Preferred Stock received cash proceeds of
$7.19 per share for total proceeds of approximately $22.0 million.
The Company's newly issued Series A Convertible Preferred Stock has certain
rights and privileges. The holders of Series A Convertible Preferred Stock are
entitled to receive noncumulative dividends equal to $0.19 per annum, when and
if declared by the Company's Board of Directors. In the event of liquidation,
dissolution or winding up of the Company, the holders of Series A Convertible
Preferred Stock are entitled to receive a liquidation preference of $2.39 per
share plus declared but unpaid dividends, and share, on an as-if converted
basis with the holders of common stock, until an additional $9.56 per share has
been distributed. In addition, each share of Series A Convertible Preferred
Stock is convertible into one share of common stock, initially at a conversion
price per share of $2.39, at the option of the holder or automatically in the
event of an Initial Public Offering involving an aggregate offering price of
not less than $15 million at a per share offering price of $7.00 per share or
more, subject to anti-dilution adjustments. The newly issued Series A
convertible preferred stock is not redeemable.
In March 1998, the Company completed a financing pursuant to which the
Company received approximately $2,740,000 in gross cash proceeds in exchange
for 1,144,535 shares of its Series A Convertible Preferred Stock.
F-19
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
In February 1997, in connection with the Recapitalization, the Company
granted a related party a warrant to purchase 389,918 shares of the Company's
common stock at an exercise price of $0.10 per share. The warrant expires on
February 4, 2002. In July 1997, in connection with a financing arrangement,
the Company granted to a financing company a warrant to purchase 179,816 shares
of the Company's common stock at an exercise price equal to $2.39 per share.
The warrant expires on March 31, 2003. The value of these warrants at their
respective grant dates was immaterial.
Stock Options
In October 1994, the Predecessor Company adopted the 1994 Stock Option/Stock
Issuance Plan (the "Predecessor Plan"), which provided for incentive stock
options, as defined by the Internal Revenue Code, to be granted to employees,
at an exercise price not less than 100% of the fair value at the grant date as
determined by the Board of Directors. The Predecessor Plan also provided for
nonqualified stock options to be issued to nonemployee officers, directors and
consultants at an exercise price of not less than 85% of the fair value at the
grant date. All options granted under the Predecessor Plan were canceled in
connection with the Recapitalization.
In conjunction with the Recapitalization in January 1997, the Company adopted
the Headway Technologies, Inc. 1997 Stock Option Plan (the "Plan"), which
provides for incentive stock options, as defined by the Internal Revenue Code,
to be granted to employees, at an exercise price not less than 100% of the fair
value at the grant date as determined by the Board of Directors. The Plan also
provides for nonqualified stock options to be issued to nonemployee officers,
directors and consultants at an exercise price of not less than 85% of the fair
value at the grant date.
The options are exercisable at such time or times, or upon such event or
events, and subject to such terms, conditions, performance criteria, and
restrictions as determined by the Board of Directors, within certain
limitations, including a term of 10 years. Generally, granted options vest
ratably over 48 months; however, the Company has issued fully vested options
and options with 12 and 48 month vesting periods. Common shares purchased
under the Plan are subject to certain restrictions including the right of
refusal by the Company for the sale or transfer of shares to outside parties.
As of January 2, 1999, 9,480,000 shares of common stock were reserved for
issance under the Plan.
Certain options under the Plan are immediately exercisable; however, shares
issued are subject to repurchase rights which lapse in a series of installments
measured from the vesting commencement date of the option. Unvested stock is
subject to repurchase agreements whereby the Company has the option to
repurchase unvested shares upon termination of employment at the original issue
price. As of January 2, 1999, there are no shares of outstanding common stock
which are subject to repurchase.
In December 1998, the Board of Directors approved a stock option repricing
program pursuant to which employees of the Company (excluding certain executive
officers) could elect to exchange or amend their then outstanding employee
stock options for new employee stock options having an exercise price of $2.25
per share (equal to the then fair market value). A total of 1,215,020 options
with exercise prices ranging from $2.40 to $6.50 per share were exchanged or
amended under the program.
F-20
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the Predecessor Plan and the Plan is as
follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Balance at December 31, 1995.................. 1,048,817 $0.23
Options granted............................. 350,200 0.80
Options canceled............................ (197,566) 0.80
Options exercised........................... (31,151) 0.80
---------- -----
Balance at December 29, 1996.................. 1,170,300 0.29
Options canceled in connection with the
Recapitalization........................... (1,170,300) 0.29
Options granted............................. 6,189,435 0.56
Options canceled............................ (538,559) 0.31
Options exercised........................... (135,428) 0.14
---------- -----
Balance at December 28, 1997.................. 5,515,448 0.60
Options granted............................. 2,548,905 4.15
Options canceled............................ (1,635,166) 4.86
Options exercised........................... (560,668) 0.22
---------- -----
Balance at January 2, 1999.................... 5,868,519 0.99
Options granted (unaudited)................. 159,950 3.54
Options canceled (unaudited)................ (208,468) 0.22
Options exercised (unaudited)............... (515,048) 0.74
---------- -----
Balance at July 3, 1999 (unaudited)........... 5,304,953 $1.15
========== =====
</TABLE>
The following table summarizes information about options outstanding at
January 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Average Weighted- Weighted-
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Shares Life (Years) Price Shares Price
-------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.10 1,067,008 8.1 $0.10 698,975 $0.10
0.33 1,824,967 8.3 0.33 837,376 0.33
1.16 1,353,381 8.5 1.16 477,502 1.16
1.61 105,823 8.8 1.61 32,179 1.61
2.00 255,570 9.0 2.00 68,088 2.00
2.25 1,241,770 9.8 2.25 17,850 2.25
2.40 20,000 9.1 2.40 -- --
------------ --------- --- ----- --------- -----
$ 0.10-$2.40 5,868,519 8.6 $0.99 2,131,970 $0.53
============ ========= === ===== ========= =====
</TABLE>
As of December 29, 1996, December 28, 1996, and July 3, 1999, options
exercisable totaled 246,552, 1,152,729, and 2,373,463, respectively, and the
weighted-average exercise price was $0.21, $0.46, and $0.81, respectively.
F-21
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At January 2, 1999 and July 3, 1999, the Company has reserved shares of
capital stock for future issuances as follows:
<TABLE>
<CAPTION>
Common Shares
---------------------------
July 3,
January 2, 1999 1999
--------------- -----------
(unaudited)
<S> <C> <C>
Convertible preferred shares..................... 15,764,535 15,764,535
Stock options outstanding........................ 5,868,519 5,304,953
Stock options available for grant................ 2,915,390 2,963,903
Warrants......................................... 569,734 569,734
---------- ----------
25,118,178 24,603,125
========== ==========
</TABLE>
For purposes of pro forma disclosures required by FAS 123, the estimated fair
value of the options is amortized to expense over the options' vesting period.
Pro forma net (loss) income has been determined using the minimum value
method. The minimum value method calculates the fair value of options as the
excess of the estimated fair value of the underlying stock at the date of grant
over the present value of both the exercise price and the expected dividend
payments, each discounted at the risk-free rate, over the expected life of the
option. In determining the estimated fair value of granted stock options under
the minimum value method, the risk-free interest rate was assumed to be 6%, the
dividend yield was estimated to be 0% and the expected life was assumed to be
between 3 and 5 years. Because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the minimum
value method and other methods prescribed by FAS 123 do not necessarily provide
a single measure of the fair value of its stock options. The Company's
information follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
------------------------------------ -----------
December 29, December 28, January 2, July 3,
1996 1997 1999 1999
------------ ------------ ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Net (loss) income--as
reported................ $(4,967) $(19,404) $6,735 $911
Net (loss) income--as
adjusted................ $(4,998) $(19,534) $5,985 $803
</TABLE>
The weighted-average fair value of options granted during 1996, 1997, 1998,
and the six months ended 1999 was $0.21, $0.13, $0.48, and $0.92, respectively.
Deferred Compensation
The Company recorded deferred compensation expense of $331,000 during 1997
for the difference between the exercise or purchase price and the deemed fair
value of certain of the Company's stock options granted and stock issued under
stock purchase agreements. These amounts are being amortized by charges to
operations over the vesting periods of the individual stock options and stock
purchase agreements, which are generally four years.
Notes Receivable from Officers
Notes receivable from officers outstanding at December 29, 1996, resulting
from the purchase of common stock, were paid in connection with the
Recapitalization. During 1996, the notes earned interest at 6%, payable
annually, and were secured by the shares issued.
In December 1997, the Company loaned an officer $400,000. The note is being
forgiven in equal installments on January 1 of each of the subsequent four
years for as long as the officer continues employment with the Company.
F-22
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The provision for income taxes for the year ended January 2, 1999 consists of
the following (in thousands):
<TABLE>
<S> <C>
Current provision for income taxes:
Federal............................................................ $1,195
State.............................................................. 280
------
Provision for income taxes........................................... $1,475
======
</TABLE>
An additional income tax expense of approximately $67,000 was allocated to
the extraordinary gain related to early retirement of debt during the year
ended January 2, 1999.
The Company did not incur any federal or state income tax expenses for the
years ended December 29, 1996 or December 28, 1997 due to net operating losses.
The differences between the income tax expense and the amount computed by
applying the federal statutory rate to income (loss) before taxes for the years
ended December 29, 1996, December 28, 1997 and January 2, 1999 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
December 29, December 28, January 2,
1996 1997 1999
------------ ------------ ----------
<S> <C> <C> <C>
Income tax (benefit) at federal
statutory rate...................... $(1,689) $(6,597) $2,814
Change in valuation allowance........ 1,689 4,557 (2,787)
Write-off of acquired technology..... -- 2,040 --
State taxes, net of federal benefit.. -- -- 178
Amortization of acquired intangible
assets.............................. -- -- 214
Federal alternative minimum tax...... -- -- 944
Other--net........................... -- -- 112
------- ------- ------
Provision for income taxes........... $ -- $ -- $1,475
======= ======= ======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
December 28, January 2,
1997 1999
------------ ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 9,229 $ 6,396
Tax credit carryforwards........................... 2,329 3,415
Reserves and accruals.............................. 2,445 4,071
Other, net......................................... 2 2
-------- --------
Total deferred tax assets.......................... 14,005 13,884
Valuation allowance................................ (13,450) (11,774)
-------- --------
Deferred tax asset................................. 555 2,110
Deferred tax liabilities:
Depreciation and amortization...................... (555) (2,110)
-------- --------
Total deferred tax liabilities....................... (555) (2,110)
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
</TABLE>
F-23
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance,
in the amount equal to the net deferred tax assets, has been established to
reflect these uncertainties. The valuation allowance for deferred tax assets
increased by approximately $2,148,000 and $5,819,000 during the years ended
December 29, 1996 and December 28, 1997, respectively, and decreased by
approximately $1,676,000 during the year ended January 2, 1999.
As of January 2, 1999, the Company had federal and state net operating loss
carryforwards of approximately $16,325,000 and $14,495,000, respectively. The
Company also had federal and state tax credit carryforwards of approximately
$2,320,000 and $1,658,000, respectively. If not utilized, these carryforwards
will expire beginning in 2009 and 2002 for federal and state income tax
purposes, respectively.
Utilization of the domestic net operating loss carryforwards and tax credit
carryforwards may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended, and similar state provisions. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
10. Retirement Plan
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Plan allows for discretionary employer contributions.
To date, no employer contributions have been made.
11. Contingencies
During 1998, the Company evaluated potential patent infringements of a third
party's technology. Based on discussions held in April 1999 between the Company
and the third party, the Company provided in cost of sales and other accrued
liabilities as of January 2, 1999 an amount which represents the Company's
estimate of the potential liabilities to the third party for sales of the
Company's potentially infringing products during 1997 and 1998.
In July 1999, the Company finalized the terms of a patent license agreement
and a technology transfer agreement, collectively "the Agreement," with the
third party. Under the Agreement, eleven patents were licensed to the Company
for the life of those patents. The Company reflected the acquisition of these
patents, among other patents acquired from third parties during the second
quarter of 1999, by recording intangible assets and related notes payable as of
July 3, 1999. The Agreement also licensed to the third party all of the
Company's existing and future patents filed by the Company through December 31,
2002 for the life of the patents and transferred to the third party know-how
related to two manufacturing processes.
The Company may become a party to legal disputes and proceedings arising in
the ordinary course of its business activities. In the opinion of management,
resolution of these matters is not expected to have a material adverse effect
on the financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of some or all of these matters could
materially affect the Company's future financial position, results of
operations or liquidity in a particular period.
F-24
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Joint Venture
In January 1999, the Company entered into a joint venture with a company
located in Hong Kong to provide subcontracting consulting and services for
recording head products. The Company contributed approximately $64,000 and
holds a non-controlling interest in the voting stock of the entity. In
addition, the Company has the right to purchase, at fair value at the
respective date, an additional 10% of the joint venture for approximately 9
years beginning in January 13, 1999. The Company is accounting for the joint
venture using the equity method.
13. Subsequent Events (unaudited)
Proposed Public Offering of Common Stock
In August 1999, the Board of Directors authorized the Company to proceed with
an initial public offering of its common stock. If the offering is consummated
as presently anticipated, all of the outstanding preferred stock will
automatically convert to common stock. The unaudited pro forma stockholders'
equity at July 3, 1999 gives effect to the conversion of all outstanding shares
of convertible preferred stock at that date into 15,764,535 shares of common
stock upon the completion of the offering.
1999 Employee Stock Purchase Plan
The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in August 1999 and approved by the
stockholders in August 1999 and will be effective upon consummation of the
initial public offering. A total of 750,000 shares of common stock has been
authorized for issuance under the Purchase Plan, plus an annual increase to be
added on January 1 of each year equal to the number of shares needed to restore
the maximum number of shares of common stock that may be available for grant
under the purchase plan to 750,000 shares.
The Purchase Plan contains consecutive, overlapping twenty-four-month
offering periods. Each offering period consists of four purchase periods, each
approximately six months in length. The offering periods generally start on
the first trading day on or after February 1 and August 1 of each year, except
for the first such offering period which commences on the first trading day on
or after the effective date of this offering and ends on the last trading day
on or before January 31, 2002.
The Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed ten percent of an employee's
compensation. The price of stock purchased under the Purchase Plan is equal to
85% of the fair market value of the common stock at the beginning of each
offering period or the last day of the purchase period, whichever is lower.
The maximum number of shares a participant may purchase during a single
purchase period is 5,000 shares.
Director Option Plan
The Company's 1999 Director Option Plan (the "Director Plan") was adopted by
the Board of Directors in August 1999 and approved by the stockholders in
August 1999. A total of 150,000 shares of common stock has been reserved for
issuance under the Director Plan, plus an annual increase to be added each year
on the day after the date of the annual stockholder meeting equal to the lesser
of (a) the number of shares needed to restore the maximum number of shares
available for grant to 150,000 shares or (b) an amount determined by the Board
of Directors. The outside directors are eligible to participate in the
Director Plan, which provides for the grant of nonstatutory stock options
pursuant to an automatic,
F-25
<PAGE>
HEADWAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
nondiscretionary grant mechanism. The Director Plan provides that each outside
director, except for employee directors who become outside directors, shall be
granted a nonstatutory stock option to purchase 50,000 shares of common stock
on the date that the person first becomes an outside director. Thereafter,
each outside director shall be automatically granted an option to purchase
12,500 shares of common stock each year on the date of the annual stockholder
meeting provided that the director has served on the Board for at least the
preceding six months. The Director Plan provides that the initial option shall
become vested as to 25% of the shares subject to the option on the first
anniversary of its date of grant, with monthly vesting thereafter. Each
subsequent option shall become vested in equal monthly installments over a one
year period beginning after all previously granted options have fully vested.
The exercise price per share of all options granted under the Director Plan
shall be equal to the fair market value of a share of our common stock on the
date of grant. Options granted to outside directors under the Director Plan
have a ten year term.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Headway Technologies, Inc.
Common Stock
------------
PROSPECTUS
------------
Hambrecht & Quist
Banc of America Securities LLC
------------
, 1999
------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade in the securities in this offering, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the securities being registered. All amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 9,591
NASD filing fee.................................................... 3,950
NASDAQ National Market Fees........................................ 95,000
Blue Sky qualification fees and expenses........................... 10,000
Printing and engraving expenses.................................... *
Accountant's fees and expenses..................................... *
Legal fees and expenses............................................ 130,000
Miscellaneous...................................................... 100,000
--------
Total.............................................................. $
*
========
</TABLE>
- --------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
The Registrant's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
The Registrant's Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.
The Registrant has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
Registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
The form of Underwriting Agreement filed as Exhibit 1.1 hereto provides for
the indemnification of the Registrant's directors and officers in certain
circumstances as provided therein.
Item 15. Recent Sales of Unregistered Securities.
(a) Since June 30, 1996, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities:
(1) Between January 1997 and June 30, 1999, the Registrant granted
1,203,794 shares of Common Stock to employees and consultants of the
Registrant pursuant to option exercises under the Registrant's 1997
Stock Option Plan for an aggregate exercise price of $256,575.
(2) On January 22, 1997, the Registrant issued and sold 2,000 shares of
Common Stock to a total of one investor for an aggregate purchase price
of $200.00.
II-1
<PAGE>
(3) From February 4, 1997 to March 11, 1998, the Registrant issued and sold
its shares of its Series A Preferred Stock convertible into an
aggregate of 15,764,535 shares of Common Stock to a total of 22
investors for an aggregate purchase price of $ 37,739,993.91.
(4) On February 4, 1997, the Registrant issued a warrant convertible into
389,918 shares of Common Stock at a purchase price of $0.10 per share
to a total of one investor.
(5) On July 23, 1997, the Registrant issued a warrant convertible into
179,816 shares of Common Stock at a purchase price of $2.39 per share
to a total of one investor.
There was no underwriter involved in connection with the transactions set
forth above. The issuance of the securities set forth in paragraph 1 of this
Item 15 was deemed to be exempt from registration under the Securities Act in
reliance upon Rule 701 promulgated thereunder. The issuance of the securities
set forth in paragraphs 2, 3, 4, and 5 of this Item 15 were deemed to be exempt
from registration pursuant to Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder as a transaction by an issuer not involving
a public offering.
In all of such transactions, the recipients of securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the securities issued. All recipients received
adequate information about the Registrant at the time of the acquisition of
such securities or had access, through employment or other relationships, with
the Registrant, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.1 Form of Underwriting Agreement.
Agreement of Merger by and between Registrant and Headway
2.1 Reorganization Subsidiary, Inc.
3.1 Registrant's Certificate of Incorporation.
3.2 Registrant's Bylaws.
4.1* Form of Specimen Certificate for Registrant's common stock.
4.2 Registration and Information Rights Agreement by and between Registrant
and the purchasers of the Registrant's Series A preferred stock named
therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality of
the securities being registered.
10.1 Patent License Agreement between Registrant and Seagate Technology,
Inc.
10.2** Cross-License and Know-How Transfer Agreement between Registrant and
Seagate Technology, Inc., dated May 19, 1995.
10.3** Cross License and Know-How Transfer Agreement between Registrant and
Seagate Technology Inc., dated April 27, 1998.
10.4** Strategic Alliance Agreement between Registrant and SAE Magnetics
(H.K.) Ltd.
10.5** Master Technology License Agreement by and among Registrant, Hewlett-
Packard Company, Komag, Incorporated and Asahi America, Inc., and
Amendment thereto.
10.6 Shareholders Agreement among Registrant, MRST Limited and SFI
Investment Ltd.
10.7 Standard Industrial/Commercial Single-Tenant Lease-Net between
Registrant and Joseph Rubino and Dorothy Rubino Intervivos Trust, et.
al., and Lease Addendum No. 1 thereto.
10.8 Sublease Agreement between Registrant, Sanjaylyn Company and Komag,
Inc., and First Amendment thereto.
10.9 Loan and Security Agreement between Registrant and Silicon Valley Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10 Master Lease Agreement between Registrant and General Electric Capital
Corporation, and addendum thereto.
10.11 Promissory Note by and between Registrant and David Begin.
10.12 Promissory Note by and between Registrant and Western Digital
Corporation.
10.13 Promissory Note by and between Registrant and Maxtor Corporation.
10.14** License Agreement between Registrant and International Business
Machines Corporation.
10.15 Registrant's 1997 Stock Option Plan and related documents.
10.16 Registrant's 1999 Employee Stock Purchase Plan and related documents.
10.17 Registrant's 1999 Director Stock Option Plan and related documents.
10.18** Volume Supply Agreement between Registrant and SAE Magnetics (H.K.)
Ltd.
10.19** Technology Transfer Agreement between Registrant and International
Business Machines Corporation.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1).
23.2 Consent of Ernst & Young LLP, independent auditors.
24.1 Power of Attorney (see page II-5 of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with regard to certain portions of
this document. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification 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 controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, in the State of California, on September 2, 1999.
HEADWAY TECHNOLOGIES, INC.
/s/ Thomas A. Surran
By: _________________________________
Thomas A. Surran
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mike Y. Chang and Thomas A. Surran and
each one of them, acting individually and without the other, as his attorney-
in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and to sign any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, and all post-effective amendments thereto, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mike Y. Chang President, Chief Executive September 2, 1999
____________________________________ Officer and Director
Mike Y. Chang (Principal Executive
Officer)
/s/ Kochan Ju Vice President of Technology September 2, 1999
____________________________________ and Director
Kochan Ju
/s/ Thomas A. Surran Chief Financial Officer September 2, 1999
____________________________________ (Principal Financial
Thomas A. Surran Officer and Principal
Accounting Officer)
/s/ Ta-Lin Hsu Director September 2, 1999
____________________________________
Ta-Lin Hsu
/s/ Irwin Federman Director September 2, 1999
____________________________________
Irwin Federman
/s/ Heinrich Sussner Director September 2, 1999
____________________________________
Heinrich Sussner
/s/ Tu Chen Director September 2, 1999
____________________________________
Tu Chen
/s/ David Tsang Director September 2, 1999
____________________________________
David Tsang
</TABLE>
II-4
<PAGE>
HEADWAY TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged to Balance at
beginning of costs and other Deductions-- end of
period expenses accounts write-offs period
------------ ---------- ---------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended December 29,
1996.................. $ -- $ 5 $ -- $ -- $ 5
Year ended December 28,
1997.................. 5 530 -- (5) 530
Year ended January 2,
1999.................. 530 -- -- -- 530
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.1 Form of Underwriting Agreement.
Agreement of Merger by and between Registrant and Headway
2.1 Reorganization Subsidiary, Inc.
3.1 Registrant's Certificate of Incorporation.
3.2 Registrant's Bylaws.
4.1* Form of Specimen Certificate for Registrant's common stock.
4.2 Registration and Information Rights Agreement by and between
Registrant and the purchasers of the Registrant's Series A preferred
stock named therein.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality
of the securities being registered.
10.1 Patent License Agreement between Registrant and Seagate Technology,
Inc.
10.2** Cross-License and Know-How Transfer Agreement between Registrant and
Seagate Technology, Inc., dated May 19, 1995.
10.3** Cross License and Know-How Transfer Agreement between Registrant and
Seagate Technology Inc., dated April 27, 1998.
10.4** Strategic Alliance Agreement between Registrant and SAE Magnetics
(H.K.) Ltd.
10.5** Master Technology License Agreement by and among Registrant, Hewlett-
Packard Company, Komag, Incorporated and Asahi America, Inc., and
Amendment thereto.
10.6 Shareholders Agreement among Registrant, MRST Limited and SFI
Investment Ltd.
10.7 Standard Industrial/Commercial Single-Tenant Lease-Net between
Registrant and Joseph Rubino and Dorothy Rubino Intervivos Trust, et.
al., and Lease Addendum No. 1 thereto.
10.8 Sublease Agreement between Registrant, Sanjaylyn Company and Komag,
Inc., and First Amendment thereto.
10.9 Loan and Security Agreement between Registrant and Silicon Valley
Bank.
10.10 Master Lease Agreement between Registrant and General Electric Capital
Corporation, and addendum thereto.
10.11 Promissory Note by and between Registrant and David Begin.
10.12 Promissory Note by and between Registrant and Western Digital
Corporation.
10.13 Promissory Note by and between Registrant and Maxtor Corporation.
10.14** License Agreement between Registrant and International Business
Machines Corporation.
10.15 Registrant's 1997 Stock Option Plan and related documents.
10.16 Registrant's 1999 Employee Stock Purchase Plan and related documents.
10.17 Registrant's 1999 Director Stock Option Plan and related documents.
10.18** Volume Supply Agreement between Registrant and SAE Magnetics (H.K.)
Ltd.
10.19** Technology Transfer Agreement between Registrant and International
Business Machines Corporation.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit
5.1)
23.2 Consent of Ernst & Young LLP, independent auditors
24.1 Power of Attorney (see page II-5 of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Confidential treatment has been requested with regard to certain portions of
this document. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
HEADWAY TECHNOLOGIES, INC.
Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
_____ __, 19__
HAMBRECHT & QUIST LLC
BANK OF AMERICA SECURITIES LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Headway Technologies, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the Common Stock) (said
shares of Common Stock being herein called the Underwritten Stock). The Company
proposes to grant to the Underwriters (as hereinafter defined) an option to
purchase up to additional shares of Common Stock (herein called the Option
Stock and with the Underwritten Stock herein collectively called the Stock). The
Common Stock is more fully described in the Registration Statement and the
Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-_____), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including, all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the
_______________
/1/ Plus an option to purchase from the Company up to additional shares
to cover over-allotments.
1
<PAGE>
effectiveness of such amendment) such registration statement as so amended
(including any Rule 462(b) registration statement). The term Prospectus as used
in this Agreement shall mean the prospectus relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the
Securities Exchange Act of 1934, as amended (herein called the Exchange
Act), and the rules and regulations of the Commission thereunder; on the
Effective Date, the Registration Statement did not contain any untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date the Prospectus did not
and, on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and
warranties in this subparagraph (iii) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company
2
<PAGE>
by or on behalf of the Underwriters for use in the Registration Statement
or the Prospectus.
(iv) All of the capital stock of the Company has been duly
authorized and validly issued and is fully paid and non-assessable and not
subject to any preemptive or similar rights; and the Stock to be issued and
sold by the Company has been duly authorized and, when issued and delivered
to the Underwriters against payment therefore as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of the Stock will not be subject to any preemptive or similar
rights. No further approval or authority of the stockholders or the Board
of Directors of the Company will be required for the issuance and sale of
the Stock as contemplated herein.
(v) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of its subsidiaries relating to or
entitling any person to purchase or otherwise to acquire any securities of
the Company or any of its subsidiaries, except as otherwise disclosed in
the Registration Statement.
(vi) The authorized capital stock of the Company, and of each of the
Company's subsidiaries, conforms as to legal matters to the description
thereof contained in the Prospectus.
(vii) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of
any obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or instrument
that is material to the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective property is bound.
(viii) The execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not (i)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (ii) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (iv)
result in the suspension, termination or revocation of any Authorization
(as defined below) of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Authorization.
(ix) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries, is or could be
a party or to which any of their respective property is or could be subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described; nor are there any statutes,
regulations, contracts or other documents that are required to be described
in the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement that are not so described or filed as
required.
3
<PAGE>
(x) Neither the Company nor any of its subsidiaries has violated
any foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (herein called
Environmental Laws), any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or any provisions of the Foreign Corrupt
Practices Act or the rules and regulations promulgated thereunder, except
for such violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a whole.
(xi) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other
approvals (each herein called an Authorization) of, and has made all
filings with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals,
including, without limitation, under any applicable Environmental Laws, as
are necessary to own, lease, license and operate its respective properties
and to conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or in
the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in
full force and effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction
with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such Authorization or results
or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company
or any of its subsidiaries; except where such failure to be valid and in
full force and effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction would not, singly or in the
aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(xii) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on
operating activities and any potential liabilities to third parties) which
would, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(xiii) There are no legal or governmental proceedings pending relating
to patent rights, trade secrets, trademarks, service marks or other
proprietary information or materials of the Company, and no such
proceedings are threatened or contemplated by governmental authorities or
others.
(xiv) There are no contracts or other documents, relating to
governmental regulation affecting the Company or the Company's patents,
trade secrets, trademarks, service marks or other proprietary information
or materials, of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required.
4
<PAGE>
(xv) The Company is not infringing or otherwise violating any
patents, trade secrets, trademarks, service marks or other proprietary
information or materials, of others, and there are no infringements by
others of any of the Company's patents, trade secrets, trademarks, service
marks or other proprietary information or materials which could affect
materially the use thereof by the Company.
(xvi) The Company owns or possesses sufficient licenses or other
rights to use all patents, trade secrets, trademarks, service marks or
other proprietary information or materials necessary to conduct the
business now being or proposed to be conducted by the Company as described
in the Prospectus.
(xvii) This Agreement has been duly authorized, executed and
delivered by the Company.
(xviii) Ernst & Young LLP is an independent public accountant with
respect to the Company and its subsidiaries as required by the Securities
Act.
(xix) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as disclosed therein; the
supporting schedules, if any, included in the Registration Statement
present fairly in accordance with generally accepted accounting principles
the information required to be stated therein; and the other financial and
statistical information and data set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) are, in all
material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(xx) The Company is not and, after giving effect to the offering
and sale of the Stock and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(xxi) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Stock registered pursuant to the
Registration Statement.
(xxii) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
shares of the Underwritten Stock to the several Underwriters and each of
the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be
5
<PAGE>
sold by the Company and purchased by the several Underwriters shall be $___ per
share. In making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Stock which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
6
<PAGE>
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of , , at 7:00 a.m., San Francisco time, on the fourth/2/
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the Company and you. The date and hour of
such delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of , , at 7:00 a.m.,
San Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order by one or more certified or official bank check or checks
in same day funds. Such payment shall be made upon delivery of certificates for
the Stock to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Stock to be delivered to
you shall be registered in such name or names and shall be in such denominations
as you may request at least one business day before the Closing Date, in the
case of Underwritten Stock, and at least one business day prior to the purchase
thereof, in the case of the Option Stock. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on
the business day prior to the Closing Date or, in the case of the Option Stock,
by 3:00 p.m., New York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later
______________________
/2/ This assumes that the transaction will be priced after the close of
market and that T+4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
7
<PAGE>
date on which Option Stock is purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. Further Agreements of the Company. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the
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<PAGE>
Company or of counsel for the Underwriters such proposed variation requires that
the Prospectus be supplemented or amended, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the Underwriters
and all dealers to whom any of the Stock may be sold by the several Underwriters
to use the Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Stock in accordance with the applicable
provisions of the Securities Act and the applicable rules and regulations
thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission [(including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act)].
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the offering
by the NASD.
(k) The Company hereby agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a
period of 180 days following the commencement of the public offering of the
Stock by the Underwriters, directly or
9
<PAGE>
indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for or any rights to purchase or acquire Common Stock or (ii)
enter into any swap or other agreement that transfers, in whole or in part, any
of the economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to the Stock to be sold to the Underwriters pursuant to
this Agreement.
(l) The Company agrees to use its best efforts to cause all directors,
officers, and beneficial holders of more than 5% of the outstanding Common Stock
to agree that, without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
(m) If at any time during the [25]-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for any
legal or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary
10
<PAGE>
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that (1) the indemnity
agreements of the Company contained in this paragraph (a) shall not apply to any
such losses, claims, damages, liabilities or expenses if such statement or
omission was made in reliance upon and in conformity with information furnished
as herein stated or otherwise furnished in writing to the Company by or on
behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
11
<PAGE>
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Underwriters shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Stock received by the Company and
the total underwriting discount received by the Underwriters, as set forth in
the table on the cover
12
<PAGE>
page of the Prospectus, bear to the aggregate public offering price of the
Stock. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
8. Termination. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, (ii) any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets of
the United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, The
Nasdaq Stock Market, or limitations on prices (other than limitations on hours
or numbers of days of trading) for securities on either such exchange or system,
(iv) the enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of, or commencement of any proceeding
or investigation by, any court, legislative body, agency or
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<PAGE>
other governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by either federal or New York State authorities or (vi) the taking of any action
by any federal, state or local government or agency in respect of its monetary
or fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this Agreement
shall be terminated pursuant to this Section 8, there shall be no liability of
the Company to the Underwriters and no liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Morrison & Foerster LLP , counsel for the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati, counsel
for the Company, and from - , patent counsel for the Company, opinions,
addressed to the Underwriters and dated the Closing Date, covering the matters
set forth in Annex A and Annex B hereto, respectively, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from each such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal
14
<PAGE>
proceedings to which the Company or any of its subsidiaries is a party or of
which property of the Company or any of its subsidiaries is the subject which
are material and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or other
documents which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, (vii) the representations and
warranties of the Company herein are true and correct in all material respects
as of the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and (viii) there has not been any material change
in the market for securities in general or in political, financial or economic
conditions from those reasonably foreseeable as to render it impracticable in
your reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of companies
in particular) or financial or economic conditions which render it inadvisable
to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from [Ernst & Young LLP] a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Stock is purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the Original Letter), but carried out
to a date not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from Ernst & Young LLP a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at - , 19 - , did not disclose any
weakness in internal controls that they considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
15
<PAGE>
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 5% of the outstanding
Common Stock agreements, in form reasonably satisfactory to Hambrecht & Quist
LLC, stating that without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Morrison & Foerster LLp, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such
16
<PAGE>
payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective representatives, successors and assigns. Nothing
in this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 678 South Hillview Drive,
Milpitas, California 95035, Attention: Thomas A. Surran. All notices given by
telegraph shall be promptly confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(k) and (l) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
HEADWAY TECHNOLOGIES, INC.
By __________________________
[Name]
[Title]
The foregoing Agreement is hereby confirmed
17
<PAGE>
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANK OF AMERICA SECURITIES LLC
By Hambrecht & Quist LLC
By __________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
18
<PAGE>
SCHEDULE I
UNDERWRITERS
Shares
Number of to be
Underwriters Purchased
------------ ----------
Hambrecht & Quist LLC..........................
Bank of America Securities LLC.................
------
Total.....................................
======
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of Wilson Sonsini Goodrich & Rosati
Counsel for the Company
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property requires
such qualification (except where the failure to be so qualified would not
have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole), and has full corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of
each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the
Company free and clear of all liens, encumbrances and security interests,
and to the best of such counsel's knowledge, no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of [
shares of Stock, of which there are outstanding
shares, and] shares of Common Stock, $0.001 par value, of which
there are outstanding shares (including the Underwritten
Stock plus the number of shares of Option Stock issued on the date hereof);
proper corporate proceedings have been taken validly to authorize such
authorized capital stock; all of the outstanding shares of such capital
stock (including the Underwritten Stock and the shares of Option Stock
issued, if any) have been duly and validly issued and are fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, will have been duly and validly issued and be fully
paid and nonassessable; and no preemptive rights of, or rights of refusal
in favor of, stockholders exist with respect to the Stock, or the issue and
sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company and, to the knowledge of such counsel, there are no contractual
preemptive rights that have not been waived, rights of first refusal or
rights of co-sale which exist with respect to the issue and sale of the
Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act,
the Exchange Act and with the rules and regulations of the Commission
thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief)
at the Effective Date contained any untrue statement of a material
<PAGE>
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and schedules and other
financial and statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief)
as of its date or at the Closing Date (or any later date on which Option
Stock is purchased), contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel)
and 11(c) of Form S-1 is to the best of such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response is
required with respect to such Items, and, the description of the Company's
stock option plans and the options granted and which may be granted
thereunder and the Company's warrant agreement and the warrants issued
thereunder in the Prospectus accurately and fairly presents the information
required to be shown with respect to said plans and agreement and options
and warrants to the extent required by the Securities Act and the rules and
regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the issue and sale by the Company of the shares of Stock sold
by the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Certificate of Incorporation
or Bylaws of the Company or any agreement or instrument known to such
counsel to which the Company is a party or any applicable law or
regulation, or so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights
or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters;
(xii) the Company is not and, after giving effect to the offering and
sale of the Stock and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.; and
<PAGE>
(xiii) the Stock issued and sold by the Company will been duly
authorized for listing by the Nasdaq National Market Stock Exchange upon
official notice of issuance.
____________________________________
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the States of Delaware and
California, upon opinions of local counsel satisfactory in form and scope to
counsel for the Underwriters. Copies of any opinions so relied upon shall be
delivered to the Representatives and to counsel for the Underwriters and the
foregoing opinion shall also state that counsel knows of no reason the
Underwriters are not entitled to rely upon the opinions of such local counsel.
<PAGE>
EXHIBIT 2.1
AGREEMENT OF MERGER
Merging
HEADWAY REORGANIZATION SUBSIDIARY, INC., A
CALIFORNIA CORPORATION
with and into
HEADWAY TECHNOLOGIES, INC.
This Agreement of Merger ("Merger Agreement") is made on January 23, 1997
by and between Headway Technologies, Inc., a California corporation ("Headway
Technologies" or "the Company"), Headway Reorganization Subsidiary, Inc., a
California corporation ("Merger Sub") and Headway Holdings, Inc., a Delaware
corporation ("Headway Holdings"), the holder of all of the issued and
outstanding capital stock of Merger Sub.
MERGER
WHEREAS, the parties deem it advisable and in the best interests of each of
Headway Technologies and Merger Sub and their respective shareholders that
Merger Sub be merged into Headway Technologies pursuant to the laws of the State
of California, and upon the terms and conditions contained in this Merger
Agreement (the "Merger");
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
THE MERGER
1.1 Constituent and Surviving Corporations. Headway Technologies and
--------------------------------------
Merger Sub shall be the constituent corporations to the Merger (the "Constituent
Corporations"). At the Effective Time (as defined below), Merger Sub shall be
merged into Headway Technologies and Headway Technologies shall be the surviving
corporation (the "Surviving Corporation") of the Merger. Save as otherwise
expressly provided herein, the name, identity, existence, rights, privileges,
powers, franchises, properties and assets and the liabilities and obligations of
Headway Technologies shall continue unaffected and unimpaired by the Merger.
Upon the filing of this Merger Agreement, together with the Officers'
Certificates of each of the Constituent Corporations required by the General
Corporation Law of the State of California (the "California Law") with the
Secretary of State of California (the "Effective Time"), the identity and
separate existence of Merger Sub shall cease and all rights, privileges, powers,
franchises, properties and assets and the liabilities and obligations of Merger
Sub shall be vested in Headway Technologies.
<PAGE>
1.2 Articles of Incorporation; By-Laws. Upon the Merger becoming
----------------------------------
effective, the Articles of Incorporation of Headway Technologies are amended to
read as set forth in Exhibit A attached hereto.
---------
1.3 Officers and Directors. The officers of Headway Technologies
----------------------
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation immediately after the Effective Time, in the same capacities as
those in which they served as officers of Headway Technologies immediately prior
to the Effective Time.
1.4 Conversion of Merger Sub Common Stock. At the Effective Time, each
-------------------------------------
share of Merger Sub Common Stock issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and become one fully paid and
nonassessable share of Common Stock of the Surviving Corporation.
1.5 Conversion of Headway Technologies Common Stock. Subject to the
-----------------------------------------------
conditions and limitations set forth in this Merger Agreement, at the Effective
Time each share of the Company's Series A Preferred Stock, Class 1 Stock and
Common Stock (together the "HT Stock") issued and outstanding at the Effective
Time, by virtue of the Merger and without any action on the part of the holder
thereof, shall be cancelled. As of the Effective Time each holder of shares of
Series A Preferred Stock will be entitled to receive $7.19 per share (the
"Preferred Price Per Share") and each holder of Class 1 Stock and each holder of
Common Stock will be entitled to receive $0.10 for a share of Class 1 Stock and
$0.10 for a share of Common Stock , respectively (collectively the "Class
1/Common Price Per Share"), all payable in cash out of available funds and
without interest. Notwithstanding the provisions of this Section 1.5, holders of
HT Stock ("Dissenting Shares") who have taken all necessary steps under Chapter
13 of the California Law to dissent and demand payment and are otherwise
entitled to payment thereunder shall receive such amount as they become entitled
to receive thereunder. All certificates representing shares of HT Stock held by
shareholders of the Company at the Effective Time shall thereafter be
surrendered for cancellation in exchange for the Preferred Price Per Share or
the Class 1/Common Price Per Share as the case may be, multiplied by the number
of shares represented by such certificate or, in the case of holders of
Dissenting Shares, into such amount as they are entitled to receive under
Chapter 13 of the California Law.
If a holder of Dissenting Shares shall withdraw his or her demand for
appraisal in accordance with the California Law, or shall become ineligible for
such appraisal (through failure to perfect or otherwise), then, as of the
effective time of the occurrence of such withdrawal or ineligibility, which ever
last occurs, such shareholder shall be entitled to receive the Class 1/Common
Price Per Share. The Company will not voluntarily make any payment or
commitment with respect to any demands for appraisal and shall not, except with
the prior written consent of Headway Holdings, settle or offer to settle any
such demands. Each holder of Dissenting Shares shall have only such rights and
remedies as are granted to such holder under Chapter 13 of the California Law.
1.6 Stock Options and Related Matters. At the Effective Time, each
---------------------------------
employee stock option, stock bonus or stock award plan of the Company which
provides for the issuance of the
-2-
<PAGE>
Company's Common Stock shall be terminated without any consideration being
payable and no further stock awards, stock options or stock appreciation rights
shall be granted thereunder.
1.7 Payment of the Merger Consideration; Exchange Agent.
---------------------------------------------------
(a) From and after the Effective Time, Gray Cary Ware & Freidenrich,
a Professional Corporation, shall be designated by Headway Holdings and Headway
Technologies to act as exchange agent (the "Exchange Agent") in effecting the
exchange of cash for certificates which, prior to the Effective Time,
represented HT Stock.
(b) If all of the conditions to their obligations described in
Article IV have been met or waived in writing, Headway Holdings shall provide to
Merger Sub funds in an amount equal to the consideration payable for the Merger
based on the number of shares of HT Stock outstanding at the close of business
on the date immediately preceding the date of the Effective Time as set forth in
Section 2.1.2 hereof (the "Payment Fund"), and Merger Sub shall, at the
Effective Time, deposit in trust with the Exchange Agent, funds in an amount
equal to the Payment Fund.
(c) The Exchange Agent, acting pursuant to irrevocable instructions,
shall make the payments described in Section 1.5 out of the Payment Fund. The
Payment Fund shall not be used for any purpose other than as provided herein.
Promptly following determination of the maximum number of shares which the
holders thereof have claimed are Dissenting Shares, the Exchange Agent shall
promptly repay to the Surviving Corporation from the Payment Fund an amount
equal to the product obtained by multiplying the number of such Dissenting
Shares by the Class 1/Common Price Per Share.
(d) At or promptly after the Effective Time the Exchange Agent shall
mail or deliver to each record holder of certificates which immediately prior to
the Effective Time represented shares of HT Stock, a form of letter of
transmittal and instructions for use in surrendering such certificates and
receiving payment therefor.
(e) Upon the surrender of each certificate in proper form pursuant to
applicable instructions and with appropriate endorsements, signature guarantees
and evidence of authority of those endorsing in a representative capacity, the
holder thereof shall be paid within ten (10) days of the surrender of his
certificate, without interest thereon, or immediately upon such surrender if
such surrender is made in person at the Closing, the amount of cash to which he
is then entitled hereunder and such certificate shall forthwith be canceled.
Until so surrendered and exchanged, each such certificate shall represent solely
the right to receive the cash payable in accordance with the provisions of this
Merger Agreement. Each holder must surrender his certificate(s) in order to be
paid the cash to which he is otherwise entitled. If any cash to be paid in the
Merger is to be paid to a person other than the holder in whose name a
certificate is registered, it shall be a condition of such exchange that the
certificate surrendered shall be properly endorsed or otherwise in proper form
for transfer and that the person requesting such payment shall pay to the
Exchange Agent any transfer or other taxes and fees required by reason of the
payment of such cash to a person other than the registered holder of the
certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent
-3-
<PAGE>
that such tax has been paid or is not applicable. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
shares for any cash delivered pursuant hereto to a public official pursuant to
applicable abandoned property laws.
(f) Promptly following the date which is six months after the
Effective Time, the Exchange Agent shall return to the Surviving Corporation all
cash, certificates and other instruments in its possession relating to the
transactions described in this Merger Agreement and the Exchange Agent's duties
shall terminate. Thereafter, holders of certificates representing shares of HT
Stock may surrender such certificates to the Surviving Corporation and (subject
to applicable abandoned property, escheat and similar laws) receive such amount,
without interest, as they may be entitled to receive hereunder.
(g) As of and after the Effective Time, there shall be no transfers
on the stock transfer books of the Surviving Corporation of any shares of HT
Stock. If, after the Effective Time, certificates previously representing shares
of HT Stock are presented to the Surviving Corporation or the Exchange Agent,
they shall be canceled and exchanged as provided herein.
1.8 Proxy Statement; Other Filings. Headway Technologies shall prepare a
------------------------------
proxy statement (the "Proxy Statement") and solicit proxies with respect to the
Merger in compliance with the California Law. The Proxy Statement (including the
favorable recommendation of the Company's board of directors) and proxy shall be
promptly mailed by Headway Technologies to its shareholders. Headway
Technologies shall also promptly prepare and file any other filings required
under federal or state securities laws relating to the Merger and the
transactions contemplated herein. Headway Technologies and Headway Holdings
each shall use its best efforts to obtain and furnish the information required
to be included in the Information Statement and any other filings. Such
information shall be accurate and complete in all material respects and shall
not omit to state any material fact required to make such information not false
or misleading. The Proxy Statement and any other filing shall comply as to form
in all material respects with all applicable requirements of law.
1.9 Meetings of Shareholders. Headway Technologies shall take all action
------------------------
necessary to call, give notice, convene and hold a meeting of each class of its
shareholders; and a meeting of its shareholders voting together as a single
class as promptly as practicable to consider and vote upon the adoption of this
Merger Agreement and the Merger.
1.10 Solicitation. From the date of this Agreement until the earlier of the
------------
Effective Time or the termination of this Agreement pursuant to Section 5, the
Company will not, directly or indirectly through its officers, directors,
employees, agents or otherwise, (i) solicit, initiate or encourage any
Acquisition Proposal (defined below) or (ii) engage in negotiations with, or
disclose any nonpublic information relating to the Company, or afford access to
the properties, books or records of the Company, to any person that has
indicated to the Company that it may be considering making, or that has made, an
Acquisition Proposal. Notwithstanding the immediately preceding sentence, if an
unsolicited Acquisition Proposal, or an unsolicited written expression of
interest that the Company reasonably expects to lead to an Acquisition Proposal,
shall be received by the Board
-4-
<PAGE>
of Directors of the Company, then, to the extent the Board of Directors of the
Company believes in good faith (after consultation with its financial advisor)
(i) that such Acquisition Proposal would, if consummated, result in a
transaction that appears to be more favorable to the Company's shareholders from
a financial point of view than the transaction contemplated by this Merger
Agreement and (ii) after reasonable inquiry by the Company, that the third party
making such Acquisition Proposal is financially capable of consummating such
Acquisition Proposal (any Acquisition Proposal meeting such conditions being
referred to in this Agreement as a "Superior Proposal") and the Board of
Directors of the Company determines in good faith after consultation with
outside legal counsel that it is necessary for the Board of Directors of the
Company to comply with its fiduciary duties to shareholders under applicable
law, the Company and its officers, directors, employees, investment bankers,
financial advisors, attorneys, accountants and other representatives retained by
it may furnish information in connection therewith and take such other actions
as are consistent with the fiduciary obligations of the Company's Board of
Directors, and such actions shall not be considered a breach of this Section
1.10 or any other provisions of this Merger Agreement; provided, however, that
-------- -------
(A) upon each such determination the Company notifies Headway Holdings of such
determination by the Company's Board of Directors and provides Headway Holdings
with a true and complete copy of the Superior Proposal received from such third
party, if the Superior Proposal is in writing, or a written summary of all
material terms and conditions thereof, if it is not in writing, and (B) the
Company provides Headway Holdings (no later than the time that such documents
are provided to such third party) with all documents containing or referring to
non-public information of the Company that are supplied to such third party, to
the extent not previously supplied by the Company to Headway Holdings. The
Company shall not, and shall not permit any of its officers, directors,
employees (acting on behalf of the Company) or other representatives to agree to
or endorse any Acquisition Proposal unless the Company shall have terminated
this Merger Agreement pursuant to Section 5.2(d). Notwithstanding anything in
this Merger Agreement to the contrary, the Company shall not accept or recommend
to its shareholders, or enter into any agreement concerning a Superior Proposal
for a period of not less than 48 hours after Headway Holdings's receipt of a
true and complete copy of such Superior Proposal, if the Superior Proposal is in
writing, or a written summary of all material terms and conditions thereof, if
it is not in writing. The Company will promptly notify Headway Holdings after
receipt of any Acquisition Proposal or any notice that any person is considering
making an Acquisition Proposal or any request for non-public information
relating to the Company or for access to the properties, books or records of the
Company by any person that has indicated to the Company that it may be
considering making, or that has made, an Acquisition Proposal and will keep
Headway Holdings fully informed of the status and details of any such
Acquisition Proposal notice, request or any correspondence or communications
related thereto and shall provide Headway Holdings with a true and complete copy
of such Acquisition Proposal notice or request or correspondence or
communications related thereto, if it is in writing, or a complete written
summary thereof, if it is not in writing. For purposes of this Agreement,
"Acquisition Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving the Company or the
acquisition of 50% or more of the outstanding shares of capital stock of the
Company, or the sale or transfer of any material assets (excluding the sale or
disposition of assets in the ordinary course of business) of the Company, other
than, (i) the transactions contemplated by this Merger Agreement.
-5-
<PAGE>
1.11 Filing for Merger. Upon the fulfillment of all of the conditions
-----------------
precedent to the respective obligations of the parties hereto, Merger Sub and
Headway Technologies will cause to be executed and filed, pursuant to the
California Law, this Merger Agreement in the office of the Secretary of State of
California with respect to the Merger.
1.12 Further Agreements. Subject to satisfactory negotiation and agreement
------------------
on all relevant terms and conditions of the Stock Purchase Agreement (as defined
in Section 4.1.4), each party shall use its best efforts to take all such action
as may be necessary or appropriate in order to effectuate the Merger under the
California Law and other applicable laws as promptly as possible including,
without limitation, the filing under the California Law of this Merger Agreement
consistent with the terms hereof. If at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Merger Agreement and to vest the Surviving Corporation with full right, title
and possession to all assets, property, rights, privileges, powers and
franchises of either of the Constituent Corporations, the officers of such
corporations are fully authorized in the name of their corporation or otherwise
to take, and shall take, all such lawful and necessary action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Headway Technologies. Except as set
------------------------------------------------------
forth in a Schedule of Exceptions delivered by the parties hereto, the Company
represents and warrants to Headway Holdings and Merger Sub as follows:
2.1.1 Corporate Status. Headway Technologies is a corporation duly
----------------
organized, validly existing and in good standing under the laws of the State of
California. Headway Technologies has all requisite corporate power and authority
to own, operate and lease its properties and to carry on its business as now
conducted and as proposed to be conducted. Headway Technologies is qualified or
licensed to do business as a foreign corporation in all jurisdictions where such
qualification or licensing is required, except where the failure to so qualify
would not have a material adverse effect upon Headway Technologies, its
business, or its financial condition. Complete and accurate copies of all of the
Articles of Incorporation, Bylaws, minutes and consents of shareholders and the
Board of Directors have been previously provided to Headway Holdings and Merger
Sub together with the stock certificate books of Headway Technologies that
correctly set forth the record ownership of all outstanding shares of capital
stock of Headway Technologies.
2.1.2 Company Capitalization.
----------------------
(a) The authorized capital stock of Headway Technologies
consists of 22,500,000 shares of which 18,300,000 shares are designated as
Common Stock, 1,200,000 shares are designated as Class 1 stock and 3,000,000
shares are designated as Series A Preferred Stock. As of the date of this Merger
Agreement, 3,586,128 shares of Common Stock, 1,200,000 shares of Class 1 Stock
and 3,000,000 shares of Series A Preferred Stock were issued and outstanding.
All
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<PAGE>
such shares have been duly and validly authorized and all such issued and
outstanding shares have been validly issued, are fully paid and nonassessable
and were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. There are no outstanding shares of
Headway Technologies' capital stock or any other equity securities or rights to
purchase equity securities of Headway Technologies other than as described in
this Section 2.1.2.
(b) Except for Headway Technologies' stock options to be
canceled in accordance with the provisions of Section 1.6 hereof, there are no
options, warrants, calls, conversion rights, commitments or agreements of any
character to which Headway Technologies is a party or by which Headway
Technologies may be bound that do or may obligate Headway Technologies to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
Headway Technologies capital stock or that do or may obligate Headway
Technologies to grant, extend or enter into any such option, warrant, call,
conversion rights, commitment or agreement.
(c) The consummation of this Merger Agreement and the Merger
shall not cause an acceleration in the vesting of any of Headway Technologies'
capital stock.
(d) Except for any restrictions imposed by applicable
securities laws, there is no right of first refusal, co-sale right, right of
participation, right of first offer, option or other restriction on transfer
applicable to any shares of Headway Technologies' stock.
(e) Headway Technologies is not a party to or subject to any
agreement or understanding, and there is no agreement or understanding between
or among any persons, that affects or relates to the voting or giving of written
consent with respect to any outstanding security of Headway Technologies.
2.1.3 Company Subsidiaries. Headway Technologies does not presently
--------------------
own or control, directly or indirectly, any equity interest in any corporation,
association, or other business entity.
2.1.4 Authority for Agreement. Headway Technologies has the corporate
-----------------------
power and authority to execute and deliver this Merger Agreement and to carry
out its obligations hereunder. The execution and delivery of this Merger
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Company's Board
of Directors and, subject to the approval of this Merger Agreement by its
shareholders, this Merger Agreement constitutes the valid and legally binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by (i) bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to creditors'
rights generally and (ii) general principals of equity. The execution and
delivery of this Merger Agreement and the consummation of the Merger and the
other transactions contemplated hereby will not conflict with or result in any
violation of or default under any provision of the Articles of Incorporation or
By-Laws of the Company or any mortgage, indenture, lease, agreement or other
instrument, permit, concession, grant, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
any
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<PAGE>
of its properties. No consent, approval, order or authorization of, or
registration, declaration or filing with any governmental authority is required
in connection with the execution and delivery of this Merger Agreement or the
consummation of the Merger and the transactions contemplated hereby, except for
the filing with the Secretary of State of California of this Merger Agreement.
2.2 Representations and Warranties of Headway Holdings and Merger Sub.
-----------------------------------------------------------------
Headway Holdings and Merger Sub represent and warrant to Headway Technologies as
follows:
2.2.1 Headway Holdings Corporate Status. Headway Holdings is a
---------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with full corporate power and authority to own, operate
and lease its properties and carry on its business as now conducted and to enter
into this Merger Agreement and to carry out the transactions contemplated
hereby.
2.2.2 Headway Holdings Capitalization. The authorized capital stock
-------------------------------
of Headway Holdings will consist at the Effective Time of 39,620,000 shares of
which 25,000,000 shares are designated as Common Stock, par value $0.001 per
share, of which 2,000 shall be issued and outstanding immediately prior to the
Effective Time, and 14,620,000 shares are designated as Preferred Stock, par
value $0.001 per share, all of which shall be designated Series A Preferred
Stock and shall be issued and outstanding immediately prior to the Effective
Time. All such issued and outstanding shares, when issued, shall have been duly
authorized and validly issued, will be fully paid and nonassessable, and will
have been issued in compliance with all applicable state and federal laws
concerning the issuance of securities. As of the Effective Time Headway
Holdings will have reserved 5,380,000 shares of Common Stock for issuance to
employees pursuant to its 1997 Stock Option Plan, of which options to purchase
3,588,000 shares will be granted to employees and service providers of Headway
Holdings and its subsidiaries and options to purchase 1,792,000 shares will be
available for future grant. In addition, as of the Effective Time, Headway
Holdings will issue to Hambrecht & Quist LLC a warrant with respect to the
purchase of shares of Common Stock of Headway Holdings representing 2% of the
fully diluted Common Stock equivalents of Headway Holdings (subject to
adjustment for stock splits, stock dividends and the like).
2.2.3 Merger Sub Corporate Status. Merger Sub is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California with full corporate power and authority to enter into this Merger
Agreement and to carry out the transactions contemplated hereby. The authorized
capital stock of Merger Sub consists of 5,000 shares of Common Stock, $0.01 par
value per share, all of which are duly authorized, one share of which is validly
issued and outstanding, fully paid and nonassessable, and owned of record and
beneficially by Headway Holdings.
2.2.4 Authority for Agreement. Headway Holdings and Merger Sub have
-----------------------
the corporate power and authority to execute and deliver this Merger Agreement
and to carry out their respective obligations hereunder. The execution and
delivery of this Merger Agreement and the consummation of the Merger and the
other transactions contemplated hereby will have been duly authorized by the
respective Boards of Directors of Merger Sub and Headway Holdings and by
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<PAGE>
Headway Holdings as the sole shareholder of Merger Sub prior to the Effective
Time. This Merger Agreement constitutes a valid and legally binding obligation
of Headway Holdings and Merger Sub enforceable against Headway Holdings and
Merger Sub in accordance with its terms, except as such enforceability may be
limited by (i) bankruptcy, insolvency moratorium or other similar laws affecting
or relating to creditors' rights generally and (ii) general principals of
equity. The execution and delivery of this Merger Agreement and the consummation
of the Merger and the other transactions contemplated hereby will not conflict
with or result in any violation of or default under any provision of the
Certificate of Incorporation or By-Laws of Headway Holdings or the Articles of
Incorporation or By-Laws of Merger Sub or any mortgage, indenture, lease
agreement or other instrument, permit concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Headway Holdings or Merger Sub, as the case may be, or any of their
properties. No consent, approval, order or authorization of, or registration,
declaration or filing with any governmental authority is required in connection
with the execution and delivery of this Merger Agreement or the consummation of
the Merger and the other transactions contemplated hereby by Headway Holdings
and Merger Sub except for the filing with the Secretary of State of California
of this Merger Agreement.
ARTICLE 3
COVENANTS OF HEADWAY TECHNOLOGIES
3.1 Conduct of Business. From the date hereof to the Effective Time,
-------------------
except as otherwise consented to by Headway Holdings and Merger Sub in writing,
the Company shall:
(a) carry on its business in, and only in, the usual, regular and
ordinary course in substantially the same manner as heretofore and, to the
extent consistent with such business, use its best efforts to preserve intact
its present business organization, keep available the services of its present
officers and employees, and preserve its relationship with clients, customers,
suppliers and others having business dealings with it to the end that its
goodwill and going business shall be unimpaired at the Effective Time; and
(b) promptly advise Headway Holdings in writing of any materially
adverse change in the financial condition, operations, business or prospects of
the Company.
3.2 Access and Information. The Company shall give Headway Holdings and
----------------------
Merger Sub and their representatives full access to its properties, books,
records, contracts and commitments and will furnish all such information and
documents relating to its properties and business as Headway Holdings or Merger
Sub may reasonably request. In the event this Merger Agreement is terminated and
the Merger abandoned, Headway Holdings and Merger Sub will keep confidential any
information (unless readily ascertainable from public information or sources or
otherwise required by law to be disclosed) obtained from the Company in
connection with the Merger and will return to the Company all documents, work
papers and other written material obtained by Headway Holdings or Merger Sub
from the Company.
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<PAGE>
ARTICLE 4
CONDITIONS PRECEDENT
4.1 Conditions to Obligations of Each Party. The obligations of the
---------------------------------------
Company, Headway Holdings and Merger Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
4.1.1 Shareholder Approval. This Merger Agreement, the Merger and
--------------------
the transactions contemplated hereby shall have been approved by the affirmative
vote of all of the holders of the outstanding shares of the Company's Series A
Preferred Stock; all of the holders of the outstanding shares of the Company's
Class 1 Stock and at least ninety percent (90%) of the holders of the
outstanding shares of the Company's Common Stock.
4.1.2 No Injunction, Etc. No action or proceeding shall have been
------------------
instituted by any public authority or private person prior to the Effective Time
before any court or administrative body to restrain, enjoin or otherwise prevent
the consummation of the Merger or the transactions contemplated hereby or to
recover any damages or obtain other relief as a result of the Merger.
4.1.3 Governmental Compliance. All permits, approvals and consents of
-----------------------
any governmental body or agency, which Headway Holdings or the Company may
reasonably deem necessary or appropriate, shall have been obtained.
4.1.4 Closing of Series A Preferred Stock Purchase. The sale of at
--------------------------------------------
least thirty million dollars ($30,000,000) of Series A Preferred Stock of
Headway Holdings to be provided for in a Series A Preferred Stock Purchase
Agreement (the "Stock Purchase Agreement") to be entered into by and among
Headway Holdings, the Company and the Purchasers referred to on the Schedule of
Purchasers thereto, shall have closed as of the Effective Time.
4.1.5 California Tax Clearance. Headway Technologies shall have
------------------------
executed and filed with the California Franchise Tax Board an assumption of tax
liability on Form 3555 and shall have received a tax clearance certificate with
respect thereto.
4.2 Conditions to the Obligations of Headway Holdings and Merger Sub. The
----------------------------------------------------------------
obligation of Headway Holdings and Merger Sub to effect the Merger shall be
subject to the fulfillment, at or prior to the Effective Time (or waiver by
them), of the following additional conditions:
4.2.1 Company Representations, Performance. The representations and
------------------------------------
warranties of the Company contained in Section 2.1 shall be true at and as of
the date hereof and shall be true at and as of the Effective Time with the same
effect as though made at and as of the Effective Time. The Company shall have
duly performed and complied with all agreements and conditions required by this
Merger Agreement to be performed or complied with by it prior to or at the
Effective Time. The Company shall have delivered to Headway Holdings and Merger
Sub, a certificate, dated the
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<PAGE>
date of the Effective Time, and signed by its Chairman or its President and by
its chief financial officer to the effect set forth above in this Section 4.2.1.
4.2.2 Consents. Any required consent to this Merger Agreement and the
--------
Merger under any agreement or contract, the withholding of which in the judgment
of Headway Holdings would have a material adverse effect on the properties or
business of the Company, shall have been obtained in form and substance
satisfactory to Headway Holdings and a duly executed copy thereof shall have
been delivered to Headway Holdings.
4.2.3 Corporation Proceedings. All corporate and other proceedings of
-----------------------
Headway Technologies in connection with the Merger and the other transactions
contemplated by this Merger Agreement, and all documents and instruments
incident thereto, shall be satisfactory in substance and form to Headway
Holdings and Merger Sub and their counsel and Headway Holdings and Merger Sub
and their counsel shall have received all such documents and instruments, or
copies thereof, certified by the Secretary or the Assistant Secretary of Headway
Technologies, if requested, as may be reasonably requested.
4.2.4 Opinion of Company Counsel. Headway Holdings and Merger Sub
--------------------------
shall have received a favorable opinion, addressed to them and dated the date of
the Effective Time, of Gray Cary Ware & Freidenrich, a Professional Corporation,
counsel for the Company, as agreed among the parties hereto.
4.3 Conditions to the Obligations of Headway Technologies. The obligation
-----------------------------------------------------
of Headway Technologies to effect the Merger shall be subject to the
fulfillment, at or prior to the Effective Time (or waiver by it), of the
following additional conditions:
4.3.1 Headway Holdings and Merger Sub Representations, Performance.
------------------------------------------------------------
The representations and warranties of Headway Holdings and Merger Sub contained
in Section 2.2 shall be true at and as of the date hereof and shall be true at
and as of the Effective Time with the same effect as though made at and as of
the Effective Time. Headway Holdings and Merger Sub shall have duly performed
and complied with all agreements and conditions required by this Merger
Agreement to be performed or complied with by each of them prior to or at the
Effective Time. Each of Headway Holdings and Merger Sub shall have delivered to
Company, a certificate, dated the date of the Effective Time, and signed by its
Chairman or its President to the effect set forth above in this Section 4.3.1.
4.3.2 Consents. Any required consent to the Merger under any
--------
agreement or contract, the withholding of which would have a material adverse
effect on the properties or business of Headway Holdings, shall have been
obtained.
4.3.3 Corporation Proceedings. All corporate and other proceedings of
-----------------------
Headway Holdings and Merger Sub in connection with the Merger and the other
transactions contemplated by this Merger Agreement, and all documents and
instruments incident thereto, shall be satisfactory in substance and form to the
Company and its counsel and the Company and its counsel shall have
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<PAGE>
received all such documents and instruments, or copies thereof, certified by the
Secretary or Assistant Secretary of Headway Holdings or Merger Sub, as the case
may be, if requested, as may be reasonably requested.
4.3.4 Opinion of Headway Holdings' Counsel. The Company shall have
------------------------------------
received a favorable opinion, addressed to it and dated the date of the
Effective Time, of Wilson Sonsini Goodrich & Rosati, P.C., counsel for Headway
Holdings and Merger Sub, as agreed among the parties hereto.
4.3.5 Severance Agreements. Headway Holdings shall have executed and
--------------------
delivered severance agreements with each of John MacKay, Tom Surran, Tracy
Scott, Mao-Men Chen, Kochan Ju and Owen Bevan, in form and substance reasonably
satisfactory to Headway Holdings, Headway Technologies and their respective
counsel, entitling each individual to a severance payment equal to six months'
salary in the event of such individual's involuntary termination without cause,
each severance agreement to remain in effect until the closing of Headway
Technologies' initial public offering.
ARTICLE 5
TERMINATION, AMENDMENT, WAIVER
5.1 Automatic Termination. This Agreement shall automatically terminate
---------------------
and the Merger shall automatically be abandoned without any further action on
the part of any party hereto on March 1, 1997 if the Merger shall not have
theretofore become effective.
5.2 Termination. This Agreement may be terminated and the Merger abandoned
-----------
at any time (whether before or after the approval thereof by the shareholders of
the Company or Merger Sub or both) prior to the Effective Time:
(a) by mutual consent of the Boards of Directors of the Company,
Headway Holdings and Merger Sub evidenced by appropriate resolutions;
(b) by Headway Holdings or Merger Sub by notice to the Company (i)
if any of the conditions set forth in Section 4.1 or 4.2 shall not have been
fulfilled by February 7, 1997, or (ii) if any material default under or material
breach of any agreement or condition of this Merger Agreement, or any material
misrepresentation or material breach of any warranty contained herein, on the
part of the Company shall have occurred and shall not have been cured within
five (5) business days after delivery of notice of such breach by Headway
Holdings;
(c) by the Company by notice to Headway Holdings and Merger Sub (i)
if any of the conditions set forth in Section 4.1 or 4.3 shall not have been
fulfilled by February 7, 1997, or (ii) if any material default under or material
breach of any term or condition of this Merger Agreement, or any material
misrepresentation or material breach of any warranty contained herein,
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<PAGE>
on the part of Headway Holdings or Merger Sub shall have occurred and shall not
have been cured within five (5) business days after delivery of notice of such
breach by Headway Technologies; or
(d) by the Company by notice to Headway Holdings and Merger Sub if an
Acquisition Proposal shall have been received by the Board of Directors of the
Company and the Board of Directors in connection therewith, after consultation
with its legal counsel, withdraws its approval and recommendation of the Merger
after determining that to cause the Company to proceed with the transactions
contemplated hereby would not be consistent with the Board of Directors'
fiduciary duty to the shareholders of the Company.
5.3 Effect of Termination. In the event of the termination of this Merger
---------------------
Agreement and abandonment of the Merger pursuant to the provisions of Section
5.1 or 5.2 hereof, this Merger Agreement shall become void and have no effect,
without any liability on the part of any party thereto or its directors,
officers or shareholders in respect of this Merger Agreement, except the
liabilities of each of the parties hereto to pay the expenses incurred by it or
on its behalf.
5.4 Amendment. This Merger Agreement may be amended by action of the
---------
Boards of Directors of the parties hereto (or a duly authorized committee
thereof) at any time before or after approval hereof by the shareholders of the
Company, but after any such approval no amendment shall be made which
substantially changes the terms hereof without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing duly executed and delivered on behalf of each of the parties hereto.
5.5 Extension; Waiver. At any time prior to the Effective Time, the Boards
-----------------
of Directors of Headway Holdings or Merger Sub, on the one hand, and the
Company, on the other (or a duly authorized committee of any of them), may (a)
extend the time for the performance of any of the obligations or other acts of
the other, (b) waive any inaccuracies in the representations and warranties of
the other parties contained herein or in any document or instrument delivered
pursuant hereto and (c) waive compliance by the other with any of the agreements
or conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing duly executed and delivered on behalf of such party.
5.6 Expenses. The Company, Headway Holdings and Merger Sub shall assume
--------
and bear all expenses, costs and fees incurred or assumed by such party in the
preparation and execution of this Merger Agreement and compliance herewith,
whether or not the Merger herein provided for shall be consummated, and Headway
Holdings and the Company shall indemnify and hold each other harmless from and
against any and all liabilities or claims in respect of any such expenses, costs
or fees.
5.7 Notices. All notices, consents, requests, instructions, approvals and
-------
other communications provided for herein and all legal process in regard hereto
shall be validly given, made or served, if in writing and delivered personally
or sent by registered or certified mail, postage prepaid, (i) if to Headway
Holdings or Merger Sub, to Dr. Ta-Lin Hsu with a copy to Francis S. Currie of
Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto,
California 94304
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<PAGE>
and, (ii) if to the Company, to John MacKay, Chief Executive Officer, Headway
Technologies, Inc. 100 South Milpitas Boulevard, Milpitas, California 95035,
with a copy to Gray Cary Ware & Freidenrich, A Professional Corporation, 400
Hamilton Avenue, Palo Alto, California 94301, Attn.: Dennis C. Sullivan or, in
each case, at such other address as may be specified in writing to the other
parties.
5.8 Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California without regard to the conflicts of laws
provisions.
[THIS PAGE LEFT INTENTIONALLY BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as
of the date first written above.
Headway Technologies, Inc. Headway Reorganization
a California corporation Subsidiary, Inc.,
a California corporation
By:__________________________________ By:__________________________________
Name: John MacKay Name: Ta-lin Hsu
------------------------------ ------------------------------
Title: President Title: President, Chief Financial
------------------------------ ------------------------------
Officer and Secretary
------------------------------
By:__________________________________
Name: Tom Surran
------------------------------
Title: Secretary
------------------------------
Headway Holdings, Inc.
a Delaware corporation
By:__________________________________
Name: Ta-lin Hsu
------------------------------
Title: President and Secretary
------------------------------
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<PAGE>
EXHIBIT A
---------
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HEADWAY TECHNOLOGIES, INC.
I.
The name of this corporation is Headway Technologies, Inc.
II.
The purpose of this organization is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This corporation is authorized to issue only one class of shares of stock,
designated "Common Stock," and the total number of shares which this corporation
is authorized to issue is 5,000 with a par value of $0.01 per share.
IV.
1. Limitation of Directors' Liability. The liability of the directors of
----------------------------------
this corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
2. Indemnification of Corporate Agents. The corporation is authorized to
-----------------------------------
indemnify its agents to the fullest extent permissible under California law.
For purposes of this provision the term "agent" has the meaning set forth in
Section 317 of the California Corporations Code.
3. Repeal or Modification. Any repeal or modification of the foregoing
----------------------
provisions of this Article V shall not adversely affect any right of
indemnification or limitation of liability of an agent of the Corporation
relating to acts or omissions occurring prior to such appeal or modification.
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
HEADWAY HOLDINGS, INC.
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
The undersigned Thomas A. Surran does hereby certify that:
1. The name of the corporation is Headway Holdings, Inc., a Delaware
corporation (the "Corporation").
2. He is the duly elected and acting Secretary of the Corporation.
3. The Certificate of Incorporation of the Corporation, originally filed
on December 24, 1996 with the Delaware Secretary of State was first amended by
an Amended and Restated Certificate of Incorporation filed on February 4, 1997.
4. The amendment of the Certificate of Incorporation herein set forth has
been duly adopted by the Corporation's Board of Directors and stockholders
pursuant to Sections 228 and 242 of the General Corporation Law of the State of
Delaware ("Delaware Law"). The number of shares held by stockholders who
consented to this amendment in writing equaled or exceeded the required
percentage. Pursuant to Section 228 of the Delaware General Corporation Law,
prompt written notice of this amendment and restatement has been given to all
stockholders who did not consent to this amendment.
5. The restatement herein set forth has been duly adopted pursuant to
Sections 242 and 245 of Delaware Law. This Restated Certificate of Incorporation
restates, integrates and further amends the provisions of the Corporation's
Certificate of Incorporation.
6. The text of the Certificate of Incorporation is hereby restated to read
in its entirety as follows:
<PAGE>
"RESTATED CERTIFICATE OF INCORPORATION
OF
HEADWAY HOLDINGS, INC.
ONE. The name of this Corporation is Headway Holdings, Inc.
TWO. The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle, Delaware 19801. The name of its registered agent at such address is
The Corporation Trust Company.
THREE. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOUR. Classes of Stock Authorized. The Corporation is authorized to
issue two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of Common Stock that the
Corporation is authorized to issue is twenty five million (25,000,000) with a
par value of $0.001 per share. The total number of shares of Preferred Stock
that the Corporation is authorized to issue is fifteen million seven hundred
sixty-four thousand and five hundred thirty-five (15,764,535) with a par value
of $0.001 per share all of which shall be designated as Series A Preferred
Stock. The shares of Common Stock may be issued from time to time for such
consideration as the board of directors may determine.
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance upon conversion of the Preferred Stock shall not be sufficient to
permit conversion of the Preferred Stock.
The relative rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes and series of the shares of capital
stock or the holders thereof are as set forth below:
Section 1. Dividends.
The holders of the Series A Preferred Stock shall be entitled to
receive, out of any funds legally available therefor, noncumulative dividends in
an amount equal to $0.19 per annum, when and if declared by the Corporation's
board of directors. No dividend shall be paid on the Common Stock in any year,
other than dividends payable solely in capital stock, until all dividends for
such year have been declared and paid on the Series A Preferred Stock and no
dividends on the Common Stock shall be paid unless the amount of such dividend
on the Common Stock is also paid on the Series A Preferred Stock on an as-
converted to Common Stock basis.
-2-
<PAGE>
Section 2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, prior and in preference to any distribution of any of the assets or
funds of the Corporation to the holders of the Common Stock by reason of their
ownership of such stock, the holders of Series A Preferred Stock shall be
entitled to receive for each outstanding share of Series A Preferred Stock then
held by them an amount equal to $2.39 plus declared but unpaid dividends on such
share (as adjusted for any recapitalizations, stock combinations, stock
dividends, stock splits and the like). If, upon the occurrence of a liquidation,
dissolution or winding up, the assets and funds of the Corporation legally
available for distribution to stockholders by reason of their ownership of stock
of the Corporation shall be insufficient to permit the payment to such holders
of Series A Preferred Stock of the full aforementioned preferential amount, then
the entire assets and funds of the Corporation legally available for
distribution to stockholders by reason of their ownership of stock of the
Corporation shall be distributed ratably among the holders of Series A Preferred
Stock on an as-converted to Common Stock basis. After the preferential amounts
have been paid, the holders of Series A Preferred Stock will share with the
holders of Common Stock on an as converted basis until $9.56 per share has been
distributed (which amount shall be in addition to the $2.39 plus declared but
unpaid dividends referred to above). Thereafter, all remaining assets
available for distribution will be paid to the holders of Common Stock, without
further participation by the holders of Series A Preferred Stock.
(b) For purposes of this Section 2, a merger or consolidation of this
corporation with or into any other corporation or corporations, or a sale of all
or substantially all of the assets of this corporation, shall be treated as a
liquidation, dissolution or winding up, unless the stockholders of this
corporation immediately prior to such transaction hold at least 50% of the
outstanding voting equity securities of the surviving corporation in such
merger, consolidation or sale of assets.
Section 3. Conversion.
The holders of Series A Preferred Stock shall have conversion
rights as follows:
(a) Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such Series A Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Original
Issue Price of such share of Series A Preferred Stock by the Conversion Price at
the time in effect for a share of such series of Preferred Stock. The Original
Issue Price per share of Series A Preferred Stock is $2.39. The Conversion Price
per share of Series A Preferred Stock initially shall be $2.39, subject to
adjustment from time to time as provided below.
(b) Automatic Conversion. Each share of Series A Preferred Stock
shall automatically be converted into shares of Common Stock at the then
effective Conversion Price upon the earlier of (i) the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock to the
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public involving an aggregate offering price to the public of not less than
$15,000,000 at a per share offering price of $7.00 or more (as adjusted for any
recapitalizations, stock combinations, stock dividends, stock splits and the
like) or (ii) the consent of holders of not less than the majority of the then
outstanding shares of Series A Preferred Stock.
(c) Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price of such series of Preferred Stock. Before any holder
of Preferred Stock shall be entitled to convert the same into shares of Common
Stock pursuant to Section 3(a), such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for such Preferred Stock, and shall give written notice by mail,
postage prepaid, to the Corporation at its principal corporate office, of the
election to convert the same, and such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Preferred Stock to be converted. In the event of an automatic
conversion pursuant to Section 3(b), the outstanding shares of Preferred Stock
shall be converted automatically without any further action by the holder of
such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or the transfer agent for such Preferred Stock;
and the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Preferred Stock are either delivered to
the Corporation or the transfer agent for such Preferred Stock as provided
above, or the holder notifies the Corporation or the transfer agent for such
Preferred Stock that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable thereafter, issue and deliver to
such address as the holder may direct, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled. If the
conversion is in connection with a public offering of securities described in
Section 3(b), the conversion shall be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, and the
conversion shall not be deemed to have occurred until immediately prior to the
closing of such sale of securities.
(d) Status of Converted Stock. In the event any shares of Preferred
Stock shall be converted pursuant to this Section 3, the shares so converted
shall be canceled and shall not be reissued by the Corporation.
(e) Adjustment of Conversion Price of Preferred Stock. The Conversion
Price shall be subject to adjustment from time to time as follows:
(i) Adjustments for Subdivisions or Combinations of Common Stock.
In the event the outstanding shares of Common Stock shall be subdivided by stock
split, stock dividend or otherwise, into a greater number of shares of Common
Stock, the Conversion Price of each series of Preferred Stock then in effect
shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Common Stock
shall be combined or consolidated into a lesser number of shares of Common
Stock, the Conversion Price of each series of Preferred Stock then
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in effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(ii) Adjustments for Stock Dividends and Other Distributions.
In the event the Corporation makes, or fixes a record date for the determination
of holders of Common Stock entitled to receive, any distribution (excluding
repurchases of securities by the Corporation not made on a pro rata basis)
payable in property or in securities of the Corporation other than shares of
Common Stock, and other than as otherwise adjusted for in this Section 3 or as
provided for in Section 1 in connection with a dividend, then and in each such
event the holders of Preferred Stock shall receive, at the time of such
distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Preferred Stock been
converted into Common Stock on the date of such event.
(iii) Adjustments for Reorganizations, Reclassifications or
Similar Events. Except as provided in Section 2 upon any liquidation,
dissolution or winding up of the Corporation, if the Common Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock or other securities or property, whether by capital
reorganization, reclassification or otherwise, then each share of Preferred
Stock shall thereafter be convertible into the number of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock of the Corporation deliverable upon conversion of such shares of Preferred
Stock shall have been entitled upon such reorganization, reclassification or
other event.
(iv) Adjustments for Diluting Issues. In addition to the
adjustment of the Conversion Prices provided above, the Conversion Price of the
Series A Preferred Stock shall be subject to further adjustment from time to
time as follows:
(A) Special Definitions.
(1) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" shall mean the date on
which the first share of Series A Preferred Stock was first issued.
(3) "Convertible Securities" shall mean securities
convertible into or exchangeable for Common Stock, either directly or
indirectly.
(4) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section 3(e)(iv)(C) deemed to
be issued) by the Corporation after the Original Issue Date other than shares of
Common Stock issued (or, pursuant to Section 3(f)(iv)(C) deemed to be issued):
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(i) upon conversion of shares of Preferred Stock;
(ii) to employees, consultants, directors, equipment
lessors or banks or similar institutional credit financing sources pursuant to
plans or arrangements approved by the board of directors;
(iii) as a dividend or other distribution in
connection with which an adjustment to the Conversion Price is made pursuant to
Section 3(f)(i), (ii) or (iii); or
(iv) upon the exercise of Options outstanding as of
the Original Issue Date.
(B) No Adjustment of Conversion Price. No adjustment in the
Conversion Price shall be made in respect of the issuance of Additional Shares
of Common Stock unless the consideration per share for an Additional Share of
Common Stock issued (or, pursuant to Section 3(e)(iv)(C), deemed to be issued)
by the Corporation is less than the Conversion Price in effect on the date of,
and immediately prior to, such issue.
(C) Deemed Issue of Additional Shares of Common Stock. Except
as otherwise provided in Section 3(e)(iv)(A) or 3(e)(iv)(B), in the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of any holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that in any such case in
which additional shares of Common Stock are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof or upon the occurrence of a record date with respect thereto, and
any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease;
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(3) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof or
upon the occurrence of a record date with respect thereto, and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(i) in the case of Convertible Securities or Options for Common Stock,
the only additional shares of Common Stock issued were shares of Common Stock,
if any, actually issued upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, and the consideration received therefor
was the consideration actually received by the Corporation for the issue of all
such Options, whether or not exercised, plus the consideration actually received
by the Corporation upon such exercise, or for the issue of all such Convertible
Securities, whether or not converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon such conversion
or exchange; and
(ii) in the case of Options for Convertible Securities, only the
Convertible Securities, if any, actually issued upon the exercise thereof were
issued at the time of issue of such Options and the consideration received by
the Corporation for the Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received by the Corporation for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to Section 3(e)(iv)(C)(2) or (3) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the Conversion Price on the original adjustment date with respect to the
issuance of such Options or Convertible Securities, as adjusted for any
Additional Shares of Common Stock issued (or, pursuant to Section 3(e)(iv)(C),
deemed to be issued) between such original adjustment date and such readjustment
date;
(5) in the case of any Options which expire by their terms not more
than 30 days after the date of issue thereof, no adjustment of the Conversion
Price shall be made until the expiration or exercise of all such Options; and
(6) in the case of any Option or Convertible Security with respect to
which the maximum number of shares of Common Stock issuable upon exercise or
conversion or exchange thereof is not determinable, no adjustment to the
Conversion Price shall be made until such number becomes determinable.
(D) Adjustment of Conversion Price Upon Issuance of Additional Shares
of Common Stock. If Additional Shares of Common Stock are issued (or, pursuant
to Section 3(e)(iv)(C), deemed to be issued) without consideration or for a
consideration per share (computed on an as-converted to Common Stock basis) less
than the Conversion Price in effect on the date of, and immediately prior to,
such issue, then and in such event, such Conversion Price shall be reduced,
concurrently
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with such issue, to a price (calculated to the nearest tenth of a cent)
determined by multiplying such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation (as determined in accordance
with Section 3(e)(iv)(E)) for the total number of Additional Shares of Common
Stock so issued (or, pursuant to Section 3(e)(iv)(C), deemed to be issued) would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issue
plus the number of such Additional Shares of Common Stock so issued (or,
pursuant to Section 3(e)(iv)(C), deemed to be issued). For the purposes of this
Section 3(e)(iv)(D), all shares of Common Stock issuable upon exercise of
outstanding Options, upon conversion of outstanding Convertible Securities, or
upon conversion of Convertible Securities following exercise of outstanding
Options therefor, shall be deemed to be outstanding, and immediately after any
Additional Shares of Common Stock are deemed issued pursuant to Section
3(e)(iv)(C), such Additional Shares of Common Stock shall be deemed to be
outstanding.
(E) Determination of Consideration. For purposes of this Section
3(e)(iv)(E) the consideration received by the Corporation for any Additional
Shares of Common Stock issued (or, pursuant to Section 3(e)(iv)(C), deemed to be
issued) shall be computed as follows:
(1) Cash and Property. Such consideration shall:
i) insofar as it consists of cash, be computed at the aggregate amount
of cash received by the Corporation after deducting any commissions paid by the
Corporation with respect to such issuance;
ii) insofar as it consists of property other than cash, be computed at
the fair value thereof at the time of such issuance, as determined in good faith
by the board of directors of the Corporation; and
iii) if Additional Shares of Common Stock are issued (or, pursuant to
Section 3(e)(iv)(C), deemed to be issued) together with other shares or
securities or other assets of the Corporation for consideration which covers
both, be the proportion of such consideration so received, computed as provided
in clauses (A) and (B) above, as determined in good faith by the board of
directors of the Corporation.
(2) Options and Convertible Securities. The consideration received by
the Corporation for Additional Shares of Common Stock deemed to have been issued
pursuant to Section 3(e)(iv)(C), relating to Options and Convertible Securities,
shall be the total amount, if any, received or receivable by the Corporation as
consideration for the issue of such Options or Convertible Securities, plus the
minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such consideration) payable to the Corporation
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the
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exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities.
(f) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(g) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such holder's Preferred Stock.
(h) Notices of Record Date. In the event that the Corporation
shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of Common
Stock any additional shares of stock of any class or series or other rights;
(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other Corporation,
or sell, lease or convey all or substantially all of its property or business,
or to liquidate, dissolve or wind up;
then, in connection with any such event, the Corporation shall
send to the holders of Preferred Stock:
(A) in the case of the matters referred to in (i) and (ii) above,
at least ten (10) days prior written notice of the date on which a record shall
be taken for such dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
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entitled thereto) or for determining rights to vote in respect of the matters
referred to in (i) or (ii) above; and
(B) in the case of the matters referred to in (iii) and (iv) above, at
least ten (10) days prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event) or for determining rights to vote
in respect of the maters referred to in (iii) or (iv) above.
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Preferred
Stock at the address for each such holder as shown on the books and records of
the Corporation.
Section 4. Voting.
(a) General. Except as otherwise required by law, each holder of Common
Stock shall have one vote for each share of Common Stock so held, and each
holder of Preferred Stock shall be entitled to the number of votes equal to the
number of shares of Common Stock into which the shares of Preferred Stock so
held could be converted at the record date for determination of the stockholders
entitled to vote, or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited. Except as
required by law or as otherwise set forth herein, all shares of all series of
Preferred Stock and all shares of Common Stock shall vote together as a single
class. Fractional votes by the holders of Preferred Stock shall not, however,
be permitted, and any fractional voting rights shall (after aggregating all
shares into which shares of Preferred Stock held by each holder could be
converted) be rounded to the nearest whole number.
(b) Approval by Preferred Stock. The Corporation shall not, without first
obtaining the approval of the holders of not less than a majority of the total
number of shares of the Series A Preferred Stock then outstanding voting on an
as-converted to Common Stock basis:
(i) increase the number of authorized shares of Series A
Preferred Stock;
(ii) amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation or Bylaws if such action would
adversely affect the rights, preferences, privileges, or restrictions of the
Series A Preferred Stock;
(iii) authorize, create or issue shares of any class or series of
stock having any preference or priority superior to or on a parity with any such
preference or priority of the Series A Preferred Stock;
(iv) engage in any transaction that would be deemed to be a
liquidation event pursuant to Section 2(d);
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(v) amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation or Bylaws which has the effect of
increasing the authorized number of directors of this Corporation; or
(vi) amend this Section 4(b).
Section 5. Preemptive Rights.
(a) Each holder of Preferred Stock shall have the right to purchase
its Pro Rata Share of New Securities (as defined in this Section 5) which the
Corporation may, from time to time, propose to sell and issue. A holder's "Pro
Rata Share" is the ratio that (i) the number of shares of Common Stock issuable
upon conversion of Preferred Stock held by such holder immediately prior to
such sale of New Securities bears to (ii) the sum of the total number of shares
of Common Stock then outstanding and the number of shares of Common Stock
issuable upon exercise of then outstanding Options, upon conversion of then
outstanding Convertible Securities, or upon conversion of Convertible Securities
following exercise of then outstanding Options therefor.
(b) Except as set forth below, "New Securities" shall mean any shares of
capital stock, or rights to acquire shares of capital stock, including options
and securities convertible into capital stock of the Corporation other than (i)
the authorized Series A Preferred Stock and Common Stock underlying such
authorized Series A Preferred Stock, (ii) securities offered to the public
generally pursuant to a registration statement or pursuant to Regulation A under
the Securities Act of 1933, as amended, (iii) securities issued pursuant to the
acquisition of another Corporation by merger, purchase of all or substantially
all of its assets, or other similar reorganization or combination, (iv) shares
of the Corporation's capital stock or related options, warrants or other rights
to purchase such capital stock issued to employees, consultants, directors,
equipment lessors or banks or similar institutional credit financing sources
pursuant to plans or arrangements approved by the board of directors, (v)
capital stock issued pursuant to any rights or agreements, including without
limitation convertible securities, options and warrants, provided that the
preemptive rights established by this Section 5 apply with respect to the
initial sale or grant by the Corporation of such rights or agreements, (vi)
stock issued in connection with any stock split, stock dividend or
recapitalization by the Corporation, or (vii) capital stock issued pursuant to
any transactions involving technology licensing, research and development
activities, distribution or manufacture of the Corporation's products, or any
transactions involving corporate partners.
(c) In the event the Corporation proposes to undertake an issuance of New
Securities, it shall give each holder of Preferred Stock written notice of its
intention, describing the amount and type of New Securities, and the price and
terms upon which the Corporation proposes to issue the same. Each holder of
Preferred Stock shall have twenty (20) days from the date of receipt of any such
notice to agree to purchase up to its respective Pro Rata Share of such New
Securities for the price and upon the terms specified in the notice by giving
written notice to the Corporation and stating therein the quantity of New
Securities to be purchased.
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(d) The Corporation shall have ninety (90) days after such twenty (20) day
period to sell the New Securities not elected to be purchased by holders of
Preferred Stock at a price and upon terms no more favorable to the purchasers of
such securities than specified in the Corporation's notice. In the event the
Corporation has not sold the New Securities within said ninety (90) day period,
the Corporation shall not thereafter issue or sell any New Securities, without
first offering such securities to the holders of Preferred Stock in the manner
provided above.
(e) Notwithstanding the foregoing, the preemptive rights set forth herein
shall not prevent the Corporation from offering and selling New Securities at
any time; provided that, if the Corporation has not given notice to holders of
Preferred Stock prior to the issuance of New Securities as provided in Section
5(c), then the Corporation shall give notice to the holders of Preferred Stock
within fifteen (15) days after the issuance of New Securities. Such notice
shall describe the amount, type, price and terms of the New Securities. Each
holder of Preferred Stock shall have twenty (20) days from the date of receipt
of such notice to elect to purchase its Pro Rata Share of New Securities. The
closing of any such sale shall occur within thirty (30) days of the date of
notice to the holders of Preferred Stock.
(f) The Preemptive Rights described above shall expire upon the successful
completion of an underwritten offering pursuant to a registration statement
filed in accordance with the Securities Act of 1933, as amended.
Section 6. Consent to Distributions.
Each holder of Preferred Stock shall be deemed to have consented, for
purposes of Sections 502, 503 and 506 of the California Corporations Code and
Sections 1 and 2 of this Article Four, to distributions made by the Corporation
in connection with the repurchase of shares of Common Stock from employees,
officers, directors or consultants of the Corporation in connection with the
termination of their employment or services pursuant to agreements or
arrangements approved by the board of directors of the Corporation.
Section 7. Waiver of Rights, Preferences or Privileges.
Any right, preference or privilege of the Preferred Stock may be waived by a
majority of the outstanding shares of Preferred Stock voting on an as-converted
to Common Stock basis, and such waiver shall be binding on all holders of
Preferred Stock.
FIVE. The Corporation is to have perpetual existence.
SIX. In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the Corporation.
SEVEN. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
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EIGHT. Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws of the Corporation may provide. The books of the
Corporation may be kept outside of the State of Delaware at such place or places
as may be designated from time to time by the board of directors of the
Corporation or in the Bylaws of the Corporation.
NINE. (a) Limitation of Director's Liability. To the fullest extent
permitted by the General Corporation Law of Delaware as the same exists or as
may hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
(b) Indemnification of Corporate Agents. The Corporation shall
indemnify to the fullest extent permitted by law any person made or threatened
to be made a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he, his testator or
intestate is or was a director, officer or employee of the Corporation or any
predecessor of the Corporation or serves or served at any other enterprise as a
director, officer or employee at the request of the Corporation or any
predecessor to the Corporation.
(c) Repeal or Modification. Neither any amendment or repeal of this
Article Nine, nor the adoption of any provision of this Corporation's
Certificate of Incorporation inconsistent with this Article Nine, shall
eliminate or reduce the effect of this Article Nine, in respect of any matter
occurring, or any action or proceeding accruing or arising or that, but for this
Article Nine, would accrue or arise, prior to such amendment, repeal or adoption
of an inconsistent provision."
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We further declare under penalty of perjury under the laws of the State of
Delaware that the matters set forth in this certificate are true, correct and of
our own knowledge.
Executed at Milpitas, California, on March 11, 1998.
/s/ Thomas A. Surran
______________________
Thomas A. Surran
Secretary
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EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
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HEADWAY TECHNOLOGIES, INC.
--------------------------
(A Delaware Corporation)
<PAGE>
TABLE OF CONTENTS
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ARTICLE I - CORPORATE OFFICES............................................................................. 1
1.1 REGISTERED OFFICE....................................................................... 1
1.2 OTHER OFFICES........................................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS..................................................................... 1
2.1 PLACE OF MEETINGS....................................................................... 1
2.2 ANNUAL MEETING.......................................................................... 1
2.3 SPECIAL MEETING......................................................................... 3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS........................................................ 3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............................................ 4
2.6 QUORUM.................................................................................. 4
2.7 ADJOURNED MEETING; NOTICE............................................................... 5
2.8 CONDUCT OF BUSINESS..................................................................... 5
2.9 VOTING.................................................................................. 5
2.10 WAIVER OF NOTICE........................................................................ 5
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................. 6
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS............................. 6
2.13 PROXIES................................................................................. 7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE................................................... 7
ARTICLE III - DIRECTORS................................................................................... 7
3.1 POWERS.................................................................................. 7
3.2 NUMBER OF DIRECTORS..................................................................... 8
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS................................. 8
3.4 RESIGNATION AND VACANCIES............................................................... 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................................................ 9
3.6 REGULAR MEETINGS........................................................................ 9
3.7 SPECIAL MEETINGS; NOTICE................................................................ 9
3.8 QUORUM.................................................................................. 10
3.9 WAIVER OF NOTICE........................................................................ 10
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING....................................... 10
3.11 FEES AND COMPENSATION OF DIRECTORS...................................................... 11
3.12 APPROVAL OF LOANS TO OFFICERS........................................................... 11
3.13 REMOVAL OF DIRECTORS.................................................................... 11
3.14 CLASSES OF DIRECTORS.................................................................... 11
ARTICLE IV - COMMITTEES.................................................................................. 12
</TABLE>
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TABLE OF CONTENTS
(continued)
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4.1 COMMITTEES OF DIRECTORS................................................................. 12
4.2 COMMITTEE MINUTES....................................................................... 13
4.3 MEETINGS AND ACTION OF COMMITTEES....................................................... 13
ARTICLE V - OFFICERS...................................................................................... 13
5.1 OFFICERS................................................................................ 13
5.2 APPOINTMENT OF OFFICERS................................................................. 13
5.3 SUBORDINATE OFFICERS.................................................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS..................................................... 14
5.5 VACANCIES IN OFFICES.................................................................... 14
5.6 CHAIRMAN OF THE BOARD................................................................... 14
5.7 PRESIDENT............................................................................... 14
5.8 VICE PRESIDENTS......................................................................... 15
5.9 SECRETARY............................................................................... 15
5.10 CHIEF FINANCIAL OFFICER................................................................. 15
5.11 ASSISTANT SECRETARY..................................................................... 16
5.12 ASSISTANT TREASURER..................................................................... 16
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.......................................... 16
5.14 AUTHORITY AND DUTIES OF OFFICERS........................................................ 16
ARTICLE VI - INDEMNITY.................................................................................... 17
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS............................................... 17
6.2 INDEMNIFICATION OF OTHERS............................................................... 17
6.3 INSURANCE............................................................................... 17
ARTICLE VII - RECORDS AND REPORTS......................................................................... 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS................................................... 18
7.2 INSPECTION BY DIRECTORS................................................................. 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................................................ 19
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII - GENERAL MATTERS............................................................................ 19
8.1 CHECKS.................................................................................. 19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS........................................ 19
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.................................................. 19
8.4 SPECIAL DESIGNATION ON CERTIFICATES..................................................... 20
8.5 LOST CERTIFICATES....................................................................... 20
8.6 CONSTRUCTION; DEFINITIONS............................................................... 20
8.7 DIVIDENDS............................................................................... 21
8.8 FISCAL YEAR............................................................................. 21
8.9 SEAL.................................................................................... 21
8.10 TRANSFER OF STOCK....................................................................... 21
8.11 STOCK TRANSFER AGREEMENTS............................................................... 21
8.12 REGISTERED STOCKHOLDERS................................................................. 21
ARTICLE IX - AMENDMENTS................................................................................... 22
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED BY-LAWS
----------------------------
OF
--
HEADWAY TECHNOLOGIES, INC.
--------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The Board of Directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the Board of Directors. At the meeting,
directors shall be elected and any other proper business may be transacted.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a
<PAGE>
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, such stockholder's notice must
be delivered to or mailed and received by the Secretary of the corporation not
less than ninety (90) days prior to the meeting; provided, however, that in the
event that less than one-hundred (100) days notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information that is required to
be provided by the stockholder pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in such stockholder's
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or reelection as a Director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as a nominee and
to serving as a Director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b) of
this
-2-
<PAGE>
Section 2.2. At the request of the Board of Directors, any person nominated by a
stockholder for election as a Director shall furnish to the Secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the Chairman of the Board or the President of the
Corporation. No other person or persons are permitted to call a special
meeting. No business may be conducted at a special meeting other than the
business specified by the Board of Directors as specified in its notice of
calling of the meeting delivered to the Corporation as provided below by
Sections 2.4 and 2.5, the Chairman of the Board, or the President.
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board, the President, Chief
Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting except for such business as may properly be
brought before the stockholders and that is specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing, or affecting the
time when a meeting of stockholders called by action of the Board of Directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
Except as set forth in Section 2.3, all notices of meetings of stockholders
shall be in writing and sent or otherwise given in accordance with Section 2.5
of these bylaws not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date, and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those matters
which the Board of Directors, at the time of giving the notice, intends to
present for action by the stockholders (but any proper matter may be presented
at the meeting for such action). The notice of any meeting at which directors
are to be elected shall include
-3-
<PAGE>
the name of any nominee or nominees who, at the time of the notice, the board
intends to present for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by facsimile, telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a stockholder at the address of that stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the stockholder on written
demand of the stockholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the Secretary, Assistant Secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute, by the certificate of incorporation or
by the Stockholders Agreement. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the Chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
-4-
<PAGE>
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these by-laws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these by-laws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these by-
laws, a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these by-laws.
-5-
<PAGE>
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
-6-
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the Secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these by-laws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
-7-
<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors which constitute the whole Board of Directors shall
be fixed exclusively by one or more resolutions adopted from time to time by the
Board of Directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these by-laws, the certificate of
incorporation or the Stockholders Agreement, directors shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
Directors need not be stockholders unless so required by the certificate of
incorporation or these by-laws, wherein other qualifications for directors may
be prescribed. Each director, including a director elected to fill a vacancy,
shall hold office until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation . Subject to the provisions of the
Stockholders Agreement and the certificate of incorporation, when one or more
directors so resigns and the resignation is effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this section in the filling
of other vacancies.
Unless otherwise provided in the certificate of incorporation, these by-
laws or the Stockholders Agreement:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
-8-
<PAGE>
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these by-laws, or may
apply to the Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The Board of Directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the Board of Directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the Board of Directors for any purpose or purposes may
be called at any time by the Chairman of the Board, the President, any Vice
President, the Secretary or any one director.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall
-9-
<PAGE>
be delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
3.8 QUORUM
------
At all meetings of the Board of Directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these by-
laws, a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
-10-
<PAGE>
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
by-laws, the Board of Directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, and except as otherwise provided by
the certificate of incorporation, these by-laws or the Stockholders Agreement,
any director or the entire Board of Directors may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote at an
election of directors; provided, however, that, so long as stockholders of the
corporation are entitled to cumulative voting, if less than the entire board is
to be removed, no director may be removed without cause if the votes cast
against his or her removal would be sufficient to elect such director if then
cumulatively voted at an election of the entire Board of Directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
3.14 CLASSES OF DIRECTORS
--------------------
Following the closing of the corporation's initial public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "1933 Act"), covering the offer and sale of Common Stock of the
corporation (the "Initial Public Offering"), the Directors, other than the
Series A Director (as defined in the Corporation's Certificate of
Incorporation), shall be divided into three classes designated as Class I, Class
II and Class III, respectively. Such Directors shall be assigned to each class
in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the closing of
the Initial Public Offering, the term of office of the Class I Directors shall
expire and Class I Directors shall be elected for a full term of three years.
At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II Directors shall
expire and Class II Directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the
-11-
<PAGE>
Class III Directors shall expire and Class III Directors shall be elected a full
term of three years. At each succeeding annual meeting of stockholders, such
Directors shall be elected for a full term of three years to succeed the
Directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The Board of Directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors or in the by-laws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the by-laws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
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<PAGE>
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these by-laws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those by-laws as are necessary to substitute the
committee and its members for the Board of Directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the Board of Directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the Board of Directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these by-
laws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the Board of Directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these by-laws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these by-laws, shall
be appointed by the Board of Directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The Board of Directors may appoint, or empower the Chief Executive Officer
of the corporation to appoint, such other officers and agents as the business of
the corporation may require,
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<PAGE>
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these by-laws or as the Board of Directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the Board of Directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The Chairman of the Board, if such an officer be elected and unless
otherwise designated by the Board of Directors, shall, if present, preside at
meetings of the Board of Directors. In addition, such officer shall exercise
and perform such other powers and duties as may from time to time be assigned to
him by the Board of Directors or as may be prescribed by these by-laws. If so
designated by the Board of Directors, then the Chairman of the Board shall also
be the Chief Executive Officer of the corporation and shall have the powers and
duties prescribed in Section 5.7 of these by-laws.
5.7 PRESIDENT
---------
Subject to such powers and duties, if any, as may be given by the Board of
Directors to the Chairman of the Board or any vice chairman, if there be such an
officer, the President shall be the Chief Executive Officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction, and control of the business and the officers of the
corporation. The President shall preside at all meetings of the stockholders
and, in the absence or nonexistence of a Chairman of the Board or if otherwise
designated by the Board of Directors, at all meetings of the Board of Directors.
The President shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Directors or these by-
laws.
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<PAGE>
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the Chairman of the Board, any vice
chairman and the President, the Vice Presidents, if any, in order of their rank
as fixed by the Board of Directors or, if not ranked, a vice president
designated by the board of directors, shall perform all the duties of the
president and when so acting shall have all the powers of, and be subject to all
the restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board of Directors, these by-laws, the President or the
Chairman of the Board.
5.9 SECRETARY
---------
The Secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required to be given by law or by
these by-laws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these by-laws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. The Chief Financial Officer shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the Chief Executive Officer and directors, whenever they request it,
an account of all his or her transactions as Chief Financial Officer and of the
financial condition of
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the corporation, and shall have other powers and perform such other duties as
may be prescribed by the Board of Directors or these by-laws.
The Chief Financial Officer shall be the Treasurer of the corporation
unless otherwise designated by the Board of Directors.
5.11 ASSISTANT SECRETARY
-------------------
The Assistant Secretary, or, if there is more than one, the Assistant
Secretaries in the order determined by the stockholders or Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the Secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the Board of Directors or these by-laws.
5.12 ASSISTANT TREASURER
-------------------
The Assistant Treasurer, or, if there is more than one, the Assistant
Treasurers, in the order determined by the stockholders or Board of Directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the Chief Financial Officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the Chief Financial Officer and shall perform such other duties and have such
other powers as may be prescribed by the Board of Directors or these by-laws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or Assistant Secretary of this corporation, or
any other person authorized by the Board of Directors or the President or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
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<PAGE>
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation that was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorney's fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
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<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive officer or at such
place or places as designated by the Board of Directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these by-laws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
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<PAGE>
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The Board of Directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The Board of Directors, except as otherwise provided in these by-laws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the Chairman or Vice-Chairman of
the Board of Directors, or the President or Vice-President, and by the Chief
Financial Officer or an assistant treasurer, or the Secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if the person were such
officer, transfer agent or registrar at the date of issue.
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<PAGE>
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these by-laws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
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8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and
which may be altered by the Board of Directors, and may use the same by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on
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<PAGE>
the part of another person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
----------
Subject to any voting requirements set forth in the corporation's
certificate of incorporation, the by-laws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote; provided, however,
that the corporation may, in its certificate of incorporation, confer the power
to adopt, amend or repeal by-laws upon the directors. The fact that such power
has been so conferred upon the directors shall not divest the stockholders of
the power, nor limit their power to adopt, amend or repeal by-laws.
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<PAGE>
CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BY-LAWS
OF
HEADWAY TECHNOLOGIES, INC.
Certificate by Secretary of Adoption
------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Assistant Secretary of Headway Technologies, Inc. and that the
foregoing Amended and Restated By-Laws, comprising 26 pages, were ratified as
the By-Laws of the corporation by the unanimous written consent of the Board of
Directors effective as of May __, 1998.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Adoption of Amended and Restated By-laws on May __, 1998.
By:___________________________
Kurt J. Berney
Assistant Secretary
<PAGE>
EXHIBIT 4.2
HEADWAY HOLDINGS, INC.
REGISTRATION AND INFORMATION RIGHTS AGREEMENT
This Registration and Information Rights Agreement (the "Agreement") is
made effective as of February 4, 1997, by and among: Headway Holdings, Inc., a
Delaware corporation (the "Company"); and the purchasers (the "Purchasers") of
Series A Preferred Stock of the Company as set forth on Exhibit A hereto.
---------
RECITALS
--------
A. Further to the Series A Preferred Stock Purchase Agreement (the
"Purchase Agreement") entered into on February 4, 1997 between the Company and
the Purchasers, the Company and the Purchasers have agreed upon the execution
and delivery of this Agreement by the Company and the Purchasers as a condition
to the closing of the Purchase Agreement.
B. The Company wishes to grant the Purchasers the rights, and subject
the Purchasers to the obligations provided for herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, all parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission or any other
----------
Federal agency at the time administering the Securities Act.
"Conversion Stock" means the Common Stock issued or issuable pursuant
----------------
to conversion of the Preferred Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar Federal rule or statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Holder" means any Purchaser holding Registrable Securities, or any
------
person holding Registrable Securities to whom the rights under this Agreement
have been transferred in accordance with Section 5.10 hereof.
<PAGE>
"Initiating Holders" means any Holder or Holders who, in the
------------------
aggregate, hold not less than the required percentage of the Registrable
Securities then outstanding (the "Required Percentage"). The Required
Percentage shall be (i) 30% for the purposes of Section 5.1 or (ii) 20% for the
purposes of Section 5.3 hereof.
"Preferred Stock" shall mean the Series A Preferred Stock.
---------------
"Registrable Securities" means (i) the Conversion Stock and (ii) any
----------------------
Common Stock of the Company issued or issuable in respect of any of the
foregoing upon any conversion, stock split, stock dividend, recapitalization, or
similar event; provided, however, that securities shall only be treated as
-------- -------
Registrable Securities if and so long as (x) they have not been registered or
sold to or through a broker or dealer or underwriter in a public distribution or
a public securities transaction and (y) the registration rights with respect to
such securities have not terminated pursuant to Section 5.11.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by the Company in complying with Sections 5.1, 5.2 and
5.3 hereof, including without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legends set forth in Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar Federal rule or statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for any Holder.
2. Restrictions on Transferability. The Preferred Stock, the
-------------------------------
Conversion Stock, and any other securities issued in respect of such stock upon
any stock split, stock dividend, recapitalization, merger, or similar event,
shall not be sold, assigned, transferred or pledged except upon the conditions
specified in this Agreement, which conditions are intended to ensure compliance
with the provisions of the Securities Act. Each Holder or transferee will cause
any proposed purchaser, assignee, transferee, or pledgee of any such shares held
by the Holder or transferee to
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<PAGE>
agree to take and hold such securities subject to the restrictions and upon the
conditions specified in this Agreement, including without limitation the
restrictions set forth in Section 8.
3. Restrictive Legend. Each certificate representing the Preferred Stock,
------------------
the Conversion Stock or any other securities issued in respect of such stock
upon any stock split, stock dividend, recapitalization, merger, or similar
event, shall (unless otherwise permitted by the provisions of Section 4 below)
be stamped or otherwise imprinted with a legend in substantially the following
form (in addition to any legends required by agreement or by applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. SUCH SHARES GENERALLY MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
SAID ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCKUP PERIOD
OF 180-DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT OF THE
COMPANY FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AS SET FORTH IN
AN AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
LOCKUP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.
Each Holder consents to the Company making a notation on its records
and giving instructions to any transfer agent of its capital stock in order to
implement the restrictions on transfer established in this Agreement.
4. Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Without in any way limiting the
immediately preceding sentence, no sale, assignment, transfer or pledge of
Restricted Securities shall be made by any holder thereof to any person unless
such person shall first agree in writing to be bound by the restrictions of this
Agreement including, without limitation, Section 8 and this Section 4. Prior to
any proposed sale, assignment, transfer or pledge of any Restricted Securities,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the holder thereof shall give written notice to
the Company of such holder's intention to effect such transfer, sale, assignment
or pledge. Each such notice shall describe
-3-
<PAGE>
the manner and circumstances of the proposed transfer, sale, assignment or
pledge in sufficient detail, and, if requested by the Company, the holder shall
also provide, at such holder's expense, either (i) a written opinion of legal
counsel who shall be, and whose legal opinion shall be, reasonably satisfactory
to the Company addressed to the Company, to the effect that the proposed
transfer of the Restricted Securities may be effected without registration under
the Securities Act, or (ii) a "no action" letter from the Commission to the
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall be
entitled to transfer such Restricted Securities in accordance with the terms of
the notice delivered by the holder to the Company; provided, however, that the
-------- -------
Company shall not request an opinion of counsel or "no action" letter with
respect to (i) a transfer not involving a change in beneficial ownership, (ii) a
transaction involving the distribution without consideration of Restricted
Securities by the holder to any of its constituent partners or members, or (iii)
a transaction involving the transfer without consideration of Restricted
Securities by an individual holder during such holder's lifetime by way of gift
or on death by will or intestacy. Each certificate evidencing the Restricted
Securities transferred as above provided shall bear, except if such transfer is
made pursuant to Rule 144, the appropriate restrictive legend set forth in
Section 3 above, except that such certificate shall not bear such restrictive
legend if in the opinion of counsel for such holder and counsel for the Company
such legend is not required in order to establish compliance with any provision
of the Securities Act. Notwithstanding the foregoing, each holder of Restricted
Securities agrees that it will not request that a transfer of the Restricted
Securities be made or that the legend set forth in Section 3 be removed from the
certificate representing the Restricted Securities, solely in reliance on Rule
144(k) if as a result thereof, the Company would be rendered subject to the
reporting requirements of the Exchange Act.
5. Registration.
------------
5.1 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company effect any
registration with respect to shares of Registrable Securities, the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration as part of a firm commitment underwritten public
offering with underwriters reasonably acceptable to the Initiating Holders and
the Company (including, without limitation, appropriate qualification under
applicable state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such
-4-
<PAGE>
portion of the Registrable Securities of any Holder or Holders joining in such
request by delivering a written notice to such effect to the Company within 20
days after the date of such written notice from the Company.
Notwithstanding the foregoing, the Company shall not be obligated to take
any action to effect or complete any such registration pursuant to this Section
5.1:
(A) Prior to the earlier of (i) six months
after the effective date of the Company's first registered public offering of
its Stock and (ii) the second anniversary of the date of this Agreement;
(B) Unless the aggregate offering price of
all Registrable Securities sought to be registered by all Holders, net of
underwriting discounts and commissions, would exceed $10,000,000;
(C) During the period starting with the date
sixty (60) days prior to the Company's estimated date of filing of, and ending
on the date six (6) months immediately following the effective date of, any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;
(D) After the Company has effected two
registrations pursuant to this subparagraph 5.1(a), and such registrations has
been declared or ordered effective; or
(E) If the Company shall furnish to the
Initiating Holders a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors it would be seriously
detrimental to the Company or its stockholders for a registration statement to
be filed in the near future. In such case, the Company's obligation to use its
best efforts to register, qualify or comply under this Section 5.1(a) shall be
deferred for a period not to exceed 120 days from the date of receipt of the
written request from the Initiating Holders, provided that the Company may not
exercise this deferral right more than once per twelve month period or twice
during the term of this Agreement.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event of a registration pursuant to
------------
Section 5.1, the Company shall advise the Holders as part of the notice given
pursuant to Section 5.1(a)(i) that the right of any Holder to registration
pursuant to Section 5.1 shall be conditioned upon such Holder's participation in
the underwriting arrangements required by this Section 5.1, and the inclusion of
such
-5-
<PAGE>
Holder's Registrable Securities in the underwriting to the extent requested
shall be limited to the extent provided herein.
The Company shall, together with all Holders proposing to distribute their
securities through such underwriting, enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders, but subject to the Company's
reasonable approval. Notwithstanding any other provision of this Section 5.1, if
the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders requesting to be
included in the registration and underwriting and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Holders requesting to be included in the
registration and underwriting in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by them at the time of filing
the registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares. If any
Holder of Registrable Securities disapproves of the terms of the underwriting,
such person may elect to withdraw therefrom by written notice to the Company.
5.2 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time
----------------------
the Company shall determine to register any of its equity securities, either for
its own account or the account of a Holder or other holders, other than (i) a
registration relating solely to employee benefit plans, (ii) a registration
relating solely to a Rule 145 transaction, or (iii) a registration in which the
only equity security being registered is Common Stock issuable upon conversion
of convertible debt securities which are also being registered, the Company
will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualifications including compliance with Blue Sky laws), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after the date of such written notice from the
Company, by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 5.2(a)(i). In such event, the right of any Holder to
registration pursuant to Section 5.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting shall be limited to the extent provided herein.
-6-
<PAGE>
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other Holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this Section 5.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration (i) in the case of
the Company's initial public offering, to zero, and (ii) in the case of any
other offering, to an amount no less than 25% of all shares to be included in
such offering. The Company shall so advise all Holders requesting to be
included in the registration and underwriting and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all the Holders requesting to be included in the
registration and underwriting in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by them at the time of filing
the registration statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares. If any
Holder disapproves of the terms of any such underwriting, such person may elect
to withdraw therefrom by written notice to the Company.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 5.2
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
5.3 Registration on Form S-3.
------------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company file a registration
statement on Form S-3 (or any successor form to Form S-3) for a public offering
of shares of the Registrable Securities the aggregate price to the public of
which, net of underwriting discounts and commissions, would exceed $1,000,000,
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as such Holder or Holders may reasonably request; provided,
--------
however, that the Company shall not be required to effect more than one
- -------
registration pursuant to this Section 5.3 in any twelve (12) month period. If
such offer is to be an underwritten offer, the underwriters must be acceptable
to both the Initiating Holders and the Company. The Company shall inform the
other Holders of the proposed registration and offer them upon at least 20 days
written notice the opportunity to participate. In the event the registration is
proposed to be part of a firm commitment underwritten public offering, the
substantive provisions of Section 5.1(b) shall be applicable to each such
registration initiated under this Section 5.3.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 5.3:
-7-
<PAGE>
(i) If the Company, within ten (10) days of the receipt
of the request of the Initiating Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission
within ninety (90) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities);
(ii) During the period starting with the date sixty (60)
days prior to the Company's estimated date of filing of, and ending on the date
six (6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
(iii) If the Company shall furnish to the Initiating
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors, it would be seriously
detrimental to the Company or its stockholders for registration statements to be
filed in the near future, then the Company's obligation to use its best efforts
to file a registration statement shall be deferred for a period not to exceed
120 days from the receipt of the request to file such registration by such
Initiating Holder or Holders, provided that the Company may not exercise this
deferral right more than once per twelve month period.
5.4 Limitations on Subsequent Registration Rights. The Company shall
---------------------------------------------
not enter into any agreement granting any holder or prospective holder of any
securities of the Company registration rights superior to or on a pari passu
basis with the rights granted the Holders hereunder without the written consent
of the holders of at least a majority-in-interest of the Registrable Securities.
5.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with (i) two registrations pursuant to Section 5.1, (ii) all
registrations pursuant to Section 5.2, and (iii) two registrations pursuant to
Section 5.3 shall be borne by the Company. Notwithstanding the foregoing, in
the event that Initiating Holders cause the Company to begin a registration
pursuant to Section 5.1 or Section 5.3, and the request for such registration is
subsequently withdrawn by the Initiating Holders or such registration is not
completed due to failure to meet the net proceeds requirement set forth in such
section or is otherwise not successfully completed due to no fault of the
Company, all Holders shall be deemed to have forfeited their right to a
registration under Section 5.1, or a registration at the expense of the Company
under Section 5.3, as applicable, unless the Initiating Holders pay for, or
reimburse the Company for, the Registration Expenses incurred in connection with
such withdrawn or incomplete registration. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders and all
other registration expenses shall be borne by the Holders of such securities pro
rata on the basis of the number of shares so registered or proposed to be so
registered.
-8-
<PAGE>
5.6 Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Agreement, the Company will keep each
Holder advised in writing as to the initiation of such registration and as to
the completion thereof. The Company will:
(a) Prepare and file with the Commission a registration
statement and such amendments and supplements as may be necessary and use its
best efforts to cause such registration statement to become and remain effective
for at least 90 days or until the distribution described in the registration
statement has been completed, whichever first occurs;
(b) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities.
5.7 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration
has been effected pursuant to this Agreement, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act, the
Securities Exchange Act of 1934, as amended, state securities law or any rule or
regulation promulgated under the such laws applicable to the Company in
connection with any such registration, and the Company will reimburse each such
Holder, each of its officers and directors, and each person controlling such
Holder, for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder or controlling person, and stated to be
specifically for use therein; provided, however, that the foregoing indemnity
Agreement is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission made in
a preliminary prospectus on file with the Commission at the time the
registration statement becomes effective or the amended prospectus filed with
the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity
Agreement shall not inure to the benefit of any Holder, if a copy of the Final
Prospectus was not furnished to the person asserting the loss,
-9-
<PAGE>
liability, claim or damage at or prior to the time such action is required by
the Securities Act, and if the Final Prospectus would have cured the defect
giving rise to the loss, liability, claim or damage.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, of the Company's
securities covered by such a registration statement, each person who controls
the Company within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, but in the case of the Company or the
other Holders or their officers, directors or controlling persons, only to the
extent that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with information
furnished to the Company by such Holder. Notwithstanding the foregoing, the
liability of each Holder under this subsection 5.7(b) shall be limited in an
amount equal to the initial public offering price of the shares sold by such
Holder, unless such liability arises out of or is based on willful misconduct by
such Holder.
(c) Each party entitled to indemnification under this Section 5.7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or there are separate
and different defenses. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party (whose
consent shall not be unreasonably withheld), consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
-10-
<PAGE>
5.8 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration
referred to in this Agreement.
5.9 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use all reasonable efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as the Holder may reasonably request in availing itself of any rule
or regulation of the Commission allowing the Holder to sell any such securities
without registration.
5.10 Transfer of Registration Rights. The rights to cause the Company
-------------------------------
to register securities granted Holders under Sections 5.1, 5.2 and 5.3 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by the Holder provided that: (i) such
transfer is otherwise effected in accordance with applicable securities laws and
the terms of this Agreement, (ii) such assignee or transferee acquires at least
1.43% (as adjusted for stock splits, stock dividends, stock combinations and the
like) of Registrable Securities (including Preferred Stock convertible into
Registrable Securities), (iii) written notice is promptly given to the Company,
(iv) the Board of Directors of the Company reasonably determines that such
transferee is not an actual or potential competitor of the Company; and (v) such
transferee agrees to be bound by the provisions of this Agreement.
Notwithstanding the foregoing, the rights to cause the Company to register
securities may be assigned without compliance with item (ii) above to (x) any
constituent partner or member of a Holder which is a partnership or limited
liability company, or
-11-
<PAGE>
an affiliate (as such term is defined in Rule 405 of the Securities Act) of a
Holder which is a corporation or (y) a family member or trust for the benefit of
a Holder who is an individual, or a trust for the benefit of a family member of
such a Holder.
5.11 Termination of Registration Rights. The rights granted pursuant
----------------------------------
to Sections 5.1, 5.2 and 5.3 of this Agreement shall terminate as to any Holder
upon the earlier of (i) the date seven (7) years after the effective date of the
Company's initial public offering and (ii) such time as a public market for the
Company's Common Stock exists and the Holder may sell all Registrable Securities
held by the Holder within two successive three-month periods under Rule 144.
6. Financial Information and Inspection Rights.
-------------------------------------------
(a) The Company will provide the following reports to each
Holder who continues to hold at least 1.43% of the Registrable Securities:
(i) As soon as practicable after the end of the fiscal
year ending December 28, 1997 and each fiscal year thereafter, and in any event
within 120 days after the end of each such fiscal year, consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of such fiscal
year, and consolidated statements of operations and consolidated statements of
cash flows and stockholders' equity of the Company and its subsidiaries, if any,
for such year, prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal year (except that no such comparative data from the fiscal
year ended December 29, 1996 need be provided), all in reasonable detail and
audited by independent public accountants of national standing selected by the
Company, and a capitalization table in reasonable detail for such fiscal year.
(ii) As soon as practicable after the end of the first,
second and third quarterly accounting periods in each fiscal year of the Company
and in any event within 45 days thereafter, a consolidated balance sheet of the
Company and its subsidiaries, if any, as of the end of each such quarterly
period, and consolidated statements of operations and consolidated statements of
cash flows of the Company and its subsidiaries, if any, for such period and for
the current fiscal year to date, prepared in accordance with generally accepted
accounting principles (other than accompanying notes), subject to changes
resulting from year-end audit adjustments, in reasonable detail and signed by
the principal financial or accounting officer of the Company, and a
capitalization table in reasonable detail for such quarterly period; and
(iii) At least 30 days prior to the beginning of each
fiscal year, commencing with the fiscal year beginning December 29, 1997, a
budget as adopted by the Company's Board of Directors for the fiscal year.
(b) The Company will afford to each Holder who continues to hold
at least 1.43% of the Registrable Securities (as adjusted for stock splits,
stock dividends, stock combinations
-12-
<PAGE>
and the like) reasonable access during normal business hours to the Company's
accounting books and records and minutes of proceedings of the stockholders and
the Board of Directors and committees of the Board of Directors, and all
information distributed to the Board of Directors, for a purpose reasonably
related to such Holder's interests as a stockholder of the Company. The Company
shall not be required to disclose details of transactions where to do so would
violate confidentiality obligations of the Company. The Company will afford to
each Holder who continues to hold at least 1.43% of the Registrable Securities
(as adjusted for stock splits, stock dividends, stock combinations and the like)
the right to meet periodically with the Company's executive officers during
normal business hours to discuss and make recommendations regarding the conduct
of the Company's business and affairs.
(c) For purposes of determining the minimum holdings pursuant to
this Section 6, any Holder which is a partnership or limited liability company
shall be deemed to hold any Registrable Securities originally purchased by such
Holder and subsequently distributed to constituent partners or members of such
Holder, but which have not been resold by such partners or members. If the
partnership or limited liability company is still in existence, the Company may
satisfy any obligation to distribute reports to individual partners of the
partnership or members of a limited liability company by delivering a single
copy of each report to the partnership or limited liability company as agent for
the constituent partners or members.
(d) The rights granted pursuant to Section 6 may be assigned to
any transferee in accordance with the provisions of Section 5.10 hereof with
respect to the transfer of Registration Rights.
(e) Each Holder or transferee of rights under this Section 6
acknowledges and agrees that any information obtained pursuant to this Section 6
which may be considered nonpublic information will be maintained in confidence
by such Holder or transferee and will not be utilized by such Holder or
transferee in connection with purchases or sales of the Company's securities
except in compliance with applicable state and Federal securities laws.
(f) The rights of a Holder as set forth in this Section 6 shall
not be subject to amendment under Section 9 hereof or otherwise without the
express consent of the Holder whose rights would be affected by any proposed
amendment of this Section 6.
7. Termination of Covenants. The covenants of the Company set forth
------------------------
above in Section 6 shall terminate and be of no further force or effect upon the
closing of a firm commitment underwritten public offering or at such time as the
Company is required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act, whichever shall occur first.
8. Lockup Agreement. Each Holder and transferee hereby agrees that,
----------------
in connection with the first registration of the offering of any securities of
the Company under the Securities Act for the account of the Company, if so
requested by the Company or any representative of the underwriters (the
"Managing Underwriter"), such Holder or transferee shall not sell or otherwise
-13-
<PAGE>
transfer any securities of the Company during the period specified by the
Company's Board of Directors at the request of the Managing Underwriter, with
such period not to exceed 180 days, (the "Market Standoff Period") following the
effective date of a registration statement of the Company filed under the
Securities Act. The Company may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such Market
Standoff Period. The Company shall use its reasonable best efforts to place
similar contractual lockup restrictions on all capital stock issued now or
hereafter to officers, directors, employees and consultants of the Company, and
holders of registration rights with respect to capital stock of the Company,
unless determined otherwise by the Company's Board of Directors.
Notwithstanding the foregoing, the provisions of this Section 8 shall not apply
to a registration relating solely to employee benefit plans on Form S-1 or Form
S-8 or similar forms which may be promulgated in the future, or a registration
relating solely to a transaction within Rule 145 of the Securities Act on Form
S-4 or similar form which may be promulgated in the future.
9. Amendment. Except as otherwise provided above, any provision of this
---------
Agreement may be amended or the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority-in-interest of the Registrable Securities then outstanding, provided,
--------
however, that such amendment or waiver is designed only to, and does effect all-
- -------
of the holders of the Registrable Securities equally. Any amendment or waiver
effected in accordance with Section 5.4 or Section 9, as applicable, shall be
binding upon each Purchaser or Holder of Registrable Securities at the time
outstanding, each future holder of any of such securities, and the Company.
10. Governing Law. This Agreement shall be governed in all respects by the
-------------
internal laws of the State of Delaware without regard to conflict of laws
provisions.
11. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and Agreement among the parties regarding the matters set forth
herein. Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon the successors, assigns,
heirs, executors and administrators of the parties hereto.
12. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by facsimile
transmission, by hand or by messenger, addressed:
(a) if to a Holder, at such Holder's address as set forth in Exhibit
-------
A, or at such other address as such Holder shall have furnished to the Company.
- -
-14-
<PAGE>
(b) if to the Company, to:
Headway Holdings, Inc.
100 South Milpitas Boulevard
Milpitas, CA 95035
Fax: (408) 934-5353
Attn: Chief Executive Officer
or at such other address as the Company shall have furnished to the Holders.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally or by facsimile transmission, or, if sent by mail, at the
earlier of its receipt or 72 hours after the same has been deposited in a
regularly maintained receptacle for the deposit of mail, addressed and mailed as
aforesaid.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date written below.
Headway Holdings, Inc. HanTech Venture Capital Corporation
a Delaware corporation
By: _____________________________ By: ________________________________
Name:____________________________ Name: ______________________________
Title: __________________________ Title: _____________________________
Date: ___________________________ Date: ______________________________
Asia Pacific Growth Fund II, L.P. Maxtor Corporation
By: _____________________________
its General Partner
By: _____________________________ By: ________________________________
Name:____________________________ Name: ______________________________
Title: __________________________ Title: _____________________________
Date: ___________________________ Date: ______________________________
China Dynamic Growth Fund L.P. U.S. Venture Partners V, L.P.
By: ______________________________ By: ________________________________
its General Partner its General Partner
By: _____________________________ By: ________________________________
Name:____________________________ Name: ______________________________
Title: __________________________ Title: _____________________________
Date: ___________________________ Date: ______________________________
<PAGE>
H & Q Philippines Ventures II, Inc. USVP V International, L.P.
By: Presidio Management Group V,
L.L.C.
its General Partner
By: _____________________________ By: ________________________________
Name:____________________________ Name: ______________________________
Title: __________________________ Title: _____________________________
Date: ___________________________ Date: ______________________________
Western Digital (Tuas-Singapore) pte Ltd. 2180 Associates Fund V
By: Presidio Management Group V,
L.L.C.
its General Partner
By: _____________________________ By: ________________________________
Name:____________________________ Name: ______________________________
Title: __________________________ Title: _____________________________
Date: ___________________________ Date: ______________________________
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
(to the Registration and Information Rights Agreement)
Asia Pacific Growth Fund II, L.P.,
China Dynamic Growth Fund L.P.,
HanTech Venture Capital Corporation
H & Q Philippines Ventures II, Inc.
Western Digital (Tuas-Singapore) pte Ltd.
U.S. Venture Partners V, L.P.
USVP V International, L.P.
2180 Associates Fund V
Maxtor Corporation
<PAGE>
Exhibit 10.1
PATENT LICENSE AGREEMENT
THIS PATENT LICENSE AGREEMENT (Patent License Agreement" or "Agreement"),
dated ,as of February 1, 1995, between Headway Technologies, Inc., a California
corporation (hereinafter called "HEADWAY"), and Seagate Technology, Inc., a
Delaware corporation (hereinafter called "SEAGATE").
Each of the parties has the right (as GRANTOR herein) to grant licenses to
the other party (as GRANTEE herein) under certain patents and desires to acquire
a non-exclusive license under such patents of the other party.
Each of the parties expects to continue research and development which will
produce further patents and each party may require a non-exclusive license under
such patents of the other party.
In consideration of the promises and mutual covenants herein contained,
HEADWAY and SEAGATE agree as follows:
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
promises set forth herein and for other good and valuable consideration, receipt
of which is thereby acknowledged, HEADWAY and SEAGATE agree as follows:
1. Definitions
For purposes of this Patent License Agreement, the following
terms and all other terms defined in this Patent License Agreement shall have
the meanings so defined unless the context clearly indicates otherwise, a term
defined in the singular shall include the plural and vice versa when the context
so indicates.
1.1. "Magnetic Head" shall mean any instrumentality or aggregate of
instrumentalities primarily designed to magnetically read. write and
erase information from magnetic recording discs.
1.2. "Suspension Assembly" shall mean any instrumentality or aggregate of
instrumentalities primarily designed to attach a Magnetic Head to a
support or positioning device, which instrumentality may comprise a
load beam section, means at one end of such section to attach it to a
Magnetic Head (which may include electrical connections to the head
and lead wires), and means at the other end to attach it to a support
or positioning device.
1.3. "Manufacturing Apparatus" shall mean any instrumentality or aggregate
of instrumentalities primarily designed for use in the fabrication of
Magnetic Heads or Suspension Assemblies.
<PAGE>
1.4. "Licensed Patents" shall mean all patents, including utility models,
design patents and registrations for type fonts (but not including any
other design patents or registrations), issued or issuing on patent
applications entitled to an effective filing date prior to the fifth
anniversary of the date first above written, under which patents or
the applications therefor GRANTOR or ;any of its Subsidiaries now has,
or hereafter obtains, the right to grant licenses to GRANTEE of or
within the scope granted herein without such grant or the exercise of
rights thereunder resulting in the payment of royalties or other
consideration by GRANTOR or its Subsidiaries to third parties (except
lot payments between GRANTOR and Subsidiaries of GRANTOR. and payments
to third parties for inventions made by said third parties while
employed by GRANTOR or any of its Subsidiaries), as well as any
continuations, continuations-in-part and divisions based on such
patents. The term "Licensed Patents" shall also include said patent
applications and any patent reissuing on any of the aforesaid patents.
In the case of HEADWAY, the term "Licensed Patents" shall not include
the "Excluded HEADWAY Patents/Patent Applications" which shall mean
the HEADWAY patents and patent applications listed in Schedule 1.5. In
the case of Seagate the term "Licensed Patents" shall not include the
"Excluded Seagate Patent/Patent Applications" which shall mean the
Seagate patent and patent applications listed in Schedule 1.4.
1.5. "Licensed Product" shall mean a Magnetic Head or a Suspension
Assembly, including, without limitation, any component or subassembly.
1.6. "Subsidiary" shall mean a corporation, company or other entity:
1.6.1. more than fifty percent (50%) of whose outstanding shares
or securities (representing the right to vote for the election of
directors or other managing authority) are, now or hereafter,
owned or controlled, directly or indirectly, by a party hereto,
but such corporation, company or other entity shall be deemed to
be a Subsidiary only so long as such ownership or control exists;
or
1.6.2. which does not have outstanding shares or securities, as
may be the case in a partnership, joint venture or unincorporated
association, but more than fifty percent (50%) of whose ownership
interest representing the right to make the decisions for such
corporation, company or other entity is, now or hereafter, owned
or controlled, directly or indirectly, by a party hereto, but
such corporation, company or other entity shall be deemed to be a
Subsidiary only so long as such ownership or control exists.
2
<PAGE>
1.7. "Licensed Combination" shall mean and be limited solely to a
combination resulting from incorporation of a Licensed Product with
other components into a larger assembly wherein the larger assembly is
covered by a claim in a Licensed Patent and the sale of the Licensed
Product for use in that larger assembly would constitute contributory
infringement of such claim as defined in 35 U.S.C. (S) 271(c) without
regard to the clause reading "knowing the same to be especially made
or especially adapted for use in an infringement of such patent," and,
further, wherein such larger assembly, or any such other component, is
not separately covered by any Other Claim in any patent of a licensing
party.
1.8. "Other Claim" shall mean any claim in other than a Licensed Patent of
a party, or any claim which covers a larger assembly or any component
of a larger assembly into which a Licensed Product is or may be
incorporated or for which the sale of such Licensed Product for
incorporation into such larger assembly would not constitute
contributory infringement as defined in 35 U.S.C. (S) 271(c) without
regard to the clause reading "knowing the same to be especially made
or especially adapted for use in an infringement of such patent."
3
<PAGE>
2. Licenses And Immunities
2.1. Subject to the provisions of Section 2.7, HEADWAY on behalf of itself
and its Subsidiaries grants to SEAGATE a worldwide, fully paid-up,
non- exclusive, non-transferable, irrevocable, royalty-free license in
all countries of the world under HEADWAY's Licensed Patents:
2.1.1. to import, make, have made, use, lease, sell, offer to
sell and otherwise transfer Licensed Products and Licensed
Combinations and to practice any method or process involved in
the manufacture or use thereof; and
2.1.2. to import, make. have made, use, offer to sell and have
used Manufacturing Apparatus and to practice and have practiced
any method or process involved in the manufacture or use thereof.
2.2. In the event that neither HEADWAY nor any of its Subsidiaries has the
right to grant a license under any particular HEADWAY Licensed Patent
of the scope set forth above in this Section 2, then the license
granted herein under said HEADWAY Licensed Patent shall be of the
broadest scope which HEADWAY or any of its Subsidiaries has the right
to grant within the scope set forth above.
2.3. Subject to the provisions of Section 2.7, SEAGATE on behalf of itself
and its Subsidiaries grants to HEADWAY a worldwide, fully paid-up,
non- exclusive, non-transferable, irrevocable, royalty-free license in
all countries of the world under SEAGATE's Licensed Patents:
2.3.1. to import, make, have made, use, lease, sell, offer to
sell and otherwise transfer Licensed Products and Licensed
Combinations and to practice any method or process involved in
the manufacture of use thereof; and
2.3.2. to import, make, have made, use, offer to and have used
Manufacturing Apparatus and to practice and have practiced any
method or process involved in the manufacture or use thereof.
2.4. In the event that neither SEAGATE nor any of its Subsidiaries has the
right to grant a license under any particular SEAGATE Licensed Patent
of the scope set forth above in this Section 2, then the license
granted herein under said SEAGATE Licensed Patent shall be of the
broadest scope which SEAGATE or any of its Subsidiaries has the right
to grant within the scope set forth above.
2.5. SEAGATE on behalf of itself and its Subsidiaries, hereby grants to the
users of Licensed Products manufactured, leased, sold or otherwise
transferred by HEADWAY or its sublicensed Subsidiaries within the
scope of the licenses granted to HEADWAY under this Agreement, an
immunity from suit under SEAGATE Licensed Patents for the use, sale,
offer to sell, import or transfer of such Licensed Products or
Licensed Combinations, and with respect to such claims of Licensed
Patents for which the sale of such Licensed Product or Licensed
Combination would constitute contributory infringement as defined in
35 U.S.C. (S) 27l(c) without regard to the clause reading "knowing the
same to be especially made or especially adapted for use in an
infringement of such patent;" provided, however, that such immunity
-------- -------
shall not extend to the combination of Licensed Products or Licensed
Combinations with other apparatus which is not supplied by HEADWAY or
its sublicensed Subsidiary.
4
<PAGE>
2.6. HEADWAY hereby grants to the users of Licensed Products manufactured,
leased, sold or otherwise transferred by SEAGATE or its sublicensed
Subsidiaries within the scope of the licenses granted to SEAGATE under
this Agreement, an immunity from suit under HEADWAY Licensed Patents
for the use, sale or transfer of such Licensed Products or Licensed
Combinations, and with respect to such claims of Licensed Patents for
which the sale of such Licensed Product or Licensed Combination would
constitute contributory infringement as defined in 35 U.S.C. (S)
271(c) without regard to the clause reading "knowing the same to be
especially made or especially adapted for use in an infringement of
such patent;" provided, however, that such immunity shall not extend
-------- -------
to the combination of Licensed Products or Licensed Combinations with
other apparatus which is not supplied by SEAGATE or its sublicensed
Subsidiary.
2.7. Each party hereto, on behalf of itself and its Subsidiaries, covenants
not to sue for direct infringement customers of the other party who
purchase Licensed Products or Licensed Combinations from such other
party solely because of such customer's incorporation of Licensed
Products or Licensed Combinations into combinations under
circumstances wherein the sale of such Licensed Product or Licensed
Combination for use in such combination would constitute contributory
infringement of a Licensed Patent as defined in 35 U.S.C. (S) 271(c)
without regard to the clause reading "knowing the same to be
especially made or especially adapted for use in an infringement of
such patent." Except as above provided in this Section 2.7, no license
or immunity is granted by either party hereto with respect to the
combination of Licensed Products with any other components, devices or
assemblies that may be covered by Other Claims.
3. Extension Of License To Subsidiaries
3.1. The licenses granted herein shall include the right of the parties
hereto to sublicense their respective Subsidiaries and the right of
such sublicensed Subsidiaries to sublicense other Subsidiaries. Each
sublicensed Subsidiary shall be bound by the terms and conditions of
this Agreement as if it were named herein in the place of the party
with whom the sublicense originated. If a Subsidiary ceases to be a
Subsidiary and holds any patents or patent applications under which a
party hereto is licensed, such licenses will continue for the life of
such patents or patent applications. Any sublicense granted to a
Subsidiary shall terminate on the date such Subsidiary ceases to be a
Subsidiary.
3.2. In the event a sublicensed Subsidiary of one party hereto is an
Operating Subsidiary (as hereinafter defined) at the time it ceases to
be a Subsidiary, and, with the written approval of said one party,
requests in writing, within one hundred and eighty (180) days after
ceasing to be a Subsidiary, a license agreement with the other party
hereto upon terms and conditions substantially identical with the
terms and conditions of this Agreement (except as hereinafter
provided) the other party hereto agrees that it will enter into such
license agreement forthwith. An Operating Subsidiary shall be any
Subsidiary of one party hereto which at the time it ceases to be a
Subsidiary has all of the following:
3.2.1. a line of marketable products;
3.2.2. patents or other intellectual property relating to the
line of marketable products;
5
<PAGE>
3.2.3. tangible assets at least equivalent in value to the
lesser of twenty-five million U.S. dollars ($25,000,000) or
twenty percent (20%) of the total assets of the party of which it
was formerly a Subsidiary; and
3.2.4. at the time of entry into such license agreement, it is
not a corporation, company or other entity who has either of the
following owned or controlled by a third party:
3.2.4.1 more than fifty percent (50%) of its outstanding
shares or securities (representing the right to vote for the
election of directors or other managing authority); or
3.2.4.2 which does not have outstanding shares or
securities, as may be the case in a partnership, joint
venture or unincorporated association, but more than fifty
percent (50%) of its ownership interest representing the
right to make the decisions for such corporation, company or
other entity.
3.3. Any such agreement with an Operating Subsidiary shall differ from this
Agreement in the following respects:
3.3.1. this Section shall be omitted;
3.3.2. the name of the Operating Subsidiary shall be substituted
for the name of the party hereto of which it was formerly a
Subsidiary; and
3.3.3. in the event that such Operating Subsidiary is or
becomes organized under the laws of a country different from that
of the party hereto of which it was formerly a Subsidiary, the
parties shall negotiate in good faith an appropriate adaptation
of such license agreement to accord with customary local law and
practice.
4. Release
4.1 Each party, on behalf of itself and its Subsidiaries that are
Subsidiaries on the date hereof, hereby irrevocably releases the other
party, its Subsidiaries that are Subsidiaries on the date hereof, and
their respective customers, mediate and immediate from any and all
claims of infringement of any of the Licensed Patents, which claims
have been made or which might be made at any time, with respect to any
apparatus which includes any product manufactured, used, leased, sold
or otherwise transferred by or for the other party or its Subsidiaries
before the date hereof, and with respect to any method practiced in
the manufacture or use of such apparatus, to the extent that such
apparatus or method would have been licensed or the subject of any
immunity hereunder had it been manufactured, used, leased, sold or
otherwise transferred or practiced after the date hereof.
5. Other License Rights
5.1. It is recognized that the parties hereto or their respective
Subsidiaries may now have or hereafter obtain, the right to grant
licenses under one or more patents of any country, including utility
models, design patents and registrations for type fonts (but not
including any other design patents or registrations), issuing on
patent applications entitled to an effective filing date prior to the
fifth anniversary of the Closing Date, but that such grant or the
exercise of
6
<PAGE>
rights thereunder will result in payment of royalties or other
consideration by GRANTOR or its Subsidiaries to third parties. Each
party (as GRANTOR herein) agrees that, upon written request, it will
grant to the other party to the extent and subject to the terms and
conditions under which it then has the right to do so, a license of
the broadest scope which GRANTOR has the right to grant at any time,
but of no greater scope than the scope of the licenses granted herein
with respect to, any such patent or patent application. Such license
shall be granted under a separate agreement, upon payment of the same
royalty or other consideration as that which GRANTOR or any of its
Subsidiaries is obligated to pay to a third party because of the grant
of such license or the exercise of rights thereunder.
5.2. Upon written request by a party, the other party will inform the
requesting party of those patents or patent applications coming within
the scope of Section 5.1 at the time of such request.
6. Term Of Agreement
6.1. The term of this Agreement shall be from the date hereof until the
expiration of the last to expire of the Licensed Patents.
6.2. In the event that more than fifty percent (50%) of the outstanding
shares or securities (representing the right to vote for the election
of directors or other managing authority) of one party hereto
hereafter become owned or controlled, directly or indirectly, by a
third party prior to fifth anniversary of the Closing Date, said one
party shall promptly give notice of such acquisition to the other
party. If said one party does not have outstanding shares or
securities, such acquisition shall be deemed to occur if more than
fifty percent (50%) of its ownership interest representing the right
to make decisions for said party is acquired by said third party. All
rights granted hereunder to said one party together with any
sublicenses theretofore granted by said one party shall terminate on a
termination date one hundred and eighty (180) days after the date of
such acquisition.
In the event of such acquisition.
6.2.1. all licenses and immunities granted herein to said
other party under any patents issuing on patent applications
having an effective filing date subsequent to said
termination date and under said patent applications shall
terminate; and
6.2.2. said one party shall be entitled, upon request made
within one hundred and eighty (180) days after the date of
such acquisition to a nontransferable, non-exclusive,
royalty-free license under said other party's Licensed
Patents (including the right to sublicense its Subsidiaries)
to make, use, lease, offer to sell and otherwise transfer
only products identical with those manufactured and marketed
by said one party within the licenses granted in this
Agreement prior to such acquisition.
7. Warranty
7
<PAGE>
7.1. Each party represents and warrants that it has the full right and
power to grant the license and immunities set forth in Section 2 and
that there are no outstanding agreements, assignments or encumbrances
inconsistent with the provisions of said Section or with any other
provision of this Agreement. Each party (as a GRANTOR) further
represents and warrants that prior to the execution of this Agreement
it has set forth on the Schedules hereto informed the other party of
any patent originating from inventions made by employees of GRANTOR or
its Subsidiaries, which patent is now owned by GRANTOR or its
Subsidiaries and which patent, owing to prior arrangements with third
parties, does not, or will not, qualify as a Licensed Patent, under
which licenses are granted of the full scope set forth in Section 2.
Neither party makes any other representations or warranties, express
or implied, nor does either party assume any liability in respect of
any infringement of patents or other rights of third parties owing to
the other party's operation under the license-herein granted.
8
<PAGE>
8. Communications
8.1. Any payment, notice or other communication required or permitted to be
made or given to either party hereto pursuant to this Agreement shall
be sent to such party by certified mail, postage prepaid, addressed to
it at its address set forth below, or to such other address as it
shall designate by written notice given to the other party, and shall
be deemed to have been made or given on the date of mailing. The
addresses are as follows:
8.1.1. For HEADWAY,
Tracy Scott
VP Engineering
Headway Technologies, Inc.
497 S. Hillview Drive
Milpitas, CA 95035
8.1.2. For SEAGATE,
Patent Counsel
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, CA 95066
9. Assignments
9.1. Neither party shall grant an exclusive license with respect to, or
assign, any of its patents, or the applications therefor, which
qualify as Licensed Patents, or any of its patents or the applications
therefor or rights which are subject to the other party's rights
pursuant to Section 5, unless such assignment is made subject to the
terms and conditions of this Agreement. Subject to the provisions of
Section 3, neither party shall assign any of its rights or privileges
hereunder without the prior written consent of the other party. Any
attempted assignment in derogation of the foregoing shall be void.
10. Know-How And Trade Secrets
10.1. No license or other right is granted herein to either party,
directly or by implication, estoppel or otherwise, with respect to any
trade secrets or know-how, and no such license or other right shall
arise from the consummation of this Agreement or from any acts,
statements or dealings leading to such consummation. Except as
specifically provided herein, neither party is required hereunder to
furnish or disclose to the other any technical or other information.
9
<PAGE>
11. Applicable Law
11.1. This Agreement shall be construed, and the legal relations between
the parties hereto shall be determined, in accordance with the law of
the United States and the State of California.
12. Miscellaneous
12.1. Nothing contained in this Agreement shall be construed as a
warranty or representation by either party as to the validity or scope
of any of its Licensed Patents and either party is free to contest in
any proceeding said validity or scope.
12.2. Nothing contained in this Agreement shall be construed as
conferring any right to use in advertising, publicity, or other
promotional activities any name, trade name, trademark, or other
designation of either party hereto (including any contraction,
abbreviation or simulation of any of the foregoing); and each party
hereto agrees not to use or refer to this Agreement or any provision
thereof in any promotional activity associated with apparatus licensed
hereunder, without the express written approval of the other party.
12.3. Nothing contained in this Agreement shall be construed as
conferring on either party any license or other right to copy the
exterior design of the products of the other party.
12.4. Nothing contained in this Agreement shall be construed as
conferring any rights by implication, estoppel or otherwise, to or
under copyrights or mask work or similar rights under any form of
statutory protection now existing or hereafter enacted, in any country
or countries, wherein the copying is a requisite of infringement under
such form of protection.
12.5. Nothing contained in this Agreement shall be construed as limiting
the rights which the parties have outside the scope of the licenses
granted hereunder, or restricting the right of either party or any of
its Subsidiaries to make, have made, use, lease, sell or otherwise
dispose of any particular product or products not herein licensed.
12.6. Each party shall, upon request from the other party sufficiently
identifying any patent or patent application, inform the other party
as to the extent to which said patent or patent application is subject
to the licenses and rights granted hereunder. If such licenses or
rights under said patent or patent application are restricted in
scope, copies of all pertinent provisions of any contract or other
arrangement creating such restrictions shall, upon request, be
furnished to the party making such request, unless such disclosure is
prevented by such contract, and in that event a statement of the
nature of such restriction will be provided.
12.7. Neither of the parties hereto, nor any of their respective
Subsidiaries shall be required hereunder to file any patent
application, or to secure any patent or patent rights, or to maintain
10
<PAGE>
any patent in force, or to provide copies of patent applications to
the other party or its Subsidiaries, or to disclose any inventions
described or claimed in such patent applications.
12.8. Neither party shall have any obligation hereunder to institute any
action or suit against third parties for infringement of any of its
Licensed Patents or to defend any action or suit brought by a third
party which challenges or concerns the validity of any of its Licensed
Patents. In addition, neither party shall have any right to institute
any action or suit against third parties for infringement of any of
the other party's Licensed Patents. If, however, either party becomes
aware of any infringement or threatened infringement of any Licensed
Patent of the other party, such party shall promptly notify the other
party."
12.9. It is recognized that one party hereto may have granted to a third
party licensing rights with respect to a patent or a patent
application which would otherwise qualify as a Licensed Patent under
this Agreement, such rights being subject to payment to the granting
party of royalties or other consideration in respect of licenses
extended by such third party to another. In any such event, the one
party shall promptly repay or cause to be repaid to the other party
hereto any royalties or other monetary consideration which the
granting party receives or is entitled to receive from such third
party as a result of such third party's extension to the other party
of a license under the affected patent or patent application of or
within the scope of the license granted under Section 2 of this
Agreement.
12.10. Licensed Products leased, sold or otherwise transferred by a party
hereto or its sublicensed Subsidiary shall be considered to be
licensed under any Licensed Patent which at any time covers such
Licensed Products, notwithstanding that the Licensed Product has been
re-leased, re-sold or re-transferred by any entity in the same or
another country.
12.11. Each party shall pay all taxes (including, without limitation,
sales and value added taxes, but excluding income tax) imposed by the
national government, including any political subdivision thereof, or
any country in which said party is doing business, as the result of
said party's furnishing consideration hereunder. In the event such a
tax becomes payable as a result of a party's furnishing consideration
in respect of a sublicense granted to any of its Subsidiaries pursuant
to Section 3.1, said sublicensing party shall be responsible for
determining the amount of and paying, or causing said sublicensed
Subsidiary to pay, said tax.
12.12. This Agreement will not be binding upon the parties until it has
been signed hereinbelow by or on behalf of each party, in which event
it shall be effective as of the date first above written. No amendment
or modification hereof shall be valid or binding upon the parties
unless made in writing and signed as aforesaid. This Agreement
embodies the entire understanding of the parties with respect to the
subject matter hereof and merges all prior discussions between them,
and neither of the parties shall be bound by any conditions,
definitions, warranties, understandings or representations with
respect to the subject matter hereof other than as expressly provided
herein.
12.13. If any provision or provisions of this Agreement are found by
competent authority to be invalid, illegal or unenforceable in any
respect for any reason, the validity, legality and enforceability of
any such provision or provisions in every other respect and the
remainder of this Agreement shall continue in effect so long as the
Agreement still expresses the intent of
11
<PAGE>
the parties. If the intent of the parties cannot be preserved, this
Agreement shall be either renegotiated or terminated.
12.14. The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
12.15 It is agreed by the parties that in any action between parties
brought for the enforcement or interpretation of this Agreement, the
prevailing party will be entitled to collect reasonable expert witness
and attorneys' fees, and court costs from the other party, in addition
to any other relief to which it may be entitled."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed as of the date first above written.
Headway Technologies, Inc.
Witness: By: /s/ Ralph Patterson
-------------------------------
Ralph Patterson
President and CEO
/s/ Elaine W. Leach
- -----------------------
SEAGATE TECHNOLOGY, INC.
Witness: By: /s/ Alan F. Shugart
------------------------------
Alan Shugart
President, CEO and COO
/s/ Shellie Bailey
- -----------------------
12
<PAGE>
EXHIBIT 10.2
SEAGATE
CROSS LICENSE AND
KNOW-HOW TRANSFER AGREEMENT
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
RECITALS.................................................................1
ARTICLE 1. DEFINITIONS...................................................1
-----------
ARTICLE 2. DESIGN CROSS LICENSE..........................................1
--------------------
2.1 Design Cross License......................................1
--------------------
2.2 Term......................................................1
----
2.3 Scope.....................................................2
-----
ARTICLE 3. TECHNOLOGY LICENSE AND TRANSFER...............................2
-------------------------------
3.1 Technology License and Transfer...........................2
-------------------------------
3.2 Term......................................................2
----
ARTICLE 4. TRANSFER SCHEDULE.............................................3
-----------------
4.1 Transfer to Seagate.......................................3
-------------------
4.2 Schedule and Form.........................................3
-----------------
ARTICLE 5. TRAINING AND TECHNICAL ASSISTANCE.............................3
---------------------------------
5.1 Training..................................................3
--------
5.2 Technical Assistance......................................4
--------------------
ARTICLE 6. CAPITAL EQUIPMENT.............................................5
-----------------
ARTICLE 7. MATERIALS.....................................................5
---------
ARTICLE 8. CONSIDERATION.................................................5
-------------
8.1 Prepaid Royalty...........................................5
---------------
8.2 Ongoing Royalties.........................................5
-----------------
8.3 Maximum Royalties.........................................5
-----------------
8.4 Royalty Recovery..........................................6
----------------
8.5 Royalty Restrictions......................................6
--------------------
ARTICLE 9. TRANSPORTATION AND ASSOCIATED DOCUMENTS.......................6
---------------------------------------
ARTICLE 10. PAYMENT TERMS................................................6
-------------
10.1 Prepaid Royalty Payment Schedule..........................6
--------------------------------
10.2 Prepaid Royalty Payment Conditions........................7
----------------------------------
10.3 Ongoing Royalties.........................................7
-----------------
ARTICLE 11. TAXES........................................................8
-----
ARTICLE 12. EXPORT RESTRICTIONS..........................................8
-------------------
ARTICLE 13. PROPRIETARY INFORMATION NON-DISCLOSURE.......................8
--------------------------------------
13.1 General...................................................8
-------
13.2 Exceptions................................................8
----------
ARTICLE 14. INTELLECTUAL PROPERTY INDEMNIFICATION........................9
-------------------------------------
14.1 Headway Defense and Indemnification.......................9
-----------------------------------
14.2 Seagate Defense and Indemnification.......................9
-----------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
14.3 Warranty.................................................. 10
--------
ARTICLE 15. TERMINATION.................................................. 10
-----------
15.1 Termination of Agreement.................................. 10
------------------------
15.2 Survival of Rights and Obligations........................ 10
----------------------------------
15.3 Procedure................................................. 10
---------
ARTICLE 16. FORCE MAJEURE................................................ 10
-------------
ARTICLE 17. GENERAL...................................................... 11
-------
17.1 Entire Agreement.......................................... 11
----------------
17.2 Amendments................................................ 11
----------
17.3 Severability.............................................. 11
------------
17.4 Descriptive Headings...................................... 11
--------------------
17.5 Interpretation............................................ 11
--------------
17.6 Third Party Beneficiary................................... 11
-----------------------
17.7 Independent Contractor.................................... 11
----------------------
17.8 Media Release; Advertising................................ 11
--------------------------
17.9 Assignment................................................ 12
----------
17.10 Expenses.................................................. 12
--------
17.11 Notice.................................................... 12
------
17.12 Governing Law............................................. 12
-------------
17.13 Counterparts.............................................. 13
------------
</TABLE>
ii
<PAGE>
SEAGATE CROSS LICENSE AND KNOW-HOW TRANSFER AGREEMENT
This Seagate Cross License and Know-How Transfer Agreement is made as of
May 19, 1995, by and among Seagate Technology, Inc. of Scotts Valley,
California, U.S.A., a Delaware corporation, including all divisions and
majority-owned affiliated entities (hereinafter jointly and severally referred
to as "Seagate") and Headway Technologies, Inc., a California corporation, on
behalf of itself, (hereinafter referred to as "Headway").
RECITALS
A. Both Seagate and Headway have conducted extensive research, design and
development efforts related to magneto resistive heads used to read, write
or erase information on or from computer disk drive data storage devices.
B. Both Seagate and Headway, subject to the terms hereof, are willing to cross
license certain of their respective technology rights for the purpose of
development and determining the compatibility between Seagate and Headway
of the potential manufacture and distribution of MR Heads utilizing Headway
Dual Stripe MR Technology.
C. In addition, Headway desires to license and transfer Headway Dual Stripe MR
Technology to enable Seagate to make, use and sell DSMR Heads or other
products utilizing Headway Dual Stripe MR Technology.
D. Concurrently with entering into this Agreement, Seagate and Headway will
enter into that certain Patent Cross License Agreement in the form attached
as Exhibit 1.
NOW, THEREFORE, in consideration of the recitals and of the mutual
covenants and agreements set forth herein, Seagate and Headway hereby agree as
follows:
ARTICLE 1. DEFINITIONS
-----------
Unless the context clearly indicates otherwise, all capitalized terms used in
this Agreement shall have the meanings given them in Exhibit 2 attached hereto
and made a part hereof.
ARTICLE 2. DESIGN CROSS LICENSE
--------------------
2.1 Design Cross License. Subject to the terms hereof: (a) Headway hereby
--------------------
grants Seagate a limited non-exclusive, worldwide, fully paid-up right
and license to use its MR Head Design for the purpose of further
development, enhancement, modification and improvement in connection
with making, using or selling MR Heads without right to sublicense,
except as provided in Section 3.3; (b) Seagate hereby grants to
Headway a limited non-exclusive, worldwide, fully paid-up right and
license to use Seagate Design Technology for the purposes of
determining and establishing commonality of dimensions between
Headway's MR Head Design and Seagate's Design Technology to enable
Headway to provide wafers, head gimbal assemblies and/or sliders to
Seagate in connection with Seagate's making, using or selling DSMR
Heads and permitting Headway to make, have made, use and/or sell
products utilizing or embodying Seagate's Design Technology, provided
that Headway may not sublicense Seagate's Design Technology except to
Asahi Komag Co., Ltd. ("AKCL"), provided that AKCL and Seagate have by
then executed a patent cross license agreement, or for the purpose of
having a third party make product for Headway's use or sale.; (c)
Seagate agrees to grant to Headway a worldwide fully paid-up license
to improvements Seagate may make to Headway's MR Head Design, provided
that Seagate will identify those improvements that Headway may not
transfer to third parties, including AKCL, without Seagate's prior
written approval; and (d) Headway agrees to grant Seagate a worldwide,
fully paid-up license to improvements Headway may make to Seagate
Design Technology.
<PAGE>
2.2 Term. Unless terminated earlier pursuant to Article 15 hereunder, the
----
term of the design cross license granted by Section 2.1 shall continue
for five (5) years and may be renewed for an additional period upon
the mutual agreement of the parties. Notwithstanding the foregoing,
the cross license granted by Section 2.1 shall continue to apply to
those products or components produced and thereafter sold embodying or
utilizing the technology so licensed during the life of this Agreement
for as long as such products are in use or are being supported by
Seagate, Headway or their respective successors.
2.3 Scope. The design cross license granted by Section 2.1 shall permit:
-----
(a) Seagate to make, use and/or sell products utilizing or embodying
Headway's MR Head Design as integrated parts of storage devices used
internally by Seagate or Headway, sold to third parties or end users,
sold separately as component parts of third party storage devices, and
as sold as spare parts incidental to previous sales to support
reasonable needs of Seagate, Headway or their respective customers;
and (b) Headway to make, have made, use and/or sell products utilizing
or embodying Seagate's Design Technology; provided that Headway may
not sublicense Seagate's Design Technology except to AKCL , provided
that AKCL and Seagate have by then executed a patent cross license
agreement, or for the purpose of having a third party make product for
Headway's use or sale.
ARTICLE 3. TECHNOLOGY LICENSE AND TRANSFER
-------------------------------
3.1 Technology License and Transfer.
-------------------------------
(a) Pursuant and subject to the terms and conditions hereof, Headway
hereby grants to Seagate a non-exclusive world-wide, transferable
(pursuant to Section 17.9), royalty-bearing right and license
under Headway Dual Stripe MR Technology to make, use, import,
sell and otherwise dispose of products embodying or utilizing
Headway Dual Stripe MR Technology whether or not DSMR Products.
Headway further agrees:
(i) That it has the all rights necessary to transfer and
license the Headway Dual Stripe MR Technology, and that it
will transfer to Seagate all Headway Dual Stripe MR
Technology that is necessary for Seagate to make, have
made (pursuant to Section 3.3), use, import, sell and
otherwise dispose of DSMR Heads and/or DSMR Products;
(ii) That the Headway Dual Stripe MR Technology and other
information that will be supplied to Seagate by Headway
under this Agreement will be equivalent to what Headway
uses for the development, fabrication and/or manufacture
of DSMR Heads and DSMR Products; and
(iii) This license applies to all Headway Dual Stripe MR
Technology as specified in Schedule 1.
(iv) That Headway will negotiate in good faith to license
Seagate the foregoing rights with respect to future
generations of Headway MR Head technology having
capabilities beyond those presently projected for Headway
Dual Stripe MR Technology.
(b) Seagate agrees to grant to Headway a worldwide fully paid-up
license to improvements Seagate may make to Headway's MR Head
process without the right to sublicense, except to AKCL, provided
that Seagate will identify those improvements that Headway may
not transfer to AKCL, without Seagate's prior written approval;
(c) Seagate agrees to grant Headway and AKCL Seagate's proprietary
suspension designs, subject to the prior negotiation of license
fees or other consideration.
2
<PAGE>
3.2 Term. Unless terminated earlier pursuant to Article 15 hereunder, the
----
term of the technology license granted by Section 3.1 shall continue
indefinitely. Notwithstanding any termination, the license granted by
Section 3.1 shall continue to apply to those products or components
produced and thereafter sold embodying or utilizing the technology so
licensed during the life of this Agreement for as long as such
products are in use or are being supported by Seagate or its
successor.
3.3 Sublicense. In the event of the loss or substantial reduction in
----------
Seagate's internal capacity to fabricate thin film wafers resulting
from a sudden occurrence over which Seagate did not have reasonable
control and the expectation that such loss or reduction in capacity
shall continue for such a period of time that Seagate reasonably
believes renders it necessary to arrange for an outside source of such
capacity, Headway hereby agrees to grant Seagate the worldwide right
to sublicense the Headway Dual Stripe MR Technology for the limited
purpose of supplying Seagate and Headway with their respective needs
until such time as Seagate's internal capacity can reasonably be
restored; provided that Headway will have the first right to supply
such required capacity at mutually acceptable terms.
ARTICLE 4. TRANSFER SCHEDULE
-----------------
4.1 Transfer to Seagate. Within thirty (30) days of the execution of this
-------------------
Agreement, Headway will commence the transfer of the Headway Dual
Stripe MR Technology.
4.2 Schedule and Form. Within thirty (30) days following the execution of
-----------------
this Agreement under Section 4.1, Seagate and Headway will jointly
develop and complete a schedule, Schedule 1, which will identify the
Headway Dual Stripe MR Technology by category required to be
transferred by Headway to Seagate to enable Seagate to fabricate
wafers, machine sliders and assemble head gimbal assemblies and all
other activities necessary to completely manufacture DSMR Heads and
DSMR Products. Schedule 1 will also specify the methods to be used for
the transfer of the Headway Dual Stripe MR Technology, will specify
the schedule for complete transfer and will outline the expected
schedule for Training and Technical Assistance.
(a) The transfer of Headway Dual Stripe MR Technology identified in
Schedule 1 shall be completed within sixty (60) days after
establishing the schedule of such transfer.
(b) One (1) copy of Headway Dual Stripe MR Technology identified in
Schedule 1 will be supplied to Seagate. It shall be in clear,
legible and reproducible form.
(c) In addition, Seagate may request during the first six (6) months
following the request under Section 4.1 in writing, any other
Information not specified in Schedule 1, which is agreed to be
relevant by Headway and Seagate to the Headway Dual Stripe MR
Technology and Headway shall transfer such Information no later
than thirty (30) days after such request.
(d) The Headway Dual Stripe MR Technology supplied by Headway
pursuant to this Agreement shall be in accordance with Headway's
then standards of measurement and format.
(e) All Headway Dual Stripe MR Technology that is required to be
supplied by Headway pursuant to this Agreement shall be that
which, when requested by Seagate is in the possession of and
under the control of Headway and must be transferred by Headway
even if such transfer requires the payment of fees or royalties
to third parties by Headway.
ARTICLE 5. TRAINING AND TECHNICAL ASSISTANCE
---------------------------------
Headway will make available Training and Technical Assistance as may be
reasonably necessary to enable Seagate to manufacture DSMR Heads.
3
<PAGE>
5.1 Training. Training will be provided at Headway's designated facility
--------
as follows:
(a) Headway undertakes to permit Seagate's qualified employees, at
Seagate's request, necessary access to Headway's facility, at
dates and times to be mutually agreed upon, to receive
instructions, information, Training and any other type of
explanation appropriate to the manufacture of DSMR Head and DSMR
Products.
Such permission includes access to all Headway Dual Stripe MR
Technology only. Headway will provide copies of Headway Dual
Stripe MR Technology upon request of Seagate's employees.
Seagate's employees may take notes and upon prior written notice
may take photographs concerning the manufacturing process,
provided said access by Seagate's employees would not be
disruptive to Headway's manufacture or assembly of DSMR Head and
DSMR Products or to the production facility. All such photographs
and notes shall be deemed to be and treated as Information.
(b) To request Training, Seagate shall send a written request to
Headway, specifying the number of instruction man weeks requested
including the number of Seagate's employees, training area and a
schedule of not less than one (1) week before the request is
effective taking into account equipment availability and the
like. Headway shall commence providing such Training within ten
(10) days from the effective date of such request. The scope and
schedule of such Training will be as defined in Schedule 1.
(c) All data and Information supplied by Headway during Training
shall consist of Information in use by Headway for purposes of
training Headway's own employees in connection with the
fabrication and manufacture of DSMR Head and DSMR Products.
(d) Seagate employees, while receiving Training from Headway, shall
be subject to all internal rules and regulations of Headway as
may be necessary to prevent interference with the normal
operation and administration of Headway's facility. Seagate shall
assign one person with the responsibility of overseeing Seagate's
employees according to Headway's directions.
(e) Seagate shall, at its expense, be responsible for all business
travel expenses incurred by its employees while they are at
Headway's site receiving Training.
5.2 Technical Assistance. Technical Assistance shall be provided at
--------------------
Seagate's manufacturing facility as follows:
(a) Headway's employees, while rendering Technical Assistance to
Seagate, shall be subject to all internal rules and regulations
of Seagate as may be necessary to prevent interfere with the
normal operation and administration of Seagate's facilities, and
Headway's employees shall be accompanied by a Seagate
representative at all times. It is understood that such rules and
regulations will not prevent or hinder the performance by Headway
of its obligations under this Agreement.
(b) Seagate will, at no cost to Headway, provide Headway's employees
rendering Technical Assistance with office accommodations equal
or similar to those made available to Seagate's employees
performing similar activities. Such accommodation will include
adequate office space, furniture, communications, facilities,
secretarial and clerical assistance and such other items as may
be required to enable Headway's employees to perform their
services.
(c) To request Technical Assistance, Seagate shall send a written
request to Headway specifying the number of man weeks requested,
by technical area, and a schedule of not less than one (1) week
before such request is effective, taking into account equipment
availability and the like. The scope and schedule of such
Technical Assistance shall be as defined in Schedule 1. In no
event shall Technical Assistance be provided in increments of
less than one (1) man weeks. Headway shall commence rendering
such Technical Assistance within ten (10) days from the effective
date of such request. Seagate may cancel in advance any scheduled
period of Technical Assistance by providing Headway with written
notice five (5) days in advance of the commencement of such
Technical Assistance.
(d) Headway's employees rendering Technical Assistance will, in
general, observe Seagate's normal work schedule for the location
to which they are assigned, but in no case shall such employees
be required to work in excess of eight (8) hours per day, or in
excess of forty (40) hours per work week.
(e) Headway shall, at its expense, be responsible for all business
travel expenses incurred by its employees while they are at
Seagate's site and rendering Technical Assistance.
ARTICLE 6. CAPITAL EQUIPMENT
-----------------
A schedule of all necessary capital equipment to enable Seagate to
produce/process DSMR wafers will be provided by Headway, which will require
that Information concerning Equipment will be delivered to Seagate within
fifteen (15) days of the execution of this Agreement. The initial schedule of
equipment, tooling and test equipment shall be included in Exhibit 4 to this
Agreement for the DSMR wafer process functions. For those items produced by or
for Headway, either a copy of any necessary information required to produce the
item will be provided, or authorization to use Headway's vendor will be given.
ARTICLE 7. MATERIALS
---------
Seagate will be provided with a list of all materials critical to the
manufacture of the DSMR Heads and DSMR Products and the name and address of each
supplier on Exhibit 5 hereto, and Information with respect thereto will be
delivered to Seagate with the process documentation identified in Schedule 1.
ARTICLE 8. CONSIDERATION
-------------
In consideration for the license and transfer of Headway Dual Stripe MR
Technology and rendering of Technical Assistance and Training under this
Agreement, Seagate will pay Headway as follows:
8.1 Prepaid Royalty. Seagate agrees to pay Headway with a prepaid royalty
---------------
payment of up to [*] Dollars ($[*]) conditioned upon Headway's meeting
the performance criteria identified in Section 10.1. This payment
shall be considered a prepaid royalty, subject to recovery by Seagate
as a credit against future royal payments as provided in Section 8.4
below.
8.2 Ongoing Royalties. Seagate agrees to pay ongoing royalties for
-----------------
products actually sold by Seagate utilizing or embodying Headway Dual
Stripe MR Technology as follows:
(a) For each DSMR Head shipped from Seagate head manufacturing or its
sublicensees in accordance with Section 3.3 to Seagate drive
manufacturing for incorporation into a Seagate disk drive,
Seagate will pay a royalty of [*] ($[*]) per Head for the first
[*] ([*]) DSMR Heads and [*] ($[*]) per DSMR Head shipped
thereafter.
(b) For each DSMR Head actually sold by Seagate to third party
original equipment manufacturers (including the Hewlett-Packard
Company) and not incorporated into a Seagate disk drive, Seagate
will pay a royalty of [*] ($[*]) per DSMR Head sold for the first
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
4
<PAGE>
like. The scope and schedule of such Technical Assistance shall
be as defined in Schedule 1. In no event shall Technical
Assistance be provided in increments of less than one (1) man
weeks. Headway shall commence rendering such Technical Assistance
within ten (10) days from the effective date of such request.
Seagate may cancel in advance any scheduled period of Technical
Assistance by providing Headway with written notice five (5) days
in advance of the commencement of such Technical Assistance.
(d) Headway's employees rendering Technical Assistance will, in
general, observe Seagate's normal work schedule for the location
to which they are assigned, but in no case shall such employees
be required to work in excess of eight (8) hours per day, or in
excess of forty (40) hours per work week.
(e) Headway shall, at its expense, be responsible for all business
travel expenses incurred by its employees while they are at
Seagate's site and rendering Technical Assistance.
ARTICLE 6. CAPITAL EQUIPMENT
-----------------
A schedule of all necessary capital equipment to enable Seagate to
produce/process DSMR wafers will be provided by Headway, which will require that
Information concerning Equipment will be delivered to Seagate within fifteen
(15) days of the execution of this Agreement. The initial schedule of
equipment, tooling and test equipment shall be included in Exhibit 4 to this
Agreement for the DSMR wafer process functions. For those items produced by or
for Headway, either a copy of any necessary information required to produce the
item will be provided, or authorization to use Headway's vendor will be given.
ARTICLE 7. MATERIALS
---------
Seagate will be provided with a list of all materials critical to the
manufacture of the DSMR Heads and DSMR Products and the name and address of each
supplier on Exhibit 5 hereto, and Information with respect thereto will be
delivered to Seagate with the process documentation identified in Schedule 1.
ARTICLE 8. CONSIDERATION
-------------
In consideration for the license and transfer of Headway Dual Stripe MR
Technology and rendering of Technical Assistance and Training under this
Agreement, Seagate will pay Headway as follows:
8.1 Prepaid Royalty. Seagate agrees to pay Headway with a prepaid royalty
---------------
payment of up to [*] Dollars ([*]) conditioned upon Headway's meeting
the performance criteria identified in Section 10.1. This payment
shall be considered a prepaid royalty, subject to recovery by Seagate
as a credit against future royalty payments as provided in Section 8.4
below.
8.2 Ongoing Royalties. Seagate agrees to pay ongoing royalties for
-----------------
products actually sold by Seagate utilizing or embodying Headway Dual
Stripe MR Technology as follows:
(a) For each DSMR Head shipped from Seagate head manufacturing or its
sublicensees in accordance with Section 3.3 to Seagate drive
manufacturing for incorporation into a Seagate disk drive,
Seagate will pay a royalty of [*] ([*]) per Head for the first
[*] ([*]) DSMR Heads and Fifteen Cents ([*]) per DSMR Head
shipped thereafter.
(b) For each DSMR Head actually sold by Seagate to third party
original equipment manufacturers (including the Hewlett-Packard
Company) and not incorporated into a Seagate disk drive, Seagate
will pay a royalty of [*] ([*]) per DSMR Head sold for the first
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
5
<PAGE>
[*] ([*]) DSMR Heads and [*] ($[*]) per DSMR Head sold
thereafter.
8.3 Maximum Royalties. Notwithstanding anything else herein, Seagate will
-----------------
not be obligated to pay more than the following amounts for the sale
of DSMR Heads of the type identified which amounts will not be reduced
by royalty recovery provisions provided by Section 8.4 below:
(a) [*] Dollars ($[*]) for Generation 1 DSMR Heads having the
capacity of up to 900 megabits per square inch;
(b) [*] Dollars ($[*]) for Generation 2 DSMR Heads having the
capacity of between 900 and 1,500 megabits per square inch; and
(c) [*] Dollars ($[*]) for Generation 3 DSMR Heads having a capacity
of between 1,500 to 2,000 megabits per square inch.
The license granted by Section 3.1 shall be considered fully paid-up
upon payment of the foregoing amounts with respect to the specific
category of DSMR Heads noted.
8.4 Royalty Recovery. Seagate shall be entitled to retain as an offset
----------------
and credit against ongoing royalties [*] percent ([*]%) of all
royalty payments owed to Headway at the time such payments are due to
the extent necessary and until the entire advance royalty payments
actually made by Seagate of up to [*] ($[*]) has been recovered by
Seagate.
8.5 Royalty Restrictions. No royalty will be payable by Seagate to
--------------------
Headway in the event and to the extent Seagate utilizes or embodies
Headway Dual Stripe MR Technology in products that do not constitute
DSMR Products or with respect to DSMR Heads sold or used by Seagate
that are produced from Headway supplied wafers, sliders or head gimbal
assemblies.
ARTICLE 9. TRANSPORTATION AND ASSOCIATED DOCUMENTS
---------------------------------------
Headway will make and be responsible for all charges and arrangements for the
transfer of the technology associated with this license. Any tangible property
such as wafers, chips, DSMR Heads, gimbal assemblies and the like will be
transferred under terms specified by separate purchase orders in each occasion.
ARTICLE 10. PAYMENT TERMS
-------------
10.1 Prepaid Royalty Payment Schedule. Seagate agrees to make prepaid
--------------------------------
non-refundable (except as provided by Sections 8.4 and 10.2(a))
royalty payments according and subject to the schedule set forth
below. All dates are approximate, provided, however, that the payments
are specifically conditioned upon Headway's satisfaction of the
milestone or waiver by Seagate.
<TABLE>
<CAPTION>
Date Payment Milestone
---- ------- ---------
<S> <C> <C>
1) 5/95 $[*] Execution of this Agreement
and commencement of events
outlined in Article 4.
2) 7/95 $[*] Headway to complete delivery
to Seagate of all relevant
Headway Dual Stripe MR
Technology identified as
Generation 1 in Schedule 1.
3) 8/95 $[*] Headway to deliver to
Seagate a sufficient
quantity of 1.2 gigabits per
square inch DSMR Heads to
enable
</TABLE>
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
6
<PAGE>
<TABLE>
<S> <C> <C>
Seagate to test in prototype
drives. DSMR Heads shall meet
mutually defined
specifications and
performance criteria
including agreement on media,
channel type/code, etc.
4) 11/95 $[*] Seagate to conduct prototype
drive evaluation with 1.2
gigabits per square inch DSMR
Heads. Evaluation to be
conducted/measured per the
conditions identified in
milestone number 3) above.
5) 7/96 $[*] Headway to deliver to Seagate
a sufficient quantity of 1.8
gigabits per square inch DSMR
Heads. DSMR Heads shall meet
mutually defined
specifications and
performance criteria
including agreement on media,
channel type/code, etc.
6) 10/96 $[*] Seagate to conduct prototype
drive evaluation with 1.8
gigabits per square inch DSMR
Heads. Evaluation to be
conducted/measured per the
conditions identified in
milestone number 5) above.
</TABLE>
10.2 Prepaid Royalty Payment Conditions. The following conditions apply
----------------------------------
to prepaid royalty payments:
(a) If Headway fails to deliver item 2) within three months of the
identified due date as defined in Schedule 1, the payment
identified in item 1) shall be refunded to Seagate within one
week of such failure.
(b) If Headway fails to deliver items 3) or 5) within three (3)
months of the identified due date, Seagate shall have the
option to continue or terminate this Agreement without further
obligation for payment of fixed-fee amounts. Seagate shall have
continued access to Headway Dual Stripe MR Technology delivered
as of that date, and ongoing royalty payment obligations shall
continue.
(c) Seagate's failure to evaluate 1.2 gigabits per square inch and
1.8 gigabits per square inch DSMR Heads within three (3) months
of receipt of such DSMR Heads that meet the mutually agreed
performance and test criteria will not relieve Seagate from the
obligation to make payments called for by items 4) or 6) above.
(d) Both parties agree to use their best efforts to define
performance, test and acceptance criteria that will include but
not be limited to:
-Electrical/magnetic parametrics
-Mechanical/tribological properties
-Environmental issues
-Reliability criteria.
(e) Seagate shall be relieved from any further obligation to make
prepaid royalty payments upon the occurrence of the following:
(i) Headway's failure to continue active business operations;
and
(ii) Transfer of a majority (greater than 50%) interest in
Headway or the sale of assets or a transaction that
constitutes the functional equivalent of the transfer of
the
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
7
<PAGE>
business engaged in the manufacture of the DSMR Products
to a third party engaged in the development, manufacture
or sale of computer disk drive data storage devices or the
development, manufacture or sale of inductive or magneto
resistive Head components; provided the majority ownership
of Headway by Hewlett-Packard Company and an underwritten
public offering of Headway capital stock is specifically
permitted hereby.
10.3 Ongoing Royalties. Ongoing Royalties shall accrue upon sale or
-----------------
internal shipment but shall not be due and payable until thirty (30)
days after the end of the calendar quarter in which the sale or
internal shipment occurs. Within thirty (30) calendar days after the
end of each quarter, including the quarter following the termination
of the Agreement, Seagate shall transmit to Headway a written
report, with supporting documents, indicating the total amount of
remuneration owing Headway for such quarter according to Section
8.2, together with any payment due.
10.4 Audit Rights. Seagate agrees to keep accurate books and records of
------------
all DSMR Heads internally shipped or sold. Headway shall have the
right to have a qualified independent third party such as a
certified public accounting firm inspect and audit such books and
records during Seagate's normal business hours, upon at least five
(5) days prior written notice once per year. If Headway's
independent agent should conduct an audit, and such audit shows that
any of Seagate's statements previously submitted to Headway contain
an error which results in a payment to Headway that was in error by
5% or more of the actual amount due Headway, the expense of the
audit by Headway shall be borne by Seagate; otherwise Headway shall
bear the expense of the audit.
ARTICLE 11. TAXES
-----
Headway shall be responsible for and shall pay all taxes, duties, assessments
and governmental charges, however designated, associated with the performance by
Headway of its obligations hereunder or the payment of any amounts by Seagate
pursuant to this Agreement, which are now or hereafter imposed under or by any
governmental authority or agency.
ARTICLE 12. EXPORT RESTRICTIONS
-------------------
Seagate and Headway agree that they and their affiliates will not dispose of any
U.S. originated equipment, software, products, services, reports, know-how or
technical data furnished to them pursuant to or as a result of this Agreement
which is subject to destination control under the export control regulations of
the United States now or hereafter in effect, unless prior approval is obtained
from the appropriate agency or department of the United States Government.
ARTICLE 13. PROPRIETARY INFORMATION NON-DISCLOSURE
--------------------------------------
13.1 General. Headway and Seagate agree to keep in confidence and not
-------
disclose to others during the term of and for a period of three (3)
years after the termination of this Agreement all knowledge,
information and data furnished to it by the other party hereto and
claimed by the other party hereto to be proprietary (including
notes, videos, photographs and the like regardless of tangible
medium) provided that such proprietary information is either in
writing or if not in writing, identified in writing and such
information is marked or identified to indicate the claims of
ownership. Headway and Seagate agree that neither shall use or
reproduce for use in any way any proprietary information of the
other except in furtherance of the relationship set forth in this
Agreement. Headway and Seagate agree to protect the proprietary
information with the same standard of care and procedures which each
uses to protect its own proprietary information of similar
importance, but in no case less than reasonable care.
8
<PAGE>
13.2 Exceptions. Notwithstanding anything set forth in Section 13.1
----------
hereof, the proprietary information shall not include any
information which:
(a) Was at the time received or which prior to disclosure by the
receiving party becomes, through no act or failure on the part
of the receiving party, generally known or available to the
public;
(b) Is known to the receiving party at the time it received such
information as evidenced by documentation then rightfully in
the possession of the receiving party;
(c) Is furnished to others by a disclosing party hereunder without
restriction on the third party's rights to disclose the
information;
(d) Is rightfully received by the receiving party from the third
party without restriction by that third party on disclosure and
without the knowledge of the receiving party of a breach of an
obligation running directly or indirectly to the other party
hereto;
(e) Is released from restrictions imposed hereunder by written
release given by the owner of the information;
(f) Has been disclosed pursuant to a requirement of an applicable
governmental agency or of applicable law without restrictions
or other protections against public disclosure, or is required
to be disclosed by operation of applicable law; provided,
however, that the receiving party shall have first given
written notice of such required disclosure to the disclosing
party, made a reasonable effort to obtain a protective order
requiring that the proprietary information so disclosed be used
only for the purposes for which disclosure is required, and
taken reasonable steps to allow the disclosing party to seek to
protect the confidentiality of the proprietary information
required to be disclosed; or
(g) Is independently developed by the receiving party without use,
directly or indirectly, of the proprietary information received
from the other party hereto.
ARTICLE 14. INTELLECTUAL PROPERTY INDEMNIFICATION
-------------------------------------
14.1 Headway Defense and Indemnification. Headway shall at its own
-----------------------------------
expense defend any claim or suit instituted against Seagate which is
based upon an allegation that the use of Headway Dual Stripe MR
Technology in connection with the manufacture or sale of DSMR Heads
or DSMR Products by Seagate hereunder constitutes an infringement of
any intellectual or industrial property rights of a third party, and
Headway shall indemnify Seagate against any award or damage and any
reasonable cost incident thereto made against Seagate by final
judgment of court of last resort if it is determined therein that
any such manufacture or sale of DSMR Heads or DSMR Products
constitute an infringement of any such intellectual or industrial
property rights, provided that, five business days after receipt,
Seagate gives Headway notice in writing of any threat, notice or
claim of infringement and permits Headway through Headway's counsel
to defend the same and give Headway all available information,
assistance and authority to enable Headway to assume such defense.
Headway shall have full control of the defense with regard to such
threat, notice, claim or suit including appeals from any judgment
therein and any negotiation for the settlement or compromise thereof
and full authority to enter into a binding settlement agreement or
compromise. If any such DSMR Heads or DSMR Products are held by such
court to constitute infringement or in order to avoid potential
infringement, Seagate and Headway agree that Headway shall at its
option either:
(a) procure for Seagate the fight to continue manufacturing and
selling such DSMR Heads or DSMR Products; or
9
<PAGE>
(b) provide the necessary modification in the DSMR Heads or DSMR
Products so they no longer infringe third parties' intellectual
or industrial property rights, and furnish Seagate with the
necessary information and data to enable Seagate to manufacture
such DSMR Heads or DSMR Products.
14.2 Seagate Defense and Indemnification. Seagate represents and warrants
-----------------------------------
that it shall hold harmless Headway from any action claiming
infringement of intellectual or industrial property rights with
respect to the Seagate Design Technology furnished by Seagate to
Headway to the same extent and in the same manner as provided by
Headway under Section 14.1 above.
14.3 Warranty. Seagate and Headway hereby warrant that they have the
--------
requisite authority to grant the licenses to each other pursuant to
this Agreement and that they have not received any written notice of
infringement with respect to any of the technology licensed
hereunder.
ARTICLE 15. TERMINATION
-----------
15.1 Termination of Agreement. Without limiting any rights or remedies
------------------------
available to the parties, this Agreement may be terminated at any
time upon the mutual written agreement of both parties hereto.
Either party may, by written notice, terminate and/or suspend its
performance under this Agreement, hereunder without penalty upon the
occurrence of one or more of the following events of default:
(a) the other party fails to comply with any payment provisions of
this Agreement and such condition is not remedied within
fifteen (15) days after written notice hereof; and
(b) the other party fails to perform any material non-payment
obligation hereunder and such condition is not remedied within
thirty (30) days after written notice thereof;
(c) the other party becomes bankrupt or insolvent, suffers a
receiver to be appointed or makes an assignment for the benefit
of creditors or the dissolution or liquidation of the other
party;
(d) upon sixty (60) days prior written notice to the other party,
if the other party's performance hereunder constitutes a series
of continuing or repetitive material breaches of this Agreement
which although timely cured or remedied as set forth herein,
cause this Agreement to fail of its essential purpose.
(e) the occurrence of an event that constitutes a transfer of a
majority (greater than 50%) of the voting interest in Headway
or the sale of assets or a transaction that constitutes the
functional equivalent of the transfer of the business engaged
in the manufacture of the DSMR Products to a third party
engaged in the development, manufacture or sale of computer
disk drive data storage devices or the development, manufacture
or sale of inductive or magneto resistive Head components;
provided that the majority ownership of Headway by Hewlett-
Packard and an underwritten public offering of Headway capital
stock is specifically permitted hereby.
15.2 Survival of Rights and Obligations. Notwithstanding the above
----------------------------------
Section 15.1, the following rights and obligations of the parties
shall survive the termination:
(a) the obligation of Seagate to pay all accrued amounts payable
including ongoing royalty payments if shipments of DSMR
Products continue (as of the date of termination) and the
corresponding right of audit provided hereunder;
(b) the indemnification rights of a non-defaulting party under
Article 14 above; and
10
<PAGE>
(c) Seagate shall continue to have rights to all portions of
Headway Dual Stripe MR Technology for which it has made payment
or otherwise performed.
15.3 Procedure. In case either party mails a termination notice, such
---------
notice shall specify this Article 15 and the Section(s) of this
Agreement under which the default has occurred.
ARTICLE 16. FORCE MAJEURE
-------------
If the performance of this Agreement, or any obligation hereunder is prevented,
restricted or interfered with by reason of any act or condition beyond the
reasonable control of the affected party including but not limited to: fire,
flood, earthquake, explosion or other casualty or accident, strikes or labor
disputes, war or other violence, any law, order, proclamation, regulation,
ordinance, demand or requirement of any governmental agency, or any other act or
condition beyond the reasonable control of the affected party, the party so
affected, upon giving prompt notice to the other party, shall be excused from
such performance to the extent of such prevention, restriction, or interference;
provided, however, that the party so affected shall take all reasonable steps to
avoid or remove such cause of nonperformance, including cooperating with the
other party to enable the other party to undertake performance during the period
of prevention, and shall resume performance hereunder with dispatch whenever
such causes are removed.
If performance is delayed more than ninety (90) days, the other party shall have
the right to terminate this Agreement, without any further liability resulting
therefrom.
ARTICLE 17. GENERAL
-------
17.1 Entire Agreement. This Agreement, together with all documents,
----------------
schedules and exhibits attached hereto or referenced herein,
constitutes the entire agreement between the Parties with respect to
the transaction contemplated hereby and supersedes and is in full
substitution for any and all prior agreements and understandings
between the Parties relating to such transactions.
17.2 Amendments. No modification, termination, extension, renewal or
----------
waiver of any provisions of this Agreement shall be binding upon
either party unless made in writing and signed by an authorized
officer of each of the parties.
17.3 Severability. In case any one or more of the provisions contained in
------------
this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, except in those instances where
removal or elimination of such invalid, illegal or unenforceable
provision or provisions would result in a failure of consideration
under this Agreement, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and
this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
17.4 Descriptive Headings. The descriptive headings of the several
--------------------
Articles and Sections of this Agreement are inserted for convenience
only and shall not control or affect the meaning or construction of
any of the provisions hereof.
17.5 Interpretation. Should any provision of this Agreement require
--------------
judicial interpretation, mediation or arbitration, it is agreed that
the court, mediator or arbitrator interpreting or construing the
same shall not apply a presumption that the terms hereof shall be
more strictly construed against one party by reason of the rule of
construction that a document is to be construed more strictly
against the party who itself or through its agents prepared the
same, it being agreed that all parties, directly or through their
agents, have participated in the preparation hereof.
11
<PAGE>
17.6 Third Party Beneficiary. This Agreement is intended for the benefit
-----------------------
of the parties and their permitted assigns, and no other person
shall be entitled to rely upon this Agreement or be entitled to any
benefits under this Agreement.
17.7 Independent Contractor. Neither party shall, for any purpose, be
----------------------
deemed to be an agent of the other party and the relationship
between the parties shall only be that of independent contractors.
17.8 Media Release; Advertising. Neither party shall issue any press
--------------------------
release or otherwise announce or disclose the facts, circumstances
or existence of this Agreement without consent in advance of the
other party. No advertising by either party shall display any of the
other's trademarks or refer to the other as the manufacturer of the
Products, or any of them, without the prior written approval of the
other. Any commercial advertising of this Agreement (including the
supplies and services hereunder and the pictures and descriptions,
or samples thereof) by any party is prohibited, except as shall have
occurred prior to the Effective Date and except with the other
party's written approval.
17.9 Assignment. This Assignment shall be binding upon and inure to the
----------
benefit of the Parities and their respective successors and
permitted assigns. Neither party hereto shall sell, transfer, lease,
assign, pledge, mortgage, hypothecate or otherwise dispose of any of
the rights, privileges, duties and obligations granted or imposed
upon it under this Agreement.
17.10 Expenses.
--------
(a) Except as otherwise set forth herein, the Parties shall each
bear their own legal and accounting fees and all other costs,
expenses and fees incurred by them in connection with this
Agreement and the transactions contemplated hereby.
(b) In the event a dispute between the parties hereunder with
respect to this Agreement must be resolved by litigation, or
Headway must engage an attorney to collect any amounts due and
owing to it hereunder, the prevailing party shall be entitled to
receive reimbursement for all associated costs and expenses
(including, without limitation, reasonable attorney's fees) from
the other party.
17.11 Notice. Unless otherwise specified in this Agreement, all notices
------
and other communications permitted or required by the provisions of
this Agreement shall be in writing and shall be mailed, telecopied,
telegraphed, telexed or delivered to the other party at the address
shown below (or at such other address as either party may designate
in writing to the other party during the term of the Agreement in
accordance with this Section 15.1 1) and shall be effective and
deemed received:
(a) if mailed, when received by the addressee;
(b) if telecopied, when received by the addressee;
(c) if telegraphed, when delivered by the telegraph company to the
addressee;
(d) if telexed, when dispatched and confirmation of message received
by the sender; or
(e) if personally delivered, when delivered to the addressee.
(i) if intended to Headway, to: Ralph Patterson
HEADWAY TECHNOLOGIES, INC.
497 S. Hillview Drive
Milpitas, CA 95035
12
<PAGE>
(ii) if intended to Seagate, to: Pat Bonnie
SEAGATE TECHNOLOGY, INC.
7801 Computer Avenue South
Minneapolis, MN 55435
17.12 Governing Law. This Agreement and its performance shall be governed
-------------
by, subject to and construed in accordance with the laws of the
State of California without application of the principles of
conflicts of law.
17.13 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
HEADWAY TECHNOLOGIES, INC.
BY: /s/ Ralph Patterson
- -----------------------
ITS: President & CEO
- -----------------------
SEAGATE TECHNOLOGY, INC.
BY: [SIGNATURE ILLEGIBLE]
- ---------------------------
ITS: C.C.C. COMPONENTS
- ---------------------------
13
<PAGE>
EXHIBIT 2
DEFINITIONS
"Information" means all know-how, information, all documentation,
------------
inventions (whether or not patentable, but excluding patents thereon and whether
or not reduced to practice), other intellectual property, discoveries,
improvements, manufacturing and production processes, methods, techniques,
approaches, data and other information (including but not limited to schematics,
flow charts, test methods, purchase specifications, engineering specifications,
computer programs, technical data, software and log books).
"MR Head" means that kind or category of devices or components designed and
-------
manufactured for the purpose of recording, reading or erasing information on or
from a computer disk drive storage device utilizing or embodying magneto
resistive principles and/or technology, including a magneto resistive reader
head and an inductive writer head.
"MR Head Design" shall mean the physical characteristics and/or dimensions
--------------
and representations thereof specially relating to the wafer level transducer
design of or embodied in magneto-resistive heads owned or used by Headway as of
the date hereof including: drawings, models, purchase specifications,
engineering specifications, test specifications, geometric details, wafer layout
specifications, dimensions, materials used and documentation thereof any or all
of which may be confidential information not generally known to the public,
whether patentable or not. Improvements, modifications and enhancements to MR
Head Design shall be deemed a part of MR Head Design. MR Head Design shall
exclude all patents or patent applications. Specifically excluded is all
information related to fabrication and processing techniques for wafer
fabrication.
"Headway Dual Stripe MR Technology" means Information developed, owned or
---------------------------------
used by Headway relating to the DSMR Head excluding Information regarding slider
and head gimbal assembly fabrication or processing techniques beyond that which
is included in the DSMR Head wafer process.
"DSMR Head" means the particular form of MR Head employing a magnetic read
---------
transducer employing two or more active magneto-resistive thin film elements
operating in the differential mode to play back information previously recorded
in a magnetic media detailed in the Specifications attached as Exhibit 3.
Exhibit 3 will be completed and attached within thirty (30) days of execution of
this document.
"DSMR Product" means an individual DSMR Head or any assembly consisting of
------------
one or more DSMR Heads or combination thereof
"Specifications" means the specifications for the DSMR Head as set forth on
--------------
Exhibit 3.
"Seagate Design Technology" means the physical dimensions of Seagate's
-------------------------
design of magnetic heads specifically relating to air bearing, slider,
suspension, top bond pad and transducer and lapping guide placement on wafers
excluding all Information related to fabrication and processing techniques for
wafer fabrication, top bond pad, slider machining, air bearing, head gimbal
assembly, or methods of deposition and composition of film or other process
related Information. As of the date of the Agreement, improvements to the
Seagate Design Technology shall be deemed part of the Seagate Design Technology.
"Training" means hands-on, production, assembly, testing and se operations
--------
consistent with those currently conducted in connection with the Headway Dual
Stripe MR Technology, including detailed technical product design reviews,
facility assessment, production process reviews, equipment and tooling support,
material sources, planning, design and configurations of testers and test
equipment, software requirements, maintenance procedures and other related
matters, as requested by Seagate.
"Technical Assistance" means assistance to Seagate in on-site equipment
--------------------
installation, set-up and calibration; technical and trouble shooting, technical
assistance in connection with the transfer and delivery of the Headway Dual
Stripe MR Technology and to Seagate as contemplated under this Agreement; and to
assist Seagate in on-site training and technical assistance in connection with
its operations of the Headway Dual Stripe MR Technology following delivery.
"Equipment" means capital equipment, tooling and the like reasonably
---------
necessary for Seagate to fulfill its obligations hereunder.
<PAGE>
EXHIBIT 10.3
April 24, 1998
Mr. Mike Y. Chang
President and CEO
Headway Technologies, Inc.
497 South Hillview Drive
Milpitas, CA 95035
Dear Mike,
When fully executed by the parties, this letter will bind Seagate and
Headway to negotiate in good faith for an extension of that certain Cross
License and Know How Transfer Agreement between the parties dated May 19, 1995
("Agreement"), with the following provisions; subject to satisfying the
following conditions precedent:
1. Headway delivering to Seagate a list of unique technology that
satisfies Seagate that Headway's DSMR technology will enable Seagate
to manufacture DSMR heads at the 3.2 and, to the extent available, 4.5
and 6.2Gbit/in2 design points; and
2. A Seagate drive design center designating Headway's 3.2Gbit/in2 DSMR
head for qualification into a current or future Seagate disc drive
product.
NEW OR MODIFIED PROVISIONS
Know How
The know how ("Information" as defined in the above Agreement) transferred
will be sufficient to enable Seagate to make, at the same yields, the same head
or heads as Headway may qualify for any Seagate disc drive product, with the
understanding that Seagate may use the technology to make heads with other
designs and for any product made by Seagate or for sale to third parties.
General
1. The Agreement extension to be negotiated will provide the terms and
conditions for DSMR technology transfer beyond the 6.2Gbit/in2 design
point, to the extent that DSMR technology can be so extended, without
further negotiation.
2. Seagate and Headway will set up a Senior Management team to administer
this project to the mutual benefit of both parties. This team's
duties will be detailed in the formal agreement emanating from this
LOI, but will include guidance on the use of DSMR technology in
Seagate's drive products, the status of technology transfer
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
Mr. Mike Y. Chang
April 24, 1998
Page 2
procedures from Headway to Seagate as part of the process of the
license agreement, the status of defined projects such as yield
improvements and will also include reviewing the status of the wafer
purchase commitment detailed later in this LOI.
3. Until Seagate has qualified its head at the 6.2Gbit/in2 design point
and Seagate yields are at least those of Headway's 6.2Gbit/in2 heads,
Seagate and Headway may each maintain up to 3 engineers full time at
the other's facilities to assist in technology transfer. Information
on technologies not relating to DSMR shall be considered and treated
as each party's trade secrets.
4. Further, during this period, Seagate and Headway will set up a core
team of engineers who will be responsible for DSMR technology
transfer, yield improvement, and other technical matters under this
agreement. Where possible, the members of these core teams should be
considered as occupying long term positions
5. Recognizing that the reasons why a given technical solution was chosen
constitutes critical know how, Headway agrees to include such
information in the know how it transfers and will answer such
questions in writing when propounded in writing. Similarly, if
Seagate improves Headway's technology, the reasons behind the
alteration will be communicated to Headway in the same manner.
6. Headway will identify other head technologies it is developing (SSMR,
SAL MR, GMR) and agrees to negotiate in good faith for a know how
license and transfer to Seagate.
License fees.
- -------------
The following license fee amounts will be paid upon successful completion
of the milestone events indicated;
#1). $[*] upon signing the extension of the Agreement and upon
qualification of a Headway 3.2Gbit/in2 DSMR head in a Seagate 10,000 rpm
disc drive product.
#2). $[*] upon qualification in Seagate disc drive product of a
Seagate made DSMR head pursuant to Headway's 3.2Gbit/in2 DSMR know how (as
defined above, i.e., that the qualified Seagate DSMR head is the same as
Headway's qualified DSMR head, at the same yields).
#3). $[*] upon demonstration by Headway of satisfactory drive level
performance of 4.5Gbit/in2 (and at 10,000 rpm spindle speed) DSMR heads,
and upon
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
Mr. Mike Y. Chang
April 24, 1998
Page 3
Headway qualifying a 4.5Gbit/in2 DSMR head in a Seagate 10,000 (or higher)
rpm disc drive product.
#4). $[*] upon qualification in a Seagate disc drive product of a
Seagate made DSMR head pursuant to Headway's 4.5Gbit/in2 DSMR know how (as
defined above, i.e., that the qualified Seagate DSMR head is the same as
Headway's qualified DSMR head, at the same yields).
#5). $[*] upon demonstration by Headway of satisfactory drive level
performance of 6.2Gbit/in2 (and at 10,000 rpm spindle speed) DSMR heads,
and upon Headway qualifying a 6.2 Gbit/in2 DSMR head into a Seagate 10,000
(or higher) rpm disc drive product.
#6). $[*] upon qualification in a Seagate disc drive product of a
Seagate made DSMR head pursuant to Headway's 6.2 Gbit/in2 DSMR know how (as
defined above, i.e., that the qualified Seagate DSMR head is the same as
Headway's qualified DSMR head, at the same yields).
Per Unit Royalties
- ------------------
Notwithstanding anything in the above-referenced Agreement to the contrary,
Seagate's per unit royalties shall be as follows;
1. No per unit royalties shall be due and payable from April 1, 1998 until
March 31, 1999 (this includes royalties on DSMR heads made at existing
design points);
2. On and after April 1, 1999, all heads manufactured from wafer made by
Seagate and shipped by Seagate in a Seagate disc drive, shall bear a
royalty of $[*] per head, provided however, that the parties shall agree
to mutually acceptable terms and conditions associated with the per head
royalty provisions;
3. Such per head royalty shall be capped at [*] dollars ($[*]) per design
point, i.e., all heads made by Seagate after such cap at any design point,
past, present or future inclusive of the design points set forth in the
present Agreement and this LOI, using Headway's DSMR know how transferred
to Seagate for making DSMR heads at such design point shall be royalty
free; and
4. As a consequence of this license extension, the specific section in the
original Agreement relating to Royalty Recovery (Section #8.4 in the
Agreement) will be suspended.
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
Mr. Mike Y. Chang
April 24, 1998
Page 4
Wafer Purchase Commitment
- -------------------------
Seagate and Headway will negotiate a wafer supply agreement that will commit
Seagate to purchase from Headway at least [*] percent ([*]%) of Seagate's DSMR
die needs for all design points wherein Headway has transferred Seagate the know
how for such design point, up to a cap of [*] ([*]) Headway
candidates per week cumulative with respect to DSMR heads made at all design
points.
This arrangements shall begin no sooner that July 1, 1998, or as soon thereafter
that Headway demonstrates to Seagate's satisfaction that it has the capability
to meet Seagate's needs at the mandated fifty-percent level.
Such a supply agreement shall condition Seagate's purchase requirements on
Headway's continuing ability to support Seagate's specification and quality
requirements, on its ability to meet Seagate's forecasted schedule needs, which
in turn shall be based on the market conditions for such of Seagate drives that
employ DSMR heads, and on Headway's ability to offer pricing, which shall,
beginning on July 1, 1998, be no more than $[*] per 30 series candidate,
provided that such HGA electrical test yields are [*]% (with the understanding
that the supply agreement will detail the situation pertaining to higher or
lower candidate pricing upon the attainment of higher or lower electrical test
yields at HGA). All other pricing shall be negotiated, with the understanding
that pricing shall decline.
This commitment to purchase [*]-percent continues to future design points
provided that Headway transfers to Seagate all necessary know how for Seagate to
manufacture DSMR heads at such design point and provided further that Headway is
in current compliance with Seagate's requirements as specified herein at any
previous design point still in production.
For Headway For Seagate
/s/ Mike Y. Chang [SIGNATURE ILLEGIBLE]
- --------------------- ---------------------
Date: April 24, 1998 Date: APRIL 27, 1998
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.4
[LETTERHEAD OF HEADWAY TECHNOLOGIES APPEARS HERE]
AGREEMENT
TDK/SAE and Headway Technologies, Inc. desire to enter into a strategic
alliance.
* TDK/SAE desires technical interaction with Headway Technologies' wafer
organization to further expand and enhance its MR head technology.
* Headway Technologies desires high volume slider, HGA and HSA manufacturing
by SAE for its MR head products.
SAE, with TDK, and Headway believe it is desirable to enter into a mutually
beneficial strategic alliance with the aim of accomplishing these objectives.
The basic intent of both parties relative to this strategic alliance is outlined
below.
This document is intended to represent a binding agreement on behalf of TDK/SAE
and Headway Technologies.
TECHNOLOGY SUPPORT
Headway Technologies will support TDK's MR head technology objectives in its
Kofu wafer factory as follows:
A. ON-SITE VISITS. Headway will, at its own expense, provide technical
support by sending Engineering personnel at TDK's request to analyze TDK's
6" wafer process, tooling and materials. Following this analysis Headway
will provide a list to recommendations based on its knowledge and
experience to TDK Engineering personnel. These recommendations would
represent the most advanced technical guidance Headway Engineering
personnel could provide at that point in time to improve the technical
performance, yield and efficiency of the Kofu wafer manufacturing facility.
These visits can occur at TDK's request no more frequently than once (1)
per calendar quarter and by no more than four (4) Engineering personnel for
no longer than one (1) week.
B. VISITS TO HEADWAY TECHNOLOGIES. Engineering personnel from TDK may, at
TDK's own expense, visit Headway Technologies for hands-on training in
specific areas of interest. These areas of interest are to be determined
jointly and will be defined in Exhibit 1. These visits shall extend no
longer that one (1) week per specific area and shall consist of no more
than 4 people at any one time. Documentation shall be made available only
upon written request at the conclusion of each visit.
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
[LETTERHEAD OF HEADWAY TECHNOLOGIES APPEARS HERE]
Agreement with TDK, SAE and Headway
August 26, 1997
Page 2
C. TECHNOLOGY SHARING. Headway shall provide to TDK technology applicable to
the following areas. This technology shall be limited the best available
within Headway Technologies at the time of transfer.
1. Improved ELG lapping processes and designs
2. Wafer level top pole trim processing
D. JOINT PROJECTS
1. Self-alignment technology
2. High thermal conductivity gap material
3. Top pole width tolerance reduction including wafer level pole trim
processing
4. Others as jointly agreed on an annual basis and as described in Exhibit
2
F. FREEDOM OF ACTION. Neither company, as a result of technology transfer and
visits, shall be limited in any way from carrying out its primary mission
defined as development, manufacturing and sales of magneto-resistive
recording heads.
MANUFACTURING SUPPORT
SAE will, at its own expense, install slider, HGA and HSA manufacturing capacity
dedicated to the manufacture of Headway Technologies magneto-resistive recording
heads in either pico or nano format.
CAPACITIES. Installed capacity in terms of shipped HGAs shall be:
- ----------
* 1998 - [*] HGAs/month
* 1999 - [*] HGAs/month
* 2000 - [*] HGAs/month
PLANNING. Headway Technologies shall issue 12-month rolling forecasts to SAE by
- ---------
the last day of each month. These forecasts shall be non-binding; however, they
must represent the best collective plans available by Headway and its customers.
UTILIZATION OF INSTALLED CAPACITY. SAE is free to use capacity installed
- ---------------------------------
pursuant to this agreement for its other customers that is not projected to be
used by Headway Technologies. Projected utilization shall be defined by the 12-
month rolling forecast. Within the capacity limits defined above, Headway
Technologies shall have 100% upside flexibility in the final 6 months of the 12-
month forecast period.
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
[LETTERHEAD OF HEADWAY TECHNOLOGIES APPEARS HERE]
Agreement with TDK, SAE and Headway
August 26, 1997
Page 3
PRICE. SAE shall provide slider, HGA and HSA process support at a price no less
- -----
favorable than that provided to other customers of similar products.
MATERIALS. SAE shall purchase direct materials from its outside suppliers using
- ---------
volume purchase agreements that exist at the time of purchase to obtain
materials for the Headway product at industry competitive prices.
WAFER CONSIGNMENT. Headway shall consign wafer material to SAE for use by SAE
- -----------------
in fulfillment of its manufacturing support commitment to Headway Technologies.
Headway and SAE shall jointly develop a consigned material agreement (Exhibit
3).
/s/ Mike Y. Chang /s/ Wai Hung Aug 28.97
- ------------------------------------ --------------------------------
Mike Y. Chang, President Date Wai Hung Ng, President Date
Headway Technologies, Inc. SAE Magnetics (HK) Ltd.
<PAGE>
EXHIBIT 10.5
Confidential
MASTER TECHNOLOGY LICENSE AGREEMENT
This Master Technology License Agreement is entered into and is effective
as of the 23rd day of September, 1994 by and among M-R Assets Corporation, a
California corporation ("MAC"), Hewlett-Packard Company, a California
corporation ("HP"), Komag, Incorporated, a Delaware corporation ("Komag"), and
Asahi Glass America, Inc., a Delaware corporation ("AGA").
RECITALS
WHEREAS, MAC desires to develop and produce the Product utilizing the HP MR
Technology, the Dastek MR Technology, the Joint MR Technology and the Komag MR
Technology; and
WHEREAS, HP desires to license to MAC the HP MR Technology and to obtain
from MAC a license to the MAC MR Technology and certain Product price and
production commitments and from each of Komag and AGA a license to the Dastek MR
Technology and a license to the Joint MR Technology and from Komag a license to
the Komag MR Technology; and
WHEREAS, Komag desires to license to MAC the Dastek MR Technology, the
Joint MR Technology and the Komag MR Technology and to obtain from MAC a license
to the MAC MR Technology and from HP a license to the HP MR Technology; and
WHEREAS, AGA desires to license to MAC the Dastek MR Technology and the
Joint MR Technology and to obtain from MAC a license to the MAC MR Technology,
from HP a license to the HP MR Technology and from Komag a license to the Komag
MR Technology; and
WHEREAS, each of MAC, HP, Komag and AGA desires to cooperate with the other
parties hereto for the purpose of creating a manufacturing capability for the
Product and making the Product successful and widely accepted in the industry;
and
WHEREAS, MAC has contributed and is contributing significant development
resources to bring the Product to readiness for mass production; and
WHEREAS, HP has contributed and is contributing significant development
resources to MAC to bring the Product to readiness for mass production; and
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
WHEREAS, Komag and AGA have contributed and are contributing significant
resources to bring the Product to readiness for mass production;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS
The following terms not defined elsewhere herein shall have following
meanings:
"AKCL" shall mean Asahi Komag Co., Ltd., a Japanese corporation.
"Confidential Information" shall mean confidential or proprietary
information of any party hereto which is disclosed to any other party hereto by
reason of the parties' relationship hereunder or pursuant hereto, including
without limitation (a) Intellectual Property, (b) information about or related
to the specification, design, manufacture, test and implementation of the
Product, and (c) the business plans, vendors and customers of the respective
parties.
"Dastek" shall mean Dastek, Inc., a California corporation.
"Dastek" MR Technology" shall mean Intellectual Property related to the
Product developed or acquired and, with respect to patents, conceived or first
reduced to practice or acquired and formerly owned by Dastek, in which each of
Komag and AGA owns an undivided right.
"Discloser" shall mean any party hereto which discloses Confidential
Information under this Agreement.
"HP MR Technology" shall mean Intellectual Property related to dual-stripe
magnetoresistive heads, including without limitation air-bearings, head gimble
attachments and wire bonding processes, developed or acquired and, with respect
to patents, conceived or first reduced to practice or acquired by HP on or
before the termination of the Restriction Period.
"Intellectual Property" shall mean any and all (a) documentation; (b)
computer programs in source code or object code form; (c) works of authorship
(whether copyrightable or not); (d) inventions (whether patentable or not),
know-how, technology, trade secrets, mask works, designs, processes and
technical data; (e) patents, design patents, utility models,
2
<PAGE>
industrial designs, copyrights, mask work registrations and applications
therefor, foreign counterparts thereof and similar rights and assets in any
country.
"Inventing Parties" shall have the meaning set forth in Section 15.5 below.
"Joint Authors" shall have the meaning set forth in Section 15.5 below.
"Joint Inventions" shall have the meaning set forth in Section 15.5 below.
"Joint MR Technology" shall mean Intellectual Property related to the
Product developed or acquired and, with respect to patents, conceived or first
reduced to practice or acquired jointly by Dastek and Komag as of the date of
this Agreement.
"Joint Works" shall have the meaning set forth in Section 15.5 below.
"Komag MR Technology" shall mean Intellectual Property related exclusively
to the Product developed or acquired and, with respect to patents, filed or
acquired by Komag prior to the closing date.
"MAC MR Technology" shall mean Intellectual Property related to the Product
developed or acquired and, with respect to patents, filed or acquired by MAC
prior to the closing date.
"MAC Technical Information" shall mean all information, data, engineering
drawings and other design specifications and documentation for those aspects of
any dual-stripe magnetoresistive Product and its manufacturing process which are
developed or acquired by MAC, including without limitation any such information,
data, drawings and other design specifications and documentation developed or
acquired by Robin.
"Product" shall mean a disk drive component, namely any recording head.
"PTO" shall mean the U.S. Patent and Trademark office.
"Recipient" shall mean any party hereto which receives Confidential
Information from any other party hereto under this Agreement.
"Restriction Period" shall mean the period beginning on the date hereof and
ending on the date two (2) years thereafter.
3
<PAGE>
"Robin" shall mean Robin, Inc., a Delaware corporation.
"Third Party MR Technology" shall mean Intellectual Property related to
dual-stripe magnetoresistive heads, including without limitation air-bearings,
head gimble attachments and wire bonding processes, developed or acquired and,
with respect to patents, conceived or first reduced to practice or acquired by
third parties and licensed on or before the termination of the Restriction
Period to HP or at any time to Komag or AGA, as the case may be.
2. HP LICENSE TO MAC
2.1 (i) Grant of License under the HP MR Technology. HP hereby grants
-------------------------------------------
to MAC a perpetual, exclusive, royalty-free (subject to Section 2.2(ii) below),
worldwide license under the HP MR Technology to develop, manufacture (including
the right to have manufactured subject to Section 2.1(ii) below), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of the HP MR Technology for the purpose of developing,
manufacturing (including the right to have manufactured subject to Section 2.1
(ii) below) , testing, using, modifying, reproducing, selling, marketing and
distributing Product, with the right to sublicense and assign subject to
Sections 2.1(iii) and 16 below.
(ii) Have Made Restriction. The right of MAC to have Product made
---------------------
contained in Section 2.1(i) above is subject to the restriction that, during the
Restriction Period, MAC shall have obtained HP's prior written approval, which
shall not be unreasonably withheld.
(iii) Sublicense and Assignment Restrictions. The right of MAC to
--------------------------------------
sublicense or assign the rights contained in Section 2.1(i) is subject to the
restriction that, during the Restriction Period, except with respect to any
sublicense to be granted by MAC pursuant to Section 16 below, MAC may grant a
sublicense of commensurate scope only to AKCL, and no other party, unless prior
written approval is obtained from HP, which shall not be unreasonably withheld.
Factors which HP may consider in determining whether to grant such approval
include without limitation (a) whether the proposed sublicense includes an
option for HP to purchase a minimum of [*] percent ([*]%) of the sublicensee's
Product production output containing the sublicensed HP MR Technology, and (b)
the right of HP to receive the lowest price such sublicensee charges any
customer for similar volumes of such Product.
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
4
<PAGE>
2.2 Sublicense under the Third Party MR Technology.
----------------------------------------------
(i) HP hereby grants to MAC a sublicense under the Third Party MR
Technology licensed by the third party to HP, commensurate in scope with such
license, to the extent and for as long as permitted by such license, to develop,
manufacture (including the right to have manufactured), test, use, modify,
reproduce, sell, market and distribute Product and to modify and create
derivative works of such Third Party MR Technology for the purpose of
developing, manufacturing (including the right to have manufactured), testing,
using, modifying, reproducing, selling, marketing and distributing Product.
(ii) To the extent HP has an obligation to pay any royalties or
other fees to any third party pursuant to the license to HP under any Third
Party MR Technology sublicensed by HP to MAC under Section 2.2(i) above, HP
shall so inform MAC and MAC shall pay HP all such applicable royalties and other
fees due to such third parties under such sublicense.
3. KOMAG AND AGA LICENSES TO MAC
3.1 Grant of License under the Dastek MR Technology. Each of Komag and AGA
-----------------------------------------------
hereby grants to MAC a perpetual, exclusive, royalty-free, worldwide license
under the Dastek MR Technology to develop, manufacture (including the right to
have manufactured), test, use, modify, reproduce, sell, market and distribute
Product and to modify and create derivative works of the Dastek MR Technology
for the purpose of developing, manufacturing (including the right to have
manufactured), testing, using, modifying, reproducing, selling, marketing and
distributing Product, with the right to sublicense and assign.
3.2 Grant of License under the Joint MR Technology. Each of Komag and AGA
----------------------------------------------
hereby grants to MAC a perpetual, non-exclusive, royalty-free, worldwide license
under the Joint MR Technology to develop, manufacture (including the right to
have manufactured), test, use, modify, reproduce, sell, market and distribute
Product and to modify and create derivative works of the Joint MR Technology for
the purpose of developing, manufacturing (including the right to have
manufactured), testing, using, modifying, reproducing, selling, marketing and
distributing Product, with the right to sublicense and assign.
3.3 (i) Grant of License under the Komag MR Technology. Komag hereby
----------------------------------------------
grants to MAC a perpetual, non-exclusive, royalty-free (subject to Section
3.3(iii) (b) below), worldwide license under the Komag MR Technology to develop,
manufacture (including the right to have
5
<PAGE>
manufactured), test, use, modify, reproduce, sell, market and distribute Product
and to modify and create derivative works of the Komag MR Technology for the
purpose of developing, manufacturing (including the right to have manufactured),
testing, using, modifying, reproducing, selling, marketing and distributing
Product, with the right to sublicense or assign subject to Sections 3.3(ii) and
16 below.
(ii) Sublicense and Assignment Restrictions. During the Restriction
--------------------------------------
Period, the right of MAC to sublicense or assign the rights contained in Section
3.3(i) above is limited and subject to, except with respect to sublicenses to be
granted by MAC pursuant to Section 16 below (a) Komag's providing, in its sole
discretion, prior written approval of any such proposed sublicense or
assignment, including approval of the terms and of the parties to any such
sublicense, such approval not to be unreasonably withheld, and (b) any such
sublicense being of a scope commensurate with the rights granted herein, without
further right of sublicense. Notwithstanding the foregoing, MAC may sublicense
rights of a scope commensurate with the rights granted herein, without further
right of sublicense, to AKCL, without such prior written approval.
(iii) Sublicense under the Third Party MR Technology.
----------------------------------------------
(a) Komag hereby grants to MAC a sublicense under the Third Party
MR Technology licensed by the third party to Komag, commensurate in scope with
such license, to the extent and for as long as permitted by such license, to
develop, manufacture (including the right to have manufactured), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of such Third Party MR Technology for the purpose of
developing, manufacturing (including the right to have manufactured), testing,
using, modifying, reproducing, selling, marketing and distributing Product.
(b) To the extent Komag has an obligation to pay any royalties or
other fees to any third party pursuant to the license to Komag under any Third
Party MR Technology sublicensed by Komag to MAC under Section 3.3(iii)(a) above,
Komag shall so inform MAC and MAC shall pay Komag all such applicable royalties
and other fees due to such third parties under such sublicense.
6
<PAGE>
4. MAC LICENSES TO HP, KOMAG AND AGA
Except as provided in Section 5 below with respect to the license of the HP
MR Technology, the Dastek MR Technology, the Joint MR Technology and the Komag
MR Technology, which shall not be included in the licenses granted pursuant to
Sections 4.1-4.3:
4.1 Grant of License under the MAC MR Technology to HP. MAC hereby grants
--------------------------------------------------
to HP a perpetual, non-exclusive, royalty-free, worldwide license under the MAC
MR Technology to develop, manufacture (including the right to have
manufactured), test, use, modify, reproduce, sell, market and distribute Product
and to modify and create derivative works of the MAC MR Technology for the
purpose of developing, manufacturing (including the right to have manufactured)
, testing, using, modifying, reproducing, selling, marketing and distributing
Product, with the right to sublicense and assign.
4.2 Grant of License under the MAC MR Technology to Komag. MAC hereby
-----------------------------------------------------
grants to Komag a perpetual, non-exclusive, royalty-free, worldwide license
under the MAC MR Technology to develop, manufacture (including the right to have
manufactured), test, use, modify, reproduce, sell, market and distribute Product
and to modify and create derivative works of the MAC MR Technology for the
purpose of developing, manufacturing (including the right to have manufactured),
testing, using, modifying, reproducing, selling, marketing and distributing
Product, with the right to sublicense and assign.
4.3 Grant of License under the MAC MR Technology to AGA. MAC hereby
---------------------------------------------------
grants to AGA a perpetual, non-exclusive, royalty-free, worldwide license under
the MAC MR Technology to develop, manufacture (including the right to have
manufactured) , test, use, modify, reproduce, sell, market and distribute
Product and to modify and create derivative works of the MAC MR Technology for
the purpose of developing, manufacturing (including the right to have
manufactured), testing, using, modifying, reproducing, selling, marketing and
distributing Product, with the right to sublicense and assign.
5. CROSS-LICENSES AMONG HP, KOMAG AND AGA
5.1 (i) Grant of Cross-License under the HP MR Technology to Komag. HP
----------------------------------------------------------
hereby grants to Komag a perpetual, non-exclusive, royalty-free (subject to
Section 5.1(v)(b) below), worldwide license under the HP MR Technology to
develop, manufacture (including the right to have manufactured), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of the HP MR Technology for the purpose of developing,
7
<PAGE>
manufacturing (including the right to have manufactured), testing, using,
modifying, reproducing, selling, marketing and distributing Product, with the
right to sublicense and assign subject to Section 5.1(iii)-(iv) below.
(ii) Grant of Cross-License under the HP MR Technology to AGA. HP
--------------------------------------------------------
hereby grants to AGA a perpetual, non-exclusive, royalty-free (subject to
Section 5.1(v)(b) below), worldwide license under the HP MR Technology to
develop, manufacture (including the right to have manufactured), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of the HP MR Technology for the purpose of developing,
manufacturing (including the right to have manufactured), testing, using,
modifying, reproducing, selling, marketing and distributing Product, with the
right to sublicense and assign subject to Section 5.1(iii)-(iv) below.
(iii) Sublicense and Assignment Restrictions. Neither Komag nor AGA
--------------------------------------
may sublicense or assign under the HP MR Technology without the prior written
consent of HP, which shall not be unreasonably withheld. Notwithstanding the
foregoing, in the event that MAC has not already granted a sublicense under the
HP MR Technology to AKCL pursuant to Section 2.1(iii) above, each of Komag and
AGA may sublicense rights of a scope commensurate with the rights granted in
this Section 5.1, without further right of sublicense, to AKCL, without such
prior written approval.
(iv) Price and Production Commitments. In further consideration of
--------------------------------
the licenses granted in this Section 5.1, each of Komag and AGA hereby agrees
that, if it elects to practice the licensed technology, it shall sell Product to
HP with the same price protection and volume commitments as govern MAC's
obligation to sell to HP pursuant to Section 9 below. The obligations contained
in this Section 5.1(iv) shall be subject to independent audit, during normal
business hours upon reasonable notice, by a third party of HP's choosing, and at
HP's expense.
(v) Sublicense under the Third Party MR Technology.
----------------------------------------------
(a) HP hereby grants to each of Komag and AGA a sublicense
under the Third Party MR Technology licensed by the third party to HP,
commensurate in scope with such license, to the extent and for as long as
permitted by such license, to develop, manufacture (including the right to have
manufactured), test, use, modify, reproduce, sell, market and distribute Product
and to modify and create derivative works of such Third Party MR Technology for
the purpose of developing, manufacturing (including the right to have
manufactured), testing, using, modifying, reproducing,
8
<PAGE>
selling, marketing and distributing Product.
(b) To the extent HP has an obligation to pay any royalties or
other fees to any third party pursuant to the license to HP under any Third
Party MR Technology sublicensed by HP to Komag and AGA under Sections 5.1(i)-
(ii) above, HP shall so inform each of Komag and AGA and each of Komag and AGA
shall pay HP all such applicable royalties and other fees due to such third
parties under such sublicense.
5.2 (i) Grant of Cross-License under the Dastek MR Technology to HP.
-----------------------------------------------------------
Each of Komag and AGA hereby grants to HP a perpetual, non-exclusive, royalty-
free, worldwide license under the Dastek MR Technology to develop, manufacture
(including the right to have manufactured), test, use, modify, reproduce, sell,
market and distribute Product and to modify and create derivative works of the
Dastek MR Technology for the purpose of developing, manufacturing (including the
right to have manufactured), testing, using, modifying, reproducing, selling,
marketing and distributing Product, with the right to sublicense and assign
subject to Section 5.2(ii) below.
(ii) Sublicense and Assignment Restriction. HP may not sublicense or
-------------------------------------
assign the Dastek MR Technology without the prior written consent of Komag and
AGA, which shall not be unreasonably withheld. Notwithstanding the foregoing, in
the event that MAC has not already granted a sublicense under the Dastek MR
Technology to AKCL pursuant to Section 3. 1 above, HP may sublicense rights of a
scope commensurate with the rights granted in Section 5.2(i), without further
right of sublicense, to AKCL, without such prior written approval.
5.3 (i) Grant of Cross-License under the Joint MR Technology to HP.
----------------------------------------------------------
Each of Komag and AGA hereby grants to HP a perpetual, non-exclusive, royalty-
free, worldwide license under the Joint MR Technology to develop, manufacture
(including the right to have manufactured), test, use, modify, reproduce, sell,
market and distribute Product and to modify and create derivative works of the
Joint MR Technology for the purpose of developing, manufacturing (including the
right to have manufactured), testing, using, modifying, reproducing, selling,
marketing and distributing Product, with the right to sublicense and assign
subject to Section 5.3(ii) below.
(ii) Sublicense and Assignment Restrictions. HP may not sublicense
--------------------------------------
or assign under the Joint MR Technology without the prior written consent of
Komag and AGA, which shall not be unreasonably withheld. Notwithstanding the
foregoing, in the event that MAC has not already granted a sublicense under the
Joint MR Technology to AKCL pursuant to Section 3.2 above, HP may sublicense
rights of a scope commensurate with the rights granted in section 5.3(i),
without further right of
9
<PAGE>
sublicense, to AKCL, without such prior written approval.
5.4 (i) Grant of Cross-License under the Komag MR Technology to HP.
----------------------------------------------------------
Komag hereby grants to HP a perpetual, non-exclusive, royalty-free (subject to
Section 5.4(iv) (b) below) , worldwide license under the Komag MR Technology to
develop, manufacture (including the right to have manufactured), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of the Komag MR Technology for the purpose of developing,
manufacturing (including the right to have manufactured), testing, using,
modifying, reproducing, selling, marketing and distributing Product, with the
right to sublicense and assign subject to Section 5.4(iii) below.
(ii) Grant of Cross-License under the Komag MR Technology to AGA.
-----------------------------------------------------------
Komag hereby grants to AGA a perpetual, non-exclusive, royalty-free (subject to
Section 5.4(iv) (b) below) , worldwide license under the Komag MR Technology to
develop, manufacture (including the right to have manufactured), test, use,
modify, reproduce, sell, market and distribute Product and to modify and create
derivative works of the Komag MR Technology for the purpose of developing,
manufacturing (including the right to have manufactured), testing, using,
modifying, reproducing, selling, marketing and distributing Product, with the
right to sublicense and assign subject to Section 5.4(iii) below.
(iii) Sublicense and Assignment Restrictions. Neither HP nor AGA may
--------------------------------------
sublicense or assign under the Komag MR Technology without the prior written
consent of Komag, which shall not be unreasonably withheld. Notwithstanding the
foregoing, in the event that MAC has not already granted a sublicense under the
Joint MR Technology to AKCL pursuant to Section 3.2 above, HP and AGA may
sublicense rights of a scope commensurate with the rights granted in Section
5.4(i) and (ii) , respectively, without further right of sublicense, to AKCL,
without such prior written approval.
(iv) Sublicense under the Third Party MR Technology.
----------------------------------------------
(a) Komag hereby grants to each of HP and AGA a sublicense
under the Third Party MR Technology licensed by the third party to Komag,
commensurate in scope with such license, to the extent and for as long as
permitted by such license, to develop, manufacture (including the right to have
manufactured), test, use, modify, reproduce, sell, market and distribute
Product and to modify and create derivative works of such Third Party MR
Technology for the purpose of developing, manufacturing (including the right to
have manufactured), testing, using, modifying, reproducing, selling, marketing
and distributing Product.
10
<PAGE>
(b) To the extent Komag has an obligation to pay any royalties
or other fees to any third party pursuant to the license to Komag under any
Third Party MR Technology sublicensed by Komag to HP and AGA under Sections
5.4(i) and (ii), respectively, above, Komag shall so inform each of HP and AGA
and each of HP and AGA shall pay Komag all such applicable royalties and other
fees due to such third parties under such sublicense.
6. CONTRIBUTIONS OF HP, KOMAG AND AGA
6.1 HP Contribution. Except with respect to the HP MR Technology which
---------------
HP is licensing to MAC pursuant to Section 2.1 (i) above, HP has contributed and
will contribute to MAC the information, data, engineering drawings and other
design specifications and documentation for the dual-stripe magnetoresistive
heads which have been developed or acquired by HP on or before the termination
of the Restriction Period.
6.2 Komag and AGA Contribution. Except with respect to the Dastek MR
--------------------------
Technology and Joint MR Technology which Komag and AGA are licensing to MAC
pursuant to Section 3.1 and 3.2 above, Komag and AGA have contributed and will
contribute to MAC the information, data, engineering drawings and other design
specifications and documentation for magnetoresistive heads which have been
developed or acquired by Dastek, or Dastek and Komag, as the case may be.
6.3 Komag Contribution. Except with respect to the Komag MR Technology
------------------
which Komag is licensing to MAC pursuant to Section 3.3(i) above, Komag has
contributed and will contribute to MAC the information, data, engineering
drawings and other design specifications and documentation for magnetoresistive
heads which have been developed or acquired by Komag on or before the date of
this Agreement.
7. MAC TECHNICAL INFORMATION
7.1 Storage. MAC will store, at its own expense, at a location other than
-------
any of its offices, warehouses or manufacturing, service or other sites, copies
of the MAC Technical Information and will update and store such MAC Technical
Information no less frequently than once every six (6) months beginning on the
date hereof.
7.2 Delivery. MAC will make available to any of other parties hereto, at
--------
such party's expense, at the request of such party but no more frequently than
once every six (6) months, copies of the MAC Technical Information to be
retrieved by such party or its authorized agent at the
11
<PAGE>
location where such MAC Technical Information is stored by MAC. The party
retrieving any MAC Technical Information shall pay all expenses related to such
retrieval, including without limitation any taxes, and MAC shall use reasonable
efforts to minimize such expenses.
7.3 Site Visits. No more frequently than once every six (6) months, MAC
-----------
will make available to each of the other parties hereto such technical personnel
at MAC's sites as are reasonably necessary to explain to them MAC's Product
manufacturing processes. Such other parties will use reasonable efforts to
coordinate such visits to MAC in order to minimize any disruption to MAC's
business.
8. PROTOTYPE UNITS
8.1 Delivery to HP and AGA. MAC will deliver to each of HP and AGA, on
----------------------
mutually agreeable terms, sufficient quantities of prototypes of the Product at
each level of development completed, for use for the purpose of assembling and
testing prototype drive units containing the Product. The prototype units will
be used only for internal development and testing purposes on behalf of MAC and
will not be sold, leased or otherwise transferred or made available to third
parties.
8.2 Delivery to Komag. MAC will deliver to Komag, on mutually agreeable
-----------------
terms, sufficient quantities of prototypes of the Product at each level of
development completed, for use for the purpose of developing, testing and
manufacturing magnetic recording media for use with the Product. The prototypes
will be used only for internal development and testing purposes and will not be
sold, leased or otherwise transferred or made available to third parties.
9. PRODUCTION
For a period of three (3) years from the date hereof, MAC shall sell
Product to HP at a price equal to or less than the lowest price for Product of
similar technical specifications that MAC receives from any other customer of
such Product irrespective of volumes. During the term of this Agreement, MAC
shall sell Product to HP in such volumes as are established pursuant to the
procedures set forth in Exhibit A attached hereto. The obligations contained in
---------
this Section 9 shall be subject to independent audit, during normal business
hours upon reasonable notice, by a third party of HP's choosing, and at HP's
expense.
12
<PAGE>
10. CONFIDENTIAL INFORMATION
10.1 Disclosure Period. This Section 10 applies to Confidential
-----------------
Information which is disclosed prior to, during or after the effective period of
this Agreement.
10.2 Confidentiality Period. A Recipient's duty to protect Confidential
----------------------
Information disclosed under this Agreement expires five (5) years after the date
of disclosure of such Confidential Information to such Recipient.
10.3 Use. Recipient shall use the Confidential Information only for the
---
purposes and objectives of this Agreement and shall not disclose any
Confidential Information to any third party except as expressly permitted in
this Agreement.
10.4 Standard of Care. In order to protect certain Confidential
----------------
Information which may be disclosed among them, the parties hereto agree that the
Recipient shall protect the disclosed Confidential Information by using at least
the same degree of care, but no less than a reasonable degree of care, to
prevent the unauthorized use, dissemination or publication of the Confidential
Information as the Recipient uses to protect its own Confidential Information of
a like nature. Such reasonable degree of care shall include at a minimum:
(i) insuring that each individual person employed by or providing
consulting services to a Recipient who receives another party's Confidential
Information shall have executed a binding contract as specified in Section 11.3
to protect such Confidential Information. A standard Employee Agreement or a
Professional Services Agreement in the case of a consultant which contains terms
protecting trade secrets of the employer shall meet this requirement; and
(ii) requiring that all access to Confidential Information of the
other party be strictly controlled and that the number of copies of proprietary
documents be limited to those individuals having a "need to know" in order to
perform their respective duties. The individuals responsible for the
establishment and maintenance of this protection program at each party hereto
are:
13
<PAGE>
(a) MAC:
Tracy Scott
Vice President Slider/HGA Development
M-R Assets Corporation
497 South Hillview Drive
Milpitas, CA 95035
Fax no. (408) 946-8461;
(b) HP:
Mike Covault
R&D Section Manager
Disk Memory Division
Hewlett-Packard Company
11413 Chinden Boulevard
Boise, ID 83714
Fax no. (208) 396-5864;
(c) Komag:
Jim Opfer
Group Vice President of R&D
Komag, Incorporated
275 South Hillview Drive
Milpitas, CA 95025
Fax no. (408) 946-1126; and
(d) AGA:
Tadao Horikoshi
President
Asahi Glass America, Inc.
450 Lexington Avenue
Suite 1920
New York, NY 10017-3911
Fax no. (212)687-4663
10.5 Marking. A Recipient shall have a duty to protect only that
-------
Confidential Information which is:
(i) disclosed by the Discloser in writing and is marked as
confidential at the time of disclosure; or
(ii) disclosed by the Discloser in any other manner and is identified
as confidential at the time of disclosure and is also summarized and designated
as confidential in a written memorandum delivered to the Recipient's
representative named in Section 10.4(ii) above within thirty (30) days of the
disclosure.
14
<PAGE>
10.6 Exceptions. This Agreement imposes no obligation upon a Recipient
----------
with respect to Confidential Information which:
(i) was in the Recipient's possession before receipt from the
Discloser without any obligation of confidentiality;
(ii) is or becomes a matter of public knowledge through no fault of
the Recipient;
(iii) is rightfully received by the Recipient from a third party
without a duty of confidentiality;
(iv) is disclosed by the Discloser to a third party without a duty
of confidentiality on the third party;
(v) is independently developed, without the use of any Confidential
Information of the Discloser, by employees of the Recipient;
(vi) is disclosed under operation of law; or
(vii) is disclosed by the Recipient with the Discloser's prior
written approval.
10.7 Warranty. Each Discloser warrants that it has the right to make the
--------
disclosures under this Agreement.
11. ADDITIONAL AGREEMENTS REGARDING THE LICENSES
11.1 (i) HP Support. HP shall make commercially reasonable efforts to
----------
provide support to MAC for the HP MR Technology during the term of this
Agreement.
(ii) Komag Support. Komag shall make commercially reasonable efforts
-------------
to provide support to MAC for the Dastek MR Technology, the Joint MR Technology
and the Komag MR Technology during the term of this Agreement.
(iii) AGA Support. AGA shall make commercially reasonable efforts to
-----------
provide support to MAC for the Dastek MR Technology and the Joint MR Technology
during the term of this Agreement.
15
<PAGE>
11.2 HP Giant Magnetoresistive Technology. In the event that:
------------------------------------
(i) giant magnetoresistive technology (a) is developed or acquired
and, with respect to patents, conceived or first reduced to practice by HP, or
-----
(b) is developed and, with respect to patents, conceived or first reduced to
practice for or on behalf of HP (except with respect to Joint Inventions where
----------------------
MAC is an Inventing Party and Joint Works where MAC is a Joint Author); and
(ii) in case of either subsection (i)(a) or (b) above, HP has
determined in good faith that MAC has reasonably satisfied HP's Product needs;
then HP agrees to negotiate with MAC in good faith for the license of such
future generations of MR technology to MAC on terms and conditions that are
mutually acceptable.
11.3 Agreements with Employees and Consultants. Each of the parties
-----------------------------------------
represents and warrants to the others that it has agreements with, or policies
with respect to, its respective employees and consultants, such that the
ownership of any and all inventions made by an employee or consultant in the
course of work pursuant to this Agreement vests in the employing party, subject
to the provisions of applicable law governing ownership of such inventions.
11.4 No Further Obligation. Nothing contained in this Agreement shall be
---------------------
construed as a requirement to file or prosecute in any country any application
for patent rights, opposition, interference, conflict proceeding or other
contest of priority, or obligation to obtain or maintain in force any patent
rights, or to institute or defend any litigation, or to apply for or obtain any
reissue, renewal, validation or extension of any patent rights.
11.5 Termination of Prior Agreement. The MR Head Development Agreement,
------------------------------
dated as of March 26, 1992, by and among HP and Komag Technology, is hereby
terminated in accordance with Section 13 thereof.
12. RELATIONSHIP OF THE PARTIES
12.1 Independent Contractors. Each of the parties shall conduct the work
-----------------------
to be performed under this Agreement as an independent contractor and not as an
agent or employee of any of the other parties. Subject to the terms and
conditions of this Agreement, each party shall, at its sole discretion, choose
the means to be employed and the manner of carrying out its obligations
hereunder.
16
<PAGE>
12.2 No Marketing. Nothing in this Agreement shall be construed as an
------------
obligation on any of the parties hereto to market or not to market the Product,
and there shall not be any explicit or implied "best efforts" standard upon any
of the parties hereto in marketing the Product.
13. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
Nothing in this Agreement shall be construed as an agreement or obligation
to institute or prosecute or confer any right to institute or prosecute actions
or suits against third parties for infringement of any patent, copyright,
trademark, trade secret or other intellectual property right relating to this
Agreement.
14. REPRESENTATIONS AND WARRANTIES
14.1 (i) HP.
--
(a) HP has the right and authority to grant the licenses to the
HP MR Technology provided herein and to perform its obligations hereunder.
(b) Except pursuant to general cross-licenses between HP and
certain other companies, HP has not granted rights to manufacture, produce,
assemble, license, distribute, market or sell, or otherwise exploit, the HP MR
Technology to any other person or entity and is not bound by any agreement that
affects MAC's right to use and exploit the HP MR Technology as provided in this
Agreement or to manufacture, produce, assemble, distribute, market or sell the
Product.
(c) HP has not received any notice that the HP MR Technology
infringes the rights of others or is being infringed by others.
(d) HP has the right and authority to grant the sublicenses
provided herein.
(ii) Komag.
-----
(a) Komag owns, with AGA, an undivided right in the Dastek MR
Technology and the Joint MR Technology and has the right and authority to grant
the licenses to the Dastek MR Technology, the Joint MR Technology and the Komag
MR Technology provided herein and to perform its obligations hereunder.
(b) Except pursuant to general cross-licenses between Komag and
certain other companies, Komag has not
17
<PAGE>
granted rights to manufacture, produce, assemble, license, distribute, market or
sell, or otherwise exploit, the Dastek MR Technology, the Joint MR Technology or
the Komag Technology to any other person or entity and is not bound by any
agreement that affects MAC's right to use and exploit the Dastek MR Technology,
the Joint MR Technology or the Komag MR Technology as provided in this Agreement
or to manufacture, produce, assemble, distribute, market or sell the Product.
(c) Komag AGA has not received any notice that the Dastek MR
Technology, the Joint MR Technology or the Komag MR Technology infringes the
rights of others or is being infringed by others.
(d) Komag has the right and authority to grant the sublicenses
provided herein.
(iii) AGA.
---
(a) AGA owns, with Komag, an undivided right in the Dastek MR
Technology and the Joint MR Technology and has the right and authority to grant
the licenses to the Dastek MR Technology and the Joint MR Technology provided
herein and to perform its obligations hereunder.
(b) AGA has not granted rights to manufacture, produce, assemble,
license, distribute, market or sell, or otherwise exploit, the Dastek MR
Technology or the Joint MR Technology to any other person or entity and is not
bound by any agreement that affects MAC's right to use and exploit the Dastek MR
Technology or the Joint MR Technology as provided in this Agreement or to
manufacture, produce, assemble, distribute, market or sell the Product.
(c) AGA has not received any notice that the Dastek MR Technology
or the Joint MR Technology infringes the rights of others or is being infringed
by others.
14.2 Disclaimer. No party hereto makes any express or implied warranty of
----------
any kind with regard to the operability or functionality of any aspect of the
respective technologies or services delivered or provided hereunder. All Product
warranties shall be the subject of the purchasing contracts for that Product.
EACH OF THE PARTIES HERETO SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES OF ANY
KIND WHATSOEVER, AND IN PARTICULAR, WITHOUT LIMITATION, THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ALL DOCUMENTATION
DELIVERED OR PROVIDED HEREUNDER IS STRICTLY PROVIDED "AS IS."
18
<PAGE>
14.3 Release.
-------
(i) No Infringement. Subject to Section 14.3 (ii) below, no party
---------------
hereto shall have any liability for infringement of any patent, copyright,
trademark, trade secret or other intellectual property rights resulting from the
use of any other party's technology licensed hereunder or compliance with any
other party's designs, specifications or instructions, or from modifications of
the Product not performed by that party, or from use of the Product other than
as specified or from use of the Product with products not supplied by that
party.
(ii) Limitation. With respect to Products made, used or sold by MAC
----------
which infringe any Intellectual Property rights of HP, Komag or AGA, the release
provided to MAC by the other parties hereto pursuant to Section 14.3 (i) above
shall apply solely to (a) dual-stripe magnetoresistive Products, (b) inductive
Products, and (c) soft adjacent layer Products.
14.4 Future Patent Indemnity. MAC agrees to negotiate with HP in good
-----------------------
faith (i) whether to include, in any purchase order to be issued by HP to MAC
for Products or purchase or supply agreement to be entered into by HP and MAC
for Products, patent indemnity from MAC to HP with respect to the Products
purchased, and (ii) if HP and MAC agree to include such patent indemnity in any
such purchase order or purchase or supply agreement, the terms and conditions of
such patent indemnity.
15. INDEPENDENTLY AND JOINTLY DEVELOPED TECHNOLOGY
15.1 HP Property. All discoveries, improvements and inventions, conceived
-----------
or first reduced to practice (as such terms are used before the PTO) solely by
HP employees, shall be the sole and exclusive property of HP, and HP shall
retain any and all rights to file patent applications or seek any other form of
protection therefor. HP shall be the sole and exclusive owner of all rights,
including without limitation copyrights, in and to all derivative works and
other works of authorship created solely by HP hereunder, and HP shall retain
any and all rights to file any copyright applications or seek any other form of
protection therefor.
15.2 Komag Property. All discoveries, improvements and inventions,
--------------
conceived or first reduced to practice (as such terms are used before the PTO)
solely by Komag employees, shall be the sole and exclusive property of Komag,
and Komag shall retain any and all rights to file patent applications or seek
any other form of protection therefor. Komag shall be the sole and exclusive
owner of all rights, including without
19
<PAGE>
limitation copyrights, in and to all derivative works and other works of
authorship created solely by Komag hereunder, and Komag shall retain any and all
rights to file any copyright applications or seek any other form of protection
therefor.
15.3 AGA Property. All discoveries, improvements and inventions, conceived
------------
or first reduced to practice (as such terms are used before the PTO) solely by
AGA employees, shall be the sole and exclusive property of AGA, and AGA shall
retain any and all rights to file patent applications or seek any other form of
protection therefor. AGA shall be the sole and exclusive owner of all rights,
including without limitation copyrights, in and to all derivative works and
other works of authorship created solely by AGA hereunder, and AGA shall retain
any and all rights to file any copyright applications or seek any other form of
protection therefor.
15.4 MAC Property. All discoveries, improvements and inventions, conceived
------------
or first reduced to practice (as such terms are used before the PTO) solely by
MAC employees, shall be the sole and exclusive property of MAC, and MAC shall
retain any and all rights to file patent applications or seek any other form of
protection therefor. MAC shall be the sole and exclusive owner of all rights,
including without limitation copyrights, in and to all derivative works and
other works of authorship created solely by MAC hereunder, and MAC shall retain
any and all rights to file any copyright applications or seek any other form of
protection therefor.
15.5 Joint Property.
--------------
(i) All discoveries, improvements and inventions, conceived or first
reduced to practice (as such terms are used before the PTO) jointly ("Joint
Inventions"), by employees of any parties hereto ("Inventing Parties"), shall
be the property jointly of the Inventing Parties, each of such Inventing Parties
having an equal and undivided interest therein. The Inventing Parties shall
mutually determine whether an application or applications shall be filed on any
Joint Inventions, which of the Inventing Parties shall prepare and file such
application or applications and the country or countries in which such
application or applications shall be filed. The expenses incurred in connection
with the preparation and filing of such application or applications shall be
divided equally between and paid by the Inventing Parties. If the Inventing
Parties are unable to agree to file an application or applications on any Joint
Inventions, one or more of the Inventing Parties may prepare and file, and shall
pay the expenses of preparing and filing, such application or application at its
or their own expense. The other Inventing Parties shall automatically have a
perpetual, nonexclusive,
20
<PAGE>
royalty-free, worldwide license under any patent or patents that may be granted
on such application or applications; provided, however, that such other
Inventing Parties shall not have the right to sublicense under the patent or
patents.
(ii) All rights, including without limitation copyrights, in and to
all derivative works and other works of authorship that constitute joint works
(as defined in the U.S. Copyright Act (17 U.S.C. 101 et seq.) ("Joint Works")
created jointly by any of the parties hereto ("Joint Authors") shall be owned
jointly by the Joint Authors, each of such Joint Authors having an equal and
undivided interest therein, and each of such Joint Authors having the right to
do the following without the consent of and without accounting to the other
Joint Authors: (a) reproduce such Joint Works, (b) prepare derivative works
based upon such Joint Works, (c) distribute copies of such Joint Works, and (d)
perform and display such Joint Works publicly. The Joint Authors shall mutually
determine whether an application or applications shall be filed on any Joint
Works, which of the Joint Authors shall prepare and file such application or
applications and the country or countries in which such application or
applications shall be filed. The expenses incurred in connection with the
preparation and filing of such application or applications shall be divided
equally between and paid by the Joint Authors. If the Joint Authors are unable
to agree to file an application or applications on any Joint Works, one or more
of the Joint Authors may prepare and file, and shall pay the expenses of
preparing and filing, such application or applications at its or their own
expense.
(iii) The rights and obligations of each of the Inventing Parties and
Joint Authors under this Section 15.5 shall survive the termination of this
Agreement for any reason.
16. BUSINESS PERFORMANCE MEASURES
In the event that MAC fails to achieve the business performance measures
set forth in Exhibit B attached hereto, HP shall have the right to cause MAC,
---------
in accordance with such exhibit: (i) to sublicense the HP MR Technology, the
Dastek MR Technology, the Joint MR Technology and the Komag MR Technology and
to license the MAC MR Technology to a third party designated by HP upon such
reasonable terms and conditions as are mutually acceptable to HP, MAC and such
third party and as are approved by an affirmative vote of at least eighty
percent (80%) of the members of MAC's Board of Directors; and (ii) within six
(6) months of the execution of such sublicense, to transfer to such sublicensee
all Intellectual Property related thereto. MAC will use its
21
<PAGE>
diligent efforts (x) to begin negotiations with such third party promptly
following its designation by HP, and (y) to conclude such negotiations and
execute such license and sublicenses within forty-five (45) days following
commencement of such negotiations.
17. RELEASE OF INFORMATION
Except as required by operation of law, no party hereto, without first
securing the written consent of the other parties hereto, shall advertise or
release any publicity in regard to the existence of this Agreement or its
contents. The parties agree that press releases shall be conducted as
appropriate to further the industry acceptance of the Product.
18. LIMITATION OF LIABILITY
NO PARTY HERETO SHALL BE LIABLE UNDER ANY PROVISION OF THIS AGREEMENT OR
UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF
ANY BREACH OF THIS AGREEMENT.
19. GENERAL
19.1 No Purchases. Except as provided herein, no party hereto has an
------------
obligation under this Agreement to purchase any service or item from any of the
other parties hereto.
19.2 Exports. Each party hereto shall adhere to the U.S. Export
-------
Administration Laws and Regulations and shall not export or re-export any
technical data or products received from any other party or the direct product
of such technical data to any proscribed country listed in the U.S. Export
Administration Regulations unless properly authorized by the US Government.
19.3 Force Majeure. No party hereto shall be liable for any delay in
-------------
performance or failure to perform in whole or in part the terms of this
Agreement due to causes beyond the reasonable control of such party, and any
such delay or failure shall not be considered a breach of this Agreement.
19.4 No Waiver. The failure to enforce or the delay in enforcement of any
---------
provision, right or option of this Agreement by any party hereto shall in no way
be construed to be a waiver of such provision, right or option, unless set forth
in writing and signed by all of the parties hereto, nor shall such action be
deemed a waiver of any other right which
22
<PAGE>
that party may otherwise have at law or in equity.
19.5 Headings. The headings to sections of this Agreement are to
--------
facilitate reference only and do not form a part of this Agreement and shall not
in any way affect the construction or interpretation hereof.
19.6 Notices. Any notice, request, instruction or other document required
-------
or permitted to be given hereunder shall be in writing addressed to the person
named in Section 10. 4 above and shall be valid and sufficient if dispatched by
registered or certified mail, postage prepaid, in any post office in the United
States, by confirmed facsimile or by courier, with copies similarly dispatched
to the following persons, as appropriate:
to MAC: M-R Assets Corporation
497 S. Hillview Drive
Milpitas, CA 95035
Attn: President
Fax No.: (408) 957-4775
and Brobeck, Phleger & Harrison
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attn: Edward M. Leonard, Esq.
Fax No. (415) 496-2885
to HP: Hewlett-Packard Company
Disk Memory Division
11413 Chinden Boulevard, MS: 445
Boise, ID 83714
Attn: General Manager
Fax No.: (208) 396-6214
and: Hewlett-Packard Company
3000 Hanover Street, MS: 20BQ
Palo Alto, CA 94304
Attn: General Counsel
Fax No.: (415) 857-4392
to Komag: Komag, Incorporated
275 S. Hillview Drive
Milpitas, CA 95035
Attn: Chief Financial Officer
Fax No.: (408) 956-1104
23
<PAGE>
and: Brobeck, Phleger & Harrison
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attn: Edward M. Leonard, Esq.
Fax No. (415) 496-2885
to AGA: Asahi Glass America, Inc.
450 Lexington Avenue, Suite 1920
New York, NY 10017-3911
Attn: President
Fax No.: (212) 687-4663
and: Graham & James
5 Palo Alto Square, Suite 1000
3000 El Camino Real
Palo Alto, CA 94306
Attn: Joe C. Sorenson
Fax No.: (415) 856-3619
19.7 Taxes. All taxes imposed as a result of the existence of this
-----
Agreement or the performance of the parties hereunder shall be borne and paid by
the party required to do so by applicable law.
19.8 Governing Law. This Agreement and matters connected with the
-------------
performance thereof shall be construed, interpreted, applied, and governed in
all respects in accordance with the laws of the State of California, without
regard to the conflicts of laws provisions thereof.
19.9 Assignment. Except as specifically provided herein, no party may
----------
assign this Agreement in whole or in part without the prior written consent of
the other parties hereto, which will not be unreasonably withheld, and any
purported assignment, sublicense or transfer of any kind not expressly permitted
hereunder shall be void. Any (i) acquisition of MAC by another person or entity
by means of any transaction or series of related transactions (including without
limitation any reorganization, merger or consolidation but excluding any merger
effected exclusively for the purpose of changing the domicile of MAC or a merger
into a wholly-owned subsidiary of MAC), or (ii) sale of all or substantially all
of the assets of MAC, unless in the case of clause (i) or (ii) above MAC's
shareholders of record as constituted immediately prior to such acquisition or
sale will hold (immediately after such acquisition or sale by virtue of
securities issued as consideration for MAC's acquisition or sale or otherwise)
at least fifty percent (50%) of the voting power of the surviving or acquiring
entity, shall be deemed an assignment subject to this Section 19.9.
24
<PAGE>
19.10 Entire Agreement. This Agreement sets forth the entire understanding
----------------
and agreement between the parties hereto as to the subject matter of this
Agreement and merges and supersedes all previous communications, negotiations,
warranties, representations and agreements, either oral or written, with respect
to the specific subject matter hereof, and no addition to or modification of
this Agreement shall be binding on any party hereto unless reduced to writing
and duly executed by each of the parties hereto.
19.11 Severability. In the event that any provision of this Agreement
------------
shall be invalid, illegal or unenforceable for any reason, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not be affected or impaired in any way thereby and such remaining provisions
shall be given full effect and enforced to the broadest extent possible.
19.12 Compliance with Law. Each party hereto shall comply with all
-------------------
applicable federal, state, local and foreign laws and regulations in connection
with its activities pursuant to this Agreement.
19.13 Remedies Not Exclusive. The rights and remedies of a party set forth
----------------------
herein with respect to the failure of another party hereto to comply with the
terms of this Agreement (including without limitation rights of termination of
this Agreement) are not exclusive, the exercise thereof shall not constitute an
election of remedies and the aggrieved party shall in all events be entitled to
seek whatever additional remedies may be available in law or equity (including
without limitation appropriate injunctive relief).
19.14 Further Assurances. Each party hereto shall execute, acknowledge and
------------------
deliver such further instruments and do all such other acts as may be reasonably
necessary or appropriate to carry out the purposes of this Agreement.
19.15 Term. This Agreement shall be perpetual.
----
25
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Master Technology License
Agreement to be duly executed as of the date first written above.
M-R ASSETS CORPORATION HEWLETT-PACKARD COMPANY
By:___________________________ By:_____________________________
Print Print
name:_______________________ name:_________________________
Title: _______________________ Title: _________________________
KOMAG, INCORPORATED ASAHI GLASS AMERICA, INC.
By:___________________________ By:_____________________________
Print Print
name:_______________________ name:_________________________
Title: _______________________ Title: _________________________
Exhibits
- --------
A Procedures for Volume Shipments by MAC to HP
B Business Performance Measures of MAC
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Master Technology License
Agreement to be duly executed as of the date first written above.
M-R ASSETS CORPORATION HEWLETT-PACKARD COMPANY
By: /s/ Ralph Patterson By: /s/ Bruce Spenner
------------------------- --------------------------
Print Print
name: Ralph Patterson name: Bruce Spenner
--------------------- ---------------------
Title: President and Chief Title: General Manager
--------------------- ---------------------
Executive Officer
KOMAG, INCORPORATED ASAHI GLASS AMERICA, INC.
By: /s/ Tu Chen By: /s/ Nobuo Takamoto
------------------------- --------------------------
Print Print
name: Tu Chen name: Nobuo Takamoto
--------------------- ---------------------
Title: Chairman of the Board Title: Nobuo Takamoto, attorney-
---------------------- ---------------------
in-fact for Tadao
Horikoshi, President
Exhibits
- --------
A Procedures for Volume Shipments by MAC to HP
B Business Performance Measures of MAC
<PAGE>
EXHIBIT A
TO
MASTER TECHNOLOGY LICENSE AGREEMENT
PROCEDURES FOR VOLUME SHIPMENTS BY MAC TO HP
HP will provide MAC every month a twelve (12) month rolling shipment
forecast of HP's projected Product requirements. At any time, either HP or MAC
may request a specific review of HP's forecast, MAC's capacity commitment to HP,
and MAC's total capacity and shipment forecast.
MAC will make commercially reasonable efforts to meet on a timely basis the
volumes in HP's forecasts based on MAC's entire capacity before MAC supplies
volume shipments of Product to any other customer, and HP will purchase Product
from MAC in such forecasted volumes, subject to such adjustments as HP, after
conferring with MAC, shall make in good faith based upon HP's reasonable
business needs.
<PAGE>
EXHIBIT B
TO
MASTER TECHNOLOGY LICENSE AGREEMENT
BUSINESS PERFORMANCE MEASURES OF MAC
1. Volume. If total deliveries from MAC fall short of MAC's delivery
------
commitment to HP by an amount equal to or greater than [*] percent ([*]%) over a
period of four (4) or more consecutive months, then MAC will present a written
recovery plan to HP within ten (10) days of the end of such second month. If the
plan, in HP's sole, reasonable determination, does not demonstrate that MAC will
be able to deliver to HP [*] percent ([*]%) of MAC's prior commitment for
Product within a reasonable period of time, then MAC, in HP's sole, reasonable
discretion, will grant the licenses and sublicenses set forth in Section 16.
2. Defects. Commencing with MAC's normal commercial volume production of
-------
a Product, if a joint engineering team composed of, but not limited to, HP and
MAC engineers determines (based upon reasonable statistical samplings and
testing methodologies) that such Product is solely responsible for [*] or more
percentage points yield loss measured at HP's drive level burn-in test point
over a period of two (2) or more consecutive months, then MAC will present a
written recovery plan to HP within ten (10) working days of the end of such
second month. If the plan, in HP's sole, reasonable discretion, does not
demonstrate that MAC will be able to deliver such Product to HP that produces
five (5) or fewer percentage points yield loss (as measured at HP's drive level
burn-in test point) within a reasonable period of time, then MAC, in HP's sole,
reasonable discretion, will grant the licenses and sublicenses set forth in
Section 16.
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
HP/Headway/Komag and AGA Confidential
HEADWAY TECHNOLOGIES, INC.
AMENDMENT TO MASTER TECHNOLOGY LICENSE AGREEMENT
AND SIDE AGREEMENT
Headway Technologies, Inc., a California corporation ("Headway"), Hewlett-
Packard Company, a California corporation ("HP"), Komag, Incorporated, a
Delaware corporation ("Komag"), and Asahi Glass America, Inc., a Delaware
corporation ("AGA"), entered into a Master Technology License Agreement
effective September 23, 1994 ("MTLA"); and HP, Komag, AGA, and Headway entered
into a Side Agreement effective September 23, 1994 ("Side Agreement"); now the
parties intend to amend both agreements as follows to be effective as of the
Closing Date (hereinafter defined):
I. The Master Technology License Agreement ("MTLA") shall be amended as
follows:
1. Section 1.
(a) The definition of "MAC MR Technology" is modified by deleting
"conceived or first reduced to practice or acquired by MAC" and
replacing it with "filed or acquired by MAC prior to the Closing
Date."
(b) The definition of "Komag MR Technology" is modified by deleting
"conceived or first reduced to practice or acquired by Komag,"
and replacing it with "filed or acquired by Komag prior to the
Closing Date."
(c) Add a new definition, "Closing Date," which is the closing date
as contemplated in the Series A Preferred Stock Purchase
Agreement dated February 4, 1997.
2. Delete the following sections in their entirety:
(a) Section 7.
(b) Section 9.
(c) Section 11.1 and 11.2.
(d) Section 16.
<PAGE>
3. The following licensing provisions of the MTLA shall be modified as
follows :
(a) In addition to the exclusive and non-exclusive rights already
granted to Headway, HP hereby licenses the HP MR Technology
pursuant to Section 2.1 of the MTLA, Komag and AGA hereby
licenses the Dastek MR Technology and the Joint MR Technology
pursuant to Sections 3.1 and 3.2, respectively, and Komag hereby
licenses the Komag MR Technology pursuant to Section 3.3 of the
MTLA to Headway on a perpetual, non-exclusive, royalty-free,
worldwide basis to develop, manufacture (including the right to
have manufactured), test, use, modify, reproduce, offer to sell,
sell, import and export, market and distribute recording heads
for tape drives and to modify and create derivative works of the
HP MR Technology, Dastek MR Technology, Joint MR Technology and
Komag MR Technology for the purpose of developing, manufacturing
(including the right to have manufactured), testing, using,
modifying, reproducing, selling, marketing and distributing
recording heads for tape drives, with the right to sublicense and
assign the forgoing rights.
(b) Section 4 shall be amended to include the following license
granted by Headway to HP: Headway hereby grants to HP the rights
to the HP MR Technology to the extent required for HP to
manufacture (including the right to have manufactured), test,
use, modify, reproduce, offer to sell, sell, import, export,
market and distribute recording heads for tape drives or floppy
disk drives of any capacity for use solely in floppy disk drives,
tape drives, floppy disk drive mechanisms, or tape drive
mechanisms, all of which are either: (i) manufactured by HP, or
(ii) manufactured for HP and sold as an HP logo product (the "HP
Field of Use"). The license granted HP in Section 4.1 to MAC MR
Technology shall be replaced in its entirety with a license to
use MAC MR Technology within the "HP Field of Use." The licenses
to the MAC MR Technology granted to Komag and AGA pursuant to
Section 4.2 and 4.3 are replaced in their entirety with the
following license: Headway hereby grants to Komag and AGA the
rights to the MAC MR Technology to the extent required for Komag
or AGA to manufacture (including the right to have manufactured)
test, use, modify, reproduce, offer to sell, sell, import,
export, market and distribute media products (but not Products or
recording heads for disk drives, tape drives, disk drive
mechanisms, or tape drive mechanisms)(the "Komag/AGA Field of
Use").
(c) The cross licenses by HP of the HP MR Technology to Komag and AGA
pursuant to Sections 5.1(i) and (ii), respectively, of the MTLA
and by Komag and AGA to HP of the Dastek MR Technology pursuant
to Section 5.2(i) of the MTLA are replaced in their entirety with
licenses to the applicable technology that are limited to use of
the applicable technology in the HP Field
-2-
<PAGE>
of Use in the case of the cross license to HP, and in the
Komag/AGA Field of Use in the case of the cross license to Komag
and AGA.
(d) The cross licenses by Komag and AGA of the Joint MR Technology to
HP pursuant to Section 5.3(i) of the MTLA and by Komag of the
Komag MR Technology to HP and AGA pursuant to Sections 5.4(i) and
(ii), respectively, of the MTLA are replaced in their entirety
with licenses to the applicable technology that are limited to
the use of the HP Field of Use in the case of the cross license
to HP and the Komag/AGA Field of Use in the case of the cross
license to AGA.
4. Headway shall retain its exclusive licenses to the HP MR Technology
and the Dastek MR Technology, and neither HP nor Komag nor AGA shall
have any rights to such technology, except for the licenses granted to
HP, Komag and AGA by Headway as set forth in 3(b) above, for as long
as such licenses remain in effect. Headway's licenses to the Joint MR
Technology, the Komag MR Technology and the Third Party MR Technology
shall remain nonexclusive. All of the licenses granted HP under the
MTLA as amended shall be contingent on HP first entering into good
faith negotiations with Headway for at least ninety (90) days to allow
Headway to develop and manufacture such tape drive and/or floppy disk
drive heads for HP. If HP and Headway can not reach agreement after
such ninety (90) day period, then HP may exercise its license rights
granted in the MTLA as amended. Notwithstanding anything to the
contrary herein or in the MTLA, the MAC MR Technology, HP MR
Technology, Dastek MR Technology, Joint MR Technology and Komag MR
Technology licenses, as amended, shall be limited to the technology
already in the possession of the receiving party and the patent
applications and issued patents in existence as of the Closing Date.
5. In Section 19.9 line 2, replace "no party" with "neither HP, Komag or
AGA" and replace the second sentence (which begins with "Any (i)
acquisition") with the following: " Headway may assign this Agreement
in whole or in part or grant sublicenses without the consent of the
other parties, except that Headway may not assign this Agreement in
whole or in part or grant any sublicenses with regards to the Komag MR
Technology to a company which develops or manufactures disk media
products for a period of two (2) years from the Closing Date, without
Komag's consent, which shall not be unreasonably withheld or delayed.
Any assignment or sublicense cannot exceed the scope of the licenses
granted to Headway in this Agreement.
6. Except for those provisions expressly modified or deleted, all the
provisions of the MTLA remain in force and effect.
-3-
<PAGE>
II. The Side Agreement shall be terminated in its entirety as of the
effective date of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Master Technology License
Amendment to be duly executed as of the date first written above.
HEADWAY TECHNOLOGIES, INC. HEWLETT-PACKARD COMPANY
By:__________________________ By:__________________________
_____________________________ _____________________________
(Print Name) (Print Name)
_____________________________ _____________________________
(Title) (Title)
KOMAG, INCORPORATED ASAHI GLASS AMERICA, INC.
By:__________________________ By:__________________________
_____________________________ _____________________________
(Print Name) (Print Name)
_____________________________ _____________________________
(Title) (Title)
-4-
<PAGE>
II. The Side Agreement shall be terminated in its entirety as of the
effective date of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Master Technology License
Amendment to be duly executed as of the date first written above.
HEADWAY TECHNOLOGIES, INC. HEWLETT-PACKARD COMPANY
By: /s/ John R Mackey By: /s/ Ann O. Baskins
------------------------- ------------------------
JOHN R MACKEY ANN O. BASKINS
- ----------------------------- ----------------------------
(Print Name) (Print Name)
Assistant Secretary
President & C.E.O. and managing ??^^
- ----------------------------- -----------------------------
(Title)
KOMAG, INCORPORATED ASAHI GLASS AMERICA, INC.
By: /s/ Stephen Johnson By: /s/ O. Wada
-------------------------- --------------------------
OSAMU WADA
_____________________________ _____________________________
(Print Name) (Print Name)
President
_____________________________ -----------------------------
(Title) (Title)
<PAGE>
EXHIBIT 10.6
MRST LIMITED
SHAREHOLDERS AND OPTION AGREEMENT
THIS AGREEMENT is made as of January 13, 1999, by and among MRST Limited, a
Hong Kong corporation (the "Company"), Headway Technologies, Inc., a Delaware
corporation ("Headway") and SFI Investment Limited, a Hong Kong Corporation
("SFI"). Headway and SFI are collectively referred to herein as the
"Shareholders" and individually as a "Shareholder." Except as otherwise provided
herein, capitalized terms used herein are defined in Section 10 hereof.
RECITALS
1. Headway and SFI propose to purchase shares of the Company's share
capital (the "Share Capital") pursuant to a Share Capital Subscription Agreement
by and among Headway, SFI and the Company dated as of the date hereof (the
"Subscription Agreement").
2. In order to induce the Shareholders to purchase the Share Capital, the
parties have agreed to enter into this Agreement for the purposes, among others,
of (i) electing one representative designated by the Shareholder to the
Company's Board of Directors (the "Board"), (ii) assuring continuity in the
management and ownership of the Company and (iii) limiting the manner and terms
by which the Agreement Shares may be transferred.
3. The execution and delivery of this Agreement is a condition to closing
pursuant to the Subscription Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
4. Board of Directors. Until the Change of Control Date:
------------------
1. Each holder of Share Capital shall vote all of his or its shares
and any other voting securities of the Company over which such holder has voting
control and shall take all other necessary or desirable actions within his or
its control (in his or its capacity as a shareholder and including, without
limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Company shall take all necessary or desirable actions within its control
(including, without limitation, calling special Board and shareholder meetings),
so that:
1. the authorized number of directors on the Board shall not
exceed two (2) directors;
2. one (1) representatives designated by each Shareholder shall
be elected to the Board;
<PAGE>
3. the removal from the Board (with or without cause) of any
director shall be (A) at the written request of the holders of the Share Capital
(determined on the basis of a vote of the holders of at least 85% of the Share
Capital); and
4. in the event that any director ceases to serve as a member
of the Board during his term of office, the resulting vacancy on the Board shall
be filled by a representative designated by the Shareholder represented by the
departing director.
2. The Company shall pay the reasonable out-of-pocket expenses
incurred by the Board of Directors and any committee thereof. The Company's
Memorandum and Articles of Association, as amended, shall provide for
indemnification and exculpation of directors to the fullest extent permitted
under applicable law.
2. Approval of Certain Matters by the Board. Until the Change of
----------------------------------------
Control Date:
(a) Without the unanimous approval of the Board, the Company will
not, and will not permit any Subsidiary to:
1. sell or dispose of any asset or group of related assets
having an aggregate fair market value in excess of U.S. $50,000;
2. grant to any person any mortgage, charge, lien or
encumbrance of any kind;
3. amend the Subscription Agreement or this Agreement in any
manner that adversely affects Headway or its rights hereunder or under any
related agreement;
4. make any capital expenditure or series of capital
expenditures in an aggregate amount in any fiscal year in excess of U.S.
$50,000;
5. enter into any partnership, joint venture or similar
business collaboration agreement or create any subsidiary;
6. issue any debt or equity security or incur any indebtedness
for borrowed money in an aggregate amount in excess of U.S. $50,000;
7. prepay, repurchase or redeem any long term indebtedness of
the Company or any Subsidiary or any debt or equity security issued by the
Company or any Subsidiary, other than (A) as required by the terms of such long
term indebtedness or security or (B) pursuant to the provisions of any stock
option or employee benefit plan;
2
<PAGE>
8. make, pay or declare any dividends or other distributions
(other than any dividends paid to the Company by any of its wholly-owned
Subsidiaries);
9. adopt or change any method of accounting;
10. adopt any annual budget for the Company;
11. engage in any line of business other than the manufacturing
of magnetic recording heads;
12. in the case of any Subsidiary, issue any shares or loan
capital having attached thereto a right of conversion into share capital to any
person other than to the Company or any wholly-owned Subsidiary, or acquire the
shares, debentures, securities or obligations of any person other than a wholly-
owned Subsidiary;
13. enter into any transaction with any director, officer,
employee or with any immediate family member of any of the above that lives in
the same household of any of the above;
14. enter into any employment agreement or arrangement providing
for annual compensation in excess of U.S. $100,000 or increase the aggregate
compensation of the Company's employees by an aggregate amount in any fiscal
year in excess of 10% of the aggregate compensation of all Company employees for
the preceding fiscal year;
15. create any profit sharing, stock option, pension or other
employee benefit plan involving an annual cost to the Company and its
Subsidiaries of more than U.S. $50,000, or amend any such existing or new
benefit plan in any way;
16. appoint any officer of the Company;
17. file any petition for relief under any bankruptcy,
insolvency or similar law, or consent to the appointment of a custodian for its
assets, or make a general assignment for the benefit of its creditors;
18. enter into any contract involving Company payments in excess
of $25,000 or subcontracting arrangement;
19. issue or agree to issue any shares of any class or any loan
capital having attached thereto a right of conversion into share capital or
granting any options to acquire shares of any class;
20. increase its nominal share capital, reduce its share capital
or share premium account or capital redemption reserve fund, or sub-divide or
consolidate any of the shares in its capital for the time being;
3
<PAGE>
21. vary, modify or abrogate any of the rights attaching to any
of the shares in its capital for the time being;
22. modify or add to its Memorandum and Articles of Association
(or equivalent constitutional documents);
23. promote or take any steps to effect its winding up or pass
any resolution to liquidate it;
24. alter its accounting year end from December 31st or change
its company secretary, auditors or accounting policies and practices;
25. give any guarantee, indemnity or suretyship (whether or not
legally binding) in respect of the liability or solvency of any third party or
any similar obligation; or
26. acquire or create any estate or interest or share in land.
3. Covenants of the Company. Until the Change of Control Date:
------------------------
1. Financial Statements and Other Information. The Company
------------------------------------------
shall deliver to the Shareholders:
(a) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of the Company and its
Subsidiaries (as defined in the Subscription Agreement) for such monthly period
and for the period from the beginning of the fiscal year to the end of such
month, and unaudited consolidated balance sheets of the Company and its
Subsidiaries as of the end of such monthly period, setting forth in each case
comparisons to the Company's annual budget and to the corresponding period in
the preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently applied,
subject to the absence of footnote disclosures and to normal year-end
adjustments for recurring accruals, and shall be certified by the Company's
chief financial officer;
(b) within 90 days after the end of each fiscal year,
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year, setting forth in
each case comparisons to the Company's annual budget and to the preceding fiscal
year, all prepared in accordance with generally accepted accounting principles,
consistently applied. Upon request of either Shareholder, the annual financial
statements shall be accompanied by an opinion of a "Big Six" accounting firm as
to the whether such financial statements conform to generally accepted
accounting principals.
(c) at least 15 days but not more than 90 days prior to the
beginning of each fiscal year, an annual budget prepared on a monthly basis for
the Company and its Subsidiaries
4
<PAGE>
for such fiscal year (displaying anticipated statements of income and cash flows
and balance sheets), and promptly upon preparation thereof any other significant
budgets prepared by the Company and any revisions of such annual or other
budgets, and within 30 days after any monthly period in which there is a
material adverse deviation from the annual budget, a certificate of the
Company's Chief Financial Officer explaining the deviation and what actions the
Company has taken or proposes to take with respect thereto;
(d) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as Headway may
reasonably request. Each of the financial statements referred to in this Section
3(a) shall present fairly in all material respects the consolidated financial
condition, results of operations and cash flows of the Company in accordance
with U.S. generally accepted accounting principles applied on a consistent basis
as of the dates and for the periods set forth therein, subject, in the case of
the unaudited financial statements, to changes resulting from normal year-end
adjustments for recurring accruals (none of which would, alone or in the
aggregate, be materially adverse to the financial condition, operating results,
assets, operations or business prospects of the Company and its Subsidiaries
taken as a whole).
2. Inspection of Property. The Company shall permit any
----------------------
representatives designated by a Shareholder to (a) visit and inspect any of the
properties of the Company and its Subsidiaries, (b) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and (c) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, key employees and independent
accountants of the Company and its Subsidiaries.
4. Representations, Warranties and Agreements. Each Shareholder
------------------------------------------
represents and warrants that (i) is the beneficial and registered owner of the
number of shares described in the Subscription Agreement, (i) it has not granted
and is not a party to any proxy, voting trust or other agreement which is
inconsistent with, conflicts with or violates any provision of this Agreement,
and (ii) it agrees to vote his or its shares in favor of an amendment to the
Company's Memorandum and Articles of Association (the "Articles") which will (A)
incorporate the provisions of Section 2(a) of this Agreement into the Articles
and (B) amend Section 4 of the Articles to prohibit the directors from declining
to register the transfer of shares to Headway. No holder of Share Capital shall
grant any proxy or become party to any voting trust or other agreement which is
inconsistent with, conflicts with or violates any provision of this Agreement.
5
<PAGE>
5. Restrictions on Transfer of Agreement Shares. SFI shall not sell,
--------------------------------------------
transfer, assign, pledge or otherwise dispose of (whether with or without
consideration and whether voluntarily or involuntarily or by operation of law)
(a "Transfer") any interest in any Agreement Shares (the "Offered Shares"),
except pursuant to the provisions of this Section 5. Prior to making any
Transfer, SFI shall deliver written notice (the "Transfer Notice") to the
Company and Headway. The Transfer Notice shall disclose in reasonable detail the
identity of the prospective transferees, the number of Offered Shares and the
terms and conditions of the proposed Transfer. SFI shall not consummate any
Transfer until 30 days after the Transfer Notice has been given to the Company
and Headway. Headway shall have the ability to designate a representative to
exercise Headway's rights under this Section 5.
(a) Headway's Right of First Refusal. Headway shall have an
--------------------------------
option for a period of fifteen (15) days from receipt of the Transfer Notice to
elect to purchase the Offered Shares at the same price and subject to the same
material terms and conditions as described in the Transfer Notice. Headway may
exercise such purchase option and, thereby, purchase all (or a portion of) the
Offered Shares by notifying SFI in writing before expiration of the such fifteen
(15) day period as to the number of such Offered Shares which it wishes to
purchase. If Headway gives SFI notice that it desires to purchase such Offered
Shares, then payment for the Offered Shares shall be by check or wire transfer,
against delivery of the Offered Shares to be purchased at a place agreed upon
between the parties and at the time of the scheduled closing therefor, which
shall be no later than thirty (30) days after Headway's receipt of the Transfer
Notice, unless the Transfer Notice contemplated a later closing with the
prospective third party transferee(s) or unless the value of the purchase price
has not yet been established pursuant to this Section 5. If Headway fails to
purchase all of the Offered Shares by exercising the option granted in this
Section 5 within the period provided, the Offered Shares shall be subject to the
Call Options (as defined below) granted to Headway pursuant to Section 6 herein.
(b) Termination of Restrictions. The restrictions set forth in
---------------------------
this Section 5 shall continue with respect to each Agreement Share following any
Transfer thereof.
6. Call Option. Subject to the terms and conditions herein set
-----------
forth, SFI grants Headway the right (the "Call Option") to acquire all of the
Share Capital then held by SFI up to a maximum of 10% of the then issued share
capital of the Company at an exercise price equal to the fair market value per
share of the acquired share capital. The fair market value of the share capital
shall be determined by an independent third party qualified to determine
valuations and selected by Headway, if SFI and Headway are unable to reach an
agreement as to the fair market value within a period of ten (10) days
subsequent to Headway's notification of its intent to exercise the Call Option.
The cost for the independent valuation shall be paid for by the Company. This
Call Option is effective immediately and shall expire on January 1, 2008.
7. Preemptive Rights. Until the Change of Control Date:
-----------------
6
<PAGE>
(a) Each Shareholder shall have the right to purchase its pro
rata share of New Securities which the Company may, from time to time, propose
to sell and issue.
(b) In the event the Company proposes to undertake an issuance
of New Securities, it shall give each Shareholder written notice of its
intention, describing the amount and type of New Securities, and the price and
terms upon which the Company proposes to issue the same. Each Shareholder shall
have twenty (20) days for the date of receipt of any such notice to agree to
purchase up to its respective pro rata share of such New Securities for the
price and upon the terms specified in the notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased.
(c) The Company shall have ninety (90) days after such twenty
(20) day period to sell the New Securities not elected to be purchased by
Shareholders at a price and upon terms no more favorable to the purchasers of
such securities than specified in the Company's notice. In the event the Company
has not sold the New Securities within said ninety (90) day period, the Company
shall not thereafter issue or sell any New Securities, without first offering
such securities to the Shareholders in the manner provided above.
8. Legend. Each certificate evidencing Agreement Shares and each
------
certificate issued in exchange for or upon the Transfer of any Agreement Shares
(if such shares remain Agreement Shares after such Transfer) shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"The securities represented by this certificate are subject to a
Shareholders Agreement dated as of January 13, 1999, among the
issuer of such securities (the "Company") and certain of the
Company's shareholders, as amended and modified from time to time.
A copy of such Shareholders Agreement shall be furnished without
charge by the Company to the holder hereof upon written request."
The Company shall imprint such legend on certificates evidencing such Agreement
Shares outstanding as of the date hereof.
9. Transfers. Transferees of Agreement Shares shall be deemed to be
---------
SFI hereunder.
10. Definitions.
-----------
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person
specified.
"Agreement Shares" shall mean (i) any Share Capital issued to SFI
pursuant to the Subscription Agreement and (ii) any Share Capital issued or
issuable with respect to the Share Capital referred to in clause (i) above by
way of stock dividends or stock splits or in connection with
7
<PAGE>
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular shares of Share Capital held by SFI, such
shares shall cease to be Agreement Shares when they have been repurchased by
Headway.
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise, and the terms "Controlling" and "Controlled" shall have meanings
correlative thereto.
"Change of Control Date" shall mean the date whereon (i)SFI owns at
less than 50% of the voting securities of the Company, and (ii) Headway owns at
least 51% of the voting securities of the Company.
"New Securities" shall mean any share of the unissued share capital
of the Company or the rights to acquire shares of shares of the unissued share
capital including options and securities convertible into share capital.
"Person" shall mean any natural person, corporation, business trust,
joint venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Subsidiary" shall mean, with respect to any Person (herein referred
to as the "parent"), any corporation, partnership, association or other business
entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or more
than 50% of the general partnership interests are, at the time any determination
is being made, owned, Controlled or held or (b) that is, at the time any
determination is made, otherwise Controlled by the parent or one or more
subsidiaries of the parent or by the parent and one or more subsidiaries of the
parent.
11. Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Agreement Shares in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Agreement Shares as the owner of such
Agreement Shares for any purpose.
12. Amendment and Waiver. Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by the Company and Headway. The
failure of any party to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms.
13. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity,
8
<PAGE>
legality or enforceability of any other provision of this Agreement in such
jurisdiction or affect the validity, legality or enforceability of any provision
in any other jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
14. Entire Agreement. Except as otherwise expressly set forth
----------------
herein, this Agreement embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
15. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Shareholders and any subsequent
holders of the shares of Share Capital of the Company and the respective
successors and assigns of each of them.
16. Counterparts. This Agreement may be executed in multiple
------------
counterparts (including by means of telecopied signature pages), each of which
shall be an original and all of which taken together shall constitute one and
the same agreement.
17. Remedies. The parties hereto shall be entitled to enforce their
--------
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto agree and acknowledge that money
damages would not be an adequate remedy for any breach of the provisions of this
Agreement and that the Company and any Shareholder may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief (without posting a bond or other security)
in order to enforce or prevent any violation of the provisions of this
Agreement.
18. Notices. All notices and other communications required or
-------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and shall
be addressed as follows, or at such other address as a party may designate by
ten (10) days' advance written notice to the other parties to this Agreement
pursuant to the provisions of this Section 18:
9
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(a) if to SFI, to:
SFI Investment Limited
Room 3306 Singga Commercial Centre
148 Connaught Road West
Hong Kong
[counsel to Management Investors]
(b) if to Headway, to:
Headway Technologies, Inc.
678 South Hillview Drive
Milpitas, CA 95035
Attn: Thomas A. Surran
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Kurt J. Berney, Esq.
19. Governing Law. All issues and questions concerning the
-------------
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California, without giving effect to any choice
of law or conflict of law rules or provisions (whether of the State of
California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.
20. Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or U.S. legal
holiday in the state in which the Company's chief executive office is located,
the time period shall automatically be extended to the business day immediately
following such Saturday, Sunday or U.S. legal holiday.
21. Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
10
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
SFI INVESTMENT LIMITED
Name: /s/ Ko Kam Piu
---------------------------------------
Title: DIRECTOR
--------------------------------------
HEADWAY TECHNOLOGIES, INC.
By: /s/ Michael Y. Chang
-----------------------------------------
Michael Y. Chang, President & CEO
MRST LIMITED
Name: /s/ David Begin
---------------------------------------
Title: DIRECTOR
--------------------------------------
11
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EXHIBIT 10.7
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
April 11, 1995 is made by and between Joseph Rubino and Dorothy Rubino Inter
Vivos Trust, et. al. ("LESSOR") and Headway Technologies, Inc., "A California
Corporation" ("LESSEE") (collectively the "PARTIES," or individual a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of the Lease, and commonly
known by the street address of 100 South Milpitas Boulevard, Milpitas located in
the County of Santa Clara State of California and generally described as
(describe briefly the nature of the property) an approximately 30,816 square
foot free-standing R&D/manufacturing building on approximately 2.02 acres,
including 112 parking spaces. ("PREMISES"). (See Paragraph 2 for further
provisions.
1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing July
1, 1995 ("Commencement Date") and ending June 30, 2000 ("EXPIRATION DATE").
(See Paragraph 3 for further provisions.
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE") (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 BASE RENT: $17,719.20 per month ("BASE RENT"), payable on the 1st day
of each month commencing July 1, 1995 (See Paragraph 4 for further provisions.)
[_] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $17,719.20 as Base Rent for the Period
July 1, 1995 through July 31, 1995
1.7 SECURITY DEPOSIT: $17,719.20 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: marketing, R&D, manufacturing warehouse and corporate
office (See Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
BT Commercial represents
[X] Lessor exclusively ("LESSOR'S BROKER"); __ both Lessor and Lessee, and
CB Commercial represents
[X] Lessee exclusively ("LESSEE'S BROKER"); __ both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 93 and Exhibits A, B and C 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 square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a non-
compliance with said warranty exists as of the Commencement 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 Lessee does not give
Lessor written notice of a non-compliance with this warranty within forty-five
(45) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement 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. If the Premises do not comply with said warranty, 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 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 Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.4 Acceptance of Premises Subject to Lessor's obligations under
Paragraphs 2.2, 2.3, 72. and 53, Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters, and (c) that neither Lessor, nor
any of Lessor's agents, has made any oral or written representations or
warranties with respect to the said matters other than as set forth in this
Lease.
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, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall be in
effect during such period. Any such early possession shall not affect nor
advance the Expiration Date of the Original Term.
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3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, 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, changes or omissions of
Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, (except as
provided in Paragraphs 9.6(a) and 14.) on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges 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 the calendar month
involved. Payment of Base Rent and other charges shall be made to Lessor at its
address stated herein or to such other person or at such other addresses as
Lessor may from time to time designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), 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, cost, expense,
loss or damage (including attorneys' fees) 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 moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by the Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein) that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that unreasonably disturbs owners
and/or occupants of, or causes damage to, neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable 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, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, 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 liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "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. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, 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 such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnity, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include,
but not be limited to, the effects of any contamination or injury to person,
property or the environment created by Lessee or its assignees or sublessees and
the cost of investigation (including consultant's and attorney's fees and
testing), removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
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 or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease Paragraph 2.3, Lessee, shall, at Lessee's sole cost and expense, fully,
diligently and in a timely manner, comply with all "APPLICABLE LAW," which term
is used in this Lease to include all laws, rules, regulations, ordinances,
directives, covenants, easements and restrictions of record, permits, the
requirements of any applicable fire insurance underwriter or rating bureau,
relating in any manner to Lessee's use and occupancy of the Premises during the
term of this Lease (including but not limited to matters pertaining to (i)
industrial hygiene, (iii) (iii) Lessee's use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage, spill
or release of any Hazardous Substance or storage tank), now in effect or which
may hereafter come into effect, and whether or not reflecting a change in policy
from any previously existing policy. Lessee shall, within five (5) days after
receipt of Lessor's written request, provide Lessor with copies of all documents
and information, including, but not limited to, permits, registrations,
manifests, applications, reports and certificates, evidencing Lessee's
compliance with any Applicable Law 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 failure by Lessee or the Premises to comply
with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an 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 and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operations, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by governmental
authority as the result of any such existing or imminent violation or
contamination. In any such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LEASSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to
condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.).
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7.2 (Lessor's obligations to repair), 9(damage and destruction, and 14
(condemnation). Lessee shall, at Lessee's sole cost and expense and at all to
keep the Premises and every part thereof in good order, condition and repair,
structural and non-structural (whether or not such 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 are as a
result of Lessee's use, any prior use, the elements of the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
under pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detector
systems and equipment, fire hydrants, fixtures, walls (interior and) ceilings,
floors, windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks located in, on, about, or
adjacent to the Premises, 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 sewer system) and shall promptly, at Lessee's
expense, take all investigatory and/or remedial action reasonably recommended,
whether or not ordered or required, for the cleanup of any contamination of, and
for the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contributed to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. 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. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and standpipe and hose
or other automatic fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation system, (v) roof covering and drain
maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises, 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Less
under Paragraph 7.1 hereof. 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. Lessee and Lessor expressly waive the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is
used in this Lease to refer to all carpeting, window coverings, air lines,
panels, electrical distribution, security, fire protection systems, lighting
fixtures, heating, ventilating, and air conditioning equipment, plumbing, and
fencing in, on or about 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 on the Premises from that which is provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade Fixtures, whether
by addition or deletion. "LESSEE OWN ALTERATIONS AND/OR UTILITY INSTALLATIONS"
are defined as Alterations and/or Utility Installations, in, on, under or about
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), as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls.
(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 proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alterations
or Utility Installation to Lessor prior to commencement of the thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee for use
on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend 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 against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor 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, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7 all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this l, become the property of Lessor and remain upon and
be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. 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 of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender those portions of the
Premises that Lessee is required to maintain by the end of the last day of the
Lease term or any earlier termination date, with all of the improvements, parts
and surfaces thereof 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 by Lessee performing all of its
obligations under this Lease. Except as otherwise agreed or specified in
writing by Lessor, the Premises, as surrendered shall include the Utility
Installations. The obligation of Lessee shall include the repair of any damage
occasioned by the installation, maintenance or removal of Lessee's Trade
Fixtures, furnishings, equipment, and Alterations and/or Utility Installations,
as well as the removal of any storage tank installed by or for Lessee. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $2,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
use, occupancy or maintenance of the Premises and all areas appurtenant thereto.
Such insurance shall be on 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" 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 required by this Lease or as carried by Lessee shall not, however,
limit the liability of Lessee nor relieve Lessee of any obligation hereunder.
All insurance to be 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.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a), above, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall be named as an additional insured therein.
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8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to the holders of any mortgages, deeds of trust
or ground leases on the Premises ("LENDER(S)"), insuring loss or damage 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 Lenders, but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age of
the improvements involved, such latter amount is less than full replacement
cost. If Lessor is the Insuring Party, however, Lessee owned Alterations and
Utility Installations 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 of direct physical loss or
damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
cause of 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 for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance, costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lessee 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 rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor
shall not be required to Insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations
and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility Installation
in, on, or about the Premises similar in coverage to that carried by the
Insuring Party under Paragraph 8.3. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $5,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property or the restoration of Lessee Owned Alterations and Utility
Installations. Lessee shall be the Insuring Party with respect to the insurance
required by this Paragraph 8.4 and shall provide Lessor with written evidence
that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clause as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee 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. If
the Insuring Party shall fail to procure and maintain the insurance required to
be carried by the Insuring Party under this Paragraph 8, the other Party may,
but shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Notwithstanding any other provision of this
Lease, without affecting any other rights or remedies, Lessee and Lessor
("Waiving Party") each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss of or damage to the Waiving Party's property arising out of or
incident to the perils required to be insured against under Paragraph 8.* The
effect of such releases and waivers on the right to recover damages shall not be
limited by the amount of insurance carried or required, or by any deductibles
applicable thereto.
8.7 INDEMNITY. See Addendum. 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, costs, liens, judgments, penalties, permits, attorney's and
consultant's fees, expenses and/or liabilities arising out of, the occupancy of
the Premises by Lessee, the conduct of Lessee's business, any act, omission or
neglect of Lessee, its agents, contractors, employees, or invitees, and out of
any Default or Breach by Lessee in the performance in a timely manner of any
obligation on Lessee's part to be performed under this Lease. The foregoing
shall include, but not be limited to, the defense or pursuit of any claim or any
action or proceeding involved therein, and whether or not (in the case of claims
made against Lessor) litigated and/or reduced to judgment, and whether well
founded or not. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. See Addendum. 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,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the cause
of such damage or injury or the means of repairing the same is accessible or
not. Lessor shall not be liable for any damages arising from any act or neglect
of any other tenant of Lessor.
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 and Utility
Installations, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on the
Premises, other than Lessee Owned Alterations and Utility Installations, 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 building codes, ordinances or
laws, 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 the 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 Lease shall, at Lessor's
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 the 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 (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds 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 possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to 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. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for
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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 rather than Paragraph 9.2 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 and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor,
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said 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 and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1) month's Base Rent, whether or not an insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, 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, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option
during said Exercise Period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at
Lessor's expense repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 ABATEMENT OF RENT: LESSEE'S REMEDIES.
(a) In the event of damage described in paragraph 9.2 (Partial Damage -
Insured), whether or not Lessor or Lessee repairs or restores the Premises, the
Base Rent, Real Property Taxes, insurance premiums, and other charges, if any,
payable by Lessee hereunder for the period during which such damage, its repair
or the restoration continues (not to exceed the period for which rental value
insurance is required under Paragraph 8.3(b)), shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises 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 to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph 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.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this 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 under the terms
of this Lease.
9.9 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 Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lease shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment 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 that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by
Lessee under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 Definition of "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. 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, or changes in
applicable law taking effect, during the term of this Lease, including but not
limited to a change in the ownership of the Premises or in the improvements
thereon, the execution of this Lease, or any modification, amendment or transfer
thereof, and whether or not contemplated by the Parties.
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10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any
of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in Paragraph
10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together any taxes thereon.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"Assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under the subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis of more than
50% or more of the voting control of Lessee shall constitute a change in control
for this purpose.
(c) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent where such consent is required,
shall, at Lessor's option, be a Default curable after notice per Paragraph
13.1(c), or a noncurable Breach without the necessity of any notice and grace
period. If Lessor elects to treat such unconsented to assignment or subletting
as a noncurable Breach, Lessor shall have the right to either: (i) terminate
this Lease, or O88) upon thirty (30) days written notice ("LESSOR'S NOTICE"),
increase the monthly Base Rent to fair market rental value or one hundred ten
percent (110%) of the Base Rent then in effect, whichever is greater. Pending
determination of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any overpayment credited
against the next installment(s) of Base Rent coming due, and any underpayment
for the period retroactively to the effective date of the adjustment being due
and payable immediately upon the determination thereof. Further, in the event of
such Breach and market value adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value (without the Lease being considered an encumbrance or
any deduction for depreciation or obsolescence, and considering the Premises at
its highest and best use and in good condition), or one hundred ten percent
(110%) of the price previously in effect, whichever is greater, (ii) any index-
oriented rental or price adjustment formulas contained in this Lease shall be
adjusted to require that the base index be determined with reference to the
index applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new market rental bears to the Base Rent in effect
immediately prior to the market value adjustment.
(d) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and 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) *, (ii) release Lessee of any obligations hereunder, or (iii) after the
primary liability of Lessee for the payment of Base Rent and other sums due
Lessor hereunder or for the performance of any other obligations to be performed
by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
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 any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under this Lease
or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(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 responsibility 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 non-refundable
deposit of $500 as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
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 part 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 transfer to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, 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 the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary, Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any 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 other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee 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. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH"
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is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraph 13.2
and/or 13.3:
(a) The abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers, threatens
life or property, where such failure continues for a period of three (3)
business days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duty execute
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37.* the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease
required under Paragraph 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (vii) any other documentation or
information which 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 by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 here* that
are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee 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 of this Lease by Lessee if Lessee
commences 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 by
lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's 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 of 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 no 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 by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), 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 to Lessor upon invoice thereof. 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 under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1 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, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of 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 time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves 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 and alteration of the Premises, reasonable attorneys fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein the right to recover all or any part thereof in a separate
suit for such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, 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 this Lease entitling
Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
Abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under Lease, shall not constitute a termination of
the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) 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 IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying 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 to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, 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,
and recoverable by Lessor as additional rent due under this Lease,
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
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to five percent of such overdue
amount if the rent remains unpaid after three business days after Lessee's
receipt of notice of nonpayment. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, the notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in Breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises 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 obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"). This Lease shall terminate as
to the part so taken as of the date the condemning authority takes
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title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area 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 (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority taxes
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 the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority, Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $ per agreement) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent properly in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers in effect at
the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers,
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, fir or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. 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.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) business
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 "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of 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. LESSOR'S LIABILITY. 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 in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
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.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due and within 3 business days after
written notice thereof from Lessor shall bear interest from the thirty-first
(31st) day after it was due at the rate of 12% per annum, but not exceeding the
maximum rate allowed by law, in addition to the late charge provided for in
Paragraph 13.4.
20. 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.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR 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 with respect to any default or breach hereof
by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) 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 delivered on the date of actual receipt or refusal of
delivery. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notice purposes.
Either Party may be written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone confirmation
of receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a 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 or, 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. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statement 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 or taxes 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 earlier termination of
this Lease.
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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. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
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 by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purposes notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, 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 assurance (a "Non-Disturbance Agreement") from the
Lender that Lessee's possession 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 attorns to the record owner of the Premises.
30.4. SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorney's fees. Such fees may be awarded in the same suit or
recovered in a separate suite, 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
attorney's fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorney's fees reasonably
incurred. Lessor shall be entitled to attorney's 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 the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the Premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "FOR LEASE" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations).
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, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election 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.
(a) Except for paragraph 33 hereof (Auctions) or 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 or other consultants' fees)
reasonably incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including but
not limited to consents to an assignment, a subletting or the presence or use of
a Hazardous Substance, practice or storage tank, shall be paid by Lease to
Lessor upon receipt of an invoice and supporting documentation therefor. Except
as otherwise provided, any unused portion of said deposit shall be refunded to
Lessee without interest. Lessor's consent to any act, assignment of this Lease
or subletting of the Premises by Lessee 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.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall 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.
37. GUARANTOR.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observances 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 of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of the first
refusal to purchase other property of Lessor, or the right of first offer to
purchase 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 named in paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
PAGE 9
<PAGE>
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 to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1 which are not cured within 5
days of receipt of notice of default 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) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period which are not cured within 5 business days of receipt
of notice of default, or (iii) if Lessee commits a Breach of this Lease.
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 under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on its behalf, if
Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30)
days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor
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 Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed 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. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
adversely change Lessee's rights or obligations hereunder, Lessee agrees to make
such reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ 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.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL, FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES, NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at ___________________________ Executed at__________________________
on ____________________________________ on __________________________________
by LESSOR: by LESSEE:
Joseph Rubino and Dorothy Rubino, Headway Technologies, Inc.
- --------------------------------------- -------------------------------------
Inter Vivos Trust et.al. _____________________________________
- ---------------------------------------
By /s/ Joseph Rubino By /s/ Ralph Patterson
- --------------------------------------- -------------------------------------
Name Printed: Joseph Rubino Name Printed: Ralph Patterson
-------------------------- -----------------------
Title: ________________________________ Title: President & CEO
------------------------------
By /s/ Dorothy Rubino By __________________________________
------------------------------------
Name Printed: Dorothy Rubino Name Printed: _______________________
--------------------------
Title: ________________________________ Title:_______________________________
Address:_______________________________ Address:_____________________________
_______________________________________ _____________________________________
Tel. No.(___)________Fax No.(__)_______ Tel. No.(___)___________Fax No.(__)__
NET PAGE 10
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777.
Fax No. (213) 687-8616.
<PAGE>
LEASE ADDENDUM NO. 1
This Lease Addendum No. 1 ("Addendum") is entered into effective as of 6/28,
1995, and modifies the Standard Industrial/Commercial Single-Tenant Lease--Net
between Joseph Rubino and Dorothy Rubino Intervivos Trust et al, as Lessor, and
Headway Technologies, Inc., as Lessee, dated 6/28/95 (the "Lease Form") and
concerning property located at 100 South Milpitas Boulevard, Milpitas,
California. Unless otherwise specified herein, all references herein to
"Paragraphs" are to the paragraph numbers used in the Lease Form. The Lease
Form and this Addendum are hereinafter collectively referred to as the "Lease."
and each reference in the Lease Form to the "Lease" shall be deemed to refer to
both documents collectively. This Addendum is an integral part of the Lease
and, in the event of any inconsistency between this Addendum and the Lease Form,
the terms of this Addendum shall control. Unless otherwise defined, all terms
used in this Addendum shall have the same meanings as glen in the Lease Form.
49. Title. Lessor represents that it is not aware of any restrictions or
-----
limitations on title to the Premises other than those set forth on Exhibit
A.
50. Compliance With Laws.
--------------------
(a) Except as otherwise specifically provided in Paragraph 50(b) of this
Addendum, Lessee shall have no obligation to (i) remedy or cure any
instance of noncompliance with laws, ordinances, rules, and
regulations exiting as of the Commencement Date, (ii) make or pay for
(including, without limitation, any amortized portion of the cost of)
any improvements or Alterations (as defined in Paragraph 7.3(a) of the
Lease Form) to the Premises in order to comply with any laws,
ordinances, rules, and regulations effective as of the Commencement
Date, except to the extent such improvements and alterations are
necessitated by Lessee's particular use of the Premises, or (iii)
remedy, cure, or comply with any statute, regulation, ordinance, rule,
policy, or other law relating to the use, storage, or release of
Hazardous Substances, unless such use, storage, or release results
from the acts or omissions of Lessee or its employees, agents,
invitees or contractors. Without limiting the foregoing, but subject
to Paragraph 50(b) of this Addendum, Lessee shall have no obligation
to comply with Applicable Laws (as defined in Paragraph 6.3 of the
Lease Form), and Lessee shall have no obligation to perform, supply,
or pay for any work, materials, costs, or other expenses necessary to
make the Premises or any part thereof comply with Applicable Laws
(including, without limitation, any amortized portion of the cost
thereof), to the extent such compliance (x) is necessitated by
Lessee's installation of "General Alterations" (as defined in
Paragraph 50(c) of this Addendum), or (y) is required under any
Applicable Laws enacted after the Commencement Date; provided,
however, that to the extent compliance is required under clause (y) of
this sentence, Lessee shall reimburse Lessor, on a monthly basis
(concurrently with payments of rent) the amortized cost of such
Alterations computed on a straight-line basis over the useful life
thereof, but only to the extent such amortized amounts are
attributable to the term of the Lease.
(b) Notwithstanding Paragraph 50(a) of this Addendum to the contrary,
Lessee (at Lessee's sole cost) shall comply with (i) all requirements
arising under The Americans With Disabilities Act of 1990 ("ADA"),
including any instance of non-compliance
<PAGE>
existing prior to or after the Commencement Date, provided Lessee's
obligation to comply with ADA requirements shall terminate upon
expiration of the term or prior termination of the Lease, and (ii) all
Applicable Laws to the extent compliance therewith is required as the
result of "Lessee-Specific Alterations"' (as defined in Paragraph
50(c) of this Addendum) made to the Premises.
(c) For purposes of this Paragraph 50, the term "Lessee-Specific
Alterations" means Alterations to the Premises that are made by or at
the request of Lessee and that are related to requirements that are
unique or otherwise particular to Lessee's use and occupancy of the
Premises (e.g., a clean room). For purposes of this Paragraph 50, the
term "General Alterations" means Alterations (whether or not made by
or at the request of Lessee) or improvements to the Premises that are
general in nature and that would be required or expected to be made by
any tenant occupying the Premises for general office toe and any other
Alterations that do not constitute Lessee-Specific Alterations.
51. Early Possession. Lessee shall be allowed to take early possession of the
----------------
Premises as soon as this Lease is executed by both Lessor and Lessee. The
provisions of Paragraph 3.2 of the Lease Form are modified to the effect
that during the early possession period Lessee shall pay insurance,
utilities, management fee, and landscaping, which shall be prorated as
regards Lessee's period of early possession, but not property tax for the
Premises.
52. Operating Expenses And Real Estate Taxes. In addition to Base Rent, Lessee
------------------------------------------
will be responsible for the cost of standard operating expenses, payable
along with Base Rent on a monthly basis. Lessor shall send Lessee a yearly
statement detailing the actual cost of such expenses and either providing a
refund or requesting payment for the difference between the estimated
amount and the actual amount. If additional amounts are due, they shall be
payable within 20 days of receipt of the request for payment. The estimated
annual operating expenses for 1995/1996 are as follows:
Estimated Annual Cost
---------------------
Taxes: $22,560.00
Insurance: $ 4,680.00
CAM: $13,656.00
----------
TOTAL $40,896.00
The components of the estimated monthly total expenses for CAM (Common Area
Maintenance) are as follows: landscaping - $375.00, pest control - $63,
management fees $700.00. The fees charged for management are to cover the
services to be provided by Lessor under the Form Lease and this Addendum.
53. Condition of Premises at Lease Commencement. Lessor, at its sole cost and
-------------------------------------------
expense, shall deliver the Premises with all building systems and
components which are in existence prior to new tenant improvements in good
working order and repair including, but not limited to HVAC, electrical,
lighting, plumbing, ceiling tiles, structural integrity, roof, fire
protection system and parking lot. Lessor shall remove existing VCT/CARPET
on the ground floor and bead
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<PAGE>
blast to expose concrete surface. Lessee shall be responsible for
installation of Vi-Tex floor sealer per manufacturer's direction and
replacing the VCT/carpet flooring which may be paid for from the Tenant
Improvement Allowance (as defined in Paragraph 54(a) of this Addendum).
Subject to the foregoing and to Paragraphs 2.2 and 2.3 of the Lease Form
and Paragraph 50 of this Addendum, Lessee agrees to accept the premises in
its current "as-is" condition
54. Payment of Cost of Tenant Improvements.
--------------------------------------
(a) Subject to Paragraph 50 above, the Lessee shall be responsible for and
pay for all costs associated with improving the Premises for its
intended use. All such improvements shall be made pursuant to the
requirements of Paragraphs 7.3 and 13.3 of the Lease Form and
Paragraph 80 of this Addendum. The Lessor shall reimburse the Lessee
on a dollar-per-dollar basis for up to a maximum of $124,034.40 (the
"Tenant Improvement Allowance") of actual tenant improvement costs by
providing rent abatement as provided in this Paragraph 54.
(b) Rent shall be abated in the amount of up to a maximum of $17,719.20
per month until the entire Tenant Improvement Allowance has been
exhausted; provided that (i) such abatement shall be provided only
during the months of September through February, inclusive (the
"Window Period"), during the term of the Lease; (ii) Lessee shall be
entitled to abatement in any month during the Window Period only to
the extent Lessee has, before the commencement of any such month,
incurred tenant improvement costs which have been approved by Lessor
(in the manner described in Paragraph 54(d) below) prior to the
commencement of such month, and with respect to which Lessee has not
previously received rent abatement, and (iii) rent shall not be abated
for more than a total of $53,157.60 during the 1995-1996 Window
Period, nor more than a total of $70,876.80 during any subsequent
Window Period.
(c) The Lessee shall be responsible for all operating expenses, insurance,
CAM and real estate taxes during those months that rent is abated.
The Lessor shall provide the rent abatement with the requirement that
$40,000.00 of the Lessor's reimbursable tenant improvement allowance
must be applied toward the preparation and installation of Vi-Tax
floor sealer on the pound floor of the premises. The remaining
$84,034.40 shall be used for general improvements such as carpet,
paint, lighting, HVAC, electrical, additional office, ADA upgrades and
tile floors, and for building permits, and architectural and design
fees incurred in connection with the foregoing improvements. Should
the scope of tenant improvements exceed $124,034.40, the Lessee shall
pay for any excess costs. Subject to the foregoing, the allowance
shall not be applied to those improvements reasonably deemed by Lessor
to be for Lessee's specialized use. Lessor and Lessee hereby agree to
the improvements noted on the space plan attached hereto as Exhibit B.
Any departure from said plan must be pre-approved in writing by both
parties.
(d) Lessee shall submit paid construction invoices to Lessor upon
completion of all tenant improvements. The invoices shall be approved
by Lessor prior to Lessee receiving any
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<PAGE>
rent abatement. Said approval shall not be unreasonably withheld.
Construction invoices will be verified and approved by Lessor within
five business days of receipt. If Lessor does not reject a
construction invoice in writing to Lessee within the five business day
period, then such invoice shall be deemed approved by Lessor.
55. Governmental Approval. Lessee shall obtain any and all approvals required
---------------------
for Lessee's construction of interior improvements within the Premises and
Lessee's intended use of the Premises.
56. Definition of Hazardous Substances. In Paragraph 6.2(a) of the Lease Form,
----------------------------------
the definition of Hazardous Substances shall not include those substances
which are only classified as hazardous or as requiring disclosure by
Proposition 65. Furthermore, nothing in the Lease shall be interpreted to
prohibit storage and use, or to require a report to or permission from
Lessor, with respect to reasonable quantities of common cleaning solutions
which are used solely for janitorial purposes and office products, such as
photocopier toner and whiteout.
57. Storage and Use of Hazardous Substances. Lessor consents to the storage
---------------------------------------
and use on the Premises of the substances listed in Exhibit C, provided the
storage and use of such substances is in accordance with the Uniform
Building Code Tables 9A & 9B (attached as Exhibit D). Lessee, and not
Lessor, shall be responsible for remediation of any contamination of the
Premises with Hazardous Substances which occurs as a result of the acts or
omissions or Lessee, its agents, employees, assignees, sublessees, and
contractors.
58. Security Deposit Increase. In Paragraph 6.2(a) of the Lease Form, Lessor's
-------------------------
ability to demand an increase in the security deposit shall be limited to
the instance where a complaint is filed by any municipal, state, or federal
governmental or quasi-governmental agency, department, commission, board or
bureau against Lessee concerning Lessee's alleged discharge, disposal,
spillage, storage, generation, use, or cleanup of Hazardous Substances on,
in, or under the Premises. The maximum amount the security deposit may be
rated in such instance is 100 percent. If such complaint is dismissed with
prejudice, then the increase in the security deposit shall be returned to
Lessee.
59. Environmental Indemnifications. Lessee shall indemnify and hold Lessor
------------------------------
harmless against any claim or liability regarding the use and storage of
any toxic materials or environmental contamination in, on, or under the
Premises resulting from Lessee's occupancy and use of the Premises. Lessor
likewise shall indemnify and hold Lessee harmless against any claim or
liability regarding the use and storage of any toxic materials or
environmental contamination in, on, or under the Premises prior to Lessee's
possession of the Premises commencing at the term of this Lease as defined
in Paragraph 1.3 of the Lease Form.
60. Insurance. Paragraph 6.3 of the Lease Form is amended as follows with
---------
respect to Lessee's responsibility to comply with the "requirements of any
applicable fire insurance underwriter or rating bureau." If Lessee is
notified that it is out of compliance with such requirements and Lessee
informs Lessor than it would prefer not to comply with such requirements,
then Lessor agrees to use reasonable efforts promptly to find a substitute
insurer which does not impose the objected to requirements and which meets
the standards imposed by Paragraph 8.5 of the
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<PAGE>
Lease Form. If after a reasonable time Lessor through the exercise of
diligent efforts is unable to find such a substitute insurer, then Lessee
agrees to comply with such requirements.
61. Inspection. Paragraph 6.4 of the Lease Form is amended to require Lessor
----------
to give Lessee, except in the case of an emergency, at least 24 hours
notice prior to inspection of the building on the Premises and to inspect
the building only during Lessee's normal business hours. An emergency is
defined as a situation which requires immediate action by Lessor to avoid
or remediate significant contamination or damage to the Premises. Lessor
shall comply with Lessee's standard security procedures during such
inspections and shall use reasonable efforts to minimize the disruption of
Lessee's business during such inspection. Lessee shall have no obligation
to pay for inspections if the existing or imminent violation or
contamination results from contamination prior to the occupancy of the
Premises by Lessee or results from activities off of the Premises.
62. Repairs. The plumbing facilities shall not be used for any other purpose
-------
than that for which they are constructed, and no foreign substance of any
kind shall be thrown therein, and the expense of any breakage, stoppage or
damage resulting from violation of this provision shall be borne by Lessee.
63. Maintenance of Parking Lot and Structural Components. Within two years
----------------------------------------------------
after the Commencement Date, Lessor agrees to reseal the parking lot and
restripe the parking spaces. Once this work is done, Lessee shall
thereafter be responsible for maintenance of the parking lot. Lessor shall
be responsible, at its sole cost and expense for maintaining, repairing,
and replacing, if necessary, the structural components of the Premises,
including foundation, exterior walls, and roof (excluding roof membrane
except as otherwise provided in this Addendum), unless the damage is caused
by Lessor, its agent, contractors, or licensees.
64. Repairs and Replacements of the Premises, Systems and Equipment. Subject
---------------------------------------------------------------
to Paragraphs 50, 62 and 63 of this Addendum, Paragraph 9 of the Lease Form
(as amended by this Addendum), and the last sentence of this paragraph, if
any portion of the Premises and/or any systems or equipment therein (other
than the roof membrane, which is addressed below) shall need repair and/or
replacement, Lessee shall perform and pay for such repair and/or
replacement but only if the cost thereof does not exceed $5,000, and if the
cost of the repair and/or replacement exceeds $5,000, Lessor shall perform
and pay for such repair and/or replacement, subject to reimbursement from
Lessee in accordance with the next succeeding sentence. Lessee shall
immediately reimburse Lessor the first $5,000 of such cost, and thereafter,
on a monthly basis (concurrently with payments of rent), Lessee shall
reimburse Lessor the monthly amortized cost of such repair and/or
replacement in excess of $5,000, with such amortization computed on a
straight line basis over the useful life of the repair and/or replacement;
provided that Lessee's obligation to reimburse such monthly amortized cost
shall be limited to that amount which is attributable to the term of the
Lease as it may be extended. With respect to repairs and replacements of
the roof membrane, the foregoing provisions shall apply, except that such
reference to $5,000 shall be deemed instead to be $10,000. Notwithstanding
the foregoing provisions of this paragraph, if the repair and/or
replacement is caused by the faulty maintenance by Lessee or its
contractors, and/or other acts or omissions of Lessee, its contractors,
agents, employees, or invitees, or if the repair or replacement is to an
improvement, equipment, or system which Lessee is required to remove
Page 5
<PAGE>
at termination or expiration of the Lease, then Lessee shall perform and
pay for the full cost of such repair and/or replacement.
65. Exception to Lessor Approval. Notwithstanding the provisions of Paragraph
----------------------------
7.3(a) of the Lease Form, Lessee shall not be required to obtain the
approval of Lessor for improvements which are not structural, which do not
require the issuance of a building permit, and which do not cost in their
entirety more than $15,000.
66. Removal of Improvements. Lessee shall be required to remove at Lease
-----------------------
termination or expiration all Lessee Owned Alterations and Utility
Installations unless such items are marked with an "x" on Exhibit B hereto
or unless Lessor and Lessee have agreed in writing that an Item need not be
removed. Lessee shall have the right to remove any air handlers installed
by it Lessee shall repair any damage caused by the removal of such items.
61. Earthquake Insurance. If Lessor reasonably needs to obtain a new loan on
--------------------
the building and such loan is not effectively available from any reasonably
acceptable lender without Lessor obtaining earthquake coverage on the
building on the Premises, then Lessee agrees to pay for such earthquake
insurance as part of its obligations to reimburse Lessor for insurance
costs. Otherwise, Lessee shall not be responsible for payment of earthquake
insurance on the Premises.
68. Replacement of Lessee Owned Alterations. Paragraph 8.4 of the Lease Form
---------------------------------------
is modified to require Lessee to restore only those Lessee Owned
Alterations and Utility Installations which are damaged or destroyed in an
insured event and which are either marked by an "x" in Exhibit B or have
previously been agreed to by Lessor and Lessee in writing as items that
need not be removed at lease termination.
69. Subrogation Waiver. If Lessor is unable to obtain liability insurance from
------------------
a company which meets the standards set forth in Paragraph 8.5 of the Lease
Form unless the parties agree to relinquish the waiver of subrogation in
Paragraph 8.6 of the Form Lease, then the parties agree to discuss such
matter and to relinquish the waiver of subrogation if, after such
discussion, Lessor insists on such relinquishment.
70. Lessee's Indemnification. At the beginning of Paragraph 8.7 of the Lease
------------------------
Form, insert the following: "Except for the negligence or willful
misconduct of Lessor, its agents, employees, contractors, or invitees, or
Lessor's breach of this Lease,"
71. Lessor's Indemnification. Except for the negligence or willful misconduct
------------------------
of Lessee, its agents, employees, contractors, or invitees, or Lessee's
breach of this Lease, Lessor shall indemnify, protect, defend and hold
harmless Lessee, its employees, agents, and contractors from and against
any and all claims damages, costs, judgments, penalties, permits,
attorney's and consultant's fees, expenses and/or liabilities arising out
of Lessor's ownership or operation of the Premises, the negligence or
willful misconduct of Lessor, its agents, employees, contractors, or
invitees, and any breach of this Lease by Lessor. Such indemnification
shall be subject to the provisions of the last three sentences of Paragraph
8.6 of the Lease Form but with the duties of Lessor and Lessee reversed.
Page 6
<PAGE>
72. Exemption of Lessor from Liability. At the beginning of Paragraph 8.8 of
----------------------------------
the Lease Form, insert the following: "Except for the negligence or willful
misconduct of Lessor, its agents, employees, contractors, or invitees, or
Lessor's breach of this Lease,"
73. Damage or Destruction. Promptly after the occurrence of substantial damage
---------------------
to the Premises (but in no account later than 30 days thereafter), Lessor
shall furnish Lessee with the written opinion of Lessor's architect or
construction consultant as to when the restoration work required of Lessor
will likely be completed. Lessee shall have the right to terminate this
Lease in the event any of the following occurs:
(a) The Premises are damaged by any peril and, in the opinion of Lessor's
architect or construction consultant, the restoration of the Premises
cannot be substantially completed within 180 days after the date of
such damage. Such right to terminate under this provision may be
exercised only by delivery to Lessor of a written notice of election
to terminate within 15 days after Lessee's receipt of the written
opinion of Lessor's architect or construction consultant concerning
the time necessary to accomplish such restoration.
(b) Such restoration is not substantially completed within 180 days after
the date of such damage. Such right to terminate under this provision
may be exercised only by delivery to Lessor of a written notice of
election to terminate within 15 days after 180 days after the date of
such damage.
74. Real Property Taxes. For the first five years of the Lease term, Lessee
-------------------
shall not be responsible for paying any increase in Real Property Taxes to
the extent such increase is due to a sale of the Premises. Furthermore,
Lessee shall not be responsible for paying any environmental charges,
assessments, or other governmental impositions relating to environmental
contamination on the Premises or in the vicinity of the Premises if such
charges or assessments were levied as a result of Lessor's activities with
respect to the Premises.
75. Assignment and Subletting. Lessee agrees to notify Lessor as soon as
-------------------------
possible after it enters into serious negotiations for subletting or
assigning the Lease. Once Lessor receives formal notification of a proposed
subletting or assigning the Lease pursuant to Paragraph 12.1 of the Lease
Form, it shall use reasonable efforts to respond thereto within 10 business
days, in the case of a sublet of a portion of the Premises, and within five
business days, in the case of an assignment or sublet of all of the
Premises. If Lessor does not respond in writing to Lessee concerning such
notice within the foregoing applicable time period, then the subletting or
assignment shall be deemed approved. If Lessor denies approval of the
proposed sublet or assignment, it will state its reasons therefor in the
notice to the Lessee. Lessor may withhold approval of a proposed sublessee
or assignee if such entity proposes to use, or may reasonably be expected
to use, an amount of Hazardous Substances annually of more than 1,000
pounds, 110 gallons, or 400 cubic feet of gas (calculated at standard
temperature and pressure).
76. Exemption from Approval Requirements. The provisions of Paragraph 12.1(b)
------------------------------------
of the Lease Form shall not apply in the case of an initial public offering
of Lessee stock or in the case of a merger in which Lessee is the surviving
entity.
Page 7
<PAGE>
77. Subletting and Assignment. Notwithstanding anything in Paragraph 12.3 or
-------------------------
elsewhere in the Lease Form to the contrary, Lessee shall pay Lessor 50
percent of the Net Amount (as hereinafter defined) actually received by
Lessee from a subtenant, assignee, or other transferee in connection with
the sublease, assignment, or other transfer of Lessee's interest under the
Lease. For purposes of the preceding sentence, the "Net Amount" received by
Lessee means the amount, if any, by which the gross rentals and other
monies actually received by Lessee from a sublessee or assignee for any
such sublease or assignment exceed the sum of (i) the amounts payable by
Lessee to Lessor under the lease (including, without limitation, all Base
Rent and all other amounts payable under the Lease by Lessee for management
fees and to reimburse Lessor for operating expenses, insurance, taxes, and
other so-called "additional rent" and "net" expenses), plus (ii) Lessee's
out-of-pocket costs incurred in connection with such subletting or
assignment, including without limitation all legal fees and costs,
brokerage commissions, tenant improvements, and tenant improvement
allowances, cost of furnishings, fixtures and equipment sold to the
sublessee or assignee, and other tenant inducements related to such
subletting or assignment.
78. Default; Breach. Any reference in the Lease (other than in Paragraph 13 of
---------------
the Lease Form) to the terms "default," "breach," or other failure by
Lessee to perform under the Lease shall be construed as a "Default" and not
as a "Breach, as those terms are defined in Paragraph 13.1 of the Lease
Form.
79. Notice of Default. The clause ending on the sixth line of Paragraph
-----------------
13.1(c) of the Lease Form with the words, ".. ., where any such failure
continues for a period of ten (10) days following written notice thereof by
or on behalf of Lessor to Lessee..." hereby is deleted and replaced with
the following:
"..., but only where any such failure referred to in clauses (i)
through (vii) of this sentence continues for a period of ten (10)
business days following written notice thereof by or on behalf of
Lessor to Lessee . . ."
80. Inducement Recapture. Paragraph 13.3 of the Lease Form is modified so that
--------------------
the recapture of the value of the seven months' free rent offered to offset
the tenant improvements paid for by Lessee shall be amortized on a
straight-line basis over the initial term of the Lease in the event of a
Breach by Lessee. For example, if the Breach occurs at the end of the
fourth year of the Lease, the Lessee shall be responsible for payment of
one-fifth of the free rent granted under the Lease.
81. Emergency Response Time. Notwithstanding the thirty-day cure periods
-----------------------
specified in Paragraphs 13.1(d) and 13.5 of the Lease Form, in the event of
an emergency (which for the purposes of this paragraph shall mean an event
or circumstance which if not remedied promptly is likely to result in
immediate personal injury, death or immediate and significant property
damage), Lessee and Lessor, respectively, shall be obligated to act and
respond under Paragraphs 13.1(d) and 13.5, respectively, within the time
period in which a reasonably prudent person would act and respond after
first learning of the emergency. Lessee shall promptly report in writing to
Lessor any conditions or deficiencies in the Premises for which Lessor is
responsible. Lessor shall not be responsible for remediating such condition
or deficiency until it has notice thereof from Lessee or otherwise.
Page 8
<PAGE>
82. Condemnation. Notwithstanding any provision of Paragraph 14 of the Lease
------------
Form to the contrary, if more than ten percent of the parking spaces on the
Premises are taken by condemnation, Lessee shall be entitled to an
abatement of rent of $50.00 from monthly Base Rent for each parking space
so taken. In the event of any award resulting from the condemnation of all
or any portion of the Premises, in addition to Lessee's recovery of
Lessee's relocation expenses and the loss of Lessee's Trade Fixtures,
Lessee shall be entitled to the sum attributable to the amount, if any, by
which the market rental value of the Premises for the remainder of the term
(including any Extended Term, as defined in Paragraph 92 hereof) exceeds
the Base Rent payable for the remainder of the term.
83. Tenancy Statement. Paragraph 16.2 of the Lease Form is modified to require
------------------
Lessee to produce copies of only a balance sheet, although Lessee must,
upon request by the lender or purchaser, allow such entity to look at, but
not copy, a current profit and loss statement.
84. Lessor's Liability. Paragraph 17 of the Lease Form is modified to make it
------------------
clear that, in the event of a sale or transfer of the property, Lessor is
not relieved of its obligations for indemnification for events that
occurred prior to assignment of the Lease.
85. Notices. Notices to Lessee should be sent "Attention: Chief Financial
-------
Officer," and Lessor shall use reasonable efforts to send a copy of all
notices under the Lease to Jonathan E. Rattner, Gray Cary Ware &
Freidenrich, 400 Hamilton Avenue, Palo Alto, CA 94301, although the failure
to send a copy to Mr. Rattner shall not be considered defective delivery.
86. Waivers. Paragraph 24 of the Lease Form, with regard to waivers, shall
-------
apply to waivers by either Lessor or Lessee.
87. Holdover. Paragraph 26 of the Lease Form is modified to require Lessee to
--------
pay rent during a holdover with Lessor's consent at an amount equal to 125
percent of the rent in effect during the month immediately preceding the
holdover. If Lessee holds over without Lessor's consent, the holdover rent
shall be 200 percent of such previous rent.
88. Non-Disturbance. Lessor agrees to use reasonable efforts to obtain
---------------
promptly a non-disturbance agreement for Lessee from its current lender.
89. Attornment. Paragraph 30.2 of the Lease Form is amended to eliminate items
----------
(i) and (ii) to the extent such elimination is permitted by present and
future agreements with Lessor's lenders.
90. Lessor's Access. Paragraph 32 of the Lease Form is amended to require
---------------
Lessor to give Lessee notice and to comply with security provisions as set
forth in Paragraph 6.4 of the Lease Form, as amended herein.
91. Options Personal to Lessee. Notwithstanding any provision of Paragraph
--------------------------
39.2 of the Lease Form to the contrary, to the extent Lessee makes a
permitted assignment or sublease of the entire Premises, such assignee or
subtenant shall acquire the same rights as Lessee enjoys with respect to
any such Option.
Page 9
<PAGE>
92. Option to Renew Lease.
---------------------
(a) If Lessee is not in default of the Lease, Lessee shall have two
successive three year options to renew the Lease at the fair market
rent per square foot for similar buildings in general vicinity of the
Premises. Each such option shall be exercised by giving written
notice to Lessor at least 180 day before the expiration date of the
then current Lease term as it may be extended by exercise of an option
granted hereunder. If the parties are unable to agree on the fair
market rent for the option periods within 30 days after Lessee gives
Lessor of the option exercise, then Lessor and Lessee shall each
appoint an MAI real estate appraiser with at least five years full-
time commercial appraisal experience in the geographical area in which
the Premises are located, to appraise the then fair market rent. If a
party does not appoint an appraiser within ten days after the other
party has given notice of the name of its appraiser, the single
appraiser appointed shall be the sole appraiser and shall set the fair
market rent as provided herein. For purposes of the Lease, "fair
market rent" shall be deemed to mean the base amount of rental which
would typically be paid by a tenant under a lease such as this for
premises of a similar type, size, design, and quality in the same area
under market leasing conditions existing at that time, excluding rent
concessions and tenant improvements being offered on comparable
properties.
(b) If the two appraisers are appointed by the parties as stated herein,
they shall meet promptly and attempt to appraise and set the then fair
market rent. If they are unable to agree within 30 days after the
second appraiser has been appointed, they shall attempt to select a
third appraiser meeting the qualifications stated in this section,
within ten days after the last day the two appraisers are given to set
the fair market rent. If they are unable to agree on a third
appraiser, either of the parties to the Lease, by giving ten days
notice to the other party, may apply to the presiding judge of the
Superior Court for Santa Clara County for the selection of a third
appraiser who meets the qualifications stated in this section. Each
of the parties shall bear one-half of the cost of appointing the third
appraiser, and of paying the third appraiser's fees. The third
appraiser, however selected, shall be a person who has not previously
acted in any capacity for either party.
(c) Within 30 days after the selection of the third appraiser, a majority
of the appraisers shall appraise and set the fair market rent. If a
majority of the appraisers are unable to so set the fair market rent
within the stipulated period of time, the three appraisals of same
shall be added together and their total divided by three. The
resulting quotient shall be considered the fair market rent. If,
however, the low appraisal and/or the high appraisal are more than ten
percent lower or higher than the middle appraisal, the low appraisal
and/or the high appraisal shall be disregarded. If only one appraisal
is disregarded, the remaining two appraisals shall be added together
and their total divided by two. The resulting quotient shall be
considered the fair market rent.
(d) Notwithstanding any provision of this Paragraph 92 to the contrary,
the words "same area," "geographical area," "general vicinity," or
words of similar import shall mean that portion of the East Bay region
of the San Francisco Bay area commonly known as the "680-880
corridor." The fair market rent during the period covered by each
option
Page 10
<PAGE>
(the "Extended Term") shall be computed on a "net" basis and shall be
compared to other net leases for properties comparable to the
Premises. In that regard, the appraisers shall compare the amounts
payable with respect to the Premises on account of taxes, insurance,
operating expenses, and similar "additional rent" amounts to the
amounts that are attributable to and would be paid by the tenant of
each other property that is compared to the Premises. Such
determination also shall take into account that, with respect to the
lease of the Premises to Lessee during the Extended Term, Lessee shall
not be receiving any tenant improvement allowance, and Lessor will not
be required to pay any lease commissions.
(e) Notwithstanding any provision of this Paragraph 92 to the contrary, if
Lessee is dissatisfied with the determination of the amount of the
rent for any Extended Term, Lessee shall have the right to rescind its
exercise of the option by giving written notice thereof to Lessor
within 15 days after the rent is determined.
93. Brokers.
-------
(a) Lessor and Lessee acknowledge that BT Commercial is representing
Lessor and CB Commercial is representing the Lessee.
(b) Lessor to pay a commission to Brokers in accordance with the Exclusive
Listing Agreement with BT Commercial upon Lessor's receipt of Lessee's
written approval of all contingencies to the Lease and the Base rent
payable upon execution of the Lease.
IN WITNESS WHEREOF, LESSOR AND LESSEE HAVE EXECUTED THIS ADDENDUM EFFECTIVE
AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN.
LESSOR: LESSEE:
JOSEPH RUBINO AND HEADWAY TECHNOLOGIES, INC.
DOROTHY RUBINO "A California corporation"
INTERVIVOS TRUST
ET AL.
By: /s/ Joseph Rubino By: /s/ Signature Illegible
--------------------------- --------------------------
Joseph Rubino
By: /s/ Dorothy Rubino Its: President & CEO
--------------------------- -------------------------
Dorothy Rubino
Page 11
<PAGE>
EXHIBIT 10.8
SUBLEASE AGREEMENT
------------------
I. DEFINED TERMS
-------------
Base Rent
Monthly: $22,332.35
Annually: $267,988.2O
Building: 475-497 Hillview Drive, Milpitas, California
Effective
Date: September 23, 1994.
Expiration
Date: February 15, 2001.
Landlord: Sanjaylyn Company, a California partnership
Master
Lease: Lease Agreement dated May 24, 1991 executed between Milpitas-
Hillview, a California limited partnership, as landlord, and
Sublessor (hereinafter defined), as tenant; as assigned to
Landlord pursuant to that certain Assignment and Assumption
Agreement dated September 23, 1991.
Permitted
Uses: Manufacturing, research and development, general office, storage,
warehouse and marketing purposes.
Premises: Improved real property as more particularly described in the
Master Lease, attached hereto as Exhibit A, consisting of
---------
approximately 97,272 rentable square feet.
Rent
Commencement
Date: September 1, 1994.
Occupancy
Date: September 1, 1994.
1.
<PAGE>
Sublessee: M-R Assets Corporation, a California corporation
Sublessee's
Address: 497 South Hillview Drive
Milpitas, California 95035
Attn: Mr. Tom Surran
Sublessor: Komag, Inc., a Delaware corporation
Sublessor's
Address: 275 South Hillview Drive
Milpitas, California 95035
Attn: Chief Financial Officer
Sublet Space: A portion of the Premises consisting of approximately 31,907
square feet, as more particularly described in Exhibit B attached
---------
hereto.
Term: September 1, 1994 through February 15, 200l.
Exhibits: Exhibit A - Master Lease
---------
Exhibit B - Description of the Sublet Space
---------
Exhibit C - Commencement Date Memorandum
---------
Exhibit D - Facilities Service Agreement
---------
II.
THIS SUBLEASE AGREEMENT ("Sublease") is entered as of the Effective
Date by and between Sublessor and Sublessee.
The parties enter this Sublease on the basis of the following facts,
understandings and intentions:
A. Sublessor is presently a lessee of the Premises in the Building
pursuant to the Master Lease by and between Landlord and Sublessor. A copy of
the Master Lease with all exhibits and addenda thereto is attached hereto as
Exhibit A.
- ---------
B. Sublessor desires to sublease the Sublet Space to Sublessee and
Sublessee desires to sublease the Sublet Space from Sublessor on all of the
terms, covenants and conditions hereinafter set forth.
C. All of the terms and definitions in the Defined Terms section are
incorporated herein by this reference.
2.
<PAGE>
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises
of the parties, the parties hereto agree as follows:
1. SUBLEASE. Sublessor shall sublease to Sublessee, and Sublessee shall
--------
sublease from Sublessor, the Sublet Space for the Term upon all of the terms,
covenants and conditions herein contained. In addition Sublessor shall lease to
Sublessee, and Sublessee shall lease from Sublessor, any and all permanent
improvements ("Improvements") on the Sublet Space constructed and/or owned by
Sublessor, upon all of the terms, covenants and conditions herein contained. As
used herein, "Sublet Space" shall include the Sublet Space and the Improvements.
2. CONDITION OF SUBLET SPACE.
-------------------------
a. PHYSICAL CONDITION. As of the Effective Date, Sublessee
------------------
acknowledges that Sublessee shall have conducted Sub-lessee's own investigation
of the Sublet Space and the physical condition thereof, including accessibility
and location of utilities, improvements, existence of hazardous materials,
including but not limited to asbestos, asbestos containing materials, poly-
chlorinated biphenyls (PCB) and earthquake preparedness, which in Sublessee's
judgment affect or influence Sublessee's use of the Sublet Space and Sublessee's
willingness to enter this Sublease. Sublessee recognizes that Sublessor would
not sublease the Sublet Space except on an "as is" basis and acknowledges that
Sublessor has made no representations of any kind in connection with
improvements or physical conditions on, or bearing on, the use of the Sublet
Space. Sublessee shall rely solely on Sublessee's own inspection and examination
of such items and not on any representations of Sublessor, express or implied.
Sublessee further recognizes and agrees that neither Sublessor nor Landlord
shall be required to perform any work of construction, alteration or maintenance
of or to the Sublet Space; provided, however, Sublessor shall deliver the Sublet
Space to Sublessee in broom clean condition.
b. FURTHER INSPECTION. Sublessee represents and warrants to
------------------
Sublessor that, prior to the Effective Date, Sublessee shall examine and inspect
all matters with respect to taxes, income and expense data, insurance costs,
bonds, permissible uses, the Master Lease, zoning, covenants, conditions and
restrictions and all other matters which in Sublessee's judgment bear upon the
value and suitability of the Sublet Space for Sublessee's purposes. Sublessee
has and will rely solely on Sublessee's own inspection and examination of such
items and not on any representations of Sublessor, express or implied.
3.
<PAGE>
3. SUBLEASE SUBJECT TO MASTER LEASE.
--------------------------------
a. INCLUSIONS. It is expressly understood, acknowledged and agreed
----------
by Sublessee that all of the other terms, conditions and covenants of this
Sublease shall be those stated in the Master Lease except as excluded in section
3.b herein, modified as appropriate in the circumstances so as to make such
Sections and subsections contained therein applicable only to the subleasing
hereunder by Sublessor of the Sublet Space covered hereby. Whenever the words
"Premises" or "Initial Premises" or "UTI Premises" are used in the Master lease,
for purposes of this Sublease, the word Sublet Space shall be substituted.
Sublessee shall be subject to, bound by and comply with all of the provisions of
the Master Lease with respect to the Sublet Space and shall satisfy all
applicable terms and conditions of the Master Lease relating to the Sublet Space
for the benefit of both Sublessor and Landlord, it being understood and agreed
that wherever in the Master Lease the word "Tenant" appears, for the purposes of
this Sublease, the word "Sublessee" shall be substituted, and wherever the word
"Landlord" appears, for the purposes of this Sublease, the word "Sublessor"
shall be substituted; and that upon the breach of any of said terms, conditions
or covenants of the Master Lease by Sublessee or upon the failure of Sublessee
to pay Rent or comply with any of the provisions of this Sublease, Sublessor may
exercise any and all rights and remedies granted to Landlord by the Master
Lease. In the event of any conflict between this Sublease and the Master lease,
the terms of this Sublease shall control. It is further understood and agreed
that, except as otherwise provided in Section 9 hereof, Sublessor has no duty or
obligation to Sublessee under the Master Lease other than to perform the
obligations of Sublessor as lessee under the Master Lease during the Term of
this Sublease. Whenever the provisions of the Master Lease incorporated as
provisions of this Sublease require the written consent of Landlord, said
provisions shall be construed to require the written consent of both landlord
and Sublessor. Sublessee hereby acknowledges that it has read and is familiar
with all the terms of the Master Lease, and agrees that this Sublease is
subordinate and subject to the Master Lease and that any termination thereof not
due to a default by Sublessor thereunder shall likewise terminate this Sublease.
b. EXCLUSIONS. The terms and provisions of the following Sections
----------
and portions of the Master Lease are not incorporated into this Sublease: 1, 3,
4.E, 5, 8.C, 10.A, the third full paragraph of Section 10.B, the second full
paragraph of Section 11, the third full paragraph of Section 13, 14.A, the
second full paragraph of Section 14.B, 15.B(4), 23, 25, 3l.B, 36, 37, and 38.C,
c. TIME FOR NOTICE. The time limits provided for in the provisions
---------------
of the Master Lease for the giving of notice,
4.
<PAGE>
making of demands, performance of any act, condition or covenant, or the
exercise of any right, remedy or option, are amended for the purposes of this
Sublease by lengthening or shortening the same in each instance by five (5)
days, as appropriate, so that notices may be given, demands made, or any act,
condition or covenant performed, or any right, remedy or option hereunder
exercised, by Sublessor or Sublessee, as the case may be, within the time limit
relating thereto contained in the Master Lease. If the Master Lease allows only
eight (8) days or less for Sublessor to perform any act, or to undertake to
perform such act, or to correct any failure relating to the Premises or this
Sublease, then Sublessee shall nevertheless be allowed three (3) days to perform
such act, undertake such act and/or correct such failure.
4. LANDLORD'S OBLIGATIONS. Sublessor, upon written notice by Sublessee,
----------------------
shall diligently attempt to enforce all obligations of Landlord under the Master
Lease, including the obligation of Landlord to (i) provide all services to be
provided by Landlord under the terms of the Master Lease and (ii) satisfy all
obligations and covenants of Landlord made in the Master Lease; provided,
however, Sublessor shall be under no obligation to provide any such services or
satisfy any such obligations or covenants (except as otherwise provided in
sections 9 and 17 hereof).
5. RENT.
----
a. INITIAL RENT. Upon execution hereof, Sublessee shall deliver the
------------
first month's Base Rent to Sublessor, to be applied against Sublessee's first
obligation to pay Base Rent hereunder. Sublessee shall pay to Sublessor the Base
Rent in advance on the first day of each month of the Term, commencing on the
Rent Commencement Date without being invoiced by Sublessor. In the event the
first day of the Term shall not be the first day of a calendar month or the last
day of the Term is not the last day of the calendar month, the Base Rent shall
be appropriately prorated based on a thirty (30) day month. All installments of
Base Rent shall be delivered to Sublessor's Address, or at such other place as
may be designated in writing from time to time by Sublessor, in lawful money of
the United States and without deduction or offset for any cause whatsoever.
b. NET RENTAL. Sublessee shall be responsible for all costs and
----------
expenses of every kind and nature which may be imposed, at any time, on
Sublessor pursuant to the Master Lease including, but not limited to, Additional
Rent, Outside Area Charges, Property Taxes (and other taxes), and Environmental
Surcharges, all as defined in the Master Lease. As hereinafter used, "Rent"
shall include Base Rent and all additional charges to be paid by Sublessee
pursuant to this Section 5.b. In the event Sublessee shall require additional
services beyond those
5.
<PAGE>
standard services provided in the Master Lease, then Sublessee shall pay the
cost of any such services.
c. LATE PAYMENT CHARGES AND INTEREST. Any payment of Rent or other
---------------------------------
amount from Sublessee to Sublessor in this Sublease which is not paid on the
date due shall accrue interest from the date due until the date paid at a rate
equal to the Bank of America "reference" rate plus one percent (1%) per annum
(the "Interest Rate"), but in no event more than the maximum per annum rate of
interest legally allowed by the State of California. If any installment of Rent
is not paid promptly on the first of the month, or otherwise when due, Sublessee
shall pay to Sublessor a late payment charge equal to five percent (5%) of the
amount of such delinquent payment of Rent, in addition to the installment of
Rent then owing, This Section 5 shall not relieve Sublessee of Sublessee's
obligation to pay any amount owing hereunder at the time and in the manner
provided.
6. USE. The Sublet Space is to be used for the Permitted Uses, and for
---
no other purpose or business without the prior written consent of Sublessor. In
no event shall the Sublet Space be used for a purpose or use prohibited by the
Master Lease.
7. ASSIGNMENT AND SUBLETTING. Sublessee shall not sell, assign,
-------------------------
encumber, sublease or otherwise transfer by operation of law or otherwise the
Sublet Space or this Sublease.
8. ALTERATIONS. Sublessee shall not make or suffer to be made any
-----------
alterations, additions or improvements (collectively "Alterations") in, on, or
to the Sublet Space without the prior written consent of Sublessor which consent
shall not be unreasonably withheld. Any permitted Alterations shall be made by
Sublessee at Sublessee's sole cost and expense, and Sublessee shall notify
Sublessor at least five (5) business days in advance of the same so that
Sublessor may post appropriate notices of nonresponsibility. Any permitted
Alterations shall be performed by a licensed contractor approved in writing by
Sublessor. Upon the expiration or earlier termination of this Sublease,
Sublessee shall, upon demand by Sublessor, at Sublessee's sole cost and expense,
promptly and with all due diligence, remove any Alterations made or paid for by
Sublessee and Sublessee shall promptly and with all due diligence, at
Sublessee's sole cost and expense, repair and restore the Sublet Space to its
original condition, ordinary wear and tear excepted.
If, during the term of this Sublease, any Alteration to the Sublet Space is
required by law, regulation, ordinance, or order of any public agency, Sublessee
shall promptly make the same at its sole cost and expense, provided, however, if
such Alteration required by a public agency costs more than Twenty-Five Thousand
Dollars ($25,000) and is required for a reason other than Sublessee's specific
use of the Sublet Space, then, and in only
6.
<PAGE>
such an event, Sublessor shall make the same and cost thereof shall be amortized
over a seven (7) year period and Sublessee shall pay to Sublessor, as additional
rent, one-seventh (1/7th) of the cost thereof each year during the remaining
term of this Sublease, If during the term of this Sublease, any Alteration to
the Outside Area (as defined in the Master Lease) is required by law,
regulation, ordinance, or order of any public agency, Landlord shall make the
same and the cost of such Alteration shall be an Outside Area Charge (as defined
in the Master Lease) and Sublessee shall pay its share of such cost to Landlord
as provided in the Master Lease.
9. REPAIRS AND MAINTENANCE; ADDITIONAL SERVICES. Sublessee shall, at
--------------------------------------------
Sublessee's sole cost and expense, keep, maintain, repair and replace all
improvements in or to the Sublet Space, including, without limitation, all
doors, subfloors and floor coverings, all plumbing, electrical wiring, ceilings,
interior walls, interior surfaces of exterior walls, signs, all heating and air
conditioning systems, all fire sprinklers systems, all skylights, and other
fixtures and equipment in good repair and in a clean and safe condition.
Sublessee shall, at Sublessee's sole expense, repair any area damaged by
Sublessee, Sublessee's agents, employees and visitors. Sublessee acknowledges
that, except as otherwise provided herein, Sublessor is under no duty to make
repairs or improvements to the Sublet Space, and Sublessee hereby waives any
right it may have at law or in equity to enforce the same. Notwithstanding any
provision to the contrary contained herein, if requested by Sublessee, Sublessor
shall, at Sublessee's sole cost and expense, provide the following services in
connection with the Sublet Space: (i) landscaping, (ii) roof inspections and
maintenance, (iii) general facilities maintenance (including the installation of
interior improvements of a non-structural nature), (iv) electricity, deionized
water, chilled water, gas, nitrogen, and "clean, dry air" and (v) such other
services as the parties hereto may mutually agrees Notwithstanding the
foregoing, to the extent Landlord is obligated under the Master Lease to make
any repairs in or to the Sublet Space, Sublessor, upon written notice by
Sublessee, shall diligently attempt to enforce such obligation of Landlord.
10. DAMAGE AND DESTRUCTION.
-----------------------
a. TERMINATION OF MASTER LEASE. If the Sublet Space is damaged or
---------------------------
destroyed and Landlord or Sublessor exercises any option either may have to
terminate the Master Lease, if any, this Sublease shall terminate as of the date
of the termination of the Master Lease.
b. CONTINUATION OF SUBLEASE. If the Master Lease is not terminated
------------------------
following any damage or destruction as provided above, this Sublease shall
remain in full force and effect and
7.
<PAGE>
Sublessee shall be entitled to any reduction or abatement of Base Rent in an
amount in proportion to the corresponding reduction in Base Rent for the Sublet
Space which Sublessor receives under the Master Lease. Sublessor shall
diligently enforce any obligation of Landlord to rebuild the Sublet Space in
accordance with the Master Lease and shall make available to Sublessee any
insurance proceeds Sublessor receives as a result of such damage or destruction.
11. EMINENT DOMAIN.
--------------
a. TOTAL CONDEMNATION. If all of the Premises is condemned by
------------------
eminent domain, inversely condemned or sold in lieu of condemnation, for any
public or a quasi-public use or purpose ("Condemned" or "Condemnation"), this
Sublease shall terminate as of the date of title vesting in such proceeding, and
Base Rent shall be adjusted to the date of termination.
b. PARTIAL CONDEMNATION. If any portion of the Premises is
--------------------
Condemned, and Sublessor exercises any option to terminate the Master Lease,
this Sublease shall automatically terminate as of the date of the termination of
the Master Lease. If Sublessor has the option to terminate the Master Lease,
Sublessor shall promptly give Sublessee notice of such option and shall exercise
such option if so directed by Sublessee subject to the relevant provisions of
the Master Lease and further provided that such partial condemnation renders the
Premises unusable for Sublessee's business, as reasonably determined by
Sublessor. If this Sublease is not terminated following any such Condemnation,
this Sublease shall remain in full force and effect. Sublessor shall diligently
enforce any rights under the Master Lease to require Lessor to rebuild the
Premises. To the extent that Sublessor's Base Rent abates under the Master
Lease, Base Rent shall be equitably adjusted to take into account interference
with Sublessee's ability to conduct its operations on the Premises as a result
of such partial Condemnation. Sublessee hereby waives the provisions of
California code of Civil Procedure Section 1265.130 permitting a court of law to
terminate this Sublease.
c. SUBLESSEE'S AWARD. Subject to the provisions of the Master
-----------------
Lease, Sublessee shall have the right to recover from the condemning authority,
but not from Sublessor, such compensation as may be separately awarded to
Sublessee in connection with costs and removing Sublessee's merchandise,
furniture, fixtures, leasehold improvements and equipment to a new location.
12. INSURANCE. All insurance policies required to be carried by
---------
Sublessee, pursuant to the Master Lease, shall contain a provision whereby
Sublessor and Landlord are each named as additional insureds under such policies
and furnished with a
8.
<PAGE>
certificate of insurance. To the extent that Sublessor maintains under the
terms of the Master Lease a policy or policies of comprehensive general
liability insurance insuring Landlord (and such others as are designated by
Landlord), against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Sublet Space or the Outside Area, Sublessee shall pay its share of such costs to
Sublessor as additional rent.
13. SUBLESSEE'S INDEMNITY. Sublessee shall defend, indemnify and hold
---------------------
harmless Sublessor, its shareholders, employees, and agents, and Landlord, from
and against any and all claims, liabilities, suits, judgments, awards, damages,
losses, fines, penalties, costs and expenses, including reasonable attorney's
fees, that Sublessor, its shareholders, employees and agents, and landlord may
suffer, incur or be liable for by reason of or arising out of or related to the
breach by Sublessee of any of the duties, obligations, liabilities or covenants
applicable to Sublessee hereunder, Sublessee's occupancy or use of the Sublet
Space, any alterations, additions or modifications made to the Premises by
Sublessee or Sublessee's negligence or willful misconduct. This indemnification
shall survive termination of this Sublease.
14. RIGHT TO CURE SUBLESSEE'S DEFAULTS. If Sublessee shall at any time
----------------------------------
fail to make any payment or perform any other obligation of Sublessee hereunder,
then Sublessor shall have the right, but not the obligation, after the lesser of
five (5) days' notice to Sublessee or the time within which Landlord may act on
Sublessor's behalf under the Master Lease, or without notice to Sublessee in the
case of any emergency, and without waiving or releasing Sublessee from any
obligations of Sublessee hereunder, to make such payment or perform such other
obligation of Sublessee in such manner and to such extent as Sublessor shall
deem necessary, and in exercising any such right, to pay any incidental costs
and expenses, employ attorneys and other professionals, and incur and pay
attorneys' fees and other costs reasonably required in connection therewith.
Sublessee shall pay to Sublessor upon demand all sums so paid by Sublessor and
all incidental costs and expenses of Sublessor in connection therewith, together
with interest thereon at the Interest Rate.
15. ENVIRONMENTAL INDEMNIFICATION.
-----------------------------
a. SUBLESSEE'S INDEMNITY. Sublessee shall defend, protect, hold
---------------------
harmless and indemnify Sublessor and its agents and employees with respect to
all actions, claims, losses, fines, penalties, fees, costs, damages and
liabilities (including but not limited to attorneys' and consultants' fees)
arising out of or in connection with the negligence or willful misconduct of
Sublessee, its agents, employees, contractors and subcontractors, or any of
them, with respect to any Hazardous Material used,
9.
<PAGE>
generated, discharged, transported to or from, stored, or disposed of in, on,
under, over, through or about the Sublet Space by Sublessee or its agents,
employees, contractors or subcontractors during the term of this Sublease.
Nothing contained herein shall alter or limit the indemnification obligations of
Sublessee set forth in the Facilities Agreement (hereinafter defined). The
indemnification obligations set forth herein shall survive the termination of
this Sublease.
b. SUBLESSOR'S INDEMNITY. Sublessor shall defend, protect, hold
---------------------
harmless and indemnify Sublessee and its agents and employees with respect to
all actions, claims, losses, fines, penalties, fees, costs, damages and
liabilities (including but not limited to attorneys' and consultants' fees)
arising out of or in connection with the negligence or willful misconduct of
Sublessor or Dastek, Inc., a California corporation ("Dastek"), or their
respective agents, employees, contractors and subcontractors, or any of them,
with respect to any Hazardous Material used, generated, discharged, transported
to or from, stored, or disposed of in, on, under, over, through or about the
Sublet Space by Sublessor or Dastek, or their agents, employees, contractors or
subcontractors prior to or during the term of this Sublease. The indemnification
obligations set forth herein shall survive the termination of this Sublease.
16. TERMINATION OPTION. Sublessee shall have the right upon 120 days
------------------
prior written notice to Sublessor to terminate this Sublease (the "Termination-
Notice"). Upon receipt of the Termination Notice, Sublessor shall, in good
faith, use commercially reasonable efforts to: (a) use the Sublet Space for the
remainder of the Term, or, (b) to the extent permitted under the Master Lease,
lease the Sublet Space to a new sublessee. Sublessor shall promptly notify
Sublessee upon either (a) or (b) above, upon which notice, the termination of
this Sublease pursuant to this termination option shall be effective.
Notwithstanding any provision to the contrary contained herein, in the event of
(b) above, Sublessee shall remain liable to Sublessor for the difference between
the amount of the rent due under this Sublease and the amount of rent obtained
by Sublessor in leasing the Sublet Space to a new sublessee. The indemnification
obligations set forth in the Sections 13 and 15 shall survive any termination
effected pursuant to this Section 16.
17. MISCELLANEOUS.
-------------
a. ENTIRE AGREEMENT. This Sublease contains all of the covenants,
----------------
conditions and agreements between the parties concerning the Sublet Space, and
shall supersede all prior correspondence, agreements and understandings
concerning the Sublet Space, both oral and written. No addition or modification
of any term or provision of this Sublease shall be effective
10.
<PAGE>
unless set forth in writing and signed by both Sublessor and Sublessee.
b. CAPTIONS. All captions and headings in this Sublease are for
--------
the, purposes of reference and convenience and shall not limit or expand the
provisions of this Sublease.
c. LANDLORD'S CONSENT. This Sublease is conditioned upon Landlord's
------------------
written approval of this Sublease within twenty (20) days after the Effective
Date. If Landlord refuses to consent to this Sublease, or if the twenty (20)
day consent period expires, this Sublease shall terminate and neither party
shall have any continuing obligation to the other with respect to the Sublet
Space.
d. AUTHORITY. Each person executing this Sublease on behalf of a
---------
party hereto represents and warrants that he or she is authorized and empowered
to do so and to thereby bind the party on whose behalf he or she is signing.
e. ATTORNEYS' FEES. In the event either party shall bring any
---------------
action or proceeding for damages or for an alleged breach of any provision of
this Sublease to recover rents, or to enforce, protect or establish any right or
remedy hereunder, the prevailing party shall be entitled to recover reasonable
attorneys' fees and court costs as part of such action or proceeding.
f. HOLDOVER. This Sublease shall terminate without further notice
--------
at the expiration of the Sublease Term. If Sublessee holds over at the Sublet
Space or any part thereof after the expiration or earlier termination of the
Term, such holding over shall constitute a month-to-month tenancy, at a rent
equal to one hundred twenty-five (125%) of the Base Rent due hereunder. Nothing
in the foregoing sentence shall be deemed Sublessor's permission for Sublessee
to hold over, and acceptance of Base Rent by Sublessor following expiration of
termination of the Sublease shall not constitute a renewal of this Sublease. In
addition to the foregoing, Sublessee shall indemnify, defend by counsel
satisfactory to Sublessor, protect and hold Sublessor harmless from any and all
liabilities, claims, causes of action, damages, costs or expenses (including
reasonable attorney's fees) directly or indirectly resulting from Sublessee's
holding over at the Sublet Space beyond the expiration or termination of the
Term.
g. ACCESS. Sublessor reserves the right to enter the Sublet Space
------
upon reasonable notice to Sublessee (except that in case of emergency no notice
shall be necessary) in order to
11.
<PAGE>
inspect the Sublet Space and/or the performance by Sublessee of the terms of
this Sublease.
18. WASTE TREATMENT SERVICES. Notwithstanding any provision to the
------------------------
contrary contained herein or in the Master Lease, during the term of this
Sublease, Sublessor shall provide to Sublessee waste treatment services in
accordance with the terms and conditions of that certain Facilities Service
Agreement (the "Facilities Agreement") to be executed between Sublessor and
Sublessee, the terms and conditions of which will be in substantially the form
of the agreement attached hereto as Exhibit D. The parties covenant to one
---------
another that each will use best efforts to agree to and execute such Facilities
Agreement within twenty (20) days from the date hereof. Hewlett-Packard Company
shall have the right to approve the Facilities Agreement, which approval shall
not be unreasonably withheld. Sublessee shall pay all costs and expenses in
connection with the waste treatment services to be provided under the Facilities
Service Agreement. If Sublessee shall breach any of its covenants, conditions,
representations or warranties contained in the Facilities Agreement, such breach
shall constitute a default under this Sublease and Sublessor may exercise any
and all of the rights and remedies available to it hereunder. If any conflict
exists between the terms of this Sublease and the terms of the Facilities
Agreement, the terms of this Sublease shall control; provided, however, nothing
contained herein shall be construed to limit the indemnification obligations of
Sublessee under the Facilities Agreement, which obligations shall be in addition
to, and not in lieu of, those stated herein.
12.
<PAGE>
19. OPTION TO EXTEND. Sublessor and Sublessee acknowledge that Sublessor
----------------
has two (2) consecutive options (collectively, the "Options") to extend the term
of the Master Lease, each for a period of five (5) years (collectively, the
"Option Terms"). In the event that Sublessee desires to extend the term of this
Sublease for either or both Option Terms, Sublessee shall deliver to Sublessor
written notice ("Extension Notice") thereof no later than thirty (30) days prior
to the date on which Sublessor is obligated to notify Landlord of its intention
to exercise either such Option. Within thirty (30) days of receipt of an
Extension Notice, Sublessor shall notify Sublessee whether Sublessor intends to
extend the term of the Master Lease pursuant to either such option. If Sublessee
delivers an Extension Notice to Sublessor and Sublessor elects to exercise
either such Option, the term of this Sublease shall be automatically extended on
the same terms and conditions as contained in this Sublease, except that the
Base Rent shall be adjusted in accordance with Section 36.B of the Master Lease.
If Sublessor elects not to exercise either such option, or fails to notify
Sublessee of its election, then Sublessee shall have no right to extend the term
of this Sublease. If Sublessor elects not to exercise the first Option,
Sublessee shall have no rights hereunder with respect to the second Option.
Nothing contained herein shall obligate Sublessor to exercise its rights to
extend the term of the Master Lease and Sublessee shall have no right to extend
the term of this Sublease other than as set forth herein.
13.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed one (1) or more
copies of this Sublease, dated as of the Effective Date.
SUBLESSOR:
KOMAG, Inc., a Delaware corporation
By: /s/ William L. Potts, Jr.
---------------------------------
Name: WILLIAM L. POTTS, JR.
-------------------------------
Title: VP, CFO
------------------------------
SUBLESSEE:
M-R ASSETS CORPORATION, a
California corporation
By: /s/ Thomas Surran
---------------------------------
Name: THOMAS A. SURRAN
-------------------------------
Title: SECRETARY
------------------------------
ACCEPTED AND AGREED TO:
LANDLORD:
By: /s/ L. Shelly Eisamen
---------------------------------
Name: L. Shelly Eisamen
-------------------------------
Title: Property Mgr./ Owner's Agent
------------------------------
By: ________________________________
Name: ______________________________
Title: _____________________________
14.
<PAGE>
FIRST AMENDMENT TO SUBLEASE
---------------------------
THIS FIRST AMENDMENT TO SUBLEASE ("Amendment") is made as of December __,
1997 ("Effective Date"), between KOMAG, INCORPORATED, a Delaware corporation
("Sublessor"), and HEADWAY TECHNOLOGIES, INC., a _____ corporation
("Sublessee").
THE PARTIES ENTER INTO THIS AMENDMENT based upon the following facts,
understandings and intentions:
A. Sanjaylyn Company, a California general partnership ("Landlord"), as
landlord, and Sublessor, as tenant, are currently parties to that certain Lease
Agreement dated as of May 24, 1991 (the "Master Lease") pursuant to which
Landlord leases to Sublessor, and Sublessor leases from Landlord, approximately
97,272 rentable square feet of space (the "Leased Premises") in Landlord's
building (the "Building") located at 475-497 Hillview Drive in Milpitas,
California.
B. Sublessor, as sublessor, and Sublessee, as sublessee, are currently
parties to that certain Sublease Agreement effective September 23, 1994 (the
"Sublease") pursuant to which Sublessor subleases to Sublessee, and Sublessee
subleases from Sublessor, approximately 31,907 rentable square feet of space
(the "Existing Subleased Premises") in the Leased Premises, as more particularly
described in the Sublease, a copy of which is attached hereto as Exhibit A.
---------
C. Sublessee now desires to sublease from Sublessor, and Sublessor
desires to sublease to Sublessee, an additional 65,365 square foot portion of
the Leased Premises shown on Exhibit B attached hereto (the "Additional
---------
Subleased Premises"). (The Existing Subleased Premises and Additional Subleased
Premises are hereinafter referred to as the "Entire Subleased Premises.")
D. Sublessee desires to occupy the Entire Subleased Premises until
December 31, 2007, but the term of the Master Lease (and the Sublease) shall
expire on February 15, 2001. Therefore, Landlord and Sublessee have agreed,
provided this Amendment is entered into between Sublessor and Sublessee, to
enter into a lease agreement (the "Ensuing Lease") for the Entire Subleased
Premises. The term of the Ensuing Lease shall commence on February 16, 2001 and
end on December 31, 2007. The terms of the Ensuing Lease shall be substantially
the same as those of the Master Lease. In consideration for Sublessor's
agreement to sublease the Additional Subleased Premises to Sublessee upon the
terms hereof, Landlord has agreed to release Sublessor from Sublessor's,
removal, repair and surrender obligations under the Master Lease.
1.
<PAGE>
E. Sublessor and Sublessee now desire to amend the Sublease to provide
that the Additional Subleased Premises shall be included as a part of the
premises subleased by Sublessee upon the terms and conditions more particularly
described herein. The capitalized terms used in this Amendment shall have the
meanings given to such terms within the Sublease, unless otherwise set forth
herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of
the parties, the parties hereto agree as follows:
1. ADDITIONAL SUBLEASED PREMISES. Effective as of January 1, 1998 (the
-----------------------------
"Effective Date"), Sublessor hereby subleases to Sublessee and Sublessee
subleases from Sublessor the Additional Subleased Premises, subject to the
provisions of the Sublease and the terms and conditions set forth herein. If
the Additional Subleased Premises is not ready for occupancy on the Effective
Date for any cause beyond the control of Sublessor, this Amendment shall remain
in effect and Sublessor shall not be subjected to any liability, provided the
Effective Date shall be delayed until the date Sublessor actually delivers the
Additional Subleased Premises.
2. CONDITION OF ADDITIONAL SUBLEASED PREMISES. Sublessee hereby accepts
------------------------------------------
the Additional Subleased Premises in an "as-is, where-is" condition, as exists
as of the Effective Date, with all defects, whether or not disclosed to
Sublessee by Sublessor, and subject to all applicable laws, ordinances and
regulations and any covenants or restrictions of record relating to the
Additional Subleased Premises. Sublessor makes no representations or warranties,
express or implied, as to the physical condition of the Additional Subleased
Premises, its current compliance with law or its fitness for Sublessee's
intended use, or the condition of the structural and non-structural portions of
the Additional Subleased Premises or whether any repairs are necessary to
correct pre-existing conditions.
3. TERM. The term of Sublessee's occupancy of the Additional Subleased
----
Premises shall commence on the Effective Date and shall terminate on February
15, 2001, unless terminated earlier pursuant to the terms of the Sublease.
4. BASE RENT. From and after the Effective Date, the Base Rent for the
---------
Additional Subleased Premises payable pursuant to Section 5 of the Sublease
shall be Eighty-Eight Thousand Two Hundred Forty-Two and 75/100 Dollars
($88,242.75) per month, such that the aggregate Base Rent due for the Entire
Subleased Premises shall be One Hundred Ten Thousand Five Hundred Seventy-Five
and 10/100 Dollars ($110,575.10) per month.
5. SUBLESSEE'S SHARE. As of the Effective Date, Sublessee's share of net
-----------------
rental expenses pursuant to Section 5.b of the Sublease shall be one hundred
percent (100%).
6. FACILITIES SERVICES AGREEMENT. On the Effective Date of this
-----------------------------
Amendment, Sublessor and Sublessee shall enter into a 1988 Facilities Service
Agreement in the form attached hereto as Exhibit C with respect to the sharing
---------
of de-ionized water produced at the
2.
<PAGE>
Premises. Such 1988 Facilities Service Agreement shall amend and restate in its
entirety that certain Amended and Restated Facilities Service Agreement dated as
of March ____, 1995 and effective as of October 7, 1994, between Sublessor and
Sublessee, which agreement shall thereafter be terminated and null and void,
except for Sublessor's and Sublessee's indemnification obligations thereunder,
which shall survive without limitation.
7. SALE OF TRADE FIXTURES. On the Effective Date of this Amendment,
----------------------
Sublessor shall execute a bill of sale in the form attached hereto as Exhibit D
---------
whereby Sublessor sells to Sublessee, and Sublessee purchases from Sublessor,
on an as-is basis, certain trade fixtures more particularly described in such
bill of sale. The purchase price for such trade fixtures shall be
_______________ Dollars ($______________), which shall be paid by Sublessee to
Sublessor in the form of a promissory note bearing seven percent (7%) interest
per annum, with payments of interest due quarterly. The principal amount of
such promissory note shall be payable upon the earlier of an initial public
offering by Sublessee raising gross proceeds in excess of Thirty Million
Dollars ($30,000,000) or the expiration or earlier termination of the term of
the Sublease. A form of such promissory note to be executed by Sublessee is
attached hereto as Exhibit E.
---------
8. INDEMNITY. Provided that Sublessee is then in occupancy of all or any
---------
portion of the Entire Subleased Premises pursuant to the Ensuing Lease,
Sublessee shall indemnify, defend, protect and hold Sublessor harmless against
loss, damage, claim, cause of action, expense (including reasonable attorneys'
fees) or liability resulting from any claim by Landlord that Sublessor has
failed to surrender the Entire Subleased Premises in the condition required by
the terms of the Master Lease at the expiration or earlier termination thereof.
9. BROKERS. Sublessee warrants and represents for the benefit of
-------
Sublessor that it has had no dealings with any real estate broker or agent in
connection with the negotiation of this Amendment, and that it knows of no real
estate broker or agent who is or might be entitled to a real estate brokerage
commission or finder's fee in connection with this Amendment. Sublessee shall
indemnify, defend, protect and hold Sublessor harmless from and against any and
all liabilities or expenses arising out of claims made by any broker or
individual for commissions or fees resulting from the actions of Sublessee in
connection with this Amendment.
10. REPRESENTATIONS AND WARRANTIES. Sublessee hereby represents, warrants
------------------------------
and agrees that: (i) there exists no breach, default or event of default under
the Sublease, or any event or condition which, with notice or passage of time or
both, would constitute a breach, default or event of default under the Sublease;
(ii) the Sublease continues to be a legal, valid and binding agreement and
obligation of Sublessee; and (iii) Sublessor is not in default under the
Sublease and neither Sublessee nor any other party has any offset or defense to
their performance or obligations under the Sublease.
11. CONTINUING OBLIGATIONS. Except as expressly set forth to the contrary
----------------------
in this Amendment, the Sublease remains unmodified and in full force and effect.
To the extent of
3.
<PAGE>
any conflict between the terms of this Amendment and the terms of the Sublease,
the terms of this Amendment shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment with
duplicate counterparts as of the day and year first above written.
"SUBLESSOR"
KOMAG, INCORPORATED, a
Delaware corporation
By:__________________
Name:________________
Title:_______________
"SUBLESSEE"
HEADWAY TECHNOLOGIES, INC., a
_________ corporation
By:__________________
Name:________________
Title:_______________
By:__________________
Name:________________
Title:_______________
4.
<PAGE>
CONSENT OF LANDLORD
-------------------
Landlord, as landlord under the Master Lease, hereby consents to the
execution and delivery of this Amendment by and between Sublessor and Sublessee
and the subletting of the Entire Subleased Premises (including the Additional
Subleased Premises) in accordance with the terms of the Sublease, as amended by
this Amendment. In so consenting to the subletting of the Entire Subleased
Premises by Sublessee, Landlord acknowledges that Landlord and Sublessee are
simultaneously entering into a lease agreement whereby Landlord shall lease to
Sublessee, and Sublessee shall lease from Landlord, the Entire Subleased
Premises upon the expiration or earlier termination of this Sublease, and that
such leasing would not be possible without Sublessor's agreement to Sublease the
Additional Subleased Premises to Sublessee. In consideration of the obligations
and agreements of Sublessor pursuant to this Agreement, Landlord agrees that, if
Sublessee is then occupying all or any portion of the Entire Subleased Premises
pursuant to the terms of a direct lease with Landlord, Landlord shall release
Sublessor from any and all obligations of Sublessor under the Master Lease to
remove any alterations or signs, make any repairs or surrender the Entire
Subleased Premises in any condition whatsoever which may be required pursuant to
the terms of the Master Lease.
"LANDLORD"
SANJAYLYN COMPANY, a
California general partnership
BY: _______________________
Its general partner
BY: ___________________
Name: ___________________
Title:___________________
5.
<PAGE>
EXHIBIT A
---------
SUBLEASE
6.
<PAGE>
EXHIBIT B
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ADDITIONAL LEASED PREMISES
7.
<PAGE>
EXHIBIT C
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1998 FACILITIES SERVICE AGREEMENT
THIS 1998 FACILITIES SERVICE AGREEMENT ("Agreement") is entered into as of
____________ __, 1997, and effective as of January 1, 1998, by and between
KOMAG, INCORPORATED., a Delaware corporation ("Sublessor"), and HEADWAY
TECHNOLOGIES, INC., a corporation ("Sublessee").
A. Sublessor and Sublessee have entered into a Sublease Agreement
effective as of September 23, 1994, as amended by a First Amendment to Sublease
made as of ____________, 1997 (as amended, the "Sublease") concerning the sublet
space located at 475 South Hillview Drive, Milpitas, California (referred to as
the "Subleased Premises" in the Sublease Agreement and this Agreement);
B. Sublessee is desirous of using the Subleased Premises to develop,
produce, store, distribute, sell and service recording heads used in computer
disk drives and of obtaining certain facility support services from Sublessor
under the terms and conditions specified herein;
C. Sublessor is desirous of supplying to Sublessee certain facility
support services under the terms and conditions specified herein;
D. This agreement is intended to be a restatement and amendment in its
entirety of the Amended and Restated Facilities Service Agreement by and between
the parties hereto entered into as of March __, 1995 (the "Existing Facilities
Service Agreement"), which agreement is hereafter terminated and null and void,
except as provided for herein.
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Termination of Existing Facilities Service, Agreement. The Existing
----------------------------------------------------
Facilities Service Agreement and the obligations of the parties thereunder
(except the indemnification obligations of Sublessor and Sublessee, which shall
survive without limitation) are hereby terminated. In connection therewith,
Sublessee acknowledges that Sublessee shall be obligated to obtain any and all
permits necessary for Sublessee's wastewater generating operations at the
Subleased Premises.
2. Supply of Other Services. At Sublessor's option, Sublessee shall use
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commercially reasonable efforts to provide Sublessor with deionized water during
the period this Agreement is in effect. In October of each year, Sublessor and
Sublessee will negotiate in good faith the annual cost of any such services to
be provided during the following fiscal
8.
<PAGE>
year. Sublessor shall pay to Sublessee one-twelfth (1/12) of the cost of any
such services on the first day of each calendar month.
3. Indemnity.
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a. Sublessee shall defend, indemnify, and hold harmless Sublessor,
its stockholders, employees, and agents from and against any and all claims,
liabilities, suits, judgments, awards, damages, losses, fines, fees, that
Sublessor, its stockholders, employees or agents may suffer, incur or be liable
for by reason of or arising out of or related to any alleged breach by Sublessee
of any provision of this Agreement, and this indemnification shall survive the
termination of this Agreement.
b. Sublessor shall defend, indemnify, and hold harmless Sublessee,
its stockholders, employees, and agents from and against any and all claims,
liabilities, suits, judgments, awards, damages, losses, fines, fees, that
Sublessee, its stockholders, employees or agents may suffer, incur or be liable
for by reason of or arising out of or related to any alleged breach by Sublessor
of any provision of this Agreement, and this indemnification shall survive the
termination of this Agreement.
4. Termination. Except for Paragraph 3, this Agreement shall terminate
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when the Sublease Agreement is terminated.
5. Attorney Fees. The prevailing party shall be entitled to reasonable
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costs (including attorneys and consultant fees) in an action or proceeding to
enforce any provision of this Agreement.
6. Governing Law. This Agreement shall be governed by and construed in
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all respects in accordance with the laws in the State of California.
7. Notice. Any notice or other communication required under this
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Agreement shall be provided by certified mail postage prepaid or by express
delivery, addressed as follows:
To Sublessor: 275 South Hillview Drive
Milpitas, California 95035
Attn: Chief Financial Officer
To Sublessee: 475 South Hillview Drive
Milpitas, California 95035
Attn: Mr. Tom Surran
9.
<PAGE>
IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Agreement to
be executed by their respective duly authorized officers both as of the date and
year first above written.
"SUBLESSOR"
KOMAG, INCORPORATED,
a Delaware corporation
By: ________________________
Name: ______________________
Title: ______________________
"SUBLESSEE"
HEADWAY TECHNOLOGIES, INC.,
a ___________ corporation
By: ________________________
Name: ______________________
Title: ______________________
10.
<PAGE>
EXHIBIT 10.9
HEADWAY TECHNOLOGIES, INC.
LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 5, 1997
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of December 5, 1997, by
and between SILICON VALLEY BANK ("Bank") and HEADWAY TECHNOLOGIES, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"ACCOUNTS" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" means a loan advance under the Committed
Revolving Line.
"AFFILIATE" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"BANK EXPENSES" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
"BORROWER'S BOOKS" means all of Borrower's books and records
including, without limitation; ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"BORROWING BASE LEVEL 1" means an amount equal to eighty percent
(80%) of Eligible Accounts based on the most recent Borrowing Base Certificate
delivered by Borrower, subject to compliance with the Level 1 Covenants.
"BORROWING BASE LEVEL 2 " means an amount equal to two hundred
percent (200 %) of all of Borrower's Accounts and Inventory, subject to
compliance with the Level 2 Covenants.
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"BUSINESS DAY" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"CLOSING DATE" means the date of this Agreement.
"CODE" means the California Uniform Commercial Code.
"COLLATERAL" means the property described on Exhibit A attached
hereto.
"COMMITTED REVOLVING LINE" means a credit extension of up to Ten
Million Dollars ($10,000,000).
"CONTINGENT OBLIGATION " means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"COPYRIGHTS" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not me same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"CREDIT EXTENSION" means each Advance, Letter of Credit, or any
other extension of credit by Bank for the benefit of Borrower hereunder.
"CURRENT LIABILITIES" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"DAILY BALANCE" means the amount of the Obligations owed at the
end of a given day.
"ELIGIBLE ACCOUNTS" means those Accounts that arise in the
ordinary course of BORROWER'S business that comply with all of Borrower's
representations and warranties to Bank set forth in SECTION 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon thirty (30) days prior notification thereof
to Borrower in accordance with the provisions hereof. Unless otherwise agreed to
by Bank in writing, Eligible Accounts shall not include the following:
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(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%)
of all Accounts, except (i) with respect to Seagate Technologies, TDK (including
its Subsidiary, SAE), Hyundai (including its Subsidiary, Maxtor), Western
Digital and Toshiba, whose total obligations to the Borrower shall not exceed
sixty percent (60%) of all accounts, and (ii) other exceptions as approved in
writing by Bank from time to time;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States except for Eligible
Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local Governmental entity or any department, agency, or
instrumentality thereof.
(f) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
(sometimes referred to as "contra" accounts, e.g. accounts payable, customer
deposits, credit accounts etc.) against amounts owed to Borrower:
(g) Accounts generated by demonstration or promotional equipment,
or with respect to which goods are placed on consignment, guaranteed sale, sale
or return, sale on approval, bill and hold, or other terms by reason of which
the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful by reason of the account debtor's financial condition.
"ELIGIBLE FOREIGN ACCOUNTS" means Accounts with respect to which
the account debtor does not have its principal place of business in the United
States and that are: (1) covered by credit insurance in form and amount, and by
an insurer reasonably satisfactory to Bank less the amount of any deductible(s)
which may be or become owing thereon; or (2) supported by one or more letters of
credit either advised or negotiated through Bank or in favor of Bank as
beneficiary, in an amount and of a tenor, and issued by a financial institution,
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<PAGE>
reasonably acceptable to Bank, or (3) that Bank approves on a case-by-case
basis.
"EQUIPMENT" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"INDEBTEDNESS" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit (other than accounts payable incurred in the ordinary course
of business), (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"INTELLECTUAL PROPERTY" means
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
"INVENTORY" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now
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<PAGE>
or at any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of its
custody or possession or in transit and including any returns upon any accounts
or other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing any
of the above.
"INVESTMENT" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan. advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LETTER OF CREDIT " means a letter of credit or similar
undertaking issued by Bank pursuant to SECTION 2.1(B).
"LETTER OF CREDIT RESERVE" has the meaning set forth in SECTION
2.1(B).
"LEVEL 1 COVENANTS " means that the following financial covenants
apply to the Borrower:
QUICK RATIO: Borrower shall maintain, as of the last day of
each calendar month, a ratio of Quick Assets to Current
Liabilities of at least 1.25 to 1.00.
DEBT-NET WORTH RATIO: Borrower shall maintain, as of the
last day of each calendar month, a ratio of Total
Liabilities to Tangible Net Worth of not more than 1.00 to
1.00.
TANGIBLE NET WORTH: Borrower shall maintain, as of the last
day of each calendar quarter, a Tangible Net Worth of not
less than Fourteen Million Dollars ($14,000,000) as of
September 30, 1997 plus seventy-five percent (75 %) of
quarterly after-tax profits (exclusive of losses) plus one
hundred percent (100%) of new equity.
PROFITABILITY: Beginning December 31, 1997, Borrower shall
be profitable for each fiscal quarter.
"LEVEL 2 COVENANTS" means that the following Financial covenants
apply to the Borrower:
TANGIBLE NET WORTH: Borrower shall maintain, as of the last
day of each calendar quarter, a Tangible Net Worth of not
less than Eleven Million Dollars ($11,000,000) as of
September 30, 1997 plus seventy-five percent (75%) of
quarterly after-tax profits (exclusive of losses) plus one
hundred percent (100%) of new equity.
LIQUIDITY: Borrower shall maintain, as of the last day of
each calendar month, a ratio of Liquidity to the then
outstanding principal balance under the Committed Revolving
Line of not less than 2.0 to 1.0.
PROFITABILITY: Beginning December 31, 1997, Borrower shall
be profitable for each fiscal quarter.
"LIEN" means any mortgage, lien, deed of trust, pledge, security
interest or other encumbrance.
"LIQUIDITY" means (i) unrestricted cash (and equivalents) less
refundable customer deposits plus (ii) fifty percent (50%) of the difference
between gross accounts receivable and contra accounts for strategic
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debt discounts.
"LOAN DOCUMENTS" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"LONG TERM DEBT AGREEMENTS" means all outstanding loan
obligations other than to Bank, with a maturity date in excess of one year from
the date of initial disbursement.
"MASK WORKS" means all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired;
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"MATURITY DATE" means the Revolving Maturity Date.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"OBLIGATIONS" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"PATENTS" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"PAYMENT DATE" means the last calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Revolving Maturity Date.
"PERMITTED INDEBTEDNESS" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors and with respect to surety
bonds and similar obligations incurred in the ordinary course of business;
(e) Indebtedness secured by Permitted Liens.
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(f) Extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (e) above,
provided that the principal amount thereof A not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be; and
(g) Other Indebtedness not otherwise permitted by SECTION 7.4 not
exceeding One Hundred Thousand Dollars (S100,000) in the aggregate outstanding
at any time.
"PERMITTED INVESTMENT" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) Investments constituting acquisitions of Equipment under
capital or operating leases in an aggregate amount not to exceed Fifty Million
Dollars ($50,000,000) during the term of this Loan Agreement, provided, however,
that Indebtedness incurred for such acquisitions of Equipment shall not exceed
an aggregate amount of Thirty Million Dollars ($30,000,000) during the term of
this Agreement;
(c) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank;
(d) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transaction in the ordinary
course of business;
(e) Investments accepted in connection with Transfers permitted
by SECTION 7.1;
(f) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or As Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, and (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries pursuant to employee stock purchase plans or
agreements approved by Borrower's Board of Directors;
(g) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(h) Investments pursuant to or arising under currency agreements
or interest rate agreements entered into in the ordinary course of business;
(i) Investments consisting of prepaid royalties and other credit
extensions to, customers and suppliers who are not Affiliates, in the ordinary
course of business;
(j) Investments constituting acquisitions permitted under SECTION
7.3;
(k) Deposit accounts of Borrower in which Bank has a Lien prior
to any other Lien;
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(l) Deposit accounts of any Subsidiaries maintained in the
ordinary course of business;
(m) Investments in joint ventures in an aggregate amount not to
exceed Two Million Five Hundred Thousand Dollars ($2,500,000) during the term of
this Loan Agreement; and
(n) Other Investments aggregating not in excess of One Hundred
Thousand Dollars ($100,000).
"PERMITTED LIENS" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the Other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment in an aggregate amount not to exceed Thirty
Million Dollars ($30,000,000) during the term of this Loan Agreement, or (ii)
existing on such equipment at the time of its acquisition, provided that the
Lien is confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license provided that such leases, subleases, licenses and sublicenses do not
prohibit the grant of the security interest granted hereunder:
(e) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under SECTION 8.8;
(f) Easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not constituting a Material Adverse Effect;
(g) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payments of customs duties in connection with the
importation of goods;
(h) Liens that are not prior to the Lien of Bank which constitute
rights of set-off of a customary nature or banker's Liens with respect to
amounts on deposit, whether arising by operation of law or by contract, in
connection with arrangement entered into with banks in the ordinary course of
business;
(i) Earn-out and royalty obligations existing on the date hereof
or entered into in connection with an acquisition permitted by SECTION 7.3;
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<PAGE>
(j) Liens incurred in connection with the extension, renewal or
refinancing of the Indebtedness secured by Liens of the type described in
clauses (a), (c), (d), (e), and (f) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"PERSON" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"PRIME RATE" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"QUICK ASSETS " means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and investments with
maturities of less than 90 days of Borrower determined in accordance with GAAP.
"RESPONSIBLE OF OFFICER" means each of the Chief Executive
Officer, the President, and the Chief Financial Officer of Borrower.
"REVOLVING MATURITY DATE" means August 31, 1998.
"SCHEDULE" means the schedule of exceptions attached hereto, if
any.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"SUBSIDIARY" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"TANGIBLE NET WORTH" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unauthorized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, and (c) all reserves not already deducted from assets,
and (ii) Total Liabilities.
"TOTAL LIABILITIES" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
"TRADEMARKS" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Assignor connected
with and symbolized by such trademarks.
1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations and determinations made hereunder shall be made in
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accordance with GAAP. When used herein, the term "financial statements" shall
include the notes and schedules thereto. The terms "including"/"includes" shall
always be read as meaning "including (or includes) without limitation", when
used herein or in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 ADVANCES. Borrower promises to pay to the order of Bank, in
lawful money of the United States of America, the aggregate unpaid principal
amount of all Advances made by Bank to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Advances at rates in
accordance with the terms hereof.
(a) REVOLVING ADVANCES. Subject to and upon the terms and conditions
of this Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed (i) the Committed Revolving Line or the
Borrowing Base Level 1, whichever is less, minus (ii) the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit), provided, however, that if (i) the Borrower has failed to achieve any
one of the Level 1 Covenants or (ii) the Borrower elects the Level 2 Covenants
prior to the beginning of any month, then Bank agrees to make Advances to
Borrower in an aggregate outstanding amount not to exceed (i) the Committed
Revolving Line or the Borrowing Base Level 2, whichever is less, minus (ii) the
face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit). Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this SECTION 2.1 may be repaid and
reborrowed at any time during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank
by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this SECTION 2.1 to Borrower's deposit account.
The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this SECTION 2.1 and other
amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
(b) LETTERS OF CREDIT. Subject to the terms and conditions of
this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for
the account of Borrower in an aggregate outstanding face amount not to exceed
(i) the lesser of the Committed Revolving Line or the Borrowing Base, whichever
is less, minus (ii) the then outstanding principal balance of the Advances;
provided that the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not
in any case exceed Three Million Dollars ($3,000,000). Each Letter of Credit
shall have an expiry date no later than one hundred eighty (180) days after the
Revolving Maturity Date provided that Borrower's Letter of Credit reimbursement
obligation shall be secured by cash on terms acceptable to Bank at any time
after the Revolving Maturity Date if the term of this Agreement is not extended
by Bank. All Letters of Credit shall be, in form and substance, acceptable to
Bank in its sole discretion and shall be subject to the terms and conditions of
Bank's form of standard Application and Letter of Credit Agreement.
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The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnity, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit.
Borrower may request that Bank issue a Letter of Credit payable
in a currency other than United States Dollars. If a demand for payment is made
under any such Letter of Credit, Bank, shall treat such demand as an Advance to
Borrower of the equivalent of the amount thereof (plus cable charges) in United
States currency at the then prevailing rate of exchange in San Francisco,
California, for sales of that other currency for cable transfer to the country
of which it is the currency.
Upon the issuance of any letter of credit payable in a currency
other than United States Dollars, Bank shall create a reserve under the
Committed Revolving Line for letters of credit against fluctuations in currency
exchange rates. in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate, The availability
of funds under the Committed Revolving Line shall be reduced by the amount of
such reserve for so long as such letter of credit remains outstanding.
2.2 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1(a) of this
Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii)
the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount
of such excess. In the event that any of Borrower's Obligations to Bank
constitute issued and undrawn Letters of Credit, Borrower shall have the right
to cash collateralize such Letters of Credit to the extent that the amount of
Obligations owed by Borrower to Bank pursuant to SECTION 2.1 of this Agreement
exceeds the lesser of (i) the Committed Revolving Line, or (ii) the Borrowing
Base, in lieu of making all or a portion of the payment required by the previous
sentence of this SECTION 2.2.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in SECTION 2.3(b), any
Advances shall bear interest, on the average Daily Balance, (i) at a rate equal
to the Prime Rate when the Level 1 Covenants apply, and (ii) at a rate equal to
three quarters (0.75) of a percentage point above the Prime Rate when the Level
2 Covenants apply, provided, however that upon the attainment of one quarter of
profitability of at least One Million Dollars ($1,000,000), the rate shall equal
one-quarter (0.25) of a percentage point above the Prime Rate when the Level 2
Covenants apply.
(b) DEFAULT RATE. All Obligations shall bear interest, from and
during the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on each
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number __________________ for payments of
principal and interest due on the Obligations. Bank will notify Borrower of all
debits which Bank has made against Borrower's accounts. Any such debits against
Borrower's accounts in no way shall be deemed a set-off. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable hereunder.
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(d) COMPUTATION. In the event the Prime Rate is changed from time
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by
an amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect Of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 12:00 noon
Pacific time shall be deemed to have been received by Bank as of the opening of
business on the immediately following Business Day. Whenever any payment to
Bank under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Twenty-Five Thousand
Dollars ($25,000.00), which fee shall be due on the Closing Date and shall be
fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary
fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents;
(c) BANK EXPENSES. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses,
within thirty (30) days of when they become due.
2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law);
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
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and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to SECTION 12.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) A negative pledge agreement covering intellectual property;
(d) financing statements (Forms UCC-1);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due specified in
SECTION 2.5 hereof;
(g) a certificate of the Secretary of State of California with
respect to Borrower's standing;
(h) completion of an amounts receivable audit with results
satisfactory to Bank; and
(i) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in SECTION 2. 1; and
(b) the representations and warranties contained in SECTION 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
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continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this SECTION 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof,
except:
(i) as set forth in the Schedule; or
(ii) to the extent that certain assets are encumbered under Long Term
Debt Agreements.
Notwithstanding termination of this Agreement, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the failure to be so qualified could reasonably
be expected to result in a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
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5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business and will not without at least
thirty (30) days prior written notice to Bank do business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in SECTION 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.9 SOLVENCY. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; the Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is able to pay its
debts (including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled' by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
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revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
deposition of hazardous waste or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or periods covered by any such projections and
forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during such
period, in a form and certified by an officer of Borrower reasonably acceptable
to Bank; (b) as soon as available, but in any event within ninety (90) days
after the end of Borrower's fiscal year, audited consolidated financial
statements of Borrower prepared in accordance with GAAP, consistently applied,
together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days
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of filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt; (d) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars
($100,000) or more; and (e) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Borrower shall deliver to Bank a Borrowing Base Certificate signed by
a Responsible Officer in substantially the form of EXHIBIT C hereto, together
with aged listings of accounts receivable and accounts payable, as follows: (i)
upon the initial Advance and when there are Credit Extensions outstanding under
the Committed Revolving Line, within twenty (20) days after the last day of each
month, and (ii) if there are no Credit Extensions outstanding under the
Committed Revolving Line, within twenty (20) days of the end of each fiscal
quarter.
Borrower shall deliver to Bank a Backlog Report on a monthly basis,
within thirty (30) days after the last day of each month.
Within thirty (30) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of EXHIBIT
D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement.
Borrower shall promptly notify Bank of all returns and recoveries and of all
disputes and claims, where the return, recovery, dispute or claim involves more
than Two Hundred Thousand Dollars ($200,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is (i) contested in good faith
by appropriate proceedings, (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
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(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof (other than in respect of any Equipment leased from or financed by
third parties) and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall in respect of any casualty coverage, while
no Event of Default is continuing, be used to replace the damaged or destroyed
property or as otherwise requested by Borrower.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. When the Level 1 Covenants apply, Borrower shall
maintain, as of the last day of each calendar month, a ratio of Quick Assets to
Current Liabilities of at least 1.25 to 1.00.
6.9 MINIMUM LIQUIDITY. When the Level 2 Covenants apply, Borrower
shall maintain, as of the last day of each calendar month, a ratio of (i)
Liquidity to (ii) the then outstanding principal balance under the Committed
Revolving Line of at least 2.00 to 1.00. For purposes of this calculation, cash
(and equivalents) shall constitute at least fifty percent (50%) of Liquidity.
6.10 DEBT-NET WORTH RATIO. When the Level 1 Covenants apply,
Borrower shall maintain, as of the last day of each calendar month, a ratio of
Total Liabilities to Tangible Net Worth of not more than 1.0 to 1.0.
6.11 TANGIBLE NET WORTH. (a) When the Level 1 Covenants apply,
Borrower shall maintain, as of the last day of each calendar quarter, a Tangible
Net Worth of not less than Fourteen Million Dollars ($14,000,000) as of
September 30, 1997 plus seventy-five percent (75%) of quarterly after-tax
profits (exclusive of losses) plus one hundred percent (100%) of new equity, and
(b) when the Level 2 Covenants apply, Borrower shall maintain, as of the last
day of each calendar quarter, a Tangible Net Worth of not less than Eleven
Million Dollars ($11,000,000) as of September 30, 1997 plus seventy-five percent
(75 %) of quarterly after-tax profits (exclusive of losses) plus one hundred
percent (100%) of new equity.
6.12 PROFITABILITY. Beginning December 31, 1997, Borrower shall be
profitable for each fiscal quarter.
6.13 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than Transfers: (i) of
inventory in the ordinary course of business, (ii) of non-exclusive licenses and
similar
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arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; (iii) that constitute payment of normal and usual
operating expenses in the ordinary course of business; or (iv) of worn-out or
obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS
LOCATIONS. Engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto),
or suffer a material change in Borrower's ownership or management (other than
the sale by Borrower of equity securities of Borrower). Borrower will not,
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, except
that if no Event of Default has occurred and is continuing or would result from
such action, then: (i) Borrower may merge with any of its Subsidiaries if
Borrower is the surviving entity and (ii) Borrower or any of its Subsidiaries
may acquire another company's capital stock or assets, if and to the extent
permitted by SECTION 7.7 of this Agreement.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends, except stock dividends, or make
any other distribution or payment on account of or in redemption, retirement or
purchase of any capital stock, except for repurchases of stock from former
employees of Borrower in accordance with the terms of repurchase or similar
agreements between Borrower and such employees in an aggregate amount not to
exceed One Hundred Thousand Dollars ($100,000), provided, however, that
immediately prior to and following such repurchases there exists no Event of
Default under the Loan Documents.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in SECTION 10
hereof and such other locations of which Borrower
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gives Bank prior written notice and as to which Borrower signs and files a
financing statement where needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company", within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum finding requirements of ERISA; permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under SECTIONS
6.3, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, or 6.12 or violates any of the covenants
contained in Article 7 of this Agreement, provided however that in the case of a
failure to perform any obligation under the Level 1 Covenants or the Level 2
Covenants, whichever is applicable, under SECTIONS 6.8, 6.9, 6.10, 6.11, or 6.12
and if no Advances or Letters of Credit are outstanding, then such failure shall
not constitute an Event of Default, but the Bank shall have no obligation to
make further Advances under the Committed Revolving Line, or
(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after the occurrence thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to have cured such default
shall not be deemed an Event of Default (provided that no Advances will be
required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse
change in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other
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claim becomes a lien or encumbrance upon any material portion of Borrower's
assets, or if a notice of lien, levy, or assessment is filed of record with
respect to any of Borrower's assets by the United States Government, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect,
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Two Hundred and
Fifty Thousand Dollars ($250,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of fifteen (15) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9 NEGATIVE PLEDGE AGREEMENT. If there is a breach of any term of
the Negative Pledge Agreement.
8.10 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to Bank by Borrower
or any Person acting on Borrower's behalf pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
SECTION 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
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(c) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit.
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letters of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this SECTION 9.1,
to use, without charge, Borrower's labels, patents, copyright, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank's exercise of its rights
under this SECTION 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate:
(i) Bank may credit bid and purchase at any public sale, or at
any private sale as permitted by law; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions
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with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; (f) to file, in
its sole discretion, one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral without the signature of
Borrower where permitted by law provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
SECTION 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled, with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in SECTION 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral;(b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause (c) any
diminution in the value thereof; or (d) act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
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10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Headway Technologies, Inc.
678 South Hillview Drive
Milpitas, CA 95035
Attn: Thomas Surran
FAX: 408/ 934-5474
If to Bank Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: John Swift
FAX: 408/ 748-9478
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall, indemnity, defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or
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asserted by any other party in connection with the transactions contemplated by
the Loan Documents; and (b) all losses or Bank Expenses in any way suffered,
incurred, or paid by Bank as a result of or in any way arising out of,
following, or consequential to transactions between Bank and Borrower whether
under the Loan Documents, or otherwise (including without limitation reasonable
attorneys fees and expenses), except for losses caused by Bank's gross
negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations referred to in the first sentence of
this Section 12.7 have been satisfied, and Bank has no commitment to make any
Credit Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
HEADWAY TECHNOLOGIES, INC.
By: /s/ Signature Illegible
---------------------------
Title:________________________
SILICON VALLEY BANK
By: /s/ John M. Swift
---------------------------
Title: VICE PRESIDENT
------------------------
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EXHIBIT 10.10
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT, dated as of 09/02/97 ("AGREEMENT"), between
GENERAL ELECTRIC CAPITAL CORPORATION, with an office at 2200 POWELL STREET SUITE
600, EMERYVILLE, CA 94680 (hereinafter called, together with its successors and
assigns, if any, "LESSOR"), and HEADWAY TECHNOLOGIES, INC., a corporation
organized and existing under the laws of the state of California with its
mailing address and chief place of business at 497 S. HILLVIEW DRIVE, MILPITAS,
CA 95035 (hereinafter called "LESSEE").
WITNESSETH:
I. LEASING:
(a) Subject to the terms and conditions set forth below, Lessor agrees to
lease to Lessee, and Lessee agrees to lease from Lessor, the equipment
("EQUIPMENT") described in Annex A to any schedule hereto ("SCHEDULE") or, if
applicable, to Section A of any Schedule. Terms defined in a SCHEDULE and not
otherwise defined herein shall have the meanings ascribed to them in such
Schedule.
(b) The obligation of Lessor to purchase Equipment from the manufacturer or
supplier thereof ("SUPPLIER") and to lease the same to LESSEE under any Schedule
shall be subject to receipt by Lessor, prior to the Lease Commencement Date
(with respect to such Equipment), of each of the following documents in form and
substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then
to be leased hereunder, (ii) a Purchase Order Assignment and Consent in the form
of Annex B to the applicable Schedule, unless Lessor shall have delivered its
purchase order for such Equipment, (iii) evidence of insurance which complies
with the requirements of Section X, and (iv) such other documents as Lessor may
reasonably request. As a further condition to such obligations of Lessor,
Lessee shall, upon delivery of such Equipment (but not later than the Last
Delivery Date specified in the applicable Schedule) execute and deliver to
Lessor a Certificate of Acceptance (which may be in the form of Annex C to the
applicable Schedule) covering such Equipment, and, if requested by Lessor,
deliver to Lessor a bill of sale therefor (in form and substance satisfactory to
Lessor). Lessor hereby appoints Lessee its agent for inspection and acceptance
of the Equipment from the Supplier. Upon execution by Lessee of any Certificate
of Acceptance, the Equipment described thereon shall be deemed to have been
delivered to, and irrevocably accepted by, Lessee for lease hereunder.
II. TERM, RENT AND PAYMENT:
(a) The rent payable hereunder and Lessee's right to use the Equipment
shall commence on the date of execution by Lessee of the Certificate of
Acceptance for such Equipment ("LEASE COMMENCEMENT DATE"). The term of this
Agreement shall be the period specified in the applicable Schedule. If any term
is extended, the word "term" shall be deemed to refer to all extended terms, and
all provisions of this Agreement shall apply during any extended terms, except
as may be otherwise specifically provided in writing.
(b) Rent shall be paid to Lessor at its address stated above, except as
otherwise directed by Lessor. Payments of rent shall be in the amount set forth
in, and due in accordance with, the provisions of the applicable Schedule. If
one or more Advance Rents are payable, such Advance Rent shall be (i) set forth
on the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule,
and (iii) when received by Lessor, applied to the first rent payment and the
balance, if any, to the final rental payment(s) under such Schedule. In no event
shall any Advance Rent or any other rent payments be refunded to Lessee. If rent
is not paid within ten days of its due date, Lessee agrees to pay a late charge
of five cents ($.05) per dollar on, and in addition to, the amount of such rent
but not exceeding the lawful maximum, if any.
III. RENT ADJUSTMENT:
(a) The periodic rent payments in each Schedule have been calculated on the
assumption (which, as between Lessor and Lessee, is mutual) that the maximum
effective corporate income tax rate (exclusive of any minimum tax rate) for
calendar-year taxpayers ("EFFECTIVE RATE") will be thirty-five percent (35%)
each year during the lease term.
(b) If, solely as a result of Congressional enactment of any law
(including, without limitation, any modification of, or amendment or addition
to, the Internal Revenue Code of 1986, as amended, (the "CODE"), the Effective
Rate is higher than thirty-five percent (35%) for any year during the lease
term, then Lessor shall have the right to increase such rent payments by
requiring payment of a single additional sum equal to the product of (i) the
Effective Rate (expressed as a decimal) for such year less .35 (or, in the event
that any adjustment has been made hereunder for any previous year, the Effective
Rate (expressed as a decimal) used in calculating the next previous adjustment)
times (ii) the adjusted Termination Value, divided by (iii) the difference
between the new Effective Tax Rate (expressed as a decimal) and one (1). The
adjusted Termination Value shall be the Termination Value (calculated as of the
first rental due in the year for which such adjustment is being made) less the
Tax Benefits that would be allowable under Section 168 of the Code (as of the
first day of the year for which such adjustment is being made and all subsequent
years of the lease term). Lessee shall pay to Lessor the full amount of the
additional rent payment on the later of (i) receipt of notice or (ii) the first
day of the year for which such adjustment is being made.
(c) Lessee's obligations under this Section III shall survive any
expiration or termination of this Agreement.
IV. TAXES: Except as provided in Sections III and XV(c), Lessee shall have no
liability for taxes imposed by the United States of America or any State or
political subdivision thereof which are on or measured by the net income of
Lessor. Lessee shall report (to the extent that it is legally permissible) and
pay promptly all other taxes, fees and assessments due, imposed, assessed or
levied against any Equipment (or the purchase, ownership, delivery, leasing,
possession, use or operation thereof), this Agreement (or any rentals or
receipts hereunder), any Schedule, Lessor or Lessee by any foreign, federal,
state or local government or taxing authority during or related to the term of
this Agreement, including, without limitation, all license and registration
fees, and all sales, use, personal property, excise, gross receipts, franchise,
stamp or other taxes, imposts, duties and charges, together with any penalties,
fines or interest thereon (all hereinafter called "TAXES"). Lessee shall (i)
reimburse Lessor upon receipt of written request for reimbursement for any Taxes
charged to or assessed against Lessor, (ii) on request of Lessor, submit to
Lessor written evidence of Lessee's payment of Taxes, (iii) on all reports or
returns show the ownership of the Equipment by Lessor, and (iv) send a copy
thereof to Lessor.
<PAGE>
V. REPORTS:
(a) Lessee will notify Lessor in writing, within ten (10) days after any
tax or other lien shall attach to any Equipment, of the full particulars thereof
and of the location of such Equipment on the date of such notification.
(b) Lessee will within ninety (90) days of the close of each fiscal year of
Lessee, deliver to Lessor, Lessee's balance sheet and profit and loss statement,
certified by a recognized firm of certified public accountants. Upon request
Lessee will deliver to Lessor quarterly, within ninety (90) days of the close of
each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's
quarterly financial report certified by the chief financial officer of LESSEE.
(c) Lessee will permit Lessor to inspect any Equipment during normal
business hours.
(d) Lessee will keep the Equipment at the Equipment Location (specified in
the applicable Schedule) and will promptly notify Lessor of any relocation of
Equipment. Upon the written request of Lessor, Lessee will notify Lessor
forthwith in writing of the location of any Equipment as of the date of such
notification.
(e) Lessee will promptly and fully report to Lessor in writing if any
Equipment is lost or damaged (where the estimated repair costs would exceed ten
percent (10%) of its then fair market value), or is otherwise involved in an
accident causing personal injury or property damage.
(f) Within sixty (60) days after any request by Lessor, Lessee will furnish
a certificate of an authorized officer of Lessee stating that he has reviewed
the activities of Lessee and that, to the best of his knowledge, there exists no
default (as described in Section XII) or event which with notice or lapse of
time (or both) would become such a default.
VI. DELIVERY, USE AND OPERATION:
(a) All Equipment shall be shipped directly from the Supplier to Lessee.
(b) Lessee agrees that the Equipment will be used by Lessee solely in the
conduct of its business and in a manner complying with all applicable federal,
state, and local laws and regulations.
(c) LESSEE SHALL NOT ASSIGN, MORTGAGE, SUBLET OR HYPOTHECATE ANY EQUIPMENT,
OR THE INTEREST OF LESSEE HEREUNDER, NOR SHALL LESSEE REMOVE ANY EQUIPMENT FROM
THE CONTINENTAL UNITED STATES, WITHOUT THE PRIOR WRITTEN CONSENT OF THE LESSOR.
(d) Lessee will keep the Equipment free and clear of all liens and
encumbrances other than those which result from acts of Lessor.
VII. SERVICE:
(a) Lessee will, at its sole expense, maintain each unit of Equipment in
good operating order, repair, condition and appearance in accordance with
manufacturer's recommendations, normal wear and tear excepted. Lessee shall, if
at any time requested by Lessor, affix in a prominent position on each unit of
Equipment plates, tags or other identifying labels showing ownership thereof by
Lessor.
(b) Lessee will not, without the prior consent of Lessor, affix or install
any accessory, equipment or device on any Equipment if such addition will impair
the originally intended function or use of such Equipment. All additions,
repairs, parts, supplies, accessories, equipment, and devices furnished,
attached or affixed to any Equipment which are not readily removable shall be
made only in compliance with applicable law, including Internal Revenue Service
guidelines, and shall become the property of Lessor. Lessee will not, without
the prior written consent of Lessor and subject to such conditions as Lessor may
impose for its protection, affix or install any Equipment to or in any other
personal or real property.
(c) Any alterations or modifications to the Equipment that may, at any time
during the term of this Agreement, be required to comply with any applicable
law, rule or regulation shall be made at the expense of Lessee.
VIII. STIPULATED LOSS VALUE: Lessee shall promptly and fully notify Lessor in
writing if any unit of Equipment shall be or become worn out, lost, stolen,
destroyed, irreparably damaged in the reasonable determination of Lessee, or
permanently rendered unfit for use from any cause whatsoever (such occurrences
being hereinafter called "CASUALTY OCCURRENCES"). On the rental payment date
next succeeding a Casualty Occurrence (the "PAYMENT DATE"), Lessee shall pay
Lessor the sum of (x) the Stipulated Loss Value of such unit calculated as of
the rental next preceding such Casualty Occurrence ("CALCULATION DATE"); and (y)
all rental and other amounts which are due hereunder as of the Payment Date.
Upon payment of all sums due hereunder, the term of this lease as to such unit
shall terminate and (except in the case of the loss, theft or complete
destruction of such unit) Lessor shall be entitled to recover possession of such
unit.
IX. LOSS OR DAMAGE: Lessee hereby assumes and shall bear the entire risk of any
loss, theft, damage to, or destruction of, any unit of Equipment from any cause
whatsoever from the time the Equipment is shipped to Lessee.
X. INSURANCE: Lessee agrees, at its own expense, to keep all Equipment insured
for such amounts and against such hazards as Lessor may require, including, but
not limited to, insurance for damage to or loss of such Equipment and liability
coverage for personal injuries, death or property damage, with Lessor named as
additional insured and with a loss payable clause in favor of Lessor, as its
interest may appear, irrespective of any breach of warranty or other act or
omission of Lessee. The insurance shall provide (i) liability coverage in an
amount equal to at least ONE MILLION U.S. DOLLARS ($1,000,000.00) total
liability per occurrence, unless otherwise stated in any Schedule, and (ii)
casualty/property damage coverage in an amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Equipment; or at such
other amounts as may be required by Lessor. All such policies shall be with
companies, and on terms, satisfactory to Lessor. Lessee agrees to deliver to
Lessor evidence of insurance satisfactory to Lessor. No insurance shall be
subject to any co-insurance clause. Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make proof of loss and claim for insurance, and to make
adjustments with insurers and to receive payment of and execute or endorse all
documents, checks or drafts in connection with payments made as a result of such
insurance policies. Any expense of Lessor in adjusting or collecting insurance
shall be borne by Lessee. Lessee will not make adjustments with insurers except
(i) with respect to claims for damage to any unit of Equipment where the repair
costs do not exceed ten percent (10%) of such unit's fair market value, or (ii)
with Lessor's written consent. Said policies shall provide that the insurance
may not be altered or canceled by the insurer until after thirty (30) days
written notice to Lessor. Lessor may, at its option, apply proceeds of
insurance, in whole or in part, to (i) repair or replace Equipment or any
portion thereof, or (ii) satisfy any obligation of Lessee to Lessor hereunder.
<PAGE>
XI. RETURN OF EQUIPMENT:
(a) Upon any expiration or termination of this Agreement or any Schedule,
Lessee shall promptly, at its own cost and expense: (i) perform any testing and
repairs required to place the affected units of Equipment in the same condition
and appearance as when received by Lessee (reasonable wear and tear excepted)
and in good working order for their originally intended purpose; (ii) if
deinstallation, disassembly or crating is required, cause such units to be
deinstalled, disassembled and crated by an authorized manufacturer's
representative or such other service person as is satisfactory to Lessor; and
(iii) return such units to a location within the continental United States as
Lessor shall direct; (iv) ensure all Lessee installed markings which are not
necessary for the operation, maintenance or repair of the Equipment are properly
removed; (v) provide that all Equipment will be cleaned and cosmetically
acceptable, and in such condition as to be immediately installed and put into
use in a similar environment for which the Equipment was originally intended to
be used; (vi) remove all waste material and fluid from the Equipment and dispose
of in accordance with then current waste disposal laws; and (vii) obtain and pay
for a policy of transit insurance for the redelivery period in an amount equal
to the replacement value of the Equipment, and name Lessor as the loss payee on
all such policies of insurance.
(b) Until Lessee has fully complied with the requirements of Section XI(a)
above, Lessee's rent payment obligation and all other obligations under this
Agreement shall continue from month to month notwithstanding any expiration or
termination of the lease term. Lessor may terminate such continued leasehold
interest upon ten (10) days notice to Lessee.
(c) At least ninety (90) days and not more than one hundred twenty (120)
days prior to lease termination, Lessee shall: (i) provide to Lessor a detailed
inventory of all components of the Equipment including model and serial numbers;
and (ii) provide an up-to-date copy of all documentation pertaining to the
Equipment including, but not limited to service manuals, blue prints, process
flow diagrams, operating manuals and maintenance records.
(d) At least one hundred twenty (120) days prior to and continuing up to
lease termination, Lessee shall, upon receiving reasonable notice from Lessor,
make the Equipment available for on-site operational inspections by potential
purchasers. Lessee shall provide personnel, power and other requirements
necessary to demonstrate electrical, hydraulic and mechanical systems for each
item of Equipment.
XII. DEFAULT:
(a) Lessor may in writing declare this Agreement in default if: Lessee
breaches its obligation to pay rent or any other sum when due and fails to cure
the breach within ten (10) days; Lessee breaches any of its insurance
obligations under Section X; Lessee breaches any of its other obligations and
fails to cure that breach within thirty (30) days after written notice thereof;
any representation or warranty made by Lessee in connection with this Agreement
shall be false or misleading in any material respect; Lessee becomes insolvent
or ceases to do business as a going concern; any Equipment is illegally used; or
a petition is filed by or against Lessee or any Guarantor of Lessee's
obligations to Lessor under any bankruptcy or insolvency laws. Such declaration
shall apply to all Schedules except as specifically excepted by Lessor.
(b) After default, at the request of Lessor, Lessee shall comply with the
provisions of Section XI(a). Lessee hereby authorizes Lessor to enter, with or
without legal process, any premises where any Equipment is believed to be and
take possession thereof. Lessee shall, without further demand, forthwith pay to
Lessor (i) as liquidated damages for loss of a bargain and not as a penalty, the
Stipulated Loss Value of the Equipment (calculated as of the rental next
preceding the declaration of default), and (ii) all rentals and other sums then
due hereunder. Lessor may, but shall not be required to, sell Equipment at
private or public sale, in bulk or in parcels, with or without notice, and
without having the Equipment present at the place of sale; or Lessor may, but
shall not be required to, lease, otherwise dispose of or keep idle all or part
of the Equipment; and Lessor may use Lessee's premises for any or all of the
foregoing without liability for rent, costs, damages or otherwise. The proceeds
of sale, lease or other disposition, if any, shall be applied in the following
order of priorities: (1) to pay all of Lessor's costs, charges and expenses
incurred in taking, removing, holding, repairing and selling, leasing or other
wise disposing of Equipment; then, (2) to the extent not previously paid by
Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to reimburse
to Lessee any sums previously paid by Lessee as liquidated damages; and (4) any
surplus shall be retained by Lessor. Lessee shall pay any deficiency in (1) and
(2) forthwith.
(c) the foregoing remedies are cumulative, and any or all thereof may be
exercised in lieu of or in addition to each other or any remedies at law, in
equity, or under statute. Lessee waives notice of sale or other disposition
(and the time and place thereof), and the manner and place of any advertising.
Lessee shall pay Lessor's actual attorney's fees incurred in connection with the
enforcement, assertion, defense or preservation of Lessor's rights and remedies
hereunder, or if prohibited by law, such lesser sum as may be permitted. Waiver
of any default shall not be a waiver of any other or subsequent default.
(d) Any default under the terms of this or any other agreement between
Lessor and Lessee may be declared by Lessor a default under this and any such
other agreement.
XIII. ASSIGNMENT: Lessor may, without the consent of Lessee, assign this
Agreement or any Schedule. Lessee agrees that if Lessee receives written notice
of an assignment from Lessor, Lessee will pay all rent and all other amounts
payable under any assigned Equipment Schedule to such assignee or as instructed
by Lessor. Lessee further agrees to confirm in writing receipt of the notice of
assignment as may be reasonably requested by assignee. Lessee hereby waives and
agrees not to assert against any such assignee any defense, set-off, recoupment
claim or counterclaim which Lessee has or may at any time have against Lessor
for any reason whatsoever.
XIV. NET LEASE; NO SET-OFF, ETC: This Agreement is a net lease. Lessee's
obligation to pay rent and other amounts due hereunder shall be absolute and
unconditional. Lessee shall not be entitled to any abatement or reductions of,
or set-offs against, said rent or other amounts, including, without limitation,
those arising or allegedly arising out of claims (present or future, alleged or
actual, and including claims arising out of strict tort or negligence of Lessor)
of Lessee against Lessor under this Agreement or otherwise. Nor shall this
Agreement terminate or the obligations of Lessee be affected by reason of any
defect in or damage to, or loss of possession, use or destruction of, any
Equipment from whatsoever cause. It is the intention of the parties that rents
and other amounts due hereunder shall continue to be payable in all events in
the manner and at the times set forth herein unless the obligation to do so
shall have been terminated pursuant to the express terms hereof.
XV. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its
agents, employees, successors and assigns from and against any and all losses,
damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature, in contract or tort, whether caused
<PAGE>
by the active or passive negligence of Lessor or otherwise, and including, but
not limited to, Lessor's strict liability in tort, arising out of (i) the
selection, manufacture, purchase, acceptance or rejection of Equipment, the
ownership of Equipment during the term of this Agreement, and the delivery,
lease, possession, maintenance, uses, condition, return or operation of
Equipment (including, without limitation, latent and other defects, whether or
not discoverable by Lessor or Lessee and any claim for patent, trademark or
copyright infringement or environmental damage) or (ii) the condition of
Equipment sold or disposed of after use by Lessee, any sublessee or employees of
Lessee. Lessee shall, upon request, defend any actions based on, or arising out
of, any of the foregoing.
(b) Lessee hereby represents, warrants and covenants that (i) on the Lease
Commencement Date for any unit of Equipment, such unit will qualify for all of
the items of deduction and credit specified in Section C of the applicable
Schedule ("TAX BENEFITS") in the hands of Lessor (all references to Lessor in
this Section XV include Lessor and the consolidated taxpayer group of which
Lessor is a member), and (ii) at no time during the term of this Agreement will
Lessee take or omit to take, nor will it permit any sublessee or assignee to
take or omit to take, any action (whether or not such act or omission is
otherwise permitted by Lessor or the terms of this Agreement), which will result
in the disqualification of any Equipment for, or recapture of, all or any
portion of such Tax Benefits.
(c) If as a result of a breach of any representation, warranty or covenant
of the Lessee contained in this Agreement or any Schedule (x) tax counsel of
Lessor shall determine that Lessor is not entitled to claim on its Federal
income tax return all or any portion of the Tax Benefits with respect to any
Equipment, or (y) any such Tax Benefit claimed on the Federal income tax return
of Lessor is disallowed or adjusted by the Internal Revenue Service, or (z) any
such Tax Benefit is recomputed or recaptured (any such determination,
disallowance, adjustment, recomputation or recapture being hereinafter called a
"LOSS"), then Lessee shall pay to Lessor, as an indemnity and as additional
rent, such amount as shall, in the reasonable opinion of Lessor, cause Lessor's
after-tax economic yields and cash flows, computed on the same assumptions,
including tax rates (unless any adjustment has been made under Section III
hereof, in which case the Effective Rate used in the next preceding adjustment
shall be substituted), as were utilized by Lessor in originally evaluating the
transaction (such yields and flows being hereinafter called the "NET ECONOMIC
RETURN") to equal the Net Economic Return that would have been realized by
Lessor if such Loss had not occurred. Such amount shall be payable upon demand
accompanied by a statement describing in reasonable detail such Loss and the
computation of such amount.
(d) All of Lessor's rights, privileges and indemnities contained in this
Section XV shall survive the expiration or other termination of this Agreement
and the rights, privileges and indemnities contained herein are expressly made
for the benefit of, and shall be enforceable by Lessor, its successors and
assigns.
XVI. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT
ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS
NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE
EQUIPMENT LEASED HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY
OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR
OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All
such risks, as between Lessor and Lessee, are to be borne by Lessee. Without
limiting the foregoing, Lessor shall have no responsibility or liability to
Lessee or any other person with respect to any of the following, regardless of
any negligence of Lessor (i) any liability, loss or damage caused or alleged to
be caused directly or indirectly by any Equipment, any inadequacy thereof, any
deficiency or defect (latent or otherwise) therein, or any other circumstance in
connection therewith, (ii) the use, operation or performance of any Equipment or
any risks relating thereto; (iii) any interruption of service, loss of business
or anticipated profits or consequential damages; or (iv) the delivery,
operation, servicing, maintenance, repair, improvement or replacement of any
Equipment. If, and so long as, no default exists under this Lease, Lessee shall
be, and hereby is, authorized during the term of this Lease to assert and
enforce at Lessee's sole cost and expense, from time to time, in the name of and
for the account of Lessor and/or Lessee, as their interests may appear, whatever
claims and rights Lessor may have against any Supplier of the Equipment.
XVII. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents and
warrants to Lessor that on the date hereof and on the date of execution of each
Schedule:
(a) Lessee has adequate power and capacity to enter into, and perform
under, this Agreement and all related documents (together, the "DOCUMENTS") and
is duly qualified to do business wherever necessary to carry on its present
business and operations, including the jurisdiction(s) where the Equipment is or
is to be located.
(b) The Documents have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms, except to the extent that the enforcement of
remedies therein provided may be limited under applicable bankruptcy and
insolvency laws.
(c) No approval, consent or withholding of objections is required from any
governmental authority or instrumentality with respect to the entry into or
performance by Lessee of the Documents except such as have already been
obtained.
(d) The entry into and performance by Lessee of the Documents will not: (i)
violate any judgment, order, law or regulation applicable to Lessee or any
provision of Lessee's Certificate of Incorporation or By-Laws; or (ii) result in
any breach of, constitute a default under or result in the creation of any lien,
charge, security interest or other encumbrance upon any Equipment pursuant to
any indenture, mortgage, deed of trust, bank loan or credit agreement or other
instrument (other than this Agreement) to which Lessee is a party.
(e) There are no suits or proceedings pending or threatened in court or
before any commission, board or other administrative agency against or affecting
Lessee, which will have a material adverse effect on the ability of Lessee to
fulfill its obligations under this Agreement.
(f) The Equipment accepted under any Certificate of Acceptance is and will
remain tangible personal property.
(g) Each Balance Sheet and Statement of Income delivered to Lessor has been
prepared in accordance with generally accepted accounting principles, and since
the date of the most recent such Balance Sheet and Statement of Income, there
has been no material adverse change.
(h) Lessee is and will be at all times validly existing and in good
standing under the laws of the State of its incorporation (specified in the
first sentence of this Agreement).
(i) The Equipment will at all times be used for commercial or business
purposes.
<PAGE>
XVIII. EARLY TERMINATION:
(a) On or after the First Termination Date (specified in the applicable
Schedule), Lessee may, so long as no default exists hereunder, terminate this
Agreement as to all (but not less than all) of the Equipment on such Schedule as
of a rent payment date ("TERMINATION DATE") upon at least ninety (90) days prior
written notice to Lessor.
(b) Lessee shall, and Lessor may, solicit cash bids for the Equipment on an
AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or
implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall (i)
certify to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the
Termination Value (calculated as of the rental due on the Termination Date) for
the Equipment, and (B) all rent and other sums due and unpaid as of the
Termination Date.
(c) Provided that all amounts due hereunder have been paid on the
Termination Date, Lessor shall (i) sell the Equipment on an AS IS BASIS for cash
to the highest bidder and (ii) refund the proceeds of such sale (net of any
related expenses) to Lessee up to the amount of the Termination Value. If such
sale is not consummated, no termination shall occur and Lessor shall refund the
Termination Value (less any expenses incurred by Lessor) to Lessee.
(d) Notwithstanding the foregoing, Lessor may elect by written notice, at
any time prior to the Termination Date, not to sell the Equipment. In that
event, on the Termination Date Lessee shall (i) return the Equipment (in
accordance with Section XI) and (ii) pay to Lessor all amounts required under
Section XVIII(b) less the amount of the highest bid certified by Lessee to
Lessor.
XIX. PURCHASE OPTION:
(a) So long as no default exists hereunder and the lease has not been
earlier terminated, Lessee may at lease expiration, upon at least one hundred
eighty (180) days prior written notice to Lessor, purchase all (but not less
than all) of the Equipment in any Schedule on an AS IS WHERE IS BASIS, without
recourse to or warranty from Lessor, express or implied, for cash equal to its
then Fair Market Value (plus all applicable sales taxes).
(b) "FAIR MARKET VALUE" shall mean the price which a willing buyer (who is
neither a lessee in possession nor a used equipment dealer) would pay for the
Equipment in an arm's-length transaction to a willing seller under no compulsion
to sell; provided, however, that in such determination: (i) the Equipment shall
-------- -------
be assumed to be in the condition in which it is required to be maintained and
returned under this Agreement; (ii) in the case of any installed Equipment, that
Equipment shall be valued on an installed basis; and (iii) costs of removal from
current location shall not be a deduction from such valuation. If Lessor and
Lessee are unable to agree on the Fair Market Value at least one hundred thirty-
five (135) days before lease expiration, Lessor shall appoint an independent
appraiser (reasonably acceptable to Lessee) to determine Fair Market Value, and
that determination shall be final, binding and conclusive. Lessee shall bear all
costs associated with any such appraisal.
(c) Lessee shall be deemed to have waived this option unless it provides
Lessor with written notice of its irrevocable election to exercise the same
within fifteen (15) days after Fair Market Value is determined (by agreement or
appraisal).
XX. MISCELLANEOUS:
(a) LESSEE HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY,
THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR.
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY
RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS LEASE
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
(b) Unless and until Lessee exercises its rights under Section XIX above,
nothing herein contained shall give or convey to Lessee any right, tide or
interest in and to any Equipment except as a lessee. Any cancellation or
termination by Lessor, pursuant to the provision of this Agreement, any
Schedule, supplement or amendment hereto, or the lease of any Equipment
hereunder, shall not release Lessee from any then outstanding obligations to
Lessor hereunder. All Equipment shall at all times remain personal property of
Lessor regardless of the degree of its annexation to any real property and shall
not by reason of any installation in, or affixation to, real or personal
property become a part thereof.
(c) Time is of the essence of this Agreement. Lessor's failure at any time
to require strict performance by Lessee of any of the provisions hereof shall
not waive or diminish Lessor's right thereafter to demand strict compliance
therewith. Lessee agrees, upon Lessor's request, to execute any instrument
necessary or expedient for filing, recording or perfecting the interest of
Lessor. All notices required to be given hereunder shall be deemed adequately
given if sent by registered or certified mail to the addressee at its address
stated herein, or at such other place as such addressee may have designated in
writing. This Agreement and any Schedule and Annexes thereto constitute the
entire agreement of the parties with respect to the subject matter hereof. NO
VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF IT'S
PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN
AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO.
(d) In case of a failure of Lessee to comply with any provision of this
Agreement, Lessor shall have the right, but shall not be obligated, to effect
such compliance, in whole or in part; and all moneys spent and expenses and
obligations incurred or assumed by Lessor in effecting such compliance shall
constitute additional rent due to Lessor within five days after the date Lessor
sends notice to Lessee requesting payment. Lessor's effecting such compliance
shall not be a waiver of Lessee's default.
(e) Any rent or other amount not paid to Lessor when due hereunder shall
bear interest, both before and after any judgment or termination hereof, at the
lesser of eighteen percent (18%) per annum or the maximum rate allowed by law.
Any provisions in this Agreement and any Schedule which are in conflict with any
statute, law or applicable rule shall be deemed omitted, modified or altered to
conform thereto.
(f) Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably
authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no more
than ten percent (10%) within each Schedule to account for equipment change
orders, equipment returns, invoicing errors, and similar matters. Lessee
acknowledges and agrees that the Rent shall be adjusted as a result of such
change in the Capitalized Lessor's Cost. Lessor shall send Lessee a written
notice seating the final Capitalized Lessor's Cost, if different from that
disclosed on the Schedule.
<PAGE>
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION HEADWAY TECHNOLOGIES, INC.
By: /s/ Eric J. Staczek By: /s/ Thomas A. Surra
---------------------------- -------------------------------
Name: ERIC J. STACZEK Name: THOMAS A. SURRA
-------------------------- -----------------------------
Title: CREDIT ANALYST Title: CHIEF FINANCIAL OFFICER
------------------------- ----------------------------
<PAGE>
(4/94) 1st Amendment/Electronics
ADDENDUM
TO SCHEDULE NO. 001
TO MASTER LEASE AGREEMENT
DATED AS OF September 2, 1997
THIS ADDENDUM (this "ADDENDUM") amends and supplements the above schedule
(the "SCHEDULE") to the above lease (the "LEASE"), between GENERAL ELECTRIC
CAPITAL CORPORATION ("LESSOR") and HEADWAY TECHNOLOGIES, INC. ("LESSEE") and is
hereby incorporated into the Schedule as though fully set forth therein.
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Lease.
1. For purposes of this Schedule only, the following additional Financial
Terms are added to Paragraph B of the Schedule:
Secondary Term Lease Rate Factor: 1.725567
Secondary Term (No. of Months): 14
Secondary Term Commencement Date: 09/15/02
2. For purposes of this Schedule only, the following is added to Paragraph D
of the Schedule:
4. Secondary Term Rent. Unless the Schedule has been earlier terminated
as provided therein, commencing on the Secondary Term Commencement Date and
on the same day of each month thereafter (each, a "RENT PAYMENT DATE")
during the Secondary Term, Lessee shall pay as rent ("SECONDARY TERM RENT")
the product of the Secondary Term Lease Rate Factor times the Capitalized
Lessor's Cost of all Equipment on this Schedule.
3. For purposes of the Schedule only, Section XIX(a) of the Lease is hereby
deleted in its entirety and the following is substituted therefor:
(a) So long as no default exists hereunder and the Lease has not been
earlier terminated, Lessee may at the expiration of the Secondary Term upon
at least one hundred eighty (180) days but no more than two hundred seventy
(270) days written notice to Lessor prior to the expiration of the
Secondary Term, purchase all (but not less than all) of the Equipment in
this Schedule on an AS IS, WHERE IS BASIS, without recourse to or warranty
from Lessor, express or implied ("AS IS BASIS") for cash equal to its then
Fair Market Value (plus all applicable sales taxes).
4. For purposes of the Schedule only, the following is added to the end
thereof:
END OF BASIC TERMS OPTIONS:
At the expiration of the Basic Term (the "BASIC TERM EXPIRATION DATE"), so
long as no default has occurred and is continuing hereunder and this Lease
has not been earlier terminated, Lessee shall exercise one of the following
options:
(1) Extension Option. Lessee may extend the Lease beyond the Basic
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Term Expiration Date with respect to all (but not less than all) of the
Equipment covered by this Schedule through the Secondary Term set forth in
this Schedule and Lessee shall pay Secondary Term Rent as set forth in this
Schedule.
(2) Purchase Option. Upon at least one hundred eighty (180) but
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not more than two hundred seventy (270) days written notice to Lessor prior
to the Basic Term Expiration Date, Lessee may purchase all (but not less
than all) of the Equipment covered by this Schedule on an AS IS BASIS for
cash equal to the greater of (A) Thirty percent (30%) of the Capitalized
Lessor's Cost (plus all applicable sales taxes) or (B) the then Fair Market
Value of the Equipment (plus all applicable sales taxes). On the Basic Term
Expiration Date, Lessor shall receive in cash the full purchase price (plus
all applicable sales taxes) together with any rent or other sums then due
under the Lease on such date. Lessee shall be deemed to have waived its
purchase option if it fails to (a) timely provide Lessor with the required
written notice of its election to exercise the same or (b) provide Lessor
with written notice of its irrevocable election to exercise the same within
fifteen (15) days after Fair Market Value is determined (by agreement or
appraisal).
(3) Cancellation Option. Upon at least one hundred eighty (180)
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days but not more than two hundred seventy (270) days written notice to
Lessor prior to the Basic Term Expiration Date (the "NOTICE DATE"), Lessee
may cancel the Lease (the "CANCELLATION OPTION") with respect to all (but
not less than all) of the Equipment on this Schedule. If all of the terms
and conditions of this Section are not fulfilled, this Lease shall continue
in full force and effect and Lessee shall continue to be liable for all
obligations thereunder, including, without limitation, the obligation to
continue paying rent. Lessee shall be deemed to have waived this option of
it fails to timely provide Lessor with the required written notice of its
election to exercise the same.
(a) Prior to the date Lessee gives notice to Lessor of its
intention to exercise the Cancellation Option as provided
herein, Lessee shall:
(i) contact the original manufacturer of the Equipment
(the "MANUFACTURER") and arrange for the Manufacturer to
inspect the Equipment; and
(ii) obtain, at Lessee's expense, a written determination
from the Manufacturer, which determination shall be final,
binding and conclusive, that the Equipment's condition is in
full compliance with Section XI of the Lease and that:
(x) the Equipment is complete and fully operational
in compliance with the Manufacturer's
specifications; and
(y) the Equipment contains all field engineering
changes required by the Manufacturer to meet the
Manufacturer's then current maintenance contract
requirements.
(iii) if the written determination from the Manufacturer
required by subsection (ii) above is unavailable for any
reason, obtain, at Lessee's expense, a verification by an
independent appraiser selected by Lessor (reasonably
acceptable to Lessee), which verification shall be final,
binding and conclusive, that the Equipment's condition is
in full compliance with Section XI of the Lease and that:
<PAGE>
(x) the Equipment is complete and fully operational
in compliance with the Manufacturer's
specifications; and
(y) the Equipment contains all field engineering
changes required by the Manufacturer to meet the
Manufacturer's then current maintenance contract
requirements.
(b) Prior to the Basic Term Expiration Date, Lessee shall:
(i) deliver to Lessor the written determinations of the
Manufacturer or the independent appraiser as required
above;
(ii) pay to Lessor, as additional rent, TWENTY-THREE POINT
NINE ZERO SEVEN PERCENT (23.907%) of the Capitalized
Lessor's Cost of the Equipment, plus all rent and all other
sums due and unpaid as of the Basic Term Expiration Date
(including, but not limited to, any rent payment due and
payable on the Basic Term Expiration Date and any sales
taxes and property taxes); and
(iii) return the Equipment, all documentation related to
the Equipment including, but not limited to, all operating,
software and maintenance manuals and schematics and any and
all spare parts and nonconsumables originally provided with
the Equipment or, to the extent such parts or
nonconsumables were replaced, such replacements) in full
compliance with Section XI of the Lease.
(c) From the applicable Notice Date through the Basic Term
Expiration Date, Lessee shall:
(i) continue to comply with all of the terms and
conditions of the Lease, including, but not limited to
Lessee's obligation to pay rent, and
(ii) cooperate with Lessor in remarketing the Equipment,
including, but not limited to (A) keeping the Equipment at
Lessee's premises in service and in working order so as to
allow Lessor to market and demonstrate the Equipment to
potential purchasers or lessees from such premises, and (B)
upon reasonable notice from Lessor, to provide Lessee's
operations personnel to assist Lessor in demonstrating
Equipment to potential purchasers or lessees all at no cost
to Lessor; provided, however, that, subject to Lessor's
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rights set forth in this subsection, Lessee may still use
the Equipment until the Basic Term Expiration Date.
(d) Lessee shall, from the applicable Basic Term Expiration
Date through the earlier of the date the Equipment is sold
by Lessor to a third party or 90 days following the Basic
Term Expiration Date, comply with the following terms and
conditions:
(i) continue to provide insurance for the Equipment in
compliance with the terms found in Section X of the Lease,
and
(ii) cooperate with Lessor in remarketing the Equipment,
including, but not limited to (A) keeping the Equipment at
Lessee's premises in service and in working order so as to
allow Lessor to market and demonstrate the Equipment to
potential purchasers or lessees from such premises and (B)
upon reasonable notice from Lessor, to provide Lessee's
operations personnel to assist Lessor in demonstrating the
Equipment to potential purchasers or lessees, all at no
cost to Lessor.
(e) The proceeds of any sale or re-lease of the Equipment after
Lessee has exercised its Cancellation Option shall be for
the sole benefit of Lessor and Lessee shall have no
interest nor any claim upon any of such proceeds.
Except as expressly modified hereby, all terms and provisions of the Lease
shall remain in full force and effect. This Addendum is not binding or effective
with respect to the Lease or the Equipment until executed on behalf of Lessor
and Lessee by authorized representatives of Lessor and Lessee.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Addendum to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION HEADWAY TECHNOLOGIES, INC.
By: /s/ Eric J. Staczek By: /s/ Thomas A. Surran
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Name: ERIC J. STACZEK Name: Thomas A. Surran
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Title: CREDIT ANALYST Title: Chief Financial Officer
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ATTEST
By: /s/ Shelley Marie Hahn
--------------------------------
Name: Shelley Marie Hahn
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<PAGE>
CORPORATE LESSEE'S
BOARD OF DIRECTORS RESOLUTION
The undersigned hereby certifies: (i) that she/he is the Secretary of
HEADWAY TECHNOLOGIES, INC.; (ii) that the following is a true and correct copy
of Resolutions duly adopted at a meeting of the Board of Directors of said
Corporation duly held on the 23rd day of April, 1997; and (iii) that said
resolutions have not been amended, rescinded, modified or revoked, and are in
full force and effect:
"RESOLVED, that each of the officers of this Corporation, whose name
appears below:
/s/ Mike Y. Chang
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President _______________________________
Treasurer
[SIGNATURE ILLEGIBLE]
_____________________________________ -------------------------------
Vice President Secretary
or the duly elected or appointed successor in office of any or all of them, be,
and hereby is, authorized and empowered in the name and on behalf of this
Corporation to enter into, execute and deliver a master lease agreement with
GENERAL ELECTRIC CAPITAL CORPORATION ("LESSOR") as Lessor, providing for the
leasing to (or sale and leaseback by) this Corporation, from time to time, of
certain equipment, and further providing for this Corporation to indemnify said
Lessor against certain occurrences and against the loss of contemplated tax
treatment; and
FURTHER RESOLVED, that each officer of this Corporation be, and hereby is,
authorized and empowered in the name and on behalf of this Corporation to enter
into, execute and deliver any documents and to do and perform all other acts and
deeds which may be necessary or appropriate to effectuate the lease (or sale and
leaseback) of equipment from Lessor; and
FURTHER RESOLVED, that the Lessor may rely upon the aforesaid resolutions
until receipt by it of written notice of any change.
IN WITNESS WHEREOF, I have set my hand and affixed the seal of said
Corporation this __________________ day of _______________, 19___.
(CORPORATE SEAL)
[SIGNATURE ILLEGIBLE]
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Secretary
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$400,000 Milpitas, CA
December 24, 1997
FOR VALUE RECEIVED, Dave Begin ("Employee") promises to pay to Headway
Technologies, Inc. (the "Company"), or order, the principal sum of Four Hundred
Thousand Dollars ($400,000), together with interest on the unpaid principal
hereof from the date hereof at the rate of 5.93% per annum, compounded
semiannually.
Principal and interest shall be due and payable on the earlier of (a)
January 1, 2001, (b) ten days following Employee's voluntary termination of
employment with the Company, or (c) ten days following Employee's termination of
employment by the Company for Cause. Employee will be deemed to be terminated
for "Cause" if Employee is terminated due to any of the following:
i. any material breach of Employee's fiduciary duty to the Company
or its affiliates;
ii. any intentional misconduct, fraud or bad faith on the part of
Employee in the performance of Employee's duties as an employee of the
Company;
iii. the conviction of Employee of, or the entry by Employee of a
plea of guilty or nolo contendere to (i) any felony, (ii) any activity
constituting unlawful harassment, or (iii) any other malfeasance that could
materially impair the reputation of the Company or Employee; or
iv. the continued failure of Employee to report to work or to
perform any reasonable duties assigned to Employee by the Company, if such
breach or failure is not fully cured by Employee within ten (10) days after
Employee receives written notice of such failure from the Company.
Payments of principal and interest shall be made in lawful money of the
United States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against any collateral securing this Note
in the event of default.
<PAGE>
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
__________________________________
Dave Begin
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<PAGE>
DEBT FORGIVENESS
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This Debt Forgiveness Agreement ("Agreement") is made as of this 24th day
of December 24, 1997, by and between Headway Technologies, Inc., a Delaware
corporation (the "Company"), and Dave Begin ("Employee").
WHEREAS, Employee has executed that certain Promissory Note, dated the date
hereof (the "Note"), and has delivered the Note to the Company;
NOW THEREFORE, in consideration of the mutual promises made herein, the
parties hereby agree as follow:
1. Debt Forgiveness.
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1.1 Schedule of Debt Forgiveness. The obligation of Employee to pay
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principal and accrued interest to the Company pursuant to the Note (the "Debt")
shall be forgiven according to the following schedule:
(a) $100,000 of such principal and the accrued interest thereon
from the date of the Note shall be forgiven on each of January 1, 1998, January
1, 1999, January 1, 2000 and January 2001.
(b) 100% of such principal and accrued interest (to the extent
not previously forgiven) shall be forgiven upon the death or disability of
Employee.
(c) 100% of such principal and accrued interest (to the extent
not previously forgiven) shall be forgiven upon the sale or transfer by merger,
sale of stock or otherwise of a majority of the Company's outstanding voting
securities or assets (based on fair market value) to any person who is not an
affiliate of the Company on the date hereof.
(d) 100% of such principal and accrued interest (to the extent
not previously forgiven) shall be forgiven upon any involuntary termination of
Employee other than any termination for Cause (as defined in the Note).
1.2 Condition to Debt Forgiveness. Section 1.1(a), (b) and (c) of
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this Agreement shall only be effective so long as Employee is employed by the
Company at the time of the applicable event.
2. Additional Provisions.
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2.1 Severability. In the event that any provision hereof becomes or
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is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
<PAGE>
2.2 No Oral Modification. This Agreement may only be amended in
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writing signed by the Party against whom the amendment is being sought.
2.3 Counterparts. This Agreement may be executed in counterparts,
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and each counterpart shall have the same force and effect as an original and
shall constitute an effective, binding agreement on the part of each of the
undersigned. Execution and delivery of this Agreement by exchange of facsimile
copies bearing the facsimile signature of a party shall constitute a valid and
binding execution and delivery of the Agreement by such party. Such facsimile
copies shall constitute enforceable original documents.
2.4 Attorney's Fees. If any action or proceeding is commenced to
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enforce this Agreement or any right arising in connection with this Agreement,
the prevailing party in such action or proceeding shall be entitled to recover
from the other party, the reasonable attorneys' fees, costs and expenses
incurred by such prevailing party in connection with such action or proceeding
or negotiation to avoid such action or proceeding.
2.5 Employment At-Will. Neither this Agreement nor the Note modify
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the employment relationship between Employee and the Company, which remains at-
will. Employee and the Company acknowledge that this employment relationship may
be terminated at any time, with or without good cause or for any or no cause, at
the option of either the Employee or the Company.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth above.
HEADWAY TECHNOLOGIES, INC.
By:____________________________
Print Name:____________________
Title:_________________________
_______________________________
Dave Begin
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<PAGE>
EXHIBIT 10.12
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
PROMISSORY NOTE
$7,604,563.83 September 30, 1998
Palo Alto, California
FOR VALUE RECEIVED, Headway Technologies, Inc. (California), a California
corporation (the "Company"), hereby promises to pay to Western Digital
Corporation (the "Holder"), its successors and assigns in lawful money of the
United States of America, the principal sum of Seven Million Six Hundred Four
Thousand Five Hundred Sixty-Three Dollars and Eighty-Three Cents
($7,604,563.83), or such lesser principal amount as may be outstanding from time
to time, hereunder. This Note shall bear interest (computed on the basis of a
30-day month and 360 day year) on the unpaid principal amount hereof at 8.5 %
per annum. All interest accrued on this Note shall become due and payable as set
forth herein.
The following is a statement of the rights of the Holder and the conditions
to which this Note is subject, and to which the Holder, by the acceptance of
this Note, agrees:
1. Definitions. As used in this Note, the following capitalized
-----------
terms have the following meanings:
(a) "Change of Control" shall mean (a) the acquisition of
ownership, directly or indirectly, beneficially or of record, by any person or
group (within the meaning of the Securities Exchange Act of 1934 and the roles
of the Securities and Exchange Commission thereunder as in effect on the date
hereof shares representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of Company or (b)
occupation of a majority of the seats (other than vacant seats) on the board of
directors of Company by persons who were neither (i) nominated by the board of
directors of Company (as compromised immediately after giving effect to the
issuance of this Note) nor (ii) appointed by directors so nominated.
(b) "Company" includes the corporation initially executing this
Note and any Person which shall succeed to or assume the obligations of the
Company under this Note.
(c) "Event of Default" has the meaning given in Section 9
hereof.
(d) "Financial Statements" shall mean, with respect to any
accounting period for any Person, statements of operations, retained earnings
and cash flow of such Person for such period, and balance sheets of such Person
as of the end of such period, if such period is a full fiscal year,
corresponding figures from the preceding fiscal year, all prepared in reasonable
detail and
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<PAGE>
in accordance with Generally Accepted Accounting Principals. Unless otherwise
indicated, each reference to Financial Statements of any Person shall be deemed
to refer to Financial Statements prepared on a consolidated basis.
(e) "GECC Obligations" shall mean all obligations owing to
General Electric Capital Corporation, Tokyo Leasing (U.S.A.) Inc., Bank IV of
Kansas N.A. and Norlease Inc., and any successors and assigns of the foregoing
under the Master Security Agreement dated as of July 24, 1995 and each of the
Notes issued in connection therewith together with related agreements, documents
and certificates, as the same may be amended, restated, supplemented or
otherwise modified from time to time.
(f) "Holder" shall mean the Person specified in the introductory
paragraph of this Note and any permitted successor or assign.
(g) "Lien" shall mean, with respect to any property, any
security interest, mortgage, pledge, lien, claim, charge or other encumbrance
in, of, or on such property or the income therefrom, including, without
limitation, the interest of a vendor or lessor under a conditional sale
agreement, capital lease or other title retention agreement, or any agreement to
provide any of the foregoing.
(h) "Majority in Interest" shall mean, more than 50% of the
aggregate outstanding principal amount of this Note and the other outstanding
Notes of the Company issued on the same date hereof with substantially similar
terms and the outstanding amount prepaid to the Company by SAE pursuant to the
Prepayment Agreement dated February 4, 1997.
(i) "Maturity Date" shall mean June 30, 2000.
(j) "Note" means this Promissory Note.
(k) "Partner" means any person holding an interest in a note or
prepayment agreement which is entitled to be included in determining Majority in
Interest.
(l) "Permitted Liens" shall mean and include: (i) Liens for
taxes or other governmental charges not at the time delinquent or thereafter
payable without penalty or being contested in good faith; (ii) Liens of
carriers, warehousemen, mechanics, materialmen, vendors, and landlords incurred
in the ordinary course of business for sums not overdue or being contested in
good faith; (iii) deposits under workers' compensation, unemployment insurance
and social security laws or to secure the performance of bids, tenders,
contracts (other than for the repayment of borrowed money) or leases, or to
secure statutory obligations of surety or appeal bonds or to secure indemnity,
performance or other similar bonds in the ordinary course of business; (iv)
Liens securing obligations under any capital lease to which the Company is a
party; provided that such Liens do not extend beyond the property leased under
such capital lease, and any accessions, replacements, substitutions and proceeds
(including insurance proceeds) thereof; (v) Liens upon any equipment or other
property acquired or held by the Company or any of its Subsidiaries to secure
the purchase price of such property or indebtedness incurred solely for the
purpose of financing the acquisition of such property, so long as such Lien
extends only to the equipment financed, and any accessions,
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<PAGE>
replacements, substitutions and proceeds (including insurance proceeds) thereof
or thereto and such Lien attaches to such property within 90 days of its being
acquired by the Company; (vi) easements, reservations, rights of way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances affecting real property in a manner not materially or adversely
affecting the value or use of such property; (viii) Liens in favor of holders of
Senior Indebtedness; (ix) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods; (x) Liens which constitute rights of setoff of a
customary nature or banker's liens, whether arising by law or by contract; and
(xi) Liens on insurance proceeds in favor of insurance companies granted solely
as security for financed premium.
(m) "Person" shall mean and include an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a limited liability company, an unincorporated association, a joint venture or
other entity or a governmental authority.
(n) "Reimbursement Obligations" shall mean all obligations of
the Company owing Asahi Komag Company Ltd. and Hewlett-Packard Company under the
Reimbursement Agreement dated as of February 4, 1997, as the same may be
amended, restated, supplemented or otherwise modified from time to time.
(o) "Senior Indebtedness" shall mean, unless expressly
subordinated to or made on a parity with the mounts due under this Note, the
principal of (and premium, if any), unpaid interest on and amounts reimbursable,
fees, expenses, costs of enforcement and other mounts due in connection with,
(i) indebtedness of the Company, to any commercial bank or other financial
institution, under a revolving credit facility with a borrowing base of accounts
receivable or inventory; (ii) GECC Obligations; (iii) Reimbursement Obligations;
and (iv) obligations secured by Liens described in clauses (iv) or (v) of the
definition of Permitted Liens.
2. Interest. All accrued and unpaid interest on this Note shall
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compound monthly and shall be paid in full on the Maturity Date of this Note
unless otherwise specified in Section 3, 4 or 5 of this Note.
3. Mandatory Quarterly Repayments. The Company will make an initial
------------------------------
mandatory repayment of $160,000.00 on October 31, 1998 and three quarterly
payments of $160,000.00 on or before the last day of each calendar quarter, with
the first quarterly payment due on or before December 31, 1998. Subsequently and
until the Note is fully repaid, the Company will make quarterly payments of
$1,961,537.19 on or before the last day of each calendar quarter, with the first
due on or before September 30, 1999.
4. Product Purchase Offsets. In addition to the mandatory quarterly
------------------------
repayments defined in Section 3, the Company will make quarterly product
purchase repayments, which shall reduce the outstanding balance of this Note, in
the lesser amount of (x) $1.00 per unit of product constituting HGAs purchased
by the Holder during the previous quarter and (y) 10% of the price paid for HGAs
or Other product during the previous quarter by the Holder. No repayments may be
made under this Section 4 after the date on which the final quarterly payment
under Section 3 is due.
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<PAGE>
5. Alternative Repayment Schedule. In the event of a Change of
------------------------------
Control or the Company completes an initial public offering raising gross
proceeds in excess of Twenty Five Million Dollars ($25,000,000), the Holder may,
after good faith negotiations with the Company, require the Company make such
payments necessary such that, as of each of the dates set forth below (each a
"Measurement Date") the Note shall have an outstanding balance equal to or less
than the amounts set forth below (each a "Maximum Balance") for the
corresponding Measurement Date.
Measurement Date Maximum Balance
---------------- ---------------
June 30, 1999 $ 3,848,810.93
September 30, 1999 $ 2,904,536.47
December 31, 1999 $ 1,948,409.32
March 31, 2000 $ 980,280.72
June 30, 2000 $ 0.00
6. Prepayment. The Company may, from time to time, prepay this Note
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in whole or in part.
7. Representations and Warranties. The Company represents and
------------------------------
warrants to the Holder that since February 4, 1997:
(a) Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of the State of
California and is in good standing under such laws. The Company has requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted. The Company is duly qualified to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which failure to so qualify could have a material adverse effect on its
business, properties or financial condition.
(b) Corporate Power. The Company has all requisite legal and
corporate power to issue the Note, and to carry out and perform its obligations
under this Note.
(c) Authorization. All corporate action on the part of the Company,
its directors and its shareholders necessary for the authorization, sale,
issuance and delivery of this Note has been taken. This Note constitutes the
legal, valid and binding obligations of the Company, enforceable in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
(d) Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local, or provincial governmental authority on
the part of the Company is required in connection with the issuance of this
Note.
8. Replacement of Existing Note. This Note is being issued in
----------------------------
replacement of the note dated February 4, 1997 issued by the Company in favor of
the Western Digital (Tuas-Singapore) pte Ltd in the face amount of $7,000,000.00
(the "Old Note"). Upon the acceptance of this Note by the Holder, the Old Note
shall be deemed paid in full and terminated and of no further
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<PAGE>
force and effect and the Company shall have no further obligations thereunder
notwithstanding Section 18 of the Old Note or any other provision thereof to the
contrary.
9. Certain Covenants. While any amount is outstanding under the
-----------------
Note, without the prior written consent of the Holder:
(a) Liens. The Company shall not create, incur, assume or permit to
exist any Lien on or with respect to any of its assets or property of any
character, whether now owned or hereafter acquired, except for Permitted Liens
without the consent of the Majority in Interest, which shall not be unreasonably
withheld in the event that the Company grants the same collateral to the
Partners as security for the Company's obligations under their respective notes
or prepayment agreements.
(b) Information Rights; Notices. The Company shall furnish to the
Holder the following:
(i) Quarterly Financial Statements. Within forty-five (45) days
------------------------------
after the last day of each fiscal quarter of the Company, a copy of the
Financial Statements of the Company for such quarter, certified by the
chief financial officer or controller of the Company to present fairly the
financial condition, results of operations and other information presented
therein and to have been prepared in accordance with GAAP consistently
applied, subject to normal year end adjustments and except that no
footnotes need be included with such Financial Statements;
(ii) Annual Financial Statements. Within ninety (90) days after
---------------------------
the close of each fiscal year of the Company, (i) copies of the audited
Financial Statements of the Company for such year, audited by nationally or
regionally recognized independent certified public accountants, (ii) copies
of the opinions and management letters delivered by such accountants in
connection with such Financial Statements, and (iii) an annual budget of
the Company;
(iii) SEC Reports. As soon as possible and in no event later than
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ten (10) Business Days after they are sent, made available or filed, copies
of all registration statements and reports filed by the Company with the
Securities and Exchange Commission and all reports, proxy statements and
financial statements sent or made available by the Company to its
shareholders generally;
(iv) Notice of Default. Promptly upon the occurrence thereof,
-----------------
written notice of the occurrence of any Event of Default hereunder or any
event of default with respect to any Senior Indebtedness; and
(v) Notice of Indebtedness. Within 15 Business Days of the
----------------------
Company's incurring any indebtedness for borrowed money to any lender other
than Holder in excess of $1,000,000 (other than an increase of drawdowns
under lines of credit existing on the date hereof or equipment financing
transactions in the ordinary course of the Company's business), notice of
such incurrence of indebtnedness.
-5-
<PAGE>
(c) Most Favored Nation Purchase Rights. The Company agrees to
provide the Holder with pricing on any product purchases at a 4% discount to the
Company's "most favored nation price" as reasonably determined by the Company on
the basis of substantially equivalent volume, technology and performance.
(d) Fair Dealing. The Company shall use all reasonable endeavors to
allocate products among its customers fairly and in the event of shortages, on a
pro rata basis. In addition, the Company will not grant any allocation
preferences to any Person other than a Partner.
(e) Certain Exceptions. Notwithstanding anything herein to the
contrary, the Company shall not be required to provide any customer or supplier
specific information with respect to individual customers or products.
10. Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents:
(a) Failure to Pay. The Company shall fail to pay when due any
principal or interest required under the terms of this Note on the date due and
such payment shall not have been made within thirty (30) days of the Company's
receipt of the Holder's written notice to the Company of such failure to pay; or
(b) Voluntary Bankruptcy or Insolvency Proceedings. The Company shall
(i) apply for or consent to the appointment of a receiver, trustee, liquidator
or custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated, (v) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or
(c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of the Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to the Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief entered or such proceeding shall not be dismissed or discharged within
sixty (60) days of commencement.
11. Rights of Holder upon Default. Upon the occurrence and during the
-----------------------------
continuance of any Event of Default (other than an Event of Default, referred to
in Sections 10(b) and 10(c)), the Holder may, by written notice to the Company,
declare all outstanding principal and interest immediately due and payable. Upon
the occurrence or existence of any Event of Default described in Sections 10(b)
and 10(c), immediately and without notice, all outstanding principal and
-6-
<PAGE>
interest payable by the Company hereunder shall automatically become immediately
due and payable, without presentment, demand, protest or any other notice of any
kind, all of which are hereby expressly waived, anything contained herein to the
contrary notwithstanding. In addition to the foregoing remedies, upon the
occurrence or existence of any Event of Default, the Holder may exercise any
other right power or remedy granted to it or otherwise permitted to it by law,
either by suit in equity or by action at law, or both.
12. Subordination. The indebtedness evidenced by this Note is hereby
-------------
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's Senior
Indebtedness.
(a) Insolvency Proceedings. If there shall occur any
----------------------
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation, or any other marshaling of the assets and
liabilities of the Company, (i) no amount shall be paid by the Company in
respect of the principal of, interest on or other amounts due with respect to
this Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full, and
(ii) no claim or proof of claim shall be filed with the Company by or on behalf
of the Holder of this Note which shall assert any right to receive any payments
in respect of the principal of and interest on this Note except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding.
(b) Default on Senior Indebtedness. If there shall occur an
------------------------------
event of default which has been declared in writing with respect to any Senior
Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and the
Holder shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no cash payment shall be made in respect of the principal of
or interest on this Note, unless within one hundred eighty (180) days after the
happening of such event of default, the maturity of such Senior Indebtedness
shall not have been accelerated. Not more than one notice may be given to the
Holder pursuant to the terms of this Section 12(b) during any 360 day period.
Nothing in this Section 12(b) shall be construed to restrict the Company's
ability to honor the terms of any Purchase Agreement or engage in permitted set-
offs pursuant to Section 4 of this Note.
(c) Further Assurances. By acceptance of this Note, the Holder
------------------
agrees to execute and deliver standard forms of subordination agreement
requested from time to time by holders of Senior Indebtedness, and as a
condition to the Holder's rights hereunder, the Company may require that the
Holder execute such forms of subordination agreement.
(d) Other Indebtedness. No indebtedness which does not
------------------
constitute Senior Indebtedness shall be senior in any respect to the
indebtedness represented by this Note.
(e) Subrogation. Subject to the payment {n full of all Senior
-----------
Indebtedness, the Holder shall be subrogated to the rights of the holder(s) of
such Senior Indebtedness (to the
-7-
<PAGE>
extent of the payments or distributions made to the holder(s) of such Senior
Indebtedness pursuant to the provisions of this Section 12) to receive payments
and distributions of assets of the Company applicable to the Senior
Indebtedness. No such payments or distributions applicable to the Senior
Indebtedness shall, as between the Company and its creditors, other than the
holders of Senior Indebtedness and the Holder, be deemed to be a payment by the
Company to or on account of this Note; and for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness to which the
Holder would be entitled except for the provisions of this Section 12 shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and the Holder, be deemed to be a payment by the Company to or on
account of the Senior Indebtedness.
(f) Reliance of Holders of Senior Indebtedness. The Holder, by
------------------------------------------
its acceptance hereof, shall be deemed to acknowledge and agree that the
foregoing subordination provisions are, and are intended to be, an inducement to
and a consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.
13. Successors and Assigns. Subject to the restrictions on transfer
----------------------
described in Sections 15 below, the rights and obligations of the Company and
the Holder hereunder shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
14. Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified with a written instrument signed by the Company and the
Holder.
15. Assignment. Neither this Note nor any of the rights, interests or
----------
obligations hereunder may be assigned, by operation of law or otherwise, in
whole or in part, by the Company or Holder without the prior written consent of
the other party, except that (i) the Company may assign its rights, interests
and obligations hereunder in connection with an assignment in whole to a
successor corporation to the Company; provided that such successor corporation
acquires all or substantially all of the Company's property and assets and the
Holder's rights hereunder are not impaired; and (ii) the Holder may assign its
rights, interests and obligations hereunder to Western Digital Corporation
("Western Digital") or any direct or indirect subsidiary of Western Digital.
16. Notices. Any notice, request or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Stock Purchase Agreement
of approximate even date herewith between Headway Holdings, Inc. and certain
investors or on the register maintained by the Company. Any party hereto may by
notice so given change its address for future notice hereunder. Notice shall
conclusively be deemed to have been given when received.
17. Default Rate; Usury. In the event that any payment of principal
-------------------
or interest provided for herein is not paid by the Company when due (including
the entire unpaid balance of this Note in the event such amount is made
immediately due and payable pursuant to the terms hereof),
-8-
<PAGE>
then the Company shall pay interest on the such amounts not paid when due at a
rate per annum equal to the rate otherwise applicable hereunder plus two percent
(2%). In the event any interest is paid on this Note which is deemed to be in
excess of the then legal maximum rate, then that portion of the interest payment
representing an amount in excess of the then legal maximum rate shall be deemed
a payment of principal and applied against the principal of this Note.
18. Waivers. The Company hereby waives notice of default, presentment
-------
or demand for payment, protest or notice of nonpayment or dishonor and all other
notices or demands relative to this instrument.
19. Governing Law. This Note and all actions arising out of or in
-------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
20. Termination. This Note shall terminate upon the payment in full
-----------
(whether in cash, offset or otherwise) of all principal and interest outstanding
hereunder. Upon such termination, neither the Company nor the Holder shall have
any rights, obligations or liabilities hereunder; provided that the Company's
obligation under Sections 9(c), (d) and (e) hereof shall survive until the later
to occur of (a) one year after such termination date, or (b) June 30, 2000.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as
of the date first written above.
HEADWAY TECHNOLOGIES, INC.
By /s/ Thomas A. Surrow
--------------------------------------
Name: Thomas A. Surrow
Title: Chief Financial Officer
Acknowledged and Agreed:
WESTERN DIGITAL CORPORATION
By /s/ A. Keith Plant
------------------------------
Name: A. Keith Plant
Title: Vice President
-9-
<PAGE>
EXHIBIT 10.13
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
PROMISSORY NOTE
$4,345,465.07 September 30, 1998
Palo Alto, California
FOR VALUE RECEIVED, Headway Technologies, Inc. (California), a California
corporation (the "Company"), hereby promises to pay to Maxtor Corporation (the
"Holder"), its successors and assigns in lawful money of the United States of
America, the principal sum of Four Million Three Hundred Forty-Five Thousand
Four Hundred Sixty-Five Dollars and Seven Cents ($4,345,465.07), or such lesser
principal amount as may be outstanding from time to time, hereunder. This Note
shall bear interest (computed on the basis of a 30-day month and 360 day year)
on the unpaid principal amount hereof at 7.5 per annum. All interest accrued on
this Note shall become due and payable as set forth herein.
The following is a statement of the rights of the Holder and the conditions
to which this Note is subject, and to which the Holder, by the acceptance of
this Note, agrees:
1. Definitions. As used in this Note, the following capitalized
-----------
terms have the following meanings:
(a) "Change of Control" shall mean (a) the acquisition of
ownership, directly or indirectly, beneficially or of record, by any person or
group (within the meaning of the Securities Exchange Act of 1934 and the roles
of the Securities and Exchange Commission thereunder as in effect on the date
hereof) shares representing more than 50% of the aggregate ordinary or special
voting power represented by the issued and outstanding capital stock of Company
or (b) occupation of a majority of the seats (other than vacant seats on the
board of directors of Company by persons who were neither (i) nominated by the
board of directors of Company (as comprised immediately after giving effect to
the issuance of this Note nor (ii) appointed by directors so nominated.
(b) "Company" includes the corporation initially executing this
Note and any Person which shall succeed to or assume the obligations of the
Company under this Note.
(c) "Event of Default" has the meaning given in Section 9
hereof.
(d) "Financial Statements" shall mean, with respect to any
accounting period for any Person, statements of operations, retained earnings
and cash flow of such Person for such period, and balance sheets of such Person
as of the end of such period, if such period is a full fiscal year,
corresponding figures from the preceding fiscal year, all prepared in reasonable
detail and
-1-
<PAGE>
in accordance with Generally Accepted Accounting Principals. Unless otherwise
indicated, each reference to Financial Statements of any Person shall be deemed
to refer to Financial Statements prepared on a consolidated basis.
(e) "GECC Obligations" shall mean all obligations owing to
General Electric Capital Corporation, Tokyo Leasing (U.S.A.) Inc., Bank IV of
Kansas N.A. and Norlease Inc., and any successors and assigns of the foregoing
under the Master Security Agreement dated as of July 24, 1995 and each of the
Notes issued in connection therewith together with related agreements, documents
and certificates, as the same may be amended, restated, supplemented or
otherwise modified from time to time.
(f) "Holder" shall mean the Person specified in the introductory
paragraph of this Note and any permitted successor or assign.
(g) "Lien" shall mean, with respect to any property, any
security interest, mortgage, pledge, lien, claim, charge or other encumbrance
in, of, or on such property or the income therefrom, including, without
limitation, the interest of a vendor or lessor under a conditional sale
agreement, capital lease or other title retention agreement, or any agreement to
provide any of the foregoing.
(h) "Majority in Interest" shall mean, more than 50% of the
aggregate outstanding principal amount of this Note and the other outstanding
Notes of the Company issued on the same date hereof with substantially similar
terms and the outstanding amount prepaid to the Company by SAE pursuant to the
Prepayment Agreement dated February 4, 1997.
(i) "Maturity Date" shall mean June 30, 2000.
(j) "Milestones" shall mean the Milestones described in Exhibit
A hereto.
(k) "Note" means this Promissory Note.
(l) "Partner" means any person holding an interest in a note or
prepayment agreement which is entitled to be included in determining Majority in
Interest.
(m) "Permitted Liens" shall mean and include: (i) Liens for
taxes or other governmental charges not at the time delinquent or thereafter
payable without penalty or being contested in good faith; (ii) Liens of
carriers, warehousemen, mechanics, materialmen, vendors, and landlords incurred
in the ordinary course of business for sums not overdue or being contested in
good faith; (iii) deposits under workers' compensation, unemployment insurance
and social security laws or to secure the performance of bids, tenders,
contracts (other than for the repayment of borrowed money) or leases, or to
secure statutory obligations of surety or appeal bonds or to secure indemnity,
performance or other similar bonds in the ordinary course of business; (iv)
Liens securing obligations under any capital lease to which the Company is a
party; provided that such Liens do not extend beyond the property leased under
such capital lease, and any accessions, replacements, substitutions and proceeds
(including insurance proceeds) thereof; (v) Liens upon any equipment or other
property acquired or held by the Company or any of its Subsidiaries to secure
the purchase
-2-
<PAGE>
price of such property or indebtedness incurred solely for the purpose of
financing the acquisition of such property, so long as such Lien extends only to
the equipment financed, and any accessions, replacements, substitutions and
proceeds (including insurance proceeds) thereof or thereto and such Lien
attaches to such property within 90 days of its being acquired by the Company;
(vi) easements, reservations, rights of way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances affecting real
property in a manner not materially or adversely affecting the value or use of
such property; (viii) Liens in favor of holders of Senior Indebtedness; (ix)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payments of customs duties in connection with the importation of goods;
(x) Liens which constitute rights of setoff of a customary nature or banker's
liens, whether arising by law or by contract; and (xi) Liens on insurance
proceeds in favor of insurance companies granted solely as security for financed
premium.
(n) "Person" shall mean and include an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a limited liability company, an unincorporated association, a joint venture or
other entity or a governmental authority.
(o) "Reimbursement Obligations" shall mean all obligations of
the Company owing Asahi Komag Company Ltd. and Hewlett-Packard Company under the
Reimbursement Agreement dated as of February 4, 1997, as the same may be
amended, restated, supplemented or otherwise modified from time to time.
(p) "Senior Indebtedness" shall mean, unless expressly
subordinated to or made on a parity with the amounts due under this Note, the
principal of (and premium, if any), unpaid interest on and amounts reimbursable,
fees, expenses, costs of enforcement and other mounts due in connection with,
(i) indebtedness of the Company, to any commercial bank or other financial
institution, under a revolving credit facility with a borrowing base of accounts
receivable or inventory; (ii) GECC Obligations; (iii) Reimbursement Obligations;
and (iv) obligations secured by Liens described in clauses (iv) or (v) of the
definition of Permitted Liens.
2. Interest. All accrued and unpaid interest on this Note shall
--------
compound monthly and shall be paid in full on the Maturity Date of this Note
unless otherwise specified in Section 3 and 4 of this Note.
3. Mandatory Repayment. Subject to Section 4, the Company will make
-------------------
an initial payment of $250,000.00 on October 31, 1998 and three consecutive
quarterly payments of $250,000.00 with the first payment due on or before
December 31, 1998. Subsequently, the Company will make an additional four
quarterly payments of $,934,750.88 with the first quarterly payment due on or
before September 30, 1999 and the last quarterly payment on or before June 30,
2000.
4. Alternative Repayment Schedule. In the event of either (I) a
------------------------------
Change of Control, (ii) the Company completes an initial public offering raising
gross proceeds in excess of Twenty Five Million Dollars ($25,000,000), or (iii)
the Company fails to achieve a Milestone as defined in Exhibit A, the Holder may
require the Company make such payments necessary such that, as of each of the
dates set forth below (each a "Measurement Date") the Note shall have an
outstanding balance equal to or less than the amounts set forth below (each a
"Maximum Balance") for the corresponding Measurement Date. Should the Holder
make such an election, the Company
-3-
<PAGE>
shall be required to make payments of $579,375.25 on each subsequent Measurement
Date until the Note is fully repaid.
Measurement Date Maximum Balance
---------------- ---------------
December 31, 1998 $3,257,771.01
March 31, 1999 $2,739,861.53
June 30, 1999 $2,212,180.43
September 30, 1999 $1,674,543.35
December 31, 1999 $1,126,762.43
March 31, 2000 $ 568,646.29
June 30, 2000 $ 0.00
5. Optional Prepayment. The Company may, from time to time, prepay
-------------------
this Note in whole or in part.
6. Representations and Warranties. The Company represents and
------------------------------
warrants to the Holder that since February 4, 1997:
(a) Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of the State of
California and is in good standing under such laws. The Company has requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted. The Company is duly qualified to transact
business and is in good standing as a foreign corporation in each jurisdiction
in which failure to so qualify could have a material adverse effect on its
business, properties or financial condition.
(b) Corporate Power. The Company has all requisite legal and
corporate power to issue the Note, and to carry out and perform its obligations
under this Note.
(c) Authorization. All corporate action on the part of the Company,
its directors and its shareholders necessary for the authorization, sale,
issuance and delivery of this Note has been taken. This Note constitutes the
legal, valid and binding obligations of the Company, enforceable in accordance
with their respective terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
(d) Governmental Consents. No consent, approval, order, or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local, or provincial governmental authority on
the part of the Company is required in connection with the issuance of this
Note.
7. Replacement of Existing Note. This Note is being issued in
----------------------------
replacement of the note dated February 4, 1997 issued by the Company in favor of
the Holder in the face amount of $4,000,000.00 (the "Old Note"). Upon the
acceptance of this Note by the Holder, the Old Note shall be deemed paid in full
and terminated and of no further force and effect and the Company shall have no
further obligations thereunder notwithstanding Section 18 of the Old Note or any
other provision thereof to the contrary. The Company hereby agrees not to
contest the enforceability of this Note.
-4-
<PAGE>
8. Certain Covenants. While any amount is outstanding under the
-----------------
Note, without the prior written consent of the Holder:
(a) Liens. The Company shall not create, incur, assume or permit to
exist any Lien on or with respect to any of its assets or property of any
character, whether now owned or hereafter acquired, except for Permitted Liens
without the consent of the Majority in Interest, which shall not be unreasonably
withheld in the event that the Company grants the same collateral to the
Partners as security for the Company's obligations under their respective notes
or prepayment agreements.
(b) Information Rights; Notices. The Company shall furnish to the
Holder the following:
(i) Quarterly Financial Statements. Within forty-five (45) days
------------------------------
after the last day of each fiscal quarter of the Company, a copy of the
Financial Statements of the Company for such quarter, certified by the
chief financial officer or controller of the Company to present fairly the
financial condition, results of operations and other information presented
therein and to have been prepared in accordance with GAAP consistently
applied, subject to normal year end adjustments and except that no
footnotes need be included with such Financial Statements;
(ii) Annual Financial Statements. Within ninety (90) days after
---------------------------
the close of each fiscal year of the Company, (i) copies of the audited
Financial Statements of the Company for such year, audited by nationally or
regionally recognized independent certified public accountants, (ii) copies
of the opinions and management letters delivered by such accountants in
connection with such Financial Statements, and (iii) an annual budget of
the Company;
(iii) SEC Reports. As soon as possible and in no event later
-----------
than ten (10) Business Days after they are sent, made available or filed,
copies of all registration statements and reports filed by the Company with
the Securities and Exchange Commission and all reports, proxy statements
and financial statements sent or made available by the Company to its
shareholders generally;
(iv) Notice of Default. Promptly upon the occurrence thereof,
-----------------
written notice of the occurrence of any Event of Default hereunder or any
event of default with respect to any Senior Indebtedness; and
(v) Schedule of Indebtedness. Upon request by the Holder, the
------------------------
Company will provide a schedule of indebtedness within five business days.
(c) Semi-annual Consultation. No more than once every six months, the
Company will consult with and present to the Holder (or the Holder's
representative), information with respect to the Company's technology and
product achievements and a product road map. In this
-5-
<PAGE>
connection, Company will provide reasonable access to the technical employees
for consultation with such employees.
(d) Samples. The Company agrees to make available to Holder
engineering and early production samples when available; provided that the
Holder acknowledges that such samples are not commitments to specific production
of equivalent product; and provided further that the Holder will evaluate
samples in a timely manner.
(e) Fair Dealing. The Company shall use all reasonable endeavors to
allocate products among its customers fairly and in the event of shortages, on a
pro rata basis. In addition, the Company will not grant any allocation
preferences to any Person other than a Partner.
(f) Certain Exceptions. Notwithstanding anything herein to the
contrary, the Company shall not be required to provide any customer or supplier
specific information with respect to individual customers or products.
(g) Most Favored Nation Purchase Rights. The Company agrees to
provide the Holder with pricing on any product purchases made by Holder or any
third person on behalf of Holder at a 4% discount to the Company's "most favored
nation price" as reasonably determined by the Company on the basis of
substantially equivalent volume, technology and performance.
9. Events of Default. The occurrence of arty of the following shall
-----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents:
(a) Failure to Pay. The Company shall fail to pay when due any
principal or interest required under the terms of this Note on the date due and
such payment shall not have been made within thirty (30) days of the Company's
receipt of the Holder's written notice to the Company of such failure to pay; or
(b) Voluntary Bankruptcy or Insolvency Proceedings. The Company shall
(i) apply for or consent to the appointment of a receiver, trustee, liquidator
or custodian of itself or of all or a substantial part of its property, (ii) be
unable, or admit in writing its inability, to pay its debts generally as they
mature, (iii) make a general assignment for the benefit of its or any of its
creditors, (iv) be dissolved or liquidated, (v) commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or
(c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of the Company
or of all or a substantial part of the property thereof, or an involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to the Company or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order for
relief
-6-
<PAGE>
entered or such proceeding shall not be dismissed or discharged within sixty
(60) days of commencement.
10. Rights of Holder upon Default. Upon the occurrence and during the
-----------------------------
continuance of any Event of Default (other than an Event of Default, referred to
in Sections 9(b) and 9(c) but including, without limitation, any payment default
under Section 4), the Holder may, by written notice to the Company, declare all
outstanding principal and interest immediately due and payable, or may, as an
alternative to the foregoing if the Event of Default is failure to pay pursuant
to Section 3, require payment pursuant to Section 4 hereof. Upon the occurrence
or existence of any Event of Default described in Sections 9(b) and 9(c),
immediately and without notice, all outstanding principal and interest payable
by the Company hereunder shall automatically become immediately due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived, anything contained herein to the contrary
notwithstanding. In addition to the foregoing remedies, upon the occurrence or
existence of any Event of Default, the Holder may exercise any other right power
or remedy granted to it or otherwise permitted to it by law, either by suit in
equity or by action at law, or both.
11. Subordination. The indebtedness evidenced by this Note is hereby
-------------
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's Senior
Indebtedness.
(a) Insolvency Proceedings. If there shall occur any
----------------------
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation, or any other marshaling of the assets and
liabilities of the Company, (i) no amount shall be paid by the Company in
respect of the principal of, interest on or other mounts due with respect to
this Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full, and
(ii) no claim or proof of claim shall be filed with the Company by or on behalf
of the Holder of this Note which shall assert any right to receive any payments
in respect of the principal of and interest on this Note except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding.
(b) Default on Senior Indebtedness. If there shall occur an
------------------------------
event of default which has been declared in writing with respect to arty Senior
Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and the
Holder shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no cash payment shall be made in respect of the principal of
or interest on this Note, unless within one hundred eighty (180) days after the
happening of such event of default, the maturity of such Senior Indebtedness
shall not have been accelerated. Not more than one notice may be given to the
Holder pursuant to the terms of this Section 11 (b) during any 360 day period.
Nothing in this Section 11 (b) shall be construed to restrict the Company's
ability to honor the terms of any Purchase Agreement.
-7-
<PAGE>
(c) Further Assurances. By acceptance of this Note, the Holder agrees
------------------
to execute and deliver standard forms of subordination agreement requested from
time to time by holders of Senior Indebtedness, and as a condition to the
Holder's rights hereunder, the Company may require that the Holder execute such
forms of subordination agreement.
(d) Other Indebtedness. No indebtedness which does not constitute
------------------
Senior Indebtedness shall be senior in any respect to the indebtedness
represented by this Note.
(e) Subrogation. Subject to the payment in full of all Senior
-----------
Indebtedness, the Holder shall be subrogated to the rights of the holder(s) of
such Senior Indebtedness (to the extent of the payments or distributions made to
the holder(s) of such Senior Indebtedness pursuant to the provisions of this
Section 11) to receive payments and distributions of assets of the Company
applicable to the Senior Indebtedness. No such payments or distributions
applicable to the Senior Indebtedness shall, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by the Company to or on account of this Note; and for
purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness to which the Holder would be entitled except for the
provisions of this Section 11 shall, as between the Company and its creditors,
other than the holders of Senior Indebtedness and the Holder, be deemed to be a
payment by the Company to or on account of the Senior Indebtedness.
(f) Reliance of Holders of Senior Indebtedness. The Holder, by its
------------------------------------------
acceptance hereof, shall be deemed to acknowledge and agree that the foregoing
subordination provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.
12. Successors and Assigns. Subject to the restrictions on transfer
----------------------
described in Sections 13 below, the rights and obligations of the Company and
the Holder hereunder shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
13. Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified with a written instrument signed by the Company and the
Holder.
14. Assignment. Neither this Note nor any of the rights, interests or
----------
obligations hereunder may be assigned, by operation of law or otherwise, in
whole or in part, by the Company or Holder without the prior written consent of
the other party, except that the Company may assign its rights, interests and
obligations hereunder in connection with an assignment in whole to a successor
corporation to the Company; provided that such successor corporation acquires
all or substantially all of the Company's property and assets and the Holder's
rights hereunder are not impaired.
15. Notices. Any notice, request or other communication required or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Stock Purchase
-8-
<PAGE>
Agreement between Headway Holdings, Inc. and certain investors or on the
register maintained by the Company. Any party hereto may by notice so given
change its address for future notice hereunder. Notice shall conclusively be
deemed to have been given when received.
16. Default Rate; Usury. In the event that any payment of principal or
-------------------
interest provided for herein is not paid by the Company when due (including
the entire unpaid balance of this Note in the event such amount is made
immediately due and payable pursuant to the terms hereof and including any
unpaid balances due pursuant to Section 4 hereof), then the Company shall pay
interest on the such amounts not paid when due at a rate per annum equal to the
rate otherwise applicable hereunder plus two percent (2%). In the event any
interest is paid on this Note which is deemed to be in excess of the then legal
maximum rate, then that portion of the interest payment representing an amount
in excess of the then legal maximum rate shall be deemed a payment of principal
and applied against the principal of this Note.
17. Waivers. The Company hereby waives notice of default, presentment or
-------
demand for payment, protest or notice of nonpayment or dishonor and all other
notices or demands relative to this instrument.
18. Governing Law. This Note and all actions arising out of or in
-------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
19. Termination. This Note shall terminate upon the payment in full of
-----------
all principal and interest outstanding hereunder. Upon such termination, neither
the Company nor the Holder shall have any rights, obligations or liabilities
hereunder. Upon such termination, neither the Company nor the Holder shall have
any rights, obligations or liabilities hereunder; provided that the Company's
obligation under Sections 8(c), (d), (e) and (g) hereof shall survive until the
later to occur of (a) one year after such termination date, or (b) June 30,
2000.
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be issued as
of the date first written above.
HEADWAY TECHNOLOGIES, INC.
By /s/ Thomas A. Surrow
--------------------
Name: Thomas A. Surrow
Title: Chief Financial Officer
Acknowledged and Agreed:
MAXTOR CORPORATION
By /s/ Glenn H. Stevens
--------------------
Name: Glenn H. Stevens
Title: Vice President, General
Counsel and Secretary
-10-
<PAGE>
EXHIBIT A - MILESTONES
<TABLE>
<CAPTION>
Qty ECD
-------- --------
<S> <C> <C>
Gen 1 - intended as a first look only, not likely to meet Orion requirements
Headway to supply functional HGA @ 1.u" FHT 10 sets 11/23/98
Feedback to Headway Electrical performance 12/2/98
Gen 2 - should come close to meeting Orion requirements
Headway to supply functional HGA @ 1.u" FHT w/improvements requested from 60 sets 2/1/99
Gen 1 w/ Maxtor AB
Feedback to Headway Electrical performance 2/8/99
Drive Build Feedback 2/15/99
Headway to begin GMR Lifetime tests 2/1/99
Orion Head / Media Qual
Headway to supply functional HGA @ 1.0 u" FHT w/improvements requested from 700 sets 3/1/99
Gen 2
Maxtor to populate Orion Head / Media Qualification tests 3/8/99
Maxtor to start standards and correlation activity 3/8/99
Maxtor to complete Orion Head / Media Qualification tests 4/23/99
</TABLE>
-11-
<PAGE>
Exhibit 10.14
License Reference No: L993657
073099
LICENSE AGREEMENT ("Agreement") dated July 30, 1999 ("Agreement Date")
between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation
("IBM"), and HEADWAY TECHNOLOGIES, INC., a California corporation ("HEADWAY").
Each of the parties (as "Grantee") desires to acquire a nonexclusive
license under patents of the other party (as "Grantor"). In consideration of the
premises and mutual covenants herein contained, IBM and HEADWAY agree as
follows:
Section 1. Definitions
-----------
1.1 "Information Handling System" shall mean any instrumentality or aggregate
of instrumentalities primarily designed to compute, classify, process, transmit,
receive, retrieve, originate, switch, store, display, manifest, measure, detect,
record, reproduce, handle or utilize any form of information, intelligence or
data for business, scientific, control or other purposes.
1.2 "IHS Product" shall mean an Information Handling System or any
instrumentality or aggregate of instrumentalities (including, without
limitation, any component, subassembly, computer program or supply) designed for
incorporation in an Information Handling System. Any instrumentality or
aggregate of instrumentalities primarily designed for use in the fabrication
(including testing) of an IHS Product licensed herein shall not be considered to
be an IHS Product.
1.3 "Licensed Patents" shall mean either IBM Licensed Patents or HEADWAY
Licensed Patents as the context indicates.
1.4 "HEADWAY Licensed Patents" shall mean all patents, including utility models
and typeface design patents and registrations (but not including any other
design patents or registrations):
(a) issued or issuing on patent applications entitled to an effective filing
date on or before December 31, 2002; and
(b) under which patents or the applications therefor HEADWAY or any of its
Subsidiaries has as of the Agreement Date, or thereafter obtains, the right
to grant licenses to IBM of or within the scope granted herein without such
grant or the exercise of rights thereunder resulting in the payment of
royalties or other consideration by HEADWAY or its
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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<PAGE>
Subsidiaries to third parties (except for payments among HEADWAY and its
Subsidiaries, and payments to third parties for inventions made by said
third parties while employed by HEADWAY or any of its Subsidiaries).
HEADWAY Licensed Patents shall include said patent applications, continuations-
in-part of said patent applications, and any patents reissuing on any of the
aforesaid patents.
1.5 "IBM Patents" shall mean all patents, including utility models and typeface
design patents and registrations (but not including any other design patents or
registrations).
(a) issued or issuing on patent applications entitled to an effective filing
date on or before December 31, 2002; and
(b) under which patents or the applications therefor IBM or any of its
Subsidiaries has as of the Agreement Date, or thereafter obtains, the right
to grant licenses to HEADWAY of or within the scope granted herein without
such grant or the exercise of rights thereunder resulting in the payment of
royalties or other consideration by IBM or its Subsidiaries to third
parties (except for payments among IBM and its Subsidiaries, and payments
to third parties for inventions made by said third parties while employed
by IBM or any of its Subsidiaries).
IBM Patents shall include said patent applications, continuations-in-part of
said patent applications, and any patents reissuing on any of the aforesaid
patents.
1.6 "IBM Licensed Patents" shall mean up to, but not exceeding, eleven (11) IBM
Patents designated as IBM Licensed Patents in writing by HEADWAY to IBM on or
before March 31, 2003. HEADWAY's designation of a particular IBM Patent as an
IBM Licensed Patent pursuant to this Section 1.6 shall be irrevocable.
1.7 "IBM Licensed Products" shall mean IHS Products.
1.8 "Magnetic Transducer" shall mean a magnetic transducing unit (with or
without a Slider) primarily designed for reading, writing or erasing information
on, in or from a Magnetic Disk by transducing certain magnetic characteristics
of such disk to electrical signals, or vice versa, which characteristics and
signals are indicative of such information. Magnetic Transducer shall not
include apparatus designed for magneto-optical or optical recording. A Magnetic
Transducer is an IHS Product.
2
<PAGE>
1.9 "Slider" shall mean a structure primarily designed for supporting one or
more Magnetic Transducers in a transducing relationship with a moving Magnetic
Disk by having a surface maintained in contact with a surface of such moving
Magnetic Disk or in combination with the fluid flow generated by the movement of
such moving Magnetic Disk in close proximity above the surface a such moving
Magnetic Disk.
1.10 "Magnetic Disk" shall mean a platter-like rigid element having a magnetic
material coated or plated on or otherwise deposited on, or incorporated in, one
or both planar surfaces of said element and primarily designed for magnetically
storing digital information recorded thereon or reproduced therefrom while said
element is rotating. Magnetic Disk does not include a magnetic disk designed
primarily for magneto-optically storing digital information recorded thereon or
reproduced therefrom.
1.11 "Head Gimbal Assembly" shall mean the combination of a Suspension and at
least one Magnetic Transducer (with or without a Slider), wherein the Magnetic
Transducer is interconnected with and supported by said Suspension in a manner
allowing some degree of movement of the Magnetic Transducer about one or more
orthogonal axes of rotation of the Suspension and movement of the Suspension in
a plane perpendicular to the recording surface of a Magnetic Disk.
1.12 "Suspension" shall mean a cantilever member which is used for supporting
one or more Magnetic Transducers, wherein the cantilever member is located
between said transducer (with or without a Slider) and a supporting member
(typically an actuator or actuator arm) and includes any electrical leads
attached thereto or incorporated therein. Suspension does not include the
Slider, the Magnetic Transducer, the supporting member, the actuator, the
actuator arm and/or the Arm Electrical Components.
1.13 "Arm Electrical Components" shall mean electrical devices or elements and
combinations thereof, other than the electrical leads on the Suspension, which
devices, elements or combinations are attached to, connected to and/or
incorporated in the Suspension, actuator or actuator arm.
1.14 "Authorized Assembler" shall mean a third party that, pursuant to a
written contract with a Grantee, assembles Grantee's Licensed Products, in
accordance with written
3
<PAGE>
specifications provided by said Grantee, for sale under Grantee's brand name.
1.15 "Subsidiary" of a party hereto or of a third party shall mean a
corporation, company or other entity:
(a) more than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, now or hereafter, owned or controlled, directly or
indirectly, by a party hereto or such third party, but such corporation,
company or other entity shall be deemed to be a Subsidiary only so long as
such ownership or control exists; or
(b) which does not have outstanding shares or securities, as may be the case in
a partnership, joint venture or unincorporated association, but more than
fifty percent (50%) of whose ownership interest representing the right to
make the decisions for such corporation, company or other entity is now or
hereafter, owned or controlled, directly or indirectly, by a party hereto
or such third party, but such corporation, company or other entity shall be
deemed to be a Subsidiary only so long as such ownership or control exists.
1.16 "Effective Date" shall mean February 4, 1997.
Section 2. Grants of Rights
----------------
2.1 HEADWAY, on behalf of itself and its Subsidiaries grants to IBM, a
nonexclusive, fully paid up, worldwide license under the HEADWAY Licensed
Patents.
(a) to make (including the right to use any apparatus and practice any method
in making), use, import, offer for sale, lease, sell and/or otherwise
transfer IBM Licensed Products; and
(b) to have IBM Licensed Products made by another manufacturer for the use,
importation, offer for sale, lease, sale and/or other transfer by IBM only
when the conditions set forth in Section 2.2 are met.
A particular IBM Licensed Product shall be licensed under only those of
HEADWAY's Licensed Patents which, but for the license granted herein, would be
infringed (including contributory infringement) by IBM's making, using,
importing, offering for sale, leasing, selling and/or otherwise transferring
such product.
2.2 The license granted in Section 2.1(b) to IBM to have products made by
another manufacturer:
4
<PAGE>
(a) shall only apply to products sold to IBM after the Agreement Date;
(b) shall only apply when the specifications for such IBM Licensed Products
were created by IBM (either solely or jointly with one or more third
parties);
(c) shall only be under claims of HEADWAY Licensed Patents, the infringement of
which would be necessitated by compliance with such specifications; and
(d) shall not apply to (i) any methods used, or (ii) any products in the form
manufactured or marketed, by said other manufacturer prior to IBM's
furnishing of said specifications.
Unless IBM informs HEADWAY to the contrary, IBM shall be deemed to have
authorized said other manufacturer to make IBM Licensed Products under the
license granted to IBM in Section 2.1 when the conditions specified in this
Section 2.2 are fulfilled. In response to a written request identifying a
product and a manufacturer, IBM shall in a timely manner inform HEADWAY of the
quantity of such product, if any, manufactured by such manufacturer pursuant to
the license granted in Section 2.1(b).
2.3 IBM, on behalf of itself and its Subsidiaries grants to HEADWAY, a
nonexclusive and worldwide license under the IBM Licensed Patents.
(a) to make (including the right to use any apparatus and practice any method
in making), use, import, offer for sale, lease, sell and/or otherwise
transfer Magnetic Transducers and Head Gimbal Assemblies;
and
(b) to have Magnetic Transducers and Head Gimbal Assemblies made by another
manufacturer for the use, importation, offer for sale, lease, sale and/or
other transfer by HEADWAY only when the conditions set forth in Section 2.4
are met.
A particular Magnetic Transducer or Head Gimbal Assembly shall be licensed under
only those claims of the IBM Licensed Patents which, but for the license granted
herein, would be infringed(including contributory infringement) by HEADWAY' s
making, using, importing, offering for sale, leasing, selling and/or otherwise
transferring such Magnetic Transducer and Head Gimbal Assembly. The license
granted in this Section 2.3 to make and have made Head Gimbal Assemblies shall
not include making or having made Suspensions or Arm Electrical Components.
The license granted by IBM to HEADWAY hereunder shall become fully paid up upon
receipt by IBM of all payments required under Section 4.
5
<PAGE>
2.4 The license granted in Section 2.3 to HEADWAY to have Magnetic Transducers
and Head Gimbal Assemblies made by another manufacturer:
(a) shall only apply to Magnetic Transducers and Head Gimbal Assemblies sold to
HEADWAY after the Agreement Date;
(b) shall only apply when the specifications for such Magnetic Transducers and
Head Gimbal Assemblies were created by HEADWAY (either solely or jointly
with one or more third parties);
(c) shall only be under claims of IBM Licensed Patents, the infringement of
which would be necessitated by compliance with such specifications; and
(d) shall not apply to (i) any methods used, or (ii) any products in the form
manufactured or marketed, by said other manufacturer prior to HEADWAY's
furnishing of said specifications.
Unless HEADWAY informs IBM to the contrary, HEADWAY shall be deemed to have
authorized said other manufacturer to make Magnetic Transducers and Head Gimbal
Assemblies under the license granted to HEADWAY in Section 2.3 when the
conditions specified in this Section 2.4 are fulfilled. In response to a written
request identifying a product and a manufacturer, HEADWAY shall in a timely
manner inform IBM of the quantity of such Magnetic Transducers and Head Gimbal
Assemblies, if any, manufactured by such manufacturer pursuant to the license
granted in Section 2.3.
2.5 Except as expressly provided herein, no license or immunity is granted
under this Agreement by either party, either directly or by implication,
estoppel or otherwise to any third parties acquiring items from either party for
the combination of such acquired items with other items (including items
acquired from either party hereto) or for the use of such combination even if
such items have no substantial use other than as part of such a combination.
2.6 Subject to Section 2.7, the licenses granted herein shall include the right
of each party to grant sublicenses to its Subsidiaries existing on or after the
Agreement Date, which sublicenses may include the right of sublicensed
Subsidiaries to sublicense other Subsidiaries of said party. No sublicense shall
be broader in any respect at any time during the life of this Agreement than the
license held at that time by the party that granted the sublicense.
6
<PAGE>
2.7 A sublicense granted to a Subsidiary shall terminate on the earlier of:
(a) the date such Subsidiary ceases to be a Subsidiary; and
(b) the date of termination or expiration of the license of the party or
Subsidiary that granted the sublicense.
If a Subsidiary ceases to be a Subsidiary and holds any patents under which a
party hereto is licensed, such license shall continue for the term defined
herein.
2.8 In the event that neither a party nor any of its Subsidiaries has the right
to grant a license under any particular Licensed Patent of the scope set forth
in Section 2, then the license granted herein under said Licensed Patent shall
be of the broadest scope which said party or any of its Subsidiaries has the
right to grant within the scope set forth above.
2.9 If, after the Agreement Date, a party or any of its Subsidiaries
("Acquiring Party") either acquires an entity or acquires substantially all of
the assets from an entity, and said entity is, as of the date of acquisition,
licensed by the other party ("Licensor") under one or more Licensed Patents
through an existing agreement pursuant to which royalties or other payments are
made by said entity to Licensor, then the license and other rights granted
herein to the Acquiring Party with respect to said Licensed Patents shall apply
to products manufactured by said entity or through the use of said assets,
provided that such royalties or other payments shall continue to be made by the
Acquiring Party or said entity to the Licensor with respect to such products
notwithstanding that the Acquiring Party may have been licensed for the same
products before the acquisition.
2.10 If one party (the "Transferring Party") transfers a product line after the
Agreement Date, either as part of or separate from a disposition of a Subsidiary
to any third party, and if such transfer includes at least one marketable
product and tangible assets having a net value of at least twenty-five million
US dollars ($25,000,000.00), then after written request to the other party
hereto jointly by the Transferring Party and such third party within sixty (60)
days following the transfer, the other party hereto agrees to grant a royalty-
free license (under the same terms as the license granted to the Transferring
Party herein) under its Licensed Patents for the field (as defined between the
Transferring Party and the other party) of such product line to the ex-
Subsidiary in the case of a
7
<PAGE>
disposition of a Subsidiary, or to such third party if not such a disposition,
(each referred to as the "Recipient") provided that:
(a) such field shall not: be defined more broadly than appropriate to cover the
particular product line being transferred, including extensions thereto
based on the same technology;
(b) the license granted shall be limited in the twelve (12) months immediately
following such transfer to a volume of licensed products having an
aggregate selling price equal to no more than the aggregate selling prices
of such products by said one party in the twelve (12) months preceding such
transfer plus ten percent (10%); and shall be limited, in each of the
successive twelve-month periods following such transfer, to a volume of
licensed products having an aggregate selling price equal to no more than
the limit for the immediately preceding twelve-month period plus ten
percent (10%);
(c) the Recipient shall grant to such other party a royalty-free license (under
the same terms as the license granted to such other party herein) under all
Recipient Patents for all products licensed herein to such other party on
the date of the product line transfer. "Recipient Patents" shall mean all
patents throughout the world under which, at any time commencing with the
date of the product line transfer, the Recipient or any of its Subsidiaries
has the right to grant such licenses; and
(d) this Section 2.8, Section 3, and Section 4 shall be omitted from the
license granted to the Recipient.
2.11 A product which, if assembled by Grantee, would be licensed to Grantee
hereunder shall also be licensed hereunder if assembled by an Authorized
Assembler, provided:
(a) the purchase price paid to Grantee for items included in the product
exceeds * percent (*) of the total cost of manufacturing and/or purchasing
all of the items included in the product; and
(b) the product is sold under Guantee's brand name.
Section 3. Releases
--------
3.1 Each party (as "Releasor") on behalf of itself and its Subsidiaries which
are Subsidiaries on the Agreement Date, irrevocably releases the other party,
its Subsidiaries which are Subsidiaries on the Agreement Date and its and their
respective customers from any and all claims of infringement of Releasor's
Licensed Patents which claims are based on acts prior to the
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
8
<PAGE>
Effective Date, which, had they been performed after the Effective Date would
have been licensed under this Agreement.
The release contained herein shall not apply to any person other than the
persons named in this Section 3 and shall not apply to the manufacture of any
items by any person other than the parties and their Subsidiaries. The release
granted by HEADWAY to IBM is effective immediately. The release granted by IBM
to HEADWAY shall become effective upon receipt of all payments specified in
Section 4.
Section 4. Payment
-------
4.1.1 As partial consideration for the license, release, and other rights
granted by IBM herein, HEADWAY shall pay to IBM the total sum of * U.S. dollars
*, payable in installments as follows:
(a) * U.S. dollars
(*) within 30 days after execution of this agreement by both parties;
(b) * U.S. dollars (*) on or before August 1, 2000;
(c) * U.S. dollars (*) on or before August 1, 2001:
(d) * U.S. dollars on or before August 1, 2002: and
(e) * U.S. dollars * on or before December 1, 2002.
4.1.2 The payments specified in Section 4.1.1 are based on a projected
cumulative gross revenue less than or equal to one billion five hundred million
U.S. dollars ($1,500,000,000.00)(such amount to be referred to hereafter as
the "Revenue Cap") during the period commencing with the Effective Date to and
including December 31, 2001 (the "Period"), from the sale, lease or other
transfer by HEADWAY of Magnetic Transducers and Head Gimbal Assemblies on which
royalties would be due if HEADWAY were paying on a royalty bearing basis.
HEADWAY shall notify IBM in writing: within 30 days after execution of this
Agreement by both parties, the actual gross revenue for the period commencing
with the Effective Date to and including December 31, 1998; and by January 31 in
2000, 2001, and 2002, the actual gross revenue ("AGR") for the immediately
preceding calendar year. Upon IBM's written request, HEADWAY shall permit IBM
and/or IBM's designee to examine HEADWAY's records and other materials for the
purpose of verifying such AGR.
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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<PAGE>
If the actual cumulative gross revenue ("ACGR") exceeds the Revenue Cap during
the Period, HEADWAY shall pay IBM, in addition to the amounts owed under Section
4.1.1:
(a) for the year during the Period in which ACGR first exceeded the Revenue
Cap, no later than January 31 of the following year, a supplemental royalty
payment ("SRP1") computed as follows:
SRP1 = * x (ACGR1 - Revenue Cap)/* ,
where ACGR1 is the ACGR as of December 31 of the year in which ACGR first
exceeded the Revenue Cap; and
(b) for each successive year during the Period, no later than January 31 of the
year following such successive year, a supplemental royalty payment ("SRP")
computed as follows:
SRP = * x (the AGR for such successive year)/* .
4.2 HEADWAY shall be liable for interest on any overdue payment required to be
made pursuant to Section 4, commencing on the date such payment becomes due, at
an annual rate which is the greater of * percent (* %) or * percentage points
* than the prime interest rate as quoted by the head office of Citibank N.A.,
New York, at the close of banking on such date, or on the first business day
thereafter if such date falls on a non-business day. If such interest rate
exceeds the maximum legal rate in the jurisdiction where a claim therefor is
being asserted, the interest rate shall be reduced to such maximum legal rate.
4.3 If an installment payment set forth in Section 4.1.1, or a supplemental
payment set forth in Section 4.1.2, is not made by its due date, and if such
payment, plus interest pursuant to Section 4.2, is not made prior to fifteen
(15) days after such due date, then, at IBM's sole option, either:
(a) all of the above installment payments that have not been paid shall
automatically become due and payable in full on the fifteenth day after IBM
sends written notice of its election to accelerate the remaining payments;
or
(b) all licenses and other rights granted herein to HEADWAY shall automatically
terminate on the fifteenth day after IBM sends written notice of its
election to terminate HEADWAY's rights. In such event, HEADWAY shall remain
obligated to
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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<PAGE>
pay all installments which had become due prior to such notice (plus
interest thereon as provided in Section 4.2).
4.4 As additional consideration for the license, release and other rights
granted by IBM herein, HEADWAY grants to IBM and its Subsidiaries, pursuant to
the Technology Transfer Agreement No. L993658 between International Business
Machines Corporation and Headway Technology, Inc., a non-exclusive, worldwide
license and other rights with respect to certain technology licensable by
HEADWAY, as described in such agreement.
Section 5. Term of Agreement; Acquisition of a Party
-----------------------------------------
5.1 The term of the licenses granted under this Agreement shall be from the
Effective Date until the last to expire of the Licensed Patents, unless earlier
terminated under the provisions of this Agreement.
5.2 IBM shall have the right to terminate the license and any other rights
granted to HEADWAY granted under this Agreement if HEADWAY fails at any time to
make any payment required herein, and if HEADWAY does not cure such failure
(including the payment of any interest) within sixty (60) days after written
notice from IBM to HEADWAY specifying the nature of such failure.
5.3 If one party (the "Acquired Party") is acquired by a third party, becoming
a Subsidiary of such third party.
(a) the Acquired Party shall promptly give notice of such acquisition to the
other party; and
(b) the license granted to the Acquired Party and all sublicenses (if any)
granted to the Acquired Party's remaining Subsidiaries shall automatically
become limited to only products identical ("identical" products do not
include improvements, enhancements, substitutions, extensions, new
releases, new versions, or follow-ons) with those manufactured and marketed
by said Acquired Party (or, in the case of a Subsidiary, by such
Subsidiary) within the licenses granted in this Agreement (or in such
sublicense) prior to such acquisition.
5.4 If one party (the "Acquired Party") is acquired by a third party such that
it is no longer a separate legal entity, the license granted to the Acquired
Party shall terminate as of the date of acquisition. The Acquired Party shall
require, as a condition precedent to the acquisition, that the third party pay
11
<PAGE>
to the other party the next payment which would become due under this Agreement
after said date, if any.
Section 6. Means of Payment and Communication
----------------------------------
6.1 Payment shall be made by electronic funds transfer. Payments shall be
deemed to be made on the date credited to the following account.
IBM, Director of Licensing
The Bank of New York
1 Wall Street
New York, New York 10286
United States of America
Credit Account No. 890-0209-674
ABA No. 0210-0001-8
6.2 Notices and other communications shall be sent by facsimile or by
registered or certified mail to the following addresses and shall be effective
upon mailing-
For IBM: For HEADWAY:
Director of Licensing Headway Technologies, Inc.
IBM Corporation Chief Financial Officer
500 Columbus Avenue 678 South Hillview Avenue
Thornwood, New York 10594 Milpitas, CA 95035
Facsimile: (914) 742-6737 Facsimile: (408) 934-5474
6.3 All payments and correspondence shall reference the License Reference No.
set forth above.
Section 7. Miscellaneous
-------------
7.1 Neither party shall assign or grant any right under any of its Licensed
Patents unless such assignment or grant is made subject to the terms of this
Agreement.
7.2 Neither party shall assign any of its rights (other than the right to
receive payments) or delegate any of its obligations under this Agreement. Any
attempt to do so shall be void. However, a party which undergoes reorganization
may assign such rights and delegate such obligations to its legal successor,
provided that after the reorganization, the successor and its Subsidiaries will
have essentially the same assets as such party and its Subsidiaries had prior to
the reorganization.
7.3 Neither party shall use or refer to this Agreement or any of its provisions
in any promotional activity.
12
<PAGE>
7.4 Each party represents and warrants that it has the full right and power to
grant the license and release set forth in Sections 2 and 3. Each party (as a
Grantor) further represents and warrants that prior to the Agreement Date, it
has informed the other party of any patent originating from inventions made by
employees of Grantor or its Subsidiaries, which patent is or was owned by
Grantor or its Subsidiaries as of the Effective Date, and which patent, owing to
prior arrangements with third parties, does not qualify as a Licensed Patent of
Grantor under which licenses are or may be granted in Section 2. A listing of
such patents owned by IBM is attached as Attachment A. Neither party makes any
other representation or warranty, express or implied, nor shall either party
have any liability in respect of any infringement of patents or other rights of
third parties due to the other party's operation under the license herein
granted.
7.5 Nothing contained in this Agreement shall be construed as conferring any
rights by implication, estoppel or otherwise, under any non-patent intellectual
property right, or any patents or patent applications, other than the Licensed
Patents. Neither party is required hereunder to furnish or disclose to the other
any technical or other information (including copies of Licensed Patents) except
as specifically provided herein.
7.6 Neither party shall have any obligation hereunder to institute any action
or suit against third parties for infringement of any of its Licensed Patents or
to defend any action or suit brought by a third party which challenges or
concerns the validity of any of its Licensed Patents. Neither party shall have
any right to institute any action or suit against third parties for infringement
of any of the other party's Licensed Patents. Neither party, nor any of its
Subsidiaries, is required to file any patent application, or to secure any
patent or patent rights, or to maintain any patent in force.
7.7 Each party shall, upon a request from the other party sufficiently
identifying any patent or patent application, inform the other party as to the
extent to which said patent or patent application is subject to the licenses and
other rights granted hereunder. If such licenses or other rights under said
patent or patent application are restricted in scope, copies of all pertinent
provisions of any contract or other arrangement creating such restrictions
shall, upon request, be furnished to the party making such request, unless such
disclosure is
13
<PAGE>
prevented by such contract, and in such event, a statement of the nature of such
restriction shall be provided.
7.8 If a third party has the right to grant licenses under a patent to a party
hereto (as a "Licensee") with the consent of the other party hereto, said other
party shall provide said third party with any consent required to enable said
third party to license said Licensee on whatever terms such third party may deem
appropriate. Each party hereby waives any right it may have to receive royalties
or other consideration from said third party as a result of said third party's
so licensing said Licensee within the scope of the licenses granted under
Section 2 of this Agreement.
7.9 This Agreement shall not be binding upon the parties until it has been
signed hereinbelow by or on behalf of each party. No amendment or modification
hereof shall be valid or binding upon the parties unless made in writing and
signed as aforesaid, except that IBM may amend Section 6.1 and either party may
amend its address in Section 6.2 by written notice to the other party.
7.10 If any section of this Agreement is found by competent authority to be
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of such section in every other respect and the
remainder of this Agreement shall continue in effect so long as the Agreement
still expresses the intent of the parties. However, if the intent of the parties
cannot be preserved, this Agreement shall be either renegotiated or terminated.
7.11 This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined, in accordance with the law of the State of
New York, USA, as such law applies to contracts signed and fully performed in
New York.
7.12 The headings of sections are inserted for convenience of reference only
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement.
7.13 Until January 1, 2003, each party agrees not to disclose this Agreement to
any third party (other than its Subsidiaries) without the prior written consent
of the other party. This obligation is subject to the following exceptions-
(a) disclosure is permissible if required by government or court order,
provided the party required to disclose first gives
14
<PAGE>
the other prior written notice to enable it to seek a protective order;
(b) disclosure is permissible if otherwise required by law;
(c) disclosure is permissible if required to enforce rights under this
Agreement;
(d) each party may use similar terms and conditions in other agreements; and
(e) each party may disclose this Agreement or its contents to the extent
reasonably necessary, on a confidential basis, to its accountants,
attorneys, financial advisors, its present or future providers of venture
capital and/or potential investors in or acquirers of such party or product
lines which qualify under Section 2.8.
The nondisclosure obligation shall be satisfied by a party if it treats this
Agreement in the same manner as it treats its other similar contracts.
This Agreement and its attachments embody the entire understanding of the
parties with respect to the Licensed Patents, and replaces any prior oral or
written communications between them.
Agreed to: Agreed to.
HEADWAY TECHNOLOGIES, INC. INTERNATIONAL BUSINESS
MACHINES CORPORATION
By: /s/ T. A. Surran By: /s/ M. C. Phelps
-------------------------- ----------------------
T. A. Surran M. C. Phelps, Jr.
Chief Financial Officer Vice President
Date: 8/3/99 Date: 7/30/99
----------------------- ------------------
15
<PAGE>
ATTACHMENT A
Non-Licensed Patents
PATENTS OWNED BY IBM WHICH ARE NOT LICENSED PATENTS
PATENT NUMBER TITLE
------------- -----
U.S. 4,933,889 Method for fine decomposition in finite
element mesh generation
5,125,038 Face and edge trim method for an automatic
mesh generation system
5,214,752 Point placement method for use in a
three-dimensional automatic mesh generation system
5,487,120 Optical wavelength division multiplexer for
high speed, protocol-independent serial data
sources
5,553,206 Method and system for producing mesh
representations of objects
5,522,019 Methods and apparatus for efficiently
generating isosurfaces and for displaying
isosurfaces and surface contour line image
data
5,553,009 Parallel method for subdivision of arbitrary
curved solids
5,402,801 System and Method for Augmentation of Surgery
5,630,431 System and Method for Augmentation of Surgery
5,417,210 System and Method for Augmentation of
Endoscopic Surgery
5,572,999 Robotic System for Positioning a Surgical
Instrument Relative to a Patient's Body
5,397,323 Remote Center-of-Motion Robot for Surgery
5,343,385 Interference-Free Insertion of a Solid Body
Into a Cavity
5,279,309 Signalling Device and Method for Monitoring
Positions in a Surgical Operation
5,445,166 System for Advising a Surgeon
5,695,500 System for Manipulating Movement of a
Surgical Instrument with Computer Controlled
Brake
16
<PAGE>
5,086,401 Image-Directed Robotic System for Precise
Robotic Surgery Including Redundant
Consistency Checking
5,299,288 Image-Directed Robotic System for Precise
Robotic Surgery Including Redundant
Consistency Checking
5,408,409 Image-Directed Robotic System for Precise
Robotic Surgery Including Redundant
Consistency Checking
and all continuations (including continuations in part), divisions, reissues and
foreign counterparts thereof.
17
<PAGE>
Exhibit 10.15
HEADWAY TECHNOLOGIES, INC.
1997 STOCK OPTION PLAN
(as amended, August 1999)
1. Establishment, Purpose and Term of Plan.
---------------------------------------
1.1 Establishment. The Headway Technologies, Inc. 1997 Stock Option
-------------
Plan (the "Plan") is hereby established effective as of, 1997.
1.2 Purpose. The purpose of the Plan is to advance the interests of
-------
the Participating Company Group and its stockholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 Term of Plan. The Plan shall continue in effect until the earlier
------------
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if
at all, within ten (10) years from the earlier of the date the Plan is adopted
by the Board or the date the Plan is duly approved by the stockholders of the
Company.
2. Definitions and Construction.
----------------------------
2.1 Definitions. Whenever used herein, the following terms shall have
-----------
their respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "Code" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
(c) "Committee" means the Compensation Committee or other committee
of the Board duly appointed to administer the Plan and having such powers as
shall be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.
(d) "Company" means Headway Technologies, Inc., a Delaware
corporation, or any successor corporation thereto.
<PAGE>
(e) "Consultant" means any person, including an advisor, engaged by
a Participating Company to render services to such entity other than as an
Employee or Director.
(f) "Director" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "Disability" means the inability of the Optionee, in the opinion
of a qualified physician acceptable to the Company, to perform the major duties
of the Optionee's position with the Participating Company Group because of the
sickness or injury of the Optionee.
(h) "Employee" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means, as of any date, the value of a share
of Stock or other property as determined by the Board, in its sole discretion,
or by the Company, in its sole discretion, if such determination is expressly
allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the Stock,
the Fair Market Value of a share of Stock shall be the closing sale price of a
share of Stock (or the mean of the closing bid and asked prices of a share of
Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable for the day prior to the date of determination. If the
relevant date does not fall on a day on which the Stock has traded on such
securities exchange or market system, the date on which the Fair Market Value
shall be established shall be the last day on which the Stock was so traded
prior to the relevant date, or such other appropriate day as shall be determined
by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the Stock,
the Fair Market Value of a share of Stock shall be as determined by the Board
without regard to any restriction other than a restriction which, by its terms,
will never lapse.
(k) "Incentive Stock Option" means an Option intended to be (as set
forth in the Option Agreement) and which qualifies as an incentive stock option
within the meaning of Section 422(b) of the Code.
(l) "Insider" means an officer or a Director of the Company or any
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(m) "Nonstatutory Stock Option" means an Option not intended to be
(as set forth in the Option Agreement) or which does not qualify as an Incentive
Stock Option.
-2-
<PAGE>
(n) "Option" means a right to purchase Stock (subject to adjustment
as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An
Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.
(o) "Option Agreement" means a written agreement between the Company
and an Optionee setting forth the terms, conditions and restrictions of the
Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "Optionee" means a person who has been granted one or more
Options.
(q) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "Participating Company Group" means, at any point in time, all
corporations collectively which are then Participating Companies.
(t) "Permanent Disability" means the permanent and total disability
of the Optionee within the meaning of Section 22(e)(3) of the Code.
(u) "Rule 16b-3" means Rule 16b-3 under the Exchange Act, as amended
from time to time, or any successor rule or regulation.
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Service" means an Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, an Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence of more than a month shall
not be treated as Service for purposes of determining vesting under the
Optionee's Option Agreement. The Optionee's Service shall be deemed to have
terminated either upon an actual termination of Service or upon the corporation
for which the Optionee performs Service ceasing to be a Participating Company.
Subject to the foregoing, the Company, in its sole discretion, shall determine
whether the Optionee's Service has terminated and the effective date of such
termination.
-3-
<PAGE>
(x) "Stock" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(y) "Subsidiary Corporation" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
(z) "Ten Percent Owner Optionee" means an Optionee who, at the time
an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 Construction. Captions and titles contained herein are for
------------
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. Administration.
--------------
3.1 Procedure.
---------
(a) Multiple Administrative Bodies. The Plan shall be administered
------------------------------
by (A) the Board or (B) a Committee, which committee shall be constituted to
satisfy applicable laws and may be administered by different Committees with
respect to different groups of Employees, Consultants and Directors.
(b) Section 162(m). To the extent that the Board determines it to
--------------
be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(c) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
3.2 Powers of the Board. In addition to any other powers set forth in
-------------------
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or Nonstatutory
Stock Options;
-4-
<PAGE>
(c) to determine the Fair Market Value of shares of Stock or other
property;
(d) to determine the terms, conditions and restrictions applicable
to each Option (which need not be identical) and any shares acquired upon the
exercise thereof, including, without limitation, (i) the exercise price of the
Option, (ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to amend the exercisability of any Option or the vesting of any
shares acquired upon the exercise thereof, including with respect to the period
following an Optionee's termination of Service with the Participating Company
Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt subversions, of the Plan, including, without
limitation, as the Board deems necessary or desirable to comply with the laws
of, or to accommodate the tax policy or custom of, foreign jurisdictions whose
citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. Shares Subject to Plan.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
---------------------------------
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be [9,480,000] plus an annual increase to be
added each year on the date of the annual stockholders meeting equal to the
lesser of (i) four percent (4%) of the outstanding Shares on such date (ii)
1,500,000 shares or (iii) an amount determined by the Board, and shall consist
of authorized but unissued or reacquired shares of Stock or any combination
thereof. If an outstanding Option for any reason expires or is terminated or
canceled, or if shares of Stock acquired, subject to repurchase, upon the
exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option or such repurchased shares
of Stock shall again be available for issuance under the Plan.
-5-
<PAGE>
4.2 Adjustments for Changes in Capital Structure. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company
effected without receipt of consideration by the Company, appropriate
adjustments shall be made in the number and class of shares subject to the Plan
and to any outstanding Options and in the exercise price per share of any
outstanding Options. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or
down to the nearest whole number, as determined by the Board, and in no event
may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined
by the Board pursuant to this Section 4.2 shall be final, binding and
conclusive.
5. Eligibility and Option Limitations.
----------------------------------
5.1 Persons Eligible for Options. Options may be granted only to
----------------------------
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees," "Consultants" and "Directors" shall include prospective Employees,
prospective Consultants and prospective Directors to whom Options are granted in
connection with written offers of employment or other service relationship with
the Participating Company Group. Eligible persons may be granted more than one
(1) Option.
5.2 Option Grant Restrictions. Any person who is not an Employee on the
-------------------------
effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.3 Fair Market Value Limitation. To the extent that options designated
----------------------------
as Incentive Stock Options (granted under all stock option plans of the
Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having an
aggregate Fair Market Value greater than One Hundred Thousand Dollars
($100,000), the portion of such options which exceeds such amount shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5.3,
options designated as Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted. If
the Code is amended to provide for a different limitation from that set forth in
this Section 5.3, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an
Incentive Stock Option in part and as a Nonstatutory Stock Option in part by
reason of the limitation set forth in this Section 5.3, the Optionee may
designate which portion of such Option the Optionee is exercising. In the
absence of such designation, the Optionee shall be deemed to have exercised the
Incentive Stock Option portion of the Option first. Separate certificates
representing each such portion shall be issued upon the exercise of the Option.
-6-
<PAGE>
5.4 The following limitations shall apply to grants of Options:
(a) No Optionee shall be granted, in any fiscal year of the Company,
Options to purchase more than 750,000 shares of Stock.
(b) In connection with his or her initial service, an Optionee may
be granted Options to purchase up to an additional 750,000 shares of Stock which
shall not count against the limit set forth in subsection (a) above.
(c) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 4.2.
(d) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 8), the cancelled Option will be counted against the limits set forth
in subsections (a) and (b) above. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
6. Terms and Conditions of Options. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 Exercise Price. The exercise price for each Option shall be
--------------
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee
shall have an exercise price per share less than one hundred ten percent (110%)
of the Fair Market Value of a share of Stock on the effective date of grant of
the Option and (c) in the case of a Nonstatutory Stock Option intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the exercise per share of Stock shall not be less than 100% of the
Fair Market Value of a share of Stock on the effective date of grant.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 Exercise Period. Options shall be exercisable at such time or
---------------
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option
and (c) no Option granted to a prospective Employee, prospective Consultant or
-7-
<PAGE>
prospective Director may become exercisable prior to the date on which such
person commences service with a Participating Company.
6.3 Payment of Exercise Price.
-------------------------
(a) Forms of Consideration Authorized. Except as otherwise provided
---------------------------------
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"Cashless Exercise"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) Tender of Stock. Notwithstanding the foregoing, an Option may
---------------
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) Cashless Exercise. The Company reserves, at any and all times,
-----------------
the right, in the Company's sole and absolute discretion, to establish, decline
to approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.
(d) Payment by Promissory Note. No promissory note shall be
--------------------------
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
-8-
<PAGE>
6.4 Tax Withholding. The Company shall have the right, but not the
---------------
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 Repurchase Rights. Shares issued under the Plan may be subject to
-----------------
a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board, in its sole discretion, at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
6.6 Effect of Termination of Service.
--------------------------------
(a) Option Exercisability. Subject to earlier termination of the
---------------------
Option as otherwise provided herein, an Option shall be exercisable after an
Optionee's termination of Service as follows:
(i) Disability. If the Optionee's Service with the
----------
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such other longer period of time as determined
by the Board, in its sole discretion) after the date on which the Optionee's
Service terminated, but in any event no later than the date of expiration of the
Option's term as set forth in the Option Agreement evidencing such Option (the
"Option Expiration Date").
(ii) Permanent Disability. If the Optionee's Service with the
--------------------
Participating Company Group is terminated because of the Permanent Disability of
the Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months (or such other longer or shorter period of time
(not less than six (6) months) as determined by the Board, in its sole
discretion) after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date.
-9-
<PAGE>
(iii) Death. If the Optionee's Service with the Participating
-----
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months (or
such other longer or shorter period of time (not less than six (6) months) as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months after the
Optionee's termination of Service.
(iv) Other Termination of Service. If the Optionee's Service
----------------------------
with the Participating Company Group terminates for any reason, except
Disability, Permanent Disability or death, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionee's Service
terminated, may be exercised by the Optionee within three (3) months (or such
other longer or shorter period of time (not less than thirty (30) days) as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
(b) Extension if Optionee Subject to Section 16(b). Notwithstanding
----------------------------------------------
the foregoing, if a sale within the applicable time periods set forth in Section
6.6(a) of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
(c) Extension if Exercise Prevented by Law. Notwithstanding the
--------------------------------------
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section 6.6(a) is prevented by the provisions of Section 11 below, the
Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.
7. Standard Forms of Option Agreement.
----------------------------------
7.1 Incentive Stock Options. Unless otherwise provided by the Board at
-----------------------
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2 Nonstatutory Stock Options. Unless otherwise provided by the Board
--------------------------
at the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable
-10-
<PAGE>
Nonstatutory Stock Option Agreement adopted by the Board concurrently with its
adoption of the Plan and as amended from time to time.
7.3 Standard Term of Options. Except as otherwise provided in Section
------------------------
6.2 or by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.
7.4 Authority to Vary Terms. The Board shall have the authority from
-----------------------
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan. Such authority shall include, but not
by way of limitation, the authority to grant Options which are not immediately
exercisable.
8. Transfer of Control.
-------------------
8.1 Definitions.
-----------
(a) An "Ownership Change Event" shall be deemed to have occurred if
any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "Transfer of Control" shall mean an Ownership Change Event or
a series of related Ownership Change Events (collectively, the "Transaction")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or
-11-
<PAGE>
exchanges of the voting stock of the Company or multiple Ownership Change Events
are related, and its determination shall be final, binding and conclusive.
8.2 Effect of Transfer of Control on Options. In the event of a
----------------------------------------
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of this
Section 8.2, an Option shall be deemed assumed if, following the Transfer of
Control, the Option confers the right to purchase in accordance with its terms
and conditions, for each share of Stock subject to the Option immediately prior
to the Transfer of Control, the consideration (whether stock, cash or other
securities or property) to which a holder of a share of Stock on the effective
date of the Transfer of Control was entitled. In the event the Options are not
assumed or substituted for by the Acquiring Corporation, the Board shall provide
that all of the unvested portion of the outstanding Options shall be immediately
exercisable and vested as of the date ten (10) days prior to the date of the
Transfer of Control. The exercise or vesting of any Option that was permissible
solely by reason of this Section 8.2 and the provisions of such Option Agreement
shall be conditioned upon the consummation of the Transfer of Control. Any
Options which are neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control shall terminate and cease to be outstanding
effective as of the date of the Transfer of Control. Notwithstanding the
foregoing, shares acquired upon exercise of an Option prior to the Transfer of
Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions
of the Option Agreement evidencing such Option except as otherwise provided in
such Option Agreement. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the outstanding Options immediately
prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Transfer of Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate unless the Board
otherwise provides in its sole discretion.
9. Nontransferability of Options. Unless determined otherwise by the Board,
-----------------------------
during the lifetime of the Optionee, an Option shall be exercisable only by the
Optionee or the Optionee's guardian or legal representative. No Option shall be
assignable or transferable by the Optionee, except by will or by the laws of
descent and distribution.
10. Transfer of Company's Rights. In the event any Participating Company
----------------------------
assigns, other than by operation of law, to a third person, other than another
Participating Company, any of the Participating Company's rights to repurchase
any shares of Stock acquired upon the exercise of an Option, the assignee shall
pay to the assigning Participating Company the value of such right as determined
by the Company in the Company's sole discretion. Such consideration shall be
paid in cash. The value of such right shall be not less than the Fair Market
Value of the shares of Stock
-12-
<PAGE>
which may be repurchased under such right (as determined by the Company) minus
the repurchase price of such shares. The requirements of this Section regarding
the minimum consideration to be received by the assigning Participating Company
shall not inure to the benefit of the Optionee whose shares of Stock are being
repurchased. Failure of a Participating Company to comply with the provisions of
this Section shall not constitute a defense or otherwise prevent the exercise of
the repurchase right by the assignee of such right.
11. Compliance with Securities Law. The grant of Options and the issuance of
------------------------------
shares of Stock upon exercise of Options shall be subject to compliance with all
applicable requirements of federal, state or foreign law with respect to such
securities. Options may not be exercised if the issuance of shares of Stock
upon exercise would constitute a violation of any applicable federal, state or
foreign securities laws or other law or regulations or the requirements of any
stock exchange or market system upon which the Stock may then be listed. In
addition, no Option may be exercised unless (a) a registration statement under
the Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (b) in the opinion
of legal counsel to the Company, the shares issuable upon exercise of the Option
may be issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. The inability of the Company
to obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares hereunder shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of any
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
12. Indemnification. In addition to such other rights of indemnification as
---------------
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
-13-
<PAGE>
13. Termination or Amendment of Plan. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in applicable law, regulations or
rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify
as an Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
14. Stockholder Approval. The Plan or any increase in the maximum number of
--------------------
shares of Stock issuable thereunder as provided in Section 4.1 (the "Maximum
Shares") shall be approved by the stockholders of the Company within twelve (12)
months of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Maximum Shares previously
approved by the stockholders shall become exercisable no earlier than the date
of stockholder approval of the Plan or such increase in the Maximum Shares, as
the case may be.
-14-
<PAGE>
PLAN HISTORY
------------
______, 199__ Board adopts Plan, with an initial reserve of ____ shares.
______, 199__ Stockholders approve Plan, with an initial reserve of ____ shares.
-15-
<PAGE>
Exhibit 10.16
HEADWAY TECHNOLOGIES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Headway Technologies, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the Plan, accordingly, shall be construed so as to
extend and limit participation in a manner consistent with the requirements of
that section of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Headway Technologies, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
commissions, overtime, and shift premium but shall be exclusive of payments
for incentive compensation, incentive payments, bonuses, allowances and other
compensation
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible
to participate in the Plan
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated
as continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or
by contract, the employment relationship shall be deemed to have terminated on
the 91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
-------------
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
<PAGE>
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the date of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for
the initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan
may be exercised, commencing on the first Trading Day on or after February 1
and August 1 of each year and terminating on the last Trading Day in the
periods ending twenty-four months later; provided, however, that the first
Offering Period under the Plan shall commence with the first Trading Day on or
after the date on which the Securities and Exchange Commission declares the
Company's Registration Statement effective and ending on the last Trading Day
on or before January 31, 2002. The duration and timing of Offering Periods may
be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date,
whichever is lower; provided however, that the Purchase Price may be adjusted
by the Board pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and
the number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
-2-
<PAGE>
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth
of stock (determined at the fair market value of the shares at the time such
option is granted) for each calendar year in which such option is outstanding
at any time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the
first Trading Day on or after February 1 and August 1 each year, or on such
other date as the Board shall determine, and continuing thereafter until
terminated in accordance with Section 20 hereof; provided, however, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before January 31, 2002. The Board shall have the power to change
the duration of Offering Periods (including the commencement dates thereof)
with respect to future offerings without shareholder approval if such change
is announced at least five (5) days prior to the scheduled beginning of the
first Offering Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office
prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
-------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay
day during the Offering Period in an amount not exceeding ten percent (10%) of
the Compensation which he or she receives on each pay day during the Offering
Period
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate
shall be effective with the first full payroll period following five (5)
business days after the Company's receipt of the new subscription agreement
unless the Company elects to process a given change in participation more
quickly. A participant's subscription agreement shall remain in effect for
successive Offering Periods unless terminated as provided in Section 10
hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first
Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any
time, the Company may, but shall not be obligated to, withhold from the
participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale
or early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
-4-
<PAGE>
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall
occur as provided in Section 8 hereof, unless the participant has withdrawn
pursuant to Section 10 hereof. The option shall expire on the last day of the
Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or
her account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under
the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common Stock
on such Exercise Date, and continue all Offering Periods then in effect, or
(y) provide that the Company shall make a pro rata allocation of the shares
available for purchase on such Enrollment Date or Exercise Date, as
applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Exercise Date, and
terminate any or all Offering Periods then in effect pursuant to Section 20
hereof. The Company may make pro rata allocation of the shares available on the
Enrollment Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional shares for issuance
under the Plan by the Company's shareholders subsequent to such Enrollment
Date.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any
-5-
<PAGE>
time by giving written notice to the Company in the form of Exhibit B to this
Plan. All of the participant's payroll deductions credited to his or her
account shall be paid to such participant promptly after receipt of notice of
withdrawal and such participant's option for the Offering Period shall be
automatically terminated, and no further payroll deductions for the purchase
of shares shall be made for such Offering Period. If a participant withdraws
from an Offering Period, payroll deductions shall not resume at the beginning
of the succeeding Offering Period unless the participant delivers to the
Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws
11. Termination of Employment. Upon a participant's ceasing to be an
-------------------------
Employee, for any reason, he or she shall be deemed to have elected to
withdraw from the Plan and the payroll deductions credited to such
participant's account during the Offering Period but not yet used to exercise
the option shall be returned to such participant or, in the case of his or her
death, to the person or persons entitled thereto under Section 15 hereof, and
such participant's option shall be automatically terminated. The preceding
sentence notwithstanding, a participant who receives payment in lieu of notice
of termination of employment shall be treated as continuing to be an Employee
for the participant's customary number of hours per week of employment during
the period in which the participant is subject to such payment in lieu of
notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be seven hundred fifty thousand (750,000) Shares, plus an annual
increase to be added on January 1 of each year equal to the number of Shares
needed to restore the maximum number of shares of the Company's Common Stock
which may be available for grant under the Plan to 750,000 Shares.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and
-6-
<PAGE>
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required
for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice.In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall deliver such
shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known
to the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option
or to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
-------
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
-7-
<PAGE>
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New Exercise
Date"), and shall terminate immediately prior to the consummation of such
proposed dissolution or liquidation, unless provided otherwise by the Board.
The New Exercise Date shall be before the date of the Company's proposed
dissolution or liquidation. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or
an equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase
Periods then in progress shall be shortened by setting a new Exercise Date
(the "New Exercise Date") and any Offering Periods then in progress shall end
on the New Exercise Date. The New Exercise Date shall be before the date of
the Company's proposed sale or merger. The Board shall notify each participant
in writing, at least ten (10) business days prior to the New Exercise Date,
that the Exercise Date for the participant's option has been changed to the
New Exercise Date and that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Offering Period or
the Plan is in the best interests of the Company and its shareholders. Except
as provided in Section 19 and this Section 20 hereof, no amendment may make
any change in any option theretofore granted which adversely affects the
rights of any participant. To the extent necessary to comply with Section 423
of the Code (or any successor rule or provision or any other applicable law,
-8-
<PAGE>
regulation or stock exchange rule), the Company shall obtain shareholder
approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods,
limit the frequency and/or number of changes in the amount withheld during an
Offering Period, establish the exchange ratio applicable to amounts withheld
in a currency other than US. dollars, permit payroll withholding in excess of
the amount designated by a participant in order to adjust for delays or
mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or
accounting and crediting procedures to ensure that amounts applied toward the
purchase of Common Stock for each participant properly correspond with amounts
withheld from the participant's Compensation, and establish such other
limitations or procedures as the Board (or its committee) determines in its
sole discretion advisable which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence
including, but not limited to:
(1) altering the Purchase Price for any Offering Period including
an Offering Period underway at the time of the change in Purchase Price;
(2) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of
the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such
-9-
<PAGE>
shares if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering
Period is lower than the Fair Market Value of the Common Stock on the
Enrollment Date of such Offering Period, then all participants in such
Offering Period shall be automatically withdrawn from such Offering Period
immediately after the exercise of their option on such Exercise Date and
automatically re-enrolled in the immediately following Offering Period as of
the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
HEADWAY TECHNOLOGIES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________________ hereby elects to participate in the Headway
Technologies, Inc. 1999 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the
--------
<PAGE>
disposition of the Common Stock. The Company may, but will not be
-------------------------------
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation including any withholding necessary
to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year and
1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only to
the extent of an amount equal to the lesser of (1) the excess of the fair
market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market
value of the shares on the first day of the Offering Period. The remainder
of the gain, if any, recognized on such disposition will be taxed as
capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)__________________________________________________________
(First) (Middle) (Last)
_________________________________ ____________________________________________
Relationship
____________________________________________
(Address)
-2-
<PAGE>
Employee's Social
Security Number: ________________________________________
Employee's Address: ________________________________________
________________________________________
________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:___________________________ ____________________________________________
Signature of Employee
____________________________________________
Spouse's Signature (If beneficiary other
than spouse)
-3-
<PAGE>
EXHIBIT B
---------
HEADWAY TECHNOLOGIES, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Headway
Technologies, Inc. 1999 Employee Stock Purchase Plan which began on
____________, ______ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
<PAGE>
Exhibit 10.17
HEADWAY TECHNOLOGIES, INC.
1999 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1999 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive
to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means Headway Technologies, Inc., a Delaware corporation.
-------
(e) "Director" means a member of the Board.
--------
(f) "Disability" means total and permanent disability as defined in
----------
section 22(e)(3) of the Code.
(g) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(i) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock for the last market
<PAGE>
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Inside Director" means a Director who is an Employee.
---------------
(k) "Option" means a stock option granted pursuant to the Plan.
------
(l) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(m) "Optionee" means a Director who holds an Option.
--------
(n) "Outside Director" means a Director who is not an Employee.
----------------
(o) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 1999 Director Option Plan.
----
(q) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 150,000 Shares, plus an annual increase to be added each year
on the day after the date of the of the annual stockholder meeting equal to the
lesser of (i) the number of Shares needed to restore the maximum number of
shares of the Company's Common Stock which may be available for grant under the
Plan to 150,000 Shares or (ii) an amount determined by the Board (the "Pool").
The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
-2-
<PAGE>
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 50,000 Shares (the "First Option") on the date on which
such person first becomes an Outside Director, whether through election by the
shareholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that (A) an Inside Director who ceases to be an Inside
Director but who remains a Director and (B) an officer of the Company who
becomes a Director shall not receive a First Option (whether such officer
becomes a Director during or after his or her employment with the Company).
(iii) Each Outside Director shall be automatically granted an
Option to purchase 12,500 Shares (a "Subsequent Option") each year on the date
of the annual stockholder meeting provided he or she is then an Outside
Director and if as of such date, he or she shall have served on the Board for
at least the preceding six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option granted before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such shareholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(D) subject to Section 10 hereof, the First Option shall
become exercisable as to twenty-five percent (25%) of the Shares subject to
the First Option on the first anniversary of its date of grant and as to
1/48th of the Shares subject to the First Option at the end of each month
thereafter, provided that the Optionee continues to serve as a Director on
such dates.
(vi) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the term of the Subsequent Option shall be ten (10) years.
-3-
<PAGE>
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option shall
become exercisable as to 1/12th of the Shares subject to the Subsequent Option
at the end of each month, beginning on the first day after all previously made
option grants have fully vested, and provided that the Optionee continues to
serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options to
the Outside Directors on a pro rata basis. No further grants shall be made
until such time, if any, as additional Shares become available for grant under
the Plan through action of the Board or the shareholders to increase the
number of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth
in Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 11 of the
Plan.
7. Form of Consideration. The consideration to be paid for the Shares to be
---------------------
issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times as are set forth in Section 4
hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
-4-
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to Section
----------------------------------------------
10 hereof, in the event an Optionee's status as a Director terminates (other
than upon the Optionee's death or Disability), the Optionee may exercise his
or her Option, but only within three (3) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration
of its ten (10) year term). To the extent that the Optionee was not entitled
to exercise an Option on the date of such termination, and to the extent that
the Optionee does not exercise such Option (to the extent otherwise so
entitled) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of Disability, the Optionee may exercise his
or her Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration
of its ten (10) year term). To the extent that the Optionee was not entitled
to exercise an Option on the date of termination, or if he or she does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee
was entitled to exercise it on the date of death (but in no event later than
the expiration of its ten (10) year term). To the extent that the Optionee was
not entitled to exercise an Option on the date of death, and to the extent
that the Optionee's estate or a person who acquired the right to exercise such
Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
-5-
<PAGE>
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by
-------------------------
the shareholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding
Option, and the number of Shares issuable pursuant to the automatic grant
provisions of Section 4 hereof shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration." Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has
not been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the
assets of the Company, outstanding Options may be assumed or equivalent
options may be substituted by the successor corporation or a Parent or
Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 4 hereof for so long as the Optionee serves
as a Director or a director of the Successor Corporation. Following such
assumption or substitution, if the Optionee's status as a Director or director
of the Successor Corporation, as applicable, is terminated other than upon a
voluntary resignation by the Optionee, the Option or option shall become fully
vested and exercisable, including as to Shares for which it would not
otherwise be vested or exercisable. Thereafter, the Option or option shall
remain exercisable in accordance with Sections 8(b) through (d) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the
-6-
<PAGE>
consideration (whether stock, cash, or other securities or property) received
in the merger or sale of assets by holders of Common Stock for each Share held
on the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares). If such consideration received in the
merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the
Option, to be solely common stock of the successor corporation or its Parent
equal in fair market value to the per share consideration received by holders
of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, state securities laws, and the requirements of any
stock exchange upon which the Shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
-7-
<PAGE>
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-8-
<PAGE>
Exhibit 10.18
CTR
Volume Supply Agreement
THIS AGREEMENT is dated May 10, 1999 is made
- --------------
BETWEEN:
- --------
Headway Technologies, Inc., a Delaware Corporation having corporate offices at
678 S. Hillview Drive, Milpitas, CA 95035 ("Headway");
SAE Magnetics (H.K.) Ltd., a Hong Kong Corporation whose registered office is at
SAE Tower, 38-42 Kwai Fung Crescent, Kwai Chung, N.T. Hong Kong ("SAE")
WHEREAS:
- --------
(A) Headway is interested in procuring Slider and HGA subcontracting services
from SAE on a long-term basis and requires a commitment for capacity allocation.
(B) SAE is interested in providing Slider and HGA subcontracting services to
Headway on a long-term basis and requires a commitment of wager supply before
allocating the required capacity.
WHEREBY IT IS AGREED as follows:
- --------------------
ARTICLE 1 VOLUME COMMITMENT
1.1 Headway commits to supply wafers to SAE, consigned either directly or
indirectly, sufficient for the manufacture of up to Five Million HGAs per
month. SAE has the right to purchase the resulting HGAs.
1.2 SAE commits to allocate slider and HGA capacity to Headway, or its
designee, sufficient for the manufacture of Five Million HGAs per month.
ARTICLE 2 PROGRAM VOLUME, PRICING AND SALES TERMS
2.1 Both parties recognize that specific volumes, pricing and sales terms can
not be agreed upon in advance for the term of this Agreement. Actual
pricing, volume and terms will be reviewed quarterly and agreed to on a
program by program basis. Both parties agree that pricing and terms will be
similar to those outlined in Exhibit A.
----------
ARTICLE 3 BACKEND SUPPORT
3.1 SAE agrees to assist MRST, Inc., a joint venture between Headway and SFI
Investment Limited to establish a slider manufacturing capability. Such
assistance
[*] -- CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
shall include the transfer and qualification of SAE 's existing slider
process and the installation of equipment, tooling and facility
improvements sufficient to achieve output of One Million sliders per month.
ARTICLE 4 TERM
4.1 This Agreement will be effective from April 30, 1999 and continue for a
period of three years (the "Initial Period"). At the end of the Initial
Period and each anniversary date thereafter, the Agreement will
automatically renew for an additional year until either party notifies the
other in writing they do not wish to renew this Agreement as of the next
anniversary date.
ARTICLE 5 FORCE MAJEURE
5.1 Neither party shall be liable to the other for its failure to perform its
obligations as a result of circumstances beyond its reasonable control.
ARTICLE 6 GOVERNING LAW
6.1 This Agreement shall be governed by and construed in accordance with the
laws of the State of California, without regard to its conflicts of law
rules.
ARTICLE 7 ENTIRE AGREEMENT
7.1 This Agreement and its Exhibit constitute the entire agreement of the
parties with respect to the subject matter and supersede and replace all
prior oral and written agreements, representations and understandings of
the parties with respect to the subject matter.
APPROVED BY:
________________________________________
Mike Y. Chang, President & CEO
Headway Technologies, Inc.
________________________________________
Raymond Leung, Executive Vice President
SAE Magnetics (H.K.) Ltd.
________________________________________
Yoshinori Hashimoto, General Manager
TDK Head No. 1 Division
<PAGE>
Exhibit A
- ---------
Meteor Criteria
---------------
. The Headway pricing model for the Meteor will be [*]% of the selling price
as SAE resale price to Maxtor
. The MRST subcontract fee will be [*]% of the resale price to Headway.
. The above pricing model and demand will be reviewed each quarter, in four
quarter increments with representatives of Headway, SAE and MRST
respectively.
. Pricing effective from NPI build through end of life
. Price and yield reconciliation to be summarized on a quarterly basis, for
ships below 500k, that quantity will be rolled into the next quarter.
. Payment Terms to Start on HSA shipment
HEADWAY Request
---------------
. Payment Terms: July/August - Net 30 days
. Payment Terms: Sept./Oct. - Net 45 days
. Payment Terms: Nov.-Beyond-Net 60 days.
. Headway will allocate and commit up to 5 million HGA wafer equivalents
. SAE will commit equivalent capacity to produce up to 5 million HGA's
. Headway will commit all the HGA's being produced under this agreement will
be solely for SAE turnkey business
. Direct material cost reduction opportunity during the period will be
reviewed quarterly and opportunity savings will be shared as follows:
For BFC and suspensions combined pricing below $[*], Headway and
SAE will share [*] portion of the unyielded cost advantage below
$[*]
. MRST consigned wafer, FOC basis
. SAE to ensure that slider manufacturing will be in accordance with the
expanded row capability (45 slider/row)
. For HSA fallout, Headway to sell up to [*]% of the HGA volume in the form
of wafers at USD$[*] each.
This material to be tracked independently of the standard SAE
production flow.
For excessive HSA fallout, greater than [*]%, extra wafer sales will be
reviewed.
Subcon, Penalty Clause:
-----------------------
Less than [*]% HGA DP yield will result in a financial penalty calculated as
follows:
Where actual DP is less than [*]%
________________________________
Penalty = $[*] - $[*]
--------- ----
actual DP [*]%
________________________________
Example: Actual DP at [*]% ($[*]/[*]%)-($[*]/[*]%)= $[*] per unit adder
to subcontract fee
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
Subcon, Reward Clause:
- ----------------------
Greater than or equal to [*]% HGA DP yield will result in a financial reward
calculated as follows:
Where actual is =[*]%
--------------------------
Reward = $[*] - $[*]
--------------------------
Example: Actual DP at [*]% ($[*]/[*]%)-($[*]/[*]%) = $[*] per unit credit to
subcontract fee
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
Exhibit 10.19
License Reference No. L993658
TECHNOLOGY TRANSFER AGREEMENT
BETWEEN
INTERNATIONAL BUSINESS MACHINES
CORPORATION
AND
HEADWAY TECHNOLOGIES, INC.
July 30, 1999
[*]=CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
TECHNOLOGY TRANSFER AGREEMENT
-----------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1.0 DEFINITIONS................................ 1
Section 2.0 LICENSES................................... 3
Section 3.0 INTELLECTUAL PROPERTY PROTECTION........... 4
Section 4.0 IBM-HEADWAY PATENT LICENSE AGREEMENT....... 5
Section 5.0 MANAGING COORDINATORS...................... 5
Section 6.0 TERM....................................... 6
Section 7.0 TERMINATION................................ 7
Section 8.0 WARRANTIES................................. 7
Section 9.0 ACCEPTANCE OF HEADWAY LICENSED DELIVERABLES 8
Section 10.0 LIMITATION OF LIABILITY.................... 8
Section 11.0 INDEPENDENT RELATIONSHIP OF THE PARTIES.... 8
Section 12.0 NONEXCLUSIVE RELATIONSHIP.................. 9
Section 13.0 PUBLICITY.................................. 9
Section 14.0 ASSIGNMENT................................. 9
Section 15.0 EXPORT REGULATIONS......................... 9
Section 16.0 COMMUNICATIONS............................. 10
</TABLE>
ii
<PAGE>
TECHNOLOGY TRANSFER AGREEMENT
-----------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<C> <S> <C> <C>
Section 17.0 GENERAL PROVISIONS......................... 10
17.1 FORCE MAJEURE.............................. 10
17.2 WAIVER..................................... 10
17.3 SEVERABILITY............................... 10
17.4 SURVIVAL................................... 11
17.5 COMPLIANCE WITH LAWS AND REGULATIONS....... 11
17.6 GOVERNING LAW, VENUE, AND JURY TRIAL WAIVER 11
17.7 AGREEMENT INTERPRETATION................... 11
17.8 AMENDMENT.................................. 11
17.9 ENTIRE AGREEMENT........................... 11
17.10 EXECUTION.................................. 12
APPENDIX A...................................................... 13
APPENDIX B...................................................... 15
</TABLE>
iii
<PAGE>
TECHNOLOGY TRANSFER AGREEMENT
THIS IS A TECHNOLOGY TRANSFER AGREEMENT ("Agreement") with an "Effective
Date" as of July 30, 1999, between International Business Machines
---------
Corporation, a New York corporation having a business office at 5600 Cottle
Road, San Jose, California, 95193, United States of America ("IBM") and HEADWAY
TECHNOLOGIES, INC., a California corporation having a business office at 678 S.
Hillview Dr., Milpitas, California, 95035, United States of America ("Headway").
Whereas Headway has developed Headway Licensed Technology relating to
certain Magnetic Transducer Apparatus which is proprietary to Headway; and
Whereas IBM wishes to obtain a license to such Headway Licensed Technology
to enable IBM to build Magnetic Transducer Apparatus.
Now, therefore, in consideration of the promises herein contained, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, IBM and Headway agree as follows:
Section 1.0 DEFINITIONS
The following terms shall, for the purposes of this Agreement, have the
following meanings:
1.1 "Headway Chemical Mechanical Polishing ('CMP') Manufacturing Process" shall
mean processes, materials or devices used for providing a substantially flat and
substantially smooth wafer surface, using a fill process and a chemically
assisted mechanical polishing process, at one or more manufacturing steps in
order to manufacture Magnetic Transducer Apparatus.
1.2 "Headway Confidential Information", subject to the exclusions set forth in
Section 3.2, shall mean information related to Headway Deliverables, regardless
of the form in which it is stored or the medium on which it is stored. Headway
Confidential information includes design and implementation of the Headway
Processes including information that is discernible by observing the
manufacturing line, such as the layout of the manufacturing line, the functions
of each work station, process steps, equipment used, techniques for optimizing
the performance of the equipment, and testing equipment and processes. Headway
Confidential Information also includes failure analysis steps and processes,
measurements of the effectiveness of the manufacturing process and the quality
of its output, manufacturing capacity, yields, failure rates and manufacturing
parameters.
1.3 "Headway Deliverables" shall mean the Headway Licensed Deliverables as
listed in Appendix A and the Headway Support Deliverables as listed in Appendix
B.
1
<PAGE>
1.4 "Headway Licensed Technology" shall mean the Headway technical
information, data, formulas, knowledge, process and trade secrets developed or
acquired by Headway relating to the Headway Processes as more fully described in
the Headway Deliverables and know-how provided to IBM or inherent in samples,
specifications, equipment performance, or other information, related to the
Headway Processes. Headway Licensed Technology may be in tangible form, such as
blue prints, manufacturing process instruction, product flow charts, written
specifications or product samples. Headway Licensed Technology may also be in
intangible form such as oral conversations or the performance of technical
trainings.
1.5 "Headway Notching Manufacturing Process" shall mean processes, materials
or devices used for manufacturing first and second magnetic poles where the
first and second magnetic poles have substantially equal widths and are aligned
with each other at an air bearing surface.
1.6 "Headway Processes" refers to Headway CMP Manufacturing Process and
Headway Notching Manufacturing Process.
1.7 "IBM Licensed Product" shall mean any Magnetic Transducer Apparatus
manufactured using Headway Licensed Technology.
1.8 "Magnetic Transducer Apparatus" shall mean a device that is primarily
designed for reading, writing, or erasing information on, in or from a magnetic
medium by transducing certain of the magnetic characteristics of such medium to
electrical signals, or vice versa, which characteristics and signals are
indicative of such information.
1.9 "Managing Coordinator" shall mean the person(s) effecting or supervising
the transfer of information between the parties. The identity of the Managing
Coordinator for each party is defined in Section 5.0.
1.10 "Rotating Magnetic Memory Product" or "RMM Product" shall mean any
product primarily designed for recording and/or reproducing in magnetic form
information which is in digital form during motion of a rotating cylinder,
including but not limited to a tape reel, or disk having a magnetizable surface.
1.11 "Slider" shall mean a structure primarily designed for use in a RMM
Product for supporting one or more Magnetic Transducer Apparatus in a
transducing relationship with a moving storage medium by having a surface
maintained in contact with a surface of such moving storage medium, or in
combination with the fluid flow generated by the movement of such moving storage
medium in close proximity above the surface of such moving storage medium.
2
<PAGE>
1.12 "Subsidiary" of a party hereto shall mean a corporation, company or other
entity:
(a) more than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, now or hereafter, owned or controlled, directly or
indirectly, by a company hereto, but such corporation, company or other
entity shall be deemed to be a Subsidiary only so long as such ownership or
control exists; or
(b) which does not have outstanding shares or securities, as may be the
ease in a partnership, joint venture or unincorporated association, but
more than fifty percent (50%) of the ownership interest representing the
right to make the decisions for such corporation, company or other entity
is now or hereafter, owned or controlled, directly or indirectly, by a
party hereto, but such corporation, company or other entity shall be deemed
to be a Subsidiary only so long as such ownership or control exists.
Section 2.0 LICENSES
2.1 Headway Technology License. Headway on behalf of itself and its
Subsidiaries, hereby grants to IBM a non-exclusive, worldwide, perpetual,
irrevocable, royalty-free license to use the Headway Licensed Technology for the
purpose of enabling IBM to manufacture IBM Licensed Products for use in IBM RMM
Products and manufacture and sell lease, or otherwise transfer IBM Licensed
Products and Sliders incorporating IBM Licensed Products to third parties.
2.2 Headway Copyright License. Headway on behalf of itself and its
Subsidiaries, hereby grants to IBM a non-exclusive, worldwide, perpetual,
irrevocable, royalty-free license under Headway's copyrights relating to the
Headway Deliverables under which IBM:
(a) shall be allowed to make copies of the Headway Deliverables for
purposes set forth in Section 2.1 above; and
(b) shall have the right to prepare derivative works based upon the Headway
Deliverables to the extent needed to use the Headway Deliverables in
connection with the purposes set forth in Section 2.1 above.
Ownership of copyrights in all Headway Deliverables shall belong
exclusively to Headway.
3
<PAGE>
2.3 Right to Sublicense Subsidiaries. The licenses granted in Sections 2.1 and
2.2 include the right of IBM to grant sublicenses to its Subsidiaries of the
same scope as the licenses enumerated in Sections 2.1 and 2.2.
2.4 Headway Deliverables. In connection with the licenses recited in Sections
2.1 and 2.2, Headway will provide IBM with the Headway Deliverables, listed in
Section 1.3. The transfer of such Headway Deliverables shall commence upon the
Effective Date of this Agreement and shall be completed (subject to IBM's right
to reject under Section 9.0) within six (6) months thereof. Other than provision
of the Headway Deliverables, Headway has no further performance obligations
relating to Headway Licensed Technology under this Agreement.
2.5 Headway Document Transfer. In connection with the licenses granted to IBM
under Sections 2.1 and 2.2, Headway will transfer to IBM a single copy of any
document, including any machine-readable document, manual or drawing in which
Headway Deliverables have been recorded or incorporated.
2.6 No Other Headway License. With the exception of the licenses granted in
Sections 2.1 and 2.2, no license or immunity is granted by Headway to IBM under
this Agreement, either directly or by implication, estoppel, or otherwise, under
any other intellectual property including patents, trademarks, copyrights,
registered semiconductor mask works, know how or trade secrets.
2.7 No Other Rights. Nothing contained in this Agreement shall be construed as
conferring on either party any rights to use in advertising, publicity or other
marketing activities any name, trademark, or other designation of the other
party hereto, including any contraction, abbreviation, or simulation of any of
the foregoing, and except as provided in Section 13.0, each party hereto agrees
not to use the existence of this Agreement in any marketing, promotion or
publicity activity without the express written approval of the other party.
2.8 Patent License. IBM license to Headway patents that may be necessary in
order for IBM to manufacture IBM Licensed Products under licenses granted in
Sections 2.1 and 2.2 is governed by a separate Patent License Agreement which
parties are planning to enter into contemporaneously with this Agreement.
Section 3.0 INTELLECTUAL PROPERTY PROTECTION
3.1 Obligation to Maintain Confidentiality. Upon receipt of Headway
Confidential Information, for a period of three (3) years after receipt thereof,
IBM shall use the same efforts to avoid publication, dissemination, or
disclosure to third parties of Headway Confidential Information as it employs
with respect to information of its own which it does not wish to publish,
disseminate or disclose to third parties. However, the sale by IBM of apparatus,
4
<PAGE>
products or services including supporting documentation therefore, which
inherently disclose Headway Confidential Information shall not constitute a
violation of this Section.
3.2 Exception to Confidentiality Obligations. These obligations to avoid
publication, dissemination, or disclosure of Headway Confidential Information
shall not apply to any information which is:
(1) already in possession of IBM without obligation of confidentiality;
(2) now or hereafter becomes publicly available without breach of this
Agreement;
(3) rightfully received by IBM from third parties without obligation of
confidentiality;
(4) independently developed by IBM; or
(5) approved for release by written agreement of Headway.
3.3 Disclosure Required by Law. If disclosure of Headway Confidential
Information is required by law, IBM shall take reasonable steps to obtain a non-
disclosure agreement from any non-government recipient of such Information, and
to obtain an appropriate order protecting the confidentiality of any such
Information in any court or other government proceedings or activities, if the
Information is not otherwise legally protected from disclosure.
Section 4.0 IBM-HEADWAY PATENT LICENSE AGREEMENT
4.1 Consideration. As a partial consideration for the licenses granted by
Headway to IBM in Sections 2.1 and 2.2, IBM is entering into a separate Patent
License Agreement with Headway. This Agreement and the Patent License Agreement
("Agreements") become effective only when both Agreements are signed by fully
authorized representatives of IBM and Headway.
Section 5.0 MANAGING COORDINATORS
5.1 Designation of Managing Coordinators. Each party hereto will promptly
designate a Managing Coordinator under this Agreement.
5
<PAGE>
5.2 Identity of Managing Coordinators. The Managing Coordinators for the
parties are:
For IBM: Ian R. McFadyen
5600 Cottle Road 3D/14-2
San Jose, California 95193
(408) 256-7240
(408) 256-7409 (FAX)
For Headway: Mao-Min Chen
678 S. Hillview Drive
Milpitas, California 95035
(408) 934-5334
(408) 934-5474
5.3 Change of Managing Coordinators. Each party may change its Managing
Coordinator (or designate a temporary acting Managing Coordinator) at any time
and from time to time during the term of this Agreement by notifying the
Managing Coordinator for the other party in writing at the above designated
address.
5.4 Duties of Managing Coordinators. The Managing Coordinator or temporary
acting Managing Coordinator will solely be authorized to:
a) submit and receive requests and responses;
b) schedule and coordinate visits by personnel of each party to facilities of
the other party and its Subsidiaries in connection with activities under
this Agreement;
c) supervise and record the exchange of confidential information in accordance
with Section 3.0;
d) monitor schedules and progress of this Agreement; and
e) supervise the transfer of Headway Licensed Technology to IBM.
Section 6.0 TERM
This Agreement shall be effective for two (2) years after the Effective
Date unless otherwise earlier terminated under the provisions of this Agreement.
6
<PAGE>
Section 7.0 TERMINATION
7.1 Termination for Breach. Either party may terminate this Agreement on
ninety (90) days written notice to the other party, only if the other party has
failed to perform any of its obligations under this Agreement and has been given
an opportunity to cure such failure in accordance with Section 7.2.
7.2 Timing of Breach. Should either party fail to perform any of its
obligations under this Agreement, said party shall not be deemed to have
breached this Agreement until the other party has given written notice of such
failure to said party and said party has failed to cure such failure within
ninety (90) days from the date of such notice.
7.3 Effect of Breach. Consistent with Sections 6.0 and 7.1 and without
limiting any other obligations Headway may have in addition to the one listed
herein, if Headway, at any time, fails to adhere to its obligations of
transferring Headway Licensed Technology and such breach is not cured within
ninety (90) days after written notice from IBM to Headway specifying the nature
of such breach, IBM shall have the right to terminate this Agreement and revoke
all the licenses granted to Headway under the Patent License Agreement and such
terminations and/or revocation shall be effective immediately upon the giving of
such notice.
7.4 Additional Effects of Breach. Termination or expiration of this Agreement,
as provided herein, shall not relieve either party of any obligation or
liability accrued hereunder prior to such termination or expiration, or rescind
or give rise to any right to rescind anything done or other consideration given
prior to the time such termination or expiration becomes effective, and such
termination or expiration shall not affect in any manner any rights of either
party arising under this Agreement prior to such termination or expiration.
7.5 Reasonable Efforts to Avoid Termination. Prior to either party terminating
this Agreement under Section 7.1, the parties shall meet forty-five (45) days
before the effective date of termination at a mutually determined location to
discuss the initiating party's desire to terminate the Agreement. At that
meeting, both parties shall negotiate in good faith in order to resolve any
problems or issues surrounding the Agreement and shall use reasonable efforts,
to avoid termination of the Agreement.
Section 8.0 WARRANTIES
8.1 No Warranties. The licenses granted by Headway to IBM recited in Sections
2.1 and 2.2 do NOT include any warranty, assurance or guarantee by Headway with
respect to infringement, misappropriation or violation of any of the
intellectual property rights of third parties.
7
<PAGE>
8.2 Disclaimer of Implied Warranties. Headway MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
OR NONINFRINGEMENT IN CONNECTION WITH THE Headway DELIVERABLES. THE Headway
DELIVERABLES ARE PROVIDED "AS IS".
8.3 Headway Warranties. Headway hereby warrants that the subject matter of the
licenses granted by Headway to IBM and it Subsidiaries under this Agreement is
original to Headway. Headway also warrants that it possesses sufficient rights
to grant these licenses.
Section 9.0 ACCEPTANCE OF HEADWAY LICENSED DELIVERABLES
Any Headway Licensed Technology not expressly rejected by IBM within forty
five (45) days of receipt shall be deemed accepted.
Section 10.0 LIMITATION OF LIABILITY
10.1 Liability of Direct Economic Loss. Each party shall be liable for direct
economic loss suffered by the other party as a result of its breach of the
provisions of this Agreement in accordance with the law.
10.2 No Liability for Other Damages. Neither party shall be entitled to
indirect, incidental, consequential, special or punitive damages, including lost
profits based on any breach or default of the other party and including those
arising from infringement or alleged infringement of any patent, trademark,
copyright, mask work or any other intellectual property.
10.3 Limitation on Actions. No action, regardless of form, arising out of this
Agreement, may be brought by either party more than two (2) years after the
cause of action has arisen.
Section 11.0 INDEPENDENT RELATIONSHIP OF THE PARTIES
Each party will be responsible for its own employees and in no event shall any
employee of either party be deemed an employee of the other party. Matters
governing the terms and conditions of the employment of any employee, such as
supervision, work schedules, wage rate, income tax withholding, FICA
withholding, disability benefits and other benefits, are exclusively the
responsibility of the respective party.
8
<PAGE>
Section 12.0 NONEXCLUSIVE RELATIONSHIP
This Agreement does not impair the right of either party or its Subsidiaries,
without breach of this Agreement, to develop, make, use, procure and/or market
products and processes and services related to such products now or in the
future, individually or jointly with others, which may be compatible or
competitive with those developed under this Agreement.
Section 13.0 PUBLICITY
For a period of five (5) years from the Effective Date of this Agreement,
neither of the parties shall disclose the terms and conditions and subject
matter of this Agreement (other than to confirm the existence and scope of the
licenses contained herein upon inquiry by a bona fide customer or potential
customer), except as may be required by law, judicial order, government role or
regulation, without the prior written consent of the other party.
Section 14.0 ASSIGNMENT
14.1 Assignment. Except as provided in this Section 14.0, neither party shall
assign any of its rights or privileges nor delegate or subcontract any of its
obligations under this Agreement, without the prior written consent of the other
party and any act in derogation of the foregoing shall be void.
14.2 Subcontractors. Subject to the conditions set forth in this Section 14.0,
IBM may subcontract with a sub-contractor to provide facilities, manufacturing
equipment, or personnel for the manufacture of IBM Licensed Products.
14.3 Use of Subcontractors. Subject to Section 3.2 of this Agreement, IBM
shall have a written agreement with the sub-contractor that prohibits use or
disclosure of Headway Confidential Information outside of sub-contractor by the
sub-contractor and or its employees for a period of three (3) years after
receipt thereof.
Section 15.0 EXPORT REGULATIONS
Each party will comply with all applicable federal, state and local laws,
regulations and ordinances including but not limited to, the regulations of the
United States Government relating to export and re-export of software and
technical data.
9
<PAGE>
Section 16.0 COMMUNICATIONS
All communications shall be sent by facsimile or by registered or certified
mail to the following addresses and shall be effective upon mailing:
For IBM:
Director of Licensing
Intellectual Property & Licensing IBM Corporation
North Castle Drive, MD-NC 119 Armonk, New York 10504-1785 Facsimile: (914)
7654380
For Headway:
Thomas A. Surran
Chief Financial Officer
678 S. Hillview Dr.
Milpitas, California 95035
Facsimile: (408) 934-5474
A License Reference Number (L993658) has been assigned to this Agreement. This
number should be included in all communications including letters, faxes and e-
mail messages.
Section 17.0 GENERAL PROVISIONS
17.1 FORCE MAJEURE. Neither party shall be responsible for failure to fulfill
its obligations under this Agreement due to fire, flood, war or other such cause
beyond its control and without its fault or negligence (excluding labor
disputes) provided it promptly notifies the other party.
17.2 WAIVER. No delay or failure by either party to act in the event of a
breach or default hereunder shall be construed as a waiver of that or any
subsequent breach or default of any provision of this Agreement.
17.3 SEVERABILITY. If any section, term or provision of this Agreement is
declared unlawful or unenforceable, by competent judicial determination, the
remainder of this Agreement shall remain in full force and effect so long as the
remainder of the Agreement still provides the essential benefit of the bargain
to both parties. However, if the benefit of the bargain cannot be substantially
preserved, the remainder of the Agreement shall be either renegotiated or
terminated.
10
<PAGE>
17.4 SURVIVAL. Any rights and obligations under this Agreement which by their
nature extend beyond termination or expiration of this Agreement shall survive
and continue after termination or expiration of this Agreement and shall bind
the parties and their legal representatives, successors, heirs and assigns.
17.5 COMPLIANCE WITH LAWS AND REGULATIONS. Each party, at its own expense,
shall comply with all governmental laws and regulations relating to its duties,
obligations and performance under this Agreement and shall procure all licenses
and pay all fees and other charges required thereby.
17.6 GOVERNING LAW, VENUE, AND JURY TRIAL WAIVER. This Agreement shall be
construed, and the legal relations between the parties hereto shall be
determined, in accordance with the laws of the State of New York, United States
of America, without regard to its conflicts of laws principles. Headway consents
to the personal jurisdiction of the Federal Courts of the United States. Both
parties agree that any action brought concerning this Agreement shall be brought
in a court of competent jurisdiction in the State of New York. Both parties
agree to waive their right to a trial by jury in any dispute arising out of this
Agreement. The prevailing party in any legal action hereunder shall be entitled
to reimbursement by the other party of its expenses including, without
limitation, reasonable attorneys' fees.
17.7 AGREEMENT INTERPRETATION. The title and headings in this Agreement are
for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement. References in this
Agreement to number of days, weeks, months, or years, shall mean calendar days,
weeks, months, or years.
17.8 AMENDMENT. This Agreement may not be amended or modified except by a
written agreement signed by both parties.
17.9 ENTIRE AGREEMENT. The terms of this Agreement and its Appendices A and B
which are incorporated herein by reference, embody the entire understanding of
the parties with respect to the Headway Licensed Technology and replace any
prior or contemporaneous oral or written communications relating to the subject
of this Agreement.
This Agreement will not be binding upon the parties until it has been signed by
or on behalf of each party, in which event it shall be effective as of the
Effective Date set forth above.
11
<PAGE>
17.10 EXECUTION. IN WITNESS THEREOF, the parties have caused this Agreement to
be signed by their fully authorized representatives as of the EFFECTIVE DATE.
INTERNATIONAL BUSINESS MACHINES CORPORATION
By: /s/ John S. Best
----------------
NAME: John S. Best
------------
TITLE: VP, Technology, Storage Systems Division
-------------------------------
Date: 7/30/99
-------
HEADWAY TECHNOLOGIES, INC.
By: /s/ Thomas A. Surran
--------------------
Name: Thomas A. Surran
----------------
Title: Chief Financial Officer
-----------------------
Date: 8/3/99
------
12
<PAGE>
Appendix A
HEADWAY LICENSED DELIVERABLES
Headway Chemical Mechanical Polishing ('CMP') Manufacturing Process
- -------------------------------------------------------------------
- -------------------------------------- Headway Documents
*
Headway Manufacturing Process
Instructions, Maintenance Manuals,
Control Charts and Routings
Headway Specifications, Control Charts
and Datasets
- -------------------------------------- *Confidential treatment requested over
these portions of this exhibit.
July 30, 1999
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
13
<PAGE>
Headway Notching Manufacturing Process
- --------------------------------------
- -------------------------------------- Headway Documents
*
Headway Manufacturing Process
Instructions, Maintenance Manuals,
Control Charts and Routings
Headway Control Charts
and Datasets
- -------------------------------------- *Confidential treatment requested over
these portions of this exhibit.
July 30, 1999
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
14
<PAGE>
APPENDIX B
HEADWAY SUPPORT DELIVERABLES
Training and Technical Assistance Plan
- --------------------------------------
Headway, at its own expense, shall provide:
(1) manufacturing and engineering resources over six (6) calendar
months having the appropriate skills to facilitate the transfer of Headway
Licensed Technology to IBM as well as providing, at IBM's total discretion,
tutorials and written and verbal explanations on Headway Licensed
Technology to designated IBM employees; and
(2) access to Headway manufacturing and development plant sites
over six (6) calendar months to designated IBM employees in order for said
designated IBM employees to observe and participate in carrying out
processes identified by IBM and relating to Headway Licensed Technology.
15
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction of Incorporation
- ---- -----------------------------
Headway Technologies (California), Inc. California
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 26, 1999, except for paragraph 1 of Note 11 as to which the date is
April 26, 1999, in the Registration Statement (Form S-1) and related Prospectus
of Headway Technologies, Inc. dated September 2, 1999.
Our audits also included the financial statement schedule of Headway
Technologies, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
September 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS
<FISCAL-YEAR-END> DEC-28-1997 JAN-02-1999 JAN-01-2000
<PERIOD-START> DEC-30-1996 DEC-29-1997 JAN-03-1999
<PERIOD-END> DEC-28-1997 JAN-02-1999 JUL-03-1999
<CASH> 22,574 24,350 22,083
<SECURITIES> 0 0 0
<RECEIVABLES> 10,755 9,028 8,380
<ALLOWANCES> 530 530 130
<INVENTORY> 5,082 4,627 5,100
<CURRENT-ASSETS> 38,209 39,952 36,112
<PP&E> 43,159 77,376 79,754
<DEPRECIATION> 16,521 28,209 36,237
<TOTAL-ASSETS> 65,973 89,766 90,328
<CURRENT-LIABILITIES> 28,095 41,673 40,809
<BONDS> 0 0 0
0 0 0
34,382 37,122 37,122
<COMMON> 350 474 589
<OTHER-SE> (319) (238) (197)
<TOTAL-LIABILITY-AND-EQUITY> 15,534 25,214 25,990
<SALES> 52,369 177,669 70,693
<TOTAL-REVENUES> 54,369 179,419 72,786
<CGS> 41,222 137,001 50,928
<TOTAL-COSTS> 41,222 137,001 50,928
<OTHER-EXPENSES> 26,287 25,458 16,780
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,019 3,313 1,953
<INCOME-PRETAX> (19,404) 7,904 826
<INCOME-TAX> 0 1,475 206
<INCOME-CONTINUING> (19,404) 6,429 620
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 306 0
<CHANGES> 0 0 0
<NET-INCOME> (19,404) 6,735 620
<EPS-BASIC> (441.00) 12.36 0.68
<EPS-DILUTED> (441.00) 0.33 0.03
</TABLE>
